Third Point, LLC Destroys $100m

Sorry about the big quote, but I need to set the stage here:

Daniel Loeb, the founder of Third Point LLC, started a reinsurance company that can invest in his $8 billion hedge fund, joining rival David Einhorn in seeking more permanent capital.

Third Point Re, which is based in Bermuda, hired John Berger as chief investment officer and has about $500 million in capital, according to two investors familiar with the plan. New York-based Third Point wants to raise $250 million to $500 million more and plans to eventually sell shares of the reinsurer to the public, said the investors, who asked not to be identified because the firm is private.

Here’s more.

First, let’s clear one thing up: the insurance market is soft because there’s too much capacity. Reinsurers are running break-even and, to the extent that there is any price increases in catastrophe-driven lines, it’s in tiny little corners of the market (New Zealand EQ, Japan EQ and other non-US, non-EU catastrophe zones).

And these price increases don’t matter globally because they are being completely captured by incumbent players. Until a company or two dies by the sword and the market reprices the business that killed them (ie policies with lots of claims and fat renewals), nobody is getting rich.

So the market would instantly value a startup at 80% of book. In this case that destroys 100m. Why does Third Point want to lean into these headwinds?

Well, he wants to create a little walled garden where he can play by himself:

Loeb follows Einhorn, head of New York-based Greenlight Capital Inc., in creating a reinsurer as a way to raise capital for his hedge fund that isn’t subject to client redemptions. Reinsurers, which help insurers shoulder risk, earn premiums that they invest to make a profit.

When you put money into a regulated entity, it’s stuck. This is why AIG policyholders had nothing to fear from all the bond insurance shenanigans. Loeb is locking down a chunk of capital into a straight-up illiquid private equity bet.

What’s more, cat reinsurers do not invest for profit. Their liabilities have an 18-to-20-month duration at best and last time I checked, nobody’s getting rich on 2-year paper.

From a straight-up financial perspective, this move is lunacy. But Loeb gets his sandbox, even if he’s trading liquidity for nothing.

Good luck, Danny-boy.

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