Third Point Re sees retro contraction & trapped collateral as opportunity: CEO Malloy

Third Point Re, the Bermuda headquartered, hedge fund backed global reinsurance firm, aims to find opportunity in any dislocation seen across retrocession and ILS markets, as it stands ready to deploy more capacity into catastrophe retro renewals, its CEO told us.

Speaking with Artemis, Third Point Re CEO Dan Malloy explained that this opportunity is only now relevant to Third Point Re since it has expanded its strategy to include more of a focus on property catastrophe risks in recent years.

Third Point Re pivoted away from its original focus on longer-tailed risk underwriting and the more active, hedge fund style investing of its backer Third Point LLC, last year, with an increased focus on underwriting catastrophe risk and investments made in more liquid, fixed income type assets to match this.

The strategic move has benefited the reinsurance company, with its combined ratio for the first-quarter of 2020 perhaps its best ever reported.

Mallow explained in an interview with us, “Over time property catastrophe is a great business and is an attractive diversifying line of business for us, as are the various speciality lines that we have begun underwriting, such as Workers’ Comp, PA and Life.

“AM Best has us scored at the highest level of capital adequacy, so we can deploy more capital into these lines or look at new opportunities if the market offers an attractive return. However, COVID-19 has taught us that correlations emerge in stressed times.”

Part of the expansion into catastrophe risks was through the retrocession market, where Third Point Re has found opportunities over the last year or so.

“We started out with limited capacity aggregate exposure at 1/1/19 and have grown our book based on a conservative risk appetite. We do not have a gross to net issue. Our portfolio, with the exception of some small purchases around the margins, fits our appetite,” Mallow said.

Third Point Re has been leveraging the appetite of the capital markets to assist in its growth into property catastrophe exposures, although at this time the reinsurer has no ambitions to directly manage third-party capital like it used to when it had its own cat fund.

Malloy noted that third-party capital has become a key partner for the company though.

“We are now using third party to help shape our property catastrophe portfolio as our business expands. This gives us the capabilities to consider either traditional or alternative capital options when dealing with clients,” he said.

With current market forces now expected to drive catastrophe reinsurance and retrocession rates higher, Third Point Re believes that the way the market is moving could actually enhance the opportunities available to it.

In particular, the retrocession space, where capacity has been dented over the last few years and with the ILS and collateralised markets facing the prospects of additional trapped capital an year-end, could be a specific opportunity Third Point Re’s CEO believes.

Malloy explained, “We view the contraction of retrocessional capacity and trapped collateral and redemptions of capital from ILS funds as an opportunity not a threat.

“As a case in point, we increased writing of retro in 1/1/2020 as we felt that was the most attractive portion of the cat market to be allocating capacity.”

Which means Third Point Re is actively growing its catastrophe book into a hardening market at this time, which should bode well for its shareholders as long as the wind doesn’t blow too hard, or the ground shake.