President and CEO of Third Point Re J. Robert Bredahl highlighted a shift in strategy from a focus on generating investment float to a focus on underwriting, as the reinsurer aims to increase profit share brought in through taking on more risk.
He explained in the firm’s 2017 Annual Report; “Our underwriting focus to date has been to generate stable, long-term float to minimise underwriting risk by focusing on quota share contracts of less volatile lines of business.
“The economic engine in our total return business model is investment income, and therefore our priority to date has been to increase investment leverage through float generation from our reinsurance business.
“We are fortunate to have partnered with Third Point LLC which produced a 17.7% return on our investment portfolio in 2017 and a 10.8% annualised return over the past six years.”
However, Third Point Re will now aim to gradually grow its reinsurance portfolio, working towards a reinsurance operation that generates both float and underwriting profits, so providing a total-return to shareholders.
As the firm aims to emphasise reinsurance underwriting, it will follow a strategy of gradually shifting underwriting portfolios towards lines of business with higher expected margins.
Bredahl said; “Until now the focus has been on cash-rich lower risk pro rata reinsurance contracts and reserve covers, however, these have produced combined ratios of over 100%.
“We believe that the benign catastrophe years and the outsized profits earned by reinsurers leading up to 2017 masked inadequate pricing in non-catastrophe lines.
“The recent catastrophes have highlighted poor results in attritional lines of business and we were able to obtain improvement in prices and terms and conditions on contracts that we renewed in early 2018.
“Still, we do not believe that the improvement in pricing will be enough to bring our combined ratio below 100% without some changes to our underwriting strategy.
“To lower our combined ratio, we plan to increase our writings of specialty lines, lower layer excess covers, and shorter tail event type covers.”
After building up stable long-term float to leverage Third Point LLC’s investment expertise, Third Point Re will incrementally shift to more risk taking to improve underwriting results and Bredahl said the firm was “off to a strong start in 2018” after recent catastrophe events contributed to some general improvement in pricing and reinsurance terms and conditions.