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Hedge Funds Entering Reinsurance Business


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I suspect that over time, all these hedge funds now entering the reinsurance business...today it was announced that Steve Cohen is joining Loeb and Einhorn...will have some impact on premium pricing.  Just like hedge funds and private equity were paying too much for acquisitions that normally would have been in Berkshire's realm.  Cheers!



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Third Point Re spent about $1.30 on claims and expenses for every premium dollar it collected last year, on costs tied to “the startup nature of our business in 2012,” according to a filing from the company, which counts Loeb, 51, as a founding shareholder. That ratio improved to $1.08 in the six months ended June 30 as general and administrative expenses fell.


The better underwriting results and investments helped the company post $100.7 million in net income in the six months through June 30, compared with $99.4 million in all of 2012. Third Point Re Chief Financial Officer Rob Bredahl didn’t respond to messages seeking comment. Elissa Doyle, a managing director at Loeb’s Third Point LLC, declined to comment.


Cars, Crops


The reinsurer aims to curb underwriting volatility by limiting risks from natural disasters and focusing on auto coverage, workers’ compensation and crop protection, filings show. Still, Third Point had a $10 million underwriting loss on crop coverage last year.


Greenlight Re shows what can go wrong in the industry, which takes on risks initiated by primary insurers. The Cayman Islands-based company posted a third-quarter underwriting loss of $43.9 million last year fueled by liability contracts protecting dump trucks and other commercial vehicles.


The losses were frustrating and Greenlight Re learned from the experience, Einhorn said at the time. The reinsurer’s shares fell 5.7 percent the day after the disclosure.


Underwriting results diluted the benefits of Einhorn’s investments at Greenlight Re in the last few years, said Brian Meredith, an analyst at UBS AG. Most of the company’s 45 percent gain since its 2007 IPO was on the first day of trading.




There is the question of the insurance business.  These hedge funds that start up reinsurers typically go for the low volatility, low tail risk strategies by focusing on high frequency / low severity risks. This is true with GLRE too, as they want to minimize insurance risk and take the risk on the investment side; to the extent that their portfolios are not low risk fixed income like most insurers/reinsurers, they would want less p/l volatility on the insurance side.


I can't say anything to comfort anyone with concerns in the insurance business of these entities (TPRE, GLRE etc.) other than to say that these hedge fund folks have made a career out of managing risk.  They may not understand the insurance business as well as people who are actually in the business, but I would imagine that they would know enough (and have the resources to figure out) to get the right people and understand the risk.  Things may not look good now for hedge funds with what's going on with JCP (and SHLD), but that may just indicate how tough bricks and mortar retailing is now more than anything about hedge funds.

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