Steven A. Cohen, who built one of the world’s biggest and most successful hedge funds, is branching out and plans to set up his own reinsurance firm, two people familiar with the matter said.
Cohen, who runs $14 billion SAC Capital Advisors in Stamford, Connecticut, recently told investors he plans to launch SAC Re, a reinsurer based in Bermuda, early next year.
The billionaire stock picker, long known for delivering high double digit returns, is following other well-known hedge fund managers such as David Einhorn and Daniel Loeb into the reinsurance market.
To get SAC Re up and running, Cohen recently tapped insurance industry veteran Simon Burton to oversee the new venture, said the people, who are not authorized to speak about the matter publicly. A spokesman for SAC declined to comment.
For years, hedge fund managers have been known as big risk takers, but more recently a growing number have also move into underwriting risk.
In September, Loeb, who runs the $8 billion Third Point LLC, told investors he is founding Third Point Re. Prominent hedge fund manager Einhorn has also been involved in reinsurance for some years with his Greenlight Capital Re Ltd.
“I call it the sheep theory,” said industry consultant Andrew Barile. “When one sheep leaves the barn they all follow and it is exactly the same with the hedge funds. When one successful manager makes the decision to go into reinsurance, the others follow.”
The timing among hedge funds appears right, industry consultants said, noting that prices in the reinsurance industry are now low, but likely to rise as the economy improves.
“We haven’t had a lot of new reinsurers launched in the last five years, but that is clearly changing,” said Barile, who runs Andrew Barile Consulting Corp Inc.
For hedge funds, this may be a savvy way to raise new money during tough times. Not only are there more hedge funds competing for capital, but investors are becoming stingier, especially now that many hedge funds are nursing heavy losses, industry experts say.
In reinsurance essentially acts as a safety valve for insurance companies in that an insurer pays a reinsurer to cover part of its losses between certain thresholds.
Cohen told investors he hopes to raise about $500 million in capital and that all the money would be invested in SAC funds. Cohen recently closed his flagship fund to new investors. Loeb did the same thing earlier this year.
Burton, who will run SAC Re, cemented his insurance credentials as deputy chief executive of Lancashire Holdings, where he was also chief executive and chief underwriting officer of the group’s Bermudan underwriting subsidiary, Lancashire Insurance Co.
The new reinsurer will concentrate on property, where hurricanes and other disasters can cause substantial damage, and on casualty, where the scope of losses may be lower, but they occur more frequently in medical malpractice or workers’ compensation claims.
For decades Cohen, 55, has been admired for his ability to read stock market moves and he returned 30 percent on average every year to clients. But those steady and strong returns have also put him and his firm into the spotlight as the U.S. government investigates whether SAC’s winning bets may have been aided by insider information.
To date, neither the $14 billion fund nor its founder has been accused of any wrongdoing.
(Additional reporting from Ben Berkowitz in New York; editing by Matthew Goldstein and Andre Grenon)