Bermuda-based company eases investors’ path into reinsurance

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A new company launched in Bermuda last week will make it easier for investors to generate capital through the reinsurance industry without investing a lot of time, money and talent.

The company, called Multi-Strat Re, will give smaller hedge fund managers and other private investors a low-cost way to outsource virtually all aspects of setting up and running a reinsurance vehicle — from underwriting to processing claims.

The unique platform is the brainchild of Joseph Taussig, of Taussig Capital — a boutique advisory firm that has assisted a number of top investors with getting involved in the reinsurance space. He’s helped hedge fund managers like David Einhorn, whose Greenlight Capital set up Greenlight Re in the Cayman Islands.

“I know of nothing like this,” Mr Taussig said in a phone interview from his home in Zurich. “To my knowledge, it’s the first of its kind.”

The list of well-known hedge fund managers investing in reinsurance includes some of the investment industry’s biggest names. Warren Buffett, Steven Cohen, Daniel Loeb and John Paulson, George Soros, Apollo, AQR, Cerberus, Citadel, DE Shaw and HBK are all well-known funds or managers that have either acquired or started reinsurance companies, each with at least $250 million of equity capital.

Over the last year, a number of larger hedge fund firms have been rushing to open Bermuda and Cayman-based reinsurers as a potential source of long-term capital — with the premiums paid by policyholders effectively leveraging the equity capital in the managers’ funds.

The most recent to venture into the reinsurance business are Steven Cohen with SAC Re, Daniel Loeb with Third Point Re and John Paulson with PaCRe — all Bermuda-based reinsurers launched here within the last six months.

But the logistics and costs associated with setting up a reinsurance business have, in the past, kept many small and mid-sized hedge funds and other investors from considering it as an option.

It takes large fund firms anywhere from a year to 18 months to get a reinsurance vehicle off the ground and they spend millions upon millions of dollars to do so — the greatest expense being compensation to attract the right talent with expertise in the reinsurance business.

“The ones that I’ve been involved in were a lot of work — I mean a lot of work,” Mr Taussig said. “It’s the chicken-or-the-egg. If you want to raise money, you have to have a management team and a management team doesn’t want to come to a company if it’s not sure it’s going to raise the money.”

According to Mr Taussig, the problem is, it’s not easy and it’s hard to start small.

The idea behind Multi-Strat Re is to significantly reduce the amount of time, money and expertise it takes to launch such a complex business, thereby allowing smaller funds and investors with less capital to get in the game.

“Our analogy is, it’s like jumping into turbulent, shark-infested waters before you even know how to swim. Our way is sticking your toe in the kiddie pool, easing your way into the shallow end, you dog paddle first, you get your stroke up, you can swim in the deep end, and then later you can go out in the ocean.”

While large fund operators typically divert at least $25 million to $50 million of investor capital to seed a reinsurance vehicle, investors using Multi-Strat Re will be able to launch with the minimum statutory capital of a million dollars.

“One of these can launch for that little, but I haven’t had one discussion with anybody who’s going to launch with less than $10 million.”

And there’s been a lot of interest in this new “outsourcing reinsurance” concept, he said. While Multi-Strat Re only received approval from the Bermuda Monetary Authority this month, Mr Taussig said already they’ve signed on a handful of clients.

“I think we’ll probably do two a month, I’m hopeful,” he said.

“The beauty of it is, we’ve put the team together, we’ve gone through all the pain of pulling together the people who can operate it and every one of these gets to share those people.”

Mr Taussig said the platform isn’t targeted only at small and mid-sized hedge funds, but anyone who likes the idea of entering the reinsurance space but is overwhelmed by the process of making it happen.

“I mean, Buffett laid out this thing 40 years ago and people would look at it and go, ‘Gee, I’d like to try to do it, but what have I got to do to get there?’ We’re just making it easier to get there. You don’t have to be big to take advantage of it.

“They want to do this intellectually, but for a lot of people in the industry, it’s hard to pull the trigger because it’s such a daunting task to do it. This way, they can get in without hiring any staff. I’ve hired the staff. They don’t have to make a humongous capital investment. They can start small without all that risk and without all those commitments.”

With the launch of Multi-Strat Re, Mr Taussig says the goal is to assist newcomers with everything from setting up the reinsurance vehicle, dealing with collateralisation, underwriting business, and helping them process claims.

Once the company is launched, Multi-Strat Re makes money based on its performance.

“We only make money if the investors make money,” Mr Taussig said.

As an investor’s reinsurance business grows, Multi-Strat Re will give them the option to cut ties and hire its own in-house staff.

“Everyone of them that comes in has the goal of getting big enough to bring in its own management team and cut the umbilical cord.”

Each of the stand-alone companies set up under Multi-Strat Re will be managed by Bermuda-based Cedar Management, which is a part of the USA Risk Group. USA Risk manages 270 captives around the world. Multi-Strat Re will start by underwriting reinsurance covers for those captive insurers, which, Mr Taussig said should generate enough premiums in the foreseeable future.

He said while they also welcome business from Aon, Willis, Marsh and others, they will probably stay mostly with captives in the beginning and will also US property and casualty insurers — particularly on the specialty or niche side of the market.

The chief underwriter for Multi-Strat Re is Martin Hole, the CEO of USA Risk Barbados. Mr Hole spent 11 years in Bermuda as an underwriter with AIG and was later the head of insurance and reinsurance placement for Heddington which was once one of the largest staffed captives in Bermuda and is owned by Texaco.

Mr Taussig said Mr Hole will continue to work out of Barbados.

“He was in Bermuda a long time, but the work permitting was unfriendly and he went down to Barbados and started a captive management company and USA Risk bought a portion of it,” he said. “The business he started and owns a part of is physically there.”

Multi-Strat Re has no plans to open up an office of its own here or employ staff on the Island, but Mr Taussig said the company will indirectly be a job creator.

“It’s each of the stand-alone class 3As [reinsurers] that will likely create the employment and collectively, they’ll create a lot of employment,” he said. “Believe me, everybody we deal with wants that to happen and we want it to happen.”

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