Third Point Reinsurance Ltd. — the Bermuda-based insurance play of hedge fund manager Daniel Loeb — announced Thursday that his firm is dropping its catastrophe fund platform called Third Point Reinsurance Opportunities Fund Ltd and transferring the remaining business to Hiscox Insurance Company.
According to the press release, despite “very attractive returns” Third Point is dropping out managing catastrophe bonds because of the “increasingly difficult conditions in the catastrophe reinsurance market in the near term and the increasing value of a broad underwriting platform.”
“For investors that seek to participate in the catastrophe reinsurance market, we believe Hiscox provides an outstanding franchise for sourcing risk around the globe,” said Third Point Re CEO John Berger in a statement.
But Third Point and Loeb have been hedging their commitment to running the third-party catastrophe fund business for nearly a year, continually referencing “challenging” market conditions and limited expectations to investors.
But why now?
Third Point Re, Not Only the Cat Bond Business, Is Struggling
Since it’s initial public offering in 2013, Third Point Re shares are down over 10%, and are pushing a 20% decline year to date. This makes running a low return third-party capital vehicle a distraction. Following the IPO J.P. Morgan Chase warned that the firms would be entering a deteriorating reinsurance pricing cycle and that things could get worse if investment returns don’t make up the difference.
“[Given] its lack of underwriting income, near-term earnings and stock performance should be highly dependent on Third Point hedge fund’s returns,” a report issued last year said. “Besides volatility in short-term results, we are concerned about deterioration in reinsurance pricing and TPRE’s high expense ratio.
Catastrophe Prices Are Falling Too Far and Too Fast, and the Cat Fund Had the Most Price Risk Exposure
In it’s last annual report, Third Point Re said that catastrophe reinsurance pricing had dropped over 10 percent. According to several reports, the pricing environment could be even worse during 2015 renewals.
And where was all the price risk centered? Within Third Point’s catastrophe fund.
“Our direct exposure to falling property catastrophe prices is contained within the Catastrophe Fund and limited to our $54.8 million investment in the Catastrophe Fund and the contingent profit commission we receive from managing the Catastrophe Fund,” according to the 2013 annual report. “Given current market conditions, we expect to limit the size of the Catastrophe Fund to ensure we can continue to profitably deploy the funds under management until market conditions improve.”
It would seem, according to yesterday’s announcement, the improvement never happend.