The new kids on the block

While they share some characteristics—backing from New York-based hedge funds, an emphasis on asset management strategies that draws upon their New York connections, timing, and Bermuda as their domicile of choice—the latest class of reinsurers to call Bermuda home are in many ways very different animals. Third Point Re and SAC Re are both standalone reinsurers, backed by asset management expertise extended by hedge funds, Third Point Capital and SAC Capital Advisors, respectively. PaC Re—while backed by Paulson & Co—is rather different, leveraging underwriting capabilities at Validus in order to write its business. Nevertheless, they all face the same challenge: how to differentiate their offering in an increasingly competitive reinsurance market, characterised by overcapitalisation and rising levels of alternative capital.

Talking with Simon Burton, CEO of SAC Re, he agreed that the industry—and new entrants in particular—are facing “signifi cant headwinds, particularly on the cat side of the business”. It would seem a diffi cult time to establish a new Bermuda reinsurer and Burton concurred. “The presence of an alternative investment strategy in SAC Re enabled us to raise capital at above book value and launch at a time of depressed valuations. A more traditional strategy would have been a non-starter.” It would seem that without an investment focus, the latest class of Bermuda entrants might well have struggled.

PaC Re and Third Point Re are likewise leveraging asset management expertise to establish a presence in the market. Commenting on PaC Re’s strategy in an earnings conference call last year, Jeff Consolino, former president and CFO of Validus described the attractions of PaC Re as “agreat opportunity to combine the attractive long-term returns available from an excellent hedge fund manager with the uncorrelated returns that come from a thoughtful and remote participation in catastrophe risk. By combining uncorrelated sources of return, in theory, you get to redraw the efficient frontier and generate a higher return in levels of risk than you would otherwise see from just a straight hedge fund strategy”.

John Berger, CEO of Third Point Re, spoke in a similar vein in an interview with Bermuda Re following Third Point Re’s launch. “As a brand new company and with our asset manager, Third Point, on the investment side, we have a game plan that works regardless of the market.” Supported by investment returns from Third Point that Berger described as “stellar”, the reinsurer has been able to take an approach to underwriting that he described as “very disciplined” and enter a market that hardly seemed conducive to new entrants.

Diverging approaches

Addressing SAC Re’s efforts to differentiate its underwriting offering in the market, Burton said that on short-tail lines of business SAC Re’s offering is the “traditional rated product”, with differentiation achieved through the reinsurer’s “relatively low risk leverage on the cat side”. For those insurers worried about their panel of reinsurers and how they may respond post-event, the company’s low risk leverage is an attractive prospect, said Burton. That, coupled with the flexibility afforded insurers by adding a reinsurer like SAC Re to their reinsurance panel, has enabled the firm to attract significant interest from the market. He said that SAC Re had already attracted more than 120 clients since its start, and it was clear from talking with Burton that he was confident that others would follow suit.

Turning to the casualty side of its business, Burton said that the company’s investment strategy “enables us to create a primarily quota share reinsurance product that derives significant economic benefit from the float characteristics of those risks, whereas those with more traditional investment strategies might struggle to see the upside”. Again, leveraging the investment capabilities of SAC Capital Advisors forms a key component of SAC Re’s offering on longer-tail business.

Addressing PaC Re’s underwriting approach, Ed Noonan, Validus’ chairman and CEO said that its approach is to write high attachment point risks, with a focus on “writing the most attractively priced risks after considering rate on line, expected loss, and expected return on capital”. Noonan stated that Florida and attractive US business is very much the focus of PaC Re’s underwriting strategy, with the reinsurer happy to reduce the size of lines if they do not hit return criteria. Again, the reinsurer’s low risk leverage is likely to prove attractive to clients concerned about their panel of reinsurers, and is designed to generate true incremental uncorrelated return (“Alpha”) over and above the investment returns linked with Paulson & Co.

Berger and Third Point Re are taking a rather more conservative approach to underwriting, as he explained in a recent interviewwith Bermuda Re. “We will have less risk leverage than the average company out there, due to potential volatility on the investment side. In any way that you want to measure risk we’ll probably be below average—whether it’s premium to surplus, levels of property cat, or probable maximum loss to surplus.” He said that Third Point Re’s initial focus will be on small and medium insurers that don’t have the levels of surplus they need to write particular lines of business, with reinsurance acting as a form of capital to such firms.

Berger said that Third Point Re would be avoid chasing business and taking on risk “that goes bang in the night” for now, admitting that present conditions would prove challenging to new players. “It is a very competitive time right now. There really are no unmet needs out there.” Berger said that until conditions improve, Third Point Re would remain “way underweight” on the larger limit, property cat side of the industry, while drawing upon its investment expertise to strengthen its returns.

It seems likely that parallels will continue to be drawn between the three reinsurers, but as they develop a presence in the market and their unique selling propositions become more clear, it seems likely that they will be viewed increasingly as standalone—and welcome— additions to Bermuda’s re/insurance sector.

PaC Re
Began operations with $500 million of capital
Privately held Class 4 reinsurer President is John Hendrickson, Validus’ director of strategy, corporate development and risk management; EVP and chief underwriting officer is Lixin Zeng
Managed by Validus Holdings’ AlphaCat Managers subsidiary, which will underwrite business for the reinsurer and New York hedge fund Paulson and Co, which will manage the company’s investment portfolio

SAC Re
Began operations with $500 million of capital
Privately held Class 4 reinsurer
CEO, Simon Burton Links with New York hedge fund SAC Capital, with the firm allocating most of its investable assets to SAC Capital.

Third Point Re Held
$750 million of capital by end of 2011
Privately held Class 4 reinsurer CEO, John Berger
Links with New York hedge fund Third Point, which provides investment management capabilities to the reinsurer.