Hedge fund reinsurers hit by recent financial market volatility

by Artemis on September 2, 2015

Two of the largest hedge fund manager backed reinsurance companies have been hit by the volatility in financial markets during August, with both Greenlight Re and Third Point Re reported to have faced significant dips in return during the month.

Greenlight Re, backed by hedge fund manager David Einhorn’s Greenlight Capital, Inc., suffered a -5.5% investment loss in August, as the impact of the financial volatility hit home. Year to date Greenlight Re has been hit particularly hard, now reporting a year to date investment return of -14%.

Third Point Re, backed by hedge fund manager Daniel Loeb and his Third Point LLC firm, saw investment performance drop to -5.1%. Third Point Re has not suffered so badly through this year reporting a positive 0.2% return year to date.

Once again the financial volatility we’ve been seeing in 2015, caused by sovereign issues such as Greece, the Chinese stock market decline of recent weeks (responsible for a lot of the August loss), commodity volatility and uncertainty around interest rates, are all contributing to a difficult time for those seeking to profit from the investment side of the reinsurance business.

With underwriting returns also depressed, due to the softened reinsurance market environment, we may be looking at some very difficult third-quarter results for these hedge fund backed reinsurers.

In fact, analysts at Keefe, Bruyette & Woods said that it estimates that third-quarter investment income for Third Point Re could be as bad as -$73m, which as a result led the analyst to reduce its estimates for earnings per share for the reinsurer.

KBW notes that over time the growth of the investment float should benefit reinsurers like Third Point Re greatly, providing greater investment leverage.

However, as these strategies build they are prone to bad quarters due to financial market difficulties. But it’s worth remembering that when the financial markets rebound, which they nearly always tend to do, the hedge fund managers managing the assets for these reinsurers will hope to be on the right side of trades in order to recoup some of the investment declines.

That can make the hedge fund backed reinsurer a good investment play for those who cannot access the main hedge fund itself, but would like to benefit from any rebound in positions it takes.

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