09/26/2012

Outsourcing Option for Reinsurance Vehicles

A consulting firm that has helped big fund operators including Greenlight Capital set up reinsurance companies is pitching a low-cost way for smaller managers to raise capital via such vehicles.

Taussig Capital this week unveiled Multi-Strat Re, a Bermuda-based unit that will allow hedge funds to outsource virtually all aspects of starting and running a reinsurance business ó from underwriting various risks to structuring policies to processing claims. The idea is to significantly reduce the amount of time and money thatís typically required to launch reinsurance vehicles. Clients of Multi-Strat Re also will get marketing help from Taussig, which can draw on an extensive list of investor contacts.

Large hedge fund firms have long viewed reinsurance as a potential source of long-term capital ó with the premiums paid by policyholders effectively leveraging the equity capital in the managersí funds. In addition to Greenlight, the list of blue-chip firms that have started reinsurance companies includes AQR Capital, Cerberus Capital, Citadel, D.E. Shaw, Moore Capital, Paulson & Co. and Third Point.

But the logistical barriers and costs associated with the business have deterred small and midsize firms from considering the reinsurance option. Large fund firms typically have spent a year to 18 months getting a reinsurance business off the ground ó and shelled out millions of dollars in compensation to attract the necessary expertise. For smaller fund operators, such efforts are unthinkable.

Thatís where Multi-Strat Re comes in. Because managers wonít have to worry about hiring staff or establishing a presence in the industry, the timetable for launching a reinsurance business can be reduced to 30-60 days, with fixed costs of about $100,000 per year. Large fund operators typically divert $25 million to $50 million of investor capital to seed a reinsurance vehicle. Managers using Multi-Strat Re could manage a launch with just $1 million of equity capital.

ďItís kind of a chicken-and-egg thing,Ē said Taussig founder Joe Taussig. ďItís hard to raise money without staff and itís hard to hire staff without the commitment of investor capital.Ē

As a managerís reinsurance business grows, Multi-Strat Re gives the firm the option to cut the umbilical cord and hire in-house staff.

Taussig, who founded his company in 1994, is in the process of moving the headquarters from Zurich to Gibraltar, though he will continue to be based in Switzerland.

Taussigís partner in Multi-Strat Re is USA Risk of Barre, Vt., which employs 270 reinsurance agents and collects $3.5 billion of premium payments annually.

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