Greenlight Re continues to avoid inadequately priced business

Greenlight Re, the Cayman Islands domiciled, hedge fund strategy reinsurance firm backed by David Einhorn and his Greenlight Capital, Inc. hedge fund, has slashed its premiums written again in the last quarter as it declined to renew business deemed unprofitable.

Greenlight Re reported net income of $60.7m for the fourth quarter of 2014, down from $83.9m for Q4 2013. This resulted in an underwriting loss for the quarter of -$4.6m, compared to a gain of $7.9m a year earlier.

The key reason is that Greenlight Re spent much of 2014 walking away from underpriced retrocessional reinsurance business and declining to renew a number of accounts which it deemed inadequately priced in the currently softened market.

In the fourth-quarter, Greenlight Re underwrote gross written premiums of $74.3m, compared to $124.8m in the prior year, while net earned premiums dropped to $75.2m from $141.5m in Q4 2013.

For the full-year Greenlight Re reported gross written premiums of $324.0m, compared to $535.7m in 2013, while net earned premiums came in at $354.2m, down from $547.9m in the prior year. Underwriting income for 2014 dropped to $11.6m, compared to $37.5m for 2013.

However, reflecting the total return strategy of investment plus underwriting and growth in book value per share to investors, Greenlight Re reported that its fully diluted adjusted book value per share had grown by 10.2% to $30.76 at the end of the year, up from $27.91 per share at the end of 2013.

“We are pleased with our progress and ability to attract new business in this competitive reinsurance market,” commented Bart Hedges, Chief Executive Officer of Greenlight Re. “Overall, our 2014 premium numbers decreased due to the impact of not renewing certain business, which we believe was inadequately priced. Our combined ratio was modestly impacted by the effect of adverse development on prior years’ contracts and the deleveraging effect of flat costs on reduced premiums.”

For the 2015 portfolio renewals Greenlight Re adjusted its catastrophe retrocession business in order to avoid the most competitive contracts where it felt pricing had declined the most.

“We renewed certain of our existing catastrophe retrocession relationships at January 1, 2015 and also wrote some new catastrophe retrocession deals with new partners. We have repositioned our catastrophe retrocession book of business from predominantly excess of loss contracts to quota share contracts,” the reinsurer explained.

“We have found there to be less available capacity from alternative capital providers for quota share contracts in this area and as such terms and pricing are more favorable. Additionally, we have recently secured new contracts with larger, syndicated reinsurance placements for general casualty and professional liability business which have a longer duration of claim payments than the business we have written in the past,” the reinsurers report continues.

Despite the continued softening in pricing, Greenlight Re feels that it can continue to find attractive opportunities to deploy capacity, explaining; “While the competitive market conditions have made finding new business that meets our return hurdles challenging, we believe that we have a strong pipeline of attractive opportunities with counterparties that seek highly customized structures, terms and conditions, which aligns well with our underwriting strategy.”

The combined ratio for the year came in at 102.9% compared to 97.1% for 2013, so a few points knockes off income for the year as a result of this adverse development. However a hedge fund strategy reinsurer can offset a 100+ combined ration with its investment returns, which in 2014 came out positive enough for the firm.

Investment performance at David Einhorn’s Greenlight Capital hedge fund has been mixed, as many hedge fund managers have experienced in 2014. For the fourth quarter the investment return on Greenlight Re’s investment portfolio managed by DME Advisors, LP was a healthy 5.3%, which was down on the prior year quarter but still a strong result for a single quarter.

The Q4 investment result seems especially strong when you consider that the full-year 2014 investment return is reported as 8.7%. However, demonstrating how challenging the investment environment is right now 2015 has got off to a difficult start it seems and the investment return to for January 2015 Greenlight Re was -2.8%.

“In a persistently challenging reinsurance market, we have made progress finding new opportunities that we believe will bear favorable results,” David Einhorn, Chairman of the Board of Directors, said. “The Company remains focused on generating income and preserving capital while we continue to enhance our infrastructure and seek new business.”

Interestingly, Greenlight Re sees an opportunity in the recent rounds of M&A in reinsurance.

“The reinsurance industry has recently experienced several announcements of mergers and acquisitions (“M&A”) between large reinsurance companies. We believe there is likely to be further consolidation in the industry. However, this consolidation will not likely result in a significant reduction in total capital within the industry, but simply a concentration of capital in fewer, larger participants. Due to the reduction in the number of competitors in the industry, we believe pricing may partially stabilize. We also believe that while some business may be further restricted to only the largest reinsurance companies in the industry, this consolidation may create an opportunity for us as more capacity may be made available to other reinsurers,” the firm explained.

Greenlight Re, like fellow hedge fund backed reinsurer Third Point Re, is unlikely to be thinking about M&A itself as the strategies differ from more traditional firms, at least for the moment. These hedge fund backed firms will likely focus on maintaining a sufficiently large and well-priced book to enable the asset managers to continue to bring in returns to offset any reduction in pricing. Of course it is when the investment portfolios don’t perform that the impact of softened reinsurance rates may really be seen.