Duperreault says Mereo will focus on ‘underwriting, underwriting, underwriting’
Mereo Advisors chairman Brian Duperreault said that the overriding focus of the start-up firm would be on underwriting, despite its use of elements of hedge fund structures and approaches.
Speaking to Insurance Insider in an interview, the former AIG CEO said: “More important than anything will be underwriting, underwriting, underwriting.”
Duperreault was responding to questions about the potential parallels between start-up Mereo Advisors and the class of total return reinsurers like Third Point Re and Watford Re that heavily underperformed.
Earlier this week, Insurance Insider revealed that former Marsh McLennan and Ace CEO Duperreault had teamed up with investment executives Lawrence Minicone and Jason Miller to form a new reinsurance underwriting business that would look to marry elements of the hedge fund world to reinsurance.
Duperreault argued that Mereo would be distinct from the total return reinsurers that had run into trouble because of its emphasis on the liability side of the balance sheet, not the asset side.
“One of the things I really liked about Lawrence and Jason was that they understood that underwriting was paramount – that it was the most important thing to do,” Duperreault told Insurance Insider. “So it wasn’t a hedge fund vehicle framed around the investment return, with insurance a secondary effort.”
The seasoned industry executive played a key role at one of the total return carriers as founding CEO of Hamilton Insurance Group, a business formed as a buyout vehicle for SAC Re. Hamilton Insurance Group was backed by quant hedge fund Two Sigma, one of the only alternative investment managers attached to a reinsurer that lived up to its promises on performance.
Duperreault explained that the central aspect that Mereo would look to take from the hedge fund world was “the theoretical construct” to underpin the creation of a portfolio with an unusually high degree of diversification.
“This hedge fund portfolio structure has as its fundamental premise that a balanced portfolio of businesses will produce a good return on equity over all cycles – hard and soft,” he said.
Minicone has a background at Bridgewater, the hedge fund where Ray Dalio famously developed an investment system based around a highly diversified portfolio designed to ensure outperformance in all market conditions.
Duperreault acknowledged that there would always be “the vagaries of business, and the randomness of risk”. But he added that “what we’re trying to do here is to have this balanced portfolio that will go the distance no matter what”.
He stressed that while the firm may look to be slightly underweight in some areas and overweight in others based on their short-term attractiveness, overall “we don’t want to run to things, and we don’t want to run away from things”. Instead “we’re trying to stay balanced from the beginning”, and this kind of portfolio composition underpinned by the hedge fund portfolio construct will deliver a very good cross-cycle return.
The serial entrepreneur said that having engaged with the marketplace, Mereo was confident there is a sufficiently diverse set of risks out there at attractive pricing to get started. “So we feel very confident in our ability to execute,” he said.
As reported earlier in the week, Mereo is going to target writing 20-30 classes of business, spread across areas as diverse as auto, professional liability, commercial property, surety and crop.
Duperreault said that taking the hedge fund diversification approach to portfolio construction may in fact be easier in insurance than the investment world “because we have an enormously diverse pool of risk”.
In addition, Duperreault emphasized that Mereo would have the same “expense conscious” approach seen in the hedge fund world.
Duperreault acknowledged that one of the unusual features of the current reinsurance hard market is the lack of new capital that has been drawn in by the prospect of good returns.
“However, that’s all the more reason to get the capital into the market because there’s a scarcity out there,” he said. “The industry needs capital. There’s an increase of risk in the world – whether it’s because of global warming, or inflation, or asset accumulation, technology – the insurance world needs more capital.”
The Mereo chairman said investors had also received the business plan well and were attracted to the prospect of non-correlated returns.
The executive said he had been positive on the reinsurance business throughout his career, buying Tempest Re while running Ace, founding Hamilton in the early 2010s and acquiring Validus while CEO of AIG in the late 2010s.
“Reinsurance is a good business … I’ve always liked it,” he said, arguing that it offers attractive returns to investors with a long-term perspective.
He acknowledged that the volatility of earnings in the sector can scare some investors but said the scope for rapid growth in book value compensated reinsurers for their lower trading multiples.
Duperreault’s career stretches back to the 1970s, and the executive has formally retired from the industry three times – most recently after stepping down from his position as executive chairman at the end of 2021.
Until now, he has always been called out of retirement by one thing or another.
The executive quipped: “I’ve retired three times – so I’m really good at retiring. But I’m not very good at staying retired!”