The promise of hedge fund backed reinsurance companies is facing the reality of abysmal market conditions, as Daniel Loeb’s Third Point fund is discovering.
A problematic Florida homeowners market, a bad workers compensation contract and pricing problems in other lines is causing its reinsurance business to become “opportunistic” in underwriting while relying Loeb’s asset management acumen to focus on investment float.
In an investor presentation released this week, Third Point Re’s management cautioned institutional investors that the Bermuda-based reinsurer will move carefully in 2017 and likely write less business given the available risks and the prices clients are willing to pay.
“We may reduce premium given challenging market conditions in 2017,” the presentation states, adding that Third Point does not write catastrophe lines that have benefited many reinsurers over the past quarters. “Our potential to produce a sub 100% combined-ratio will be limited until market improve.”
In fact, the presentation lists the problems that Third Point is facing in each of lines of business in detail, such as:
- A predominantly Florida-based homeowners line that has decreased by $66 million and likely to decrease further in 2017.
- Workers compensation will also be reduced this year “if we cannot achieve adequate pricing improvement on renewals.”
- A multi-line premium made up of quota share deals from Lloyds “has performed below expectations due to poor results on several underlying programs.”
Despite the underwriting challenges, Third Point’s management remains high on what many assume is the primary goal of Bermuda-based hedge fund reinsurers: investment float.
“Certain lines of business provide reinsurers with float for several years,” the presentation states. “We are currently operating at what we believe is our optimal level of investment leverage.”
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