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Third Point Re targets higher risk business, but investments remain focus

12th November 2018 - Author: Luke Gallin

Hedge fund-backed reinsurer Third Point Re maintains that investment returns will remain the key driver of its financial results, although, the company feels it now makes sense to add some higher margin, higher risk business to its reinsurance portfolio.

third-point-reinsurance-ltd-logoSpeaking during the Bermuda-based company’s third-quarter 2018 earnings call, President and Chief Executive Officer (CEO), Rob Bredahl, underlined the reinsurer’s focus on its investment results as the main driver of its financial performance, despite both this, and its underwriting operations falling to a loss in Q3.

During the third-quarter, Third Point Re fell to an investment loss of $3.6 million compared with an $89 million gain a year earlier. However, for the first-nine months of 2018, its investment performance is positive at $25.4 million, although this is down on the $324.8 million recorded in the same period last year.

Hedge fund-backed reinsurers like Third Point Re look to offset challenging underwriting market conditions with high investment returns, and, when investment returns are low, look to their underwriting operations for greater margins. However, the challenging reinsurance landscape coupled with low interest rates and a difficult investment environment, has seen the performance of Third Point Re and others struggle, and this was again evident in Q3.

At the same time as reporting an investment loss for the period, Third Point Re also recorded an underwriting loss of $6.3 million, compared with an underwriting loss of $12.6 million in Q3 2017. For the first nine months of the year the company’s underwriting performance remains negative, with the firm recording a net loss of $17.7 million, compared with $33.3 million a year earlier.

The firm’s combined ratio for the third-quarter of 2018 reached 104.9%, and 104.3% for the first nine months of the year.

Speaking during the firm’s Q3 earnings call, Bredahl explained that the company remains focused on its investment performance for its financial results: “Investment returns will remain the key driver of our financial results, but we believe it now makes sense to add a modest amount of higher margin, albeit higher risk business, including property cat, to our reinsurance portfolio.

“We can earn margin with little use of risk capital because we are starting from a very low risk portfolio and we’ll focus on areas with little correlation to existing business. However, please note that we still expect our total risk limits, PMLs and underwriting volatility to remain much lower than most of our reinsurance company peers.”

Ultimately, said Bredahl, it makes sense for Third Point Re to continue to gradually shift its underwriting appetite to include some higher margin business, which should bring the firm’s combined ratio below the 100% mark.

“From the inception of the company the primary focus of the underwriting strategy was to generate low-cost float and to minimise underwriting volatility. We’ve now built an underwriting portfolio of stable float which allows us to manage the company to an optimal investment exposure level, with a very good capital efficiency,” said Bredahl.

Times remain challenging for reinsurer of all shapes and sizes, and this includes the hedge fund-style players. It’s clear that Third Point Re is still relying on its investment performance for its overall result, but, in light of market conditions and potential opportunities, the firm continues to adjust its underwriting appetite in an effort to achieve higher margins.

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