Big hedge fund titans Dan Loeb, Steve Cohen and John Paulson have recently set up reinsurance firms for risk management
John Paulson made a deal with reinsurer Validus Holdings. Dan Loeb‘s Third Point LLC set up a reinsurer called TP Re, while Steve Cohen’s SAC Capital has set plans to open up SAC Re. They followed on the model of David Einhorn and his Greenlight Capital Re Ltd.
Paulsons’s PaCRe Ltd, had been formed with an initial capitalization of $500 million to write reinsurance, which insurance companies use to backstop portions of their risk.
Validus put up 10 percent of that capital and will underwrite the company’s policies, collecting a commission based on its profits. The source of the rest of the capital was not immediately clear. Paulson & Co will manage PaCRe’s investment portfolio, Hedge Funds have been attracted to the reinsurance business in part from the fees to be gained on managing investments. Most have set up and funded reinsurers to profit from both the underwriting side of the business and portfolio management
Pension fund of UK bank Barclays is looking at investments in sub-Sahara Africa’s fast-growing economies, and in hedge funds which play the reinsurance industry – a sector where insurers look to unload risk. Reinsurance prices often jump in the wake of big payouts by the industry after natural disasters – such as Japan’s Tohoku earthquake in 2011 – as less well-funded players are forced to retrench, freeing those still in the market to charge more.
“It’s truly uncorrelated,” Barclay’s chief investment officer Tony Broccardo said, referring to how little prices in the industry are linked to traditional equity or bond markets. “After one of these big events, the pricing of securities becomes much more favourable for us.”