Hedge Fund Reinsurers Face Criticism, But Is It Warranted?VW Staff
Joe Taussig – “Hedge Fund Reinsurers” Face Criticism, But Is It Warranted? by Opalesque.TV
Joe Taussig is one of the most accomplished experts on insurers and reinsurers which invest their assets in alternative investments, also known as “hedge fund reinsurers”. He was instrumental in the creation of Greenlight Re, Third Point Re, and SAC Re, among many others. Joe believes the term “hedge fund reinsurer” is a misnomer and poorly understood. He also believes that attacks on hedge fund reinsurers regarding their tax structure miss the point that tax is only a tertiary or fourth level benefit. Joe estimates 70 to 80 SEC registered asset managers have set up reinsurers over the past decade and explains eight reasons why asset managers do so, citing key benefits such as providing investors with better returns and accessing (permanent) capital from sources otherwise not available. Joe believes up to 80% of hedge fund reinsurer assets come from such sources.
Joe Taussig – Lies, damned lies, and statistics.
Joe Taussig also comments on what S&P and the FT missed when recently writing that “hedge fund reinsurers are not viable” or that they are “lousy underwriters”, commenting specifically that:
- Reinsurers set up by asset managers do not need an S&P (credit) rating, but they get good to excellent AM Best ratings on their ability to pay claims,
- S&P ignores the time value of money and fact that high “combined ratios” can actually be a sign of quality or prudence, and
- Lies, damned lies, and statistics: the time frame in question makes all the difference when you include Fukushima and Hurricane Sandy, for example.
Joe also questions whether Hillary Clinton and Senator Wyden understand insurance accounting, especially topics such as the moral hazards of insurance reporting or the “Underwriter’s Dilemma”, where being cautious is not rewarded.
Even Warren Buffett is taking shots at hedge fund reinsurers saying in 2015 that they do “just enough business to look like they are in the industry”, but are really shams. Joe thinks Mr. Buffett shouldn’t throw stones given he lives in a glasshouse. Both Greenlight Re and Third Point Re, companies Buffett cited as examples, each write more dollars of premium per dollar of equity capital than Berkshire Hathaway. They also have more dollars of reserves per dollar of equity. In fact, some hedge fund reinsurers have been able to write $25-30m of premium per employee versus traditional insurers where that number can be as low as $1.5m.
However, insurance risk pricing has greatly eroded over the last four years (up to 75% in the severity business) as a consequence of contagion and the impacts of catastrophe bonds and ILS, which have both destabilized severity risk pricing. According to Taussig, companies have three solutions available to address this price erosion: 1. Focusing on business with far less moral hazard; 2. Acquiring insurers whose pricing is much less affected; and 3. Writing highly structured contracts for capital relief (Solvency II).
In this Opalesque.TV BACKSTAGE video, Taussig also speaks about:
- The five ways reinsurers can be set up
- How different confidence curves result in the massive differences between insurers
- Why Taussig likes captive insurers and making a business out of self-insurance
- When is the timing right for a corporation to set up a captive insurance company?
- How enterprise risk captives offer asset managers easy access to insurance business
- The benefits for asset managers to run an enterprise risk captive
Joe Taussig is the Founder and a Director of Multi-Strat Holdings Ltd., which owns Multi-Strat Re and partners with asset managers to incubate reinsurers in 90 to 120 days for $100,000 in startup costs. Prior to forming Multi-Strat Holdings, Mr. Taussig has acted as a merchant banker for numerous financial services startups, divestitures, and acquisitions since 1990. He was involved with the formation of many reinsurers. The best known is Greenlight Capital Re, which has more than $2 billion of assets managed by David Einhorn and is publicly traded on NASDAQ (GLRE).
Prior to 1990, Mr. Taussig took significant stock, option, and warrant positions in troubled companies and served as their CEO or COO in an effort to turn them around. Better-known companies included United Press International, Data Broadcasting (now known as Interactive Data and was recently sold for more than $3 billion), Cabletek (acquired by First Data Resources, then a subsidiary of American Express), and Instinet, which was bought by Reuters in 1987. He earned an MBA from Harvard University in 1972.