Hedge fund investment losses weigh on Greenlight Re’s Q1 results

Greenlight Re, the Cayman Islands domiciled hedge fund reinsurance firm backed by David Einhorn’s Greenlight Capital, Inc., has fallen to a first-quarter loss as investment losses at the hedge fund weighed on results.

Greenlight Re had a good quarter from an underwriting point of view, reporting an increase in gross written premiums which hit $129.7m for the quarter, up from $118.9m a year earlier.

Net earned premiums declined however, likely a reflection of lower pricing in the portfolio as market conditions continue to bite, with $94.8m reported compared to $111.7m a year earlier. That resulted in lower underwriting income of $4.7m, compared to $6.5m in the prior year period.

“We are pleased with the new business and relationships we developed during the first quarter,”
said Bart Hedges, Chief Executive Officer of Greenlight Re. “At the same time, we continue to maintain our underwriting discipline in this competitive environment.”

But it’s the investment side of the hedge fund reinsurer strategy which can be so volatile and David Einhorn’s Greenlight Capital saw an investment loss in Q1 2015 which has negatively impacted the reinsurance firm’s results leading to a quarterly loss.

Greenlight Re reported a net loss of $24m, compared to a net loss of $8.9m for Q1 2014. The main cause of the loss is the negative investment performance, however it is exacerbated by lower premium earned income reducing the ability for the reinsurer to absorb investment losses.

The investment portfolio of reinsurance firm Greenlight Re, managed by Einhorn’s DME Advisors LP, saw a loss of -1.8%, compared to -0.7% the year before. That translates into an investment loss of -$24.8m for the quarter, compared to -$10.2m for the prior year quarter.

“Our investment portfolio had a small loss during the quarter. We became more defensively positioned through the quarter as we anticipate earnings headwinds to manifest this year,” commented David Einhorn, Chairman of the Board of Directors.

That appears to mean that Einhorn expects a more challenging investment environment through 2015, which alongside a more challenging underwriting environment, and lower returns from business underwritten due to a softer market, could make returns increasingly difficult.

“We are encouraged by the increase in underwriting activity during the quarter as we prudently develop new relationships,” Einhorn continued.

Year to date the investment portfolio has suffered a -2.2% loss, up to the end of April, so the second quarter has not started as brightly as Einhorn and Greenlight Re would have liked. It will be interesting to track how the portfolio does through the rest of this year and whether the adjustment to a more defensive portfolio results in a better return.

When the investment portfolio underperforms at a time of lower reinsurance pricing and returns, the strategy followed by investment oriented reinsurers can look challenged. However, when things go well these reinsurers can outperform. Hence for investors it’s important to look at both sides of the equation and to take a total return approach.