Third Point’s property cat move reflects wider volatility push

Third Point Re’s property catastrophe play forms part of a wider move to increase the amount of volatility on its books in order to reduce its combined ratio, The Insurance Insider has been told.

The Bermudian reinsurer unveiled its plan to begin writing property cat excess of loss business in its third-quarter results. As Third Point Re CEO Rob Bredahl explained, it is hoped the move to write higher-volatility, higher-margin business will bring down the company’s combined ratio.

“We plan on writing about $40mn of premium, so it’s small. If you look at traditional companies, their 1-in-250-year aggregate PML [probable maximum loss] for property cat is somewhere around 30 percent of their surplus.

“Our exposure is going to be less than half of that. So our PMLs and risk limits will be much lower than that of the traditional companies,” Bredahl said.

In its most recent results, Third Point Re posted a combined ratio of 104.9 percent, down 7 percentage points year on year.

Third Point Re opened for business almost seven years ago and, since its inception, the company’s focus has been on generating inexpensive float, Bredahl added.

“We did so by writing pro rata deals – both quota share contracts and reserve covers. Our portfolio was 90 percent-plus quota share covers until recently. We did a good job in bringing in that float, but the issue on focusing on that type of business is you end up with a higher combined ratio.”

As Bredahl explained in the firm’s third-quarter results, Third Point Re is now looking to reduce its combined ratio by shifting its reinsurance portfolio towards higher-margin business.

He said there was no way to reduce the combined ratio other than by “taking on some incremental risk”.

“We’ve looked around and examined a number of lines of business,” Bredahl added.

And while he acknowledged that property cat pricing had reduced significantly in recent years, even in light of 2017’s losses, he said “there is still reasonable margin in the peak zones”.

“A lot of the companies that focus on property cat have diversified quite a bit within property cat, and have taken on Japanese wind deals and others that are chronically underpriced,” he explained. “We’re not going to do that. We’re going to write a small cat portfolio and only focus on the peak zones where there is still margin.

“That portfolio, because it’s uncorrelated with our investment portfolio, is extremely capital efficient for us.”

Property cat will be the focus of Third Point Re’s 2019 expansion plan but, as Bredahl explained, the company has also started writing other excess covers.

“We’re not only moving into new lines of business, but we’re also offering different types of covers. We are also looking at aggregate stop losses where you end up with about the same exposure you have on quota share contracts, it’s just in a different form,” he said.

Elsewhere, the company will continue to write mortgage business, and there is also interest in growing a book of transactional indemnity cover.

“Whereas maybe 1 percent of M&A deals had that insurance 10 years ago, now it’s around 10 percent and it’s growing rapidly,” Bredahl pointed out, adding: “We like that space and we think that growth is creating an opportunity.”

Bredahl also expects to see more business emanating from One Lime Street.

“We’ve always been active at Lloyd’s providing capital solutions in the form of reserve covers and quota shares,” he said.

“We have a rich pipeline right now because of the house cleaning being conducted by Lloyd’s. We’re getting lots of enquiries on capital solutions, and we’re also expecting the results coming out of Lloyd’s to improve, and so we’re optimistic there.”

Third Point Re posted a Q3 2018 net loss of $0.14 per diluted common share, beating a Wall Street consensus of a $0.23 net loss per diluted share, as cited by MarketWatch.

The net loss of $0.14 per diluted common share for the third quarter of 2018 compared with a profit of $0.52 per diluted common share generated in the prior-year period.

The Q3 net loss was $13.3mn, compared with a net profit of $54.7mn a year ago.