This week marks the official "coming out" for Third Point Reinsurance Ltd., a Bermuda reinsurer that has raised $785 million in seed capital with backing from Third Point LLC fund manager Daniel Loeb and other private equity investors.

Third Point Re's, or TP Re's, newly assembled team, which includes chairman and CEO John Berger, CFO Robert Bredahl and executive vice president of underwriting Daniel Malloy, recently set up shop in a waterfront office on Pitts Bay Road in Pembroke, and it has already written multiple reinsurance treaties.

In a Feb. 1 statement, the reinsurer, which has an A-financial strength rating from A.M. Best, spelled out its broad growth strategy: It plans to manage overall risk by treating the underwriting side of its balance sheet with conservative tolerance limits while using an event-driven, value-oriented investment approach to asset management.

Critical to the investment approach is Loeb's role as manager of the reinsurer's investment portfolio. Loeb is a stock picker extraordinaire and has staked $75 million of his money on this venture. In the statement, TP Re said it will not invest directly in Third Point's co-mingled funds but will own its assets. Also, with limited exceptions, the reinsurer's investment portfolio will be managed on a pari passu basis with Third Point's funds.

TP Re appears to be following in the path of Greenlight Capital Re Ltd., a Cayman Islands-based reinsurer set up in 2004 by hedge fund manager and founder of Greenlight Capital LLC, David Einhorn. It is Greenlight Re, the operating subsidiary, which pioneered the whole concept of a reinsurer wrapped around a hedge fund. This concept is different from the traditional reinsurance model in many aspects, and it encompasses the blueprint that Third Point Re has embraced.

For instance, while a traditional reinsurer is primarily focused on underwriting and manages its investment assets to reduce underperformance, a hedgefund-backed reinsurer structured like Greenlight Re strives to derive as much value, if not more, from its investment activities as it may from underwriting.

Unlike traditional reinsurers that tend to invest primarily in fixed-income securities either directly or through fixed-fee arrangements with one or more investment managers, Greenlight Re's investment strategy is to invest in long and short positions primarily in publicly traded equity and corporate debt instruments exclusively through a joint venture with a third-party investment adviser that is compensated with both a fixed annual fee based on assets under management and on the positive performance of its portfolio. Greenlight Re's investments are managed by affiliate DME Advisors, which is also owned by Einhorn.

Greenlight Re's structure also allows it the flexibility to work closely with smaller clients such as captive insurers and risk retention groups, and create customized capital protection solutions for them. According to Greenlight Re, it tends to focus on customers at times and in markets where capacity and alternatives are limited rather than pursuing and participating in broadly available traditional property and casualty opportunities. The reinsurer maintains a small staff, mostly consisting of experienced underwriters who are compensated based on underwriting performance over multiple years as opposed to premium volume or performance in a given year or period, as is the case with most traditional reinsurers.

While it's not known how Third Point intends to compensate its executives, it is clear that even with $785 million in the bank, Berger intends to run a tight ship

The team's underwriting strategy does not appear to be different from Greenlight Re's — at least, on paper it doesn't. Third Point is looking to build a reinsurance portfolio in markets where reinsurance capacity or alternative are limited, and it expects its risk tolerance overall to remain below average in comparison to the broader reinsurance market.

By David Dankwa

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