The 2012 hedge fund-backed entrants into the reinsurance market are benefiting from the track record of Greenlight Capital Re Ltd. as they look to convince buyers that their aggressive investment strategies will not disrupt their ability to meet their obligations.

While the reinsurers formed with hedge fund money this year are still seeking to establish themselves in the market, the track record of Greenlight Re makes their task easier, says John Berger, CEO of Third Point Reinsurance Ltd., one of this year's Bermuda start-up reinsurers.

“People are curious about the asset strategy, but I wouldn't say they're overly concerned,” said Mr. Berger, whose company is backed by hedge fund manager Daniel Loeb's Third Point L.L.C. fund.

“We're the beneficiary of Greenlight Re, which has been around about seven years. They were the new model at the time. Now we can tell people, "It's the Greenlight Re strategy,' and they know what that is,” he said.

Greenlight Re was set up in the Cayman Islands in 2004 by hedge fund manager David Einhorn's Greenlight Capital fund and writes a broad range of property/casualty and specialty reinsurance business.

The company's financial strength rating of A was affirmed this month by A.M Best Co. Inc., which noted Greenlight Re's “exceptional enterprise risk management as it aggressively manages risks on both sides of the balance sheet.”

Brian Schneider, Chicago-based senior director of insurance for Fitch Ratings, said Greenlight Re's underwriting performance had been largely as expected so far.

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“At the same time, from what we can tell, they've taken more of the Florida-type risk,” Mr. Schneider added. “If you'd invested in Florida underwriting for the past six years, you'd expect to have pretty good results. So it would be difficult to tell with those guys if they are overexposed on the underwriting side. Based on the models they've put in place, the balance of the risk should be on the investment side.”

The same is true of the 2012 hedge fund-backed Bermuda startups, which include SAC Re Ltd., backed by Steven Cohen's SAC Capital Advisors Group Inc., and PaCRe Ltd., a joint venture between Bermuda reinsurer Validus Reinsurance Ltd. and Paulson & Co. Inc., run by John Paulson. These two, as well as Third Point Re, all have A- ratings from A.M. Best and have their assets managed by their hedge fund backers.

Different asset managers bring varying levels of volatility to the portfolio. Take Mr. Cohen, who returned 8% in 2011 and was up 8% through August this year, according to Forbes magazine. Compare that with Mr. Paulson, whose Advantage Plus fund gained 17% in 2010, then lost 50% in 2011, according to Bloomberg L.P. reports.

Where the reinsurers also differ is in their underwriting strategies. SAC Re will write a mix of property catastrophe reinsurance and long-tail liability business, while Third Point Re steers clear of catastrophe business and has started by writing multiperil crop reinsurance, nonstandard auto, standard auto and workers compensation. PaCRe also will underwrite some catastrophe risk, focusing on the top layers.

Mr. Berger acknowledged that it is a tough time to enter the market. “It's a very competitive marketplace, and we're a new, relatively small reinsurer,” he said. Third Point Re has $750 million in capital.

“In addition, because of our asset strategy, we're not going to be a property catastrophe player, which is the biggest and the best part of being a reinsurance company.

“Given all that, I think the reception we've had is quite good. We know a lot of people who have gone out of their way to give us a look at business — not just brokers, but also other reinsurance companies.”

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For brokers, the extra capital coming to market is welcome. Charles Withers-Clarke, executive vice president of Willis Re Bermuda Ltd., said the variety of approaches from the new players also is helpful to the market.

“Each of the companies has differing strategies with varied, targeted lines of business, and this added diversity to the existing market provides value to our clients around the world,” Mr. Withers-Clarke said.

He also said he is hopeful that the newcomers will be long-term market players, compared with hedge funds that have invested in temporary reinsurance vehicles such as sidecars.

“Through them seeking their own A.M. Best ratings, we obtain a better transparency than we would from third-party capital acting behind existing players and this provides us with increased confidence of stability of capacity for the future,” he said.

The hedge-fund backers of the new companies are focused on the investment strategy, rather than the underwriting strategy. A Bermuda reinsurer creates an efficient asset-management platform for them, in that tax treatment of returns is beneficial and also investors cannot easily pull out their money, providing protection for the fund managers from mass redemptions during times of market weakness.

While the hedge fund-backed players' emphasis clearly is on investments, some believe they eventually could have a significant impact on reinsurance rates.

In a September bulletin, Fitch Ratings suggested that in years of high investment returns, reinsurance prices “could drop below their sustainable level.” In such a scenario, traditional reinsurers making single-digit investment returns “would struggle to remain profitable.”

Some existing reinsurers are embracing the hedge funds' entrance. Hiscox Ltd. has joined Third Point Re in a joint venture to establish a catastrophe reinsurance funds management business. Allied World Assurance Co. Ltd. acquired a minority interest in private-equity and hedge fund firm MatlinPatterson Global Advisers L.L.C., who eventually will manage $500 million of the insurer's assets.

The convergence between the capital markets and reinsurance looks set to continue.