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Re-balancing Risk and Return Across

the Whole Balance Sheet In an environment of depressed pricing and low interest rates, reinsurers seeking risk adjusted returns say they are focusing on the agility and responsiveness of their investment and underwriting strategies to changing market conditions and opportunities. Reinsurance leaders agree that a number of major trends will influence the industry over the next five to ten years.

Discussing misconceptions about hedge fund reinsurers, John Berger, Chairman, Chief Executive Officer and Chief Underwriting Officer, Third Point Re, said, that the hedge fund model was not a new model.

“Most companies - traditional companies - spend 90 percent of their time on the underwriting side and have a very conservative low risk investment side,” he said. “That worked well until interest rates plummeted so now there’s an advantage to being smarter and more aggressive on the investment side.”

He said: “The future is going to get tougher and tougher. A common question people love to ask is how big a loss can change the market. I am not sure there is one single loss that would change the market. There is a lot of capital out there and a lot of capital waiting to come in. I think this is the way the market is today, and assuming this will

continue it is going to slowly deteriorate for as far as the eye can see. Now do you have a gameplan that works in that environment?”

Aurora Swithenbank, Managing Director and Co-Head of Insurance Structured Finance, Goldman Sachs, said: “Increasingly traditional reinsurance and insurance companies have been going into alternative assets. In some cases that means hedge funds, for others it means private equity, for some it means structured assets like CLOs. I think there is a lot of focus on increasing - in an appropriate and risk-managed fashion - increasing investment returns and that’s something certainly the markets are focused on when we look at valuations.”

John Rathgeber, Chief Executive Officer, Watford Re, said: “There’s much less cat risk for instance than you have in typical reinsurers. Another aspect is the premium to surplus leverage is going to be much less. It’s a rebalancing ... a recalibration.

On the asset side there is more risk. It is not investment grade corporate credit, but there’s capital there to back that risk. In the end it’s all about matching capital to risk.”

He added: “It’s been a fascinating time period - the pace of change has been unprecedented. It’s obviously a very challenging environment and that’s largely the reason, though, that this vehicle was set up - to try to respond to difficult market conditions, to try to find a way to find a niche to navigate through the difficult times. We believe again it’s back to execution, you’ve got to deliver and execute on your strategy.”

Bermuda Reinsurance Conference 2014 7

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