Greenlight Re may shed catastrophe retro business if pricing drops

by Artemis on August 1, 2013

Greenlight Re, the Cayman Islands domiciled reinsurance firm, backed by fund manager David Einhorn and his Greenlight Capital, Inc. hedge fund which acts as an investment manager for Greenlight Re, is not immune from reinsurance market pricing conditions created by inflows of non-traditional capital.

In its second-quarter earnings release, Bart Hedges, Chief Executive Officer of Greenlight Re commented; “While the reinsurance environment remains quite competitive, we continue to provide superior service and maintain strong relationships with our existing clients.”

During its Q2 results conference call, Bart Hedges commented on the impact that third-party and non-traditional capital has been having on catastrophe reinsurance pricing, but said that Greenlight Re remains happy with the pricing on catastrophe retrocessional reinsurance business.

Should the influence of non-traditional capacity begin to push down those catastrophe retro prices however, Hedges made it clear that Greenlight Re may begin to reduce its activities in that area and look for other opportunities.

Hedges said; “If the new sources of capital move heavily into catastrophe retro we will remain disciplined and shed business, if we do not believe the risk-adjusted returns are adequate.”

David Einhorn added on underwriting; “The underwriting team continues to perform well during this soft environment. Our business development efforts seem to be paying off, although we continue to tread carefully and wait for better opportunities.”

On the investment strategy side of this hedge fund backed reinsurer, Greenlight had a much better quarter than it has previously when investment results had shown the potential risks associated with the hedge fund reinsurer strategy. It made a net investment gain of 2.0% on its investment portfolio for the second quarter 2013. This compares to a net investment loss of 3.3% in the second quarter of 2012. For the first six months of 2013, net investment income was $85.4 million, representing a gain of 7.9%, compared to net investment income of $34.7 million during the comparable period in 2012 when Greenlight Re reported a 3.0% return.

“Our investment portfolio performed adequately during the quarter and side-stepped most of the June turbulence,” said David Einhorn, Chairman of the Board of Directors. “Our underwriting team is actively engaged in providing excellent service to our existing clients and remains focused on identifying new profitable opportunities.”

Catastrophe retro has not yet been as heavily impacted by third-party capital as catastrophe reinsurance has, with one reason being that the market remains a niche one with not so many participants. However as catastrophe reinsurance rates have declined it stands to reason that more managers of third-party capital will begin to look at higher layers of retrocessional reinsurance coverage as the rates and pricing available there are considerably higher and this could increase competition, thus pushing down pricing.

Some market participants have told us that retro prices have declined in certain regions and lines of business, although this does seem to depend at what level in the reinsurance tower the retro covers attach. Given the changes to reinsurance pricing on catastrophe lines we expect to see some knock-on effect to retro players and Greenlight Re is clearly ready to react and find more attractive opportunities for itself. Retro pricing remains high though, so we don’t expect the ramifications for that market to be as significant as that seen in U.S. catastrophe reinsurance, for example.

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