Einhorn investment loss can’t be avoided at Greenlight Re

The size of the investment loss suffered by hedge fund backed reinsurance firm Greenlight Re could not be avoided in its quarterly and annual results, dragging the David Einhorn backed reinsurer to a $43.1m net loss for the fourth-quarter of 2015.

The fourth-quarter saw the volatile financial market really hit home for the leading hedge fund backed or partnered reinsurance firms, resulting in some dire reports of investment losses. Greenlight Re also struggled on the underwriting side earlier in 2015, hurting the full-year results even more.

The hedge fund reinsurers typically try to underwrite to a combined ratio of just under 100%, while making up the total return on the hedge fund managers investment side. For the hedge fund managers the reinsurance premium float is an attractive source of long-term capital which is added to their investment strategies.

The problem is that when financial markets are uncertain or volatile the results can look terrible very quickly, not necessarily a reflection of an issue with the strategy or the execution, but rather a factor of this approach.

In 2015 the hedge funds were hit by huge global economic uncertainty, a falling oil price, volatility in financial markets and a number of big equity bets that didn’t pay off.

For Einhorn’s Greenlight Re that came to a head in Q4, resulting in the quarterly loss, as the investment portfolio suffered a net loss of -4% for the quarter.

On the other hand the underwriting in Q4 2015 was positive, with premiums written doubling compared to Q4 2014, with a combined ratio of 98.5% helping Greenlight Re to an underwriting profit of $6.8 million.

That bodes well for the future, as the more premiums written the larger the float available to invest, as long, of course, as the Einhorn investment strategy bounces back.

“We are pleased with our fourth quarter underwriting results and our ability to grow our underwriting portfolio during 2015, with our premiums up 55% from the prior year,” commented Bart Hedges, Chief Executive Officer of Greenlight Re.

But the full-year underwriting result was not so impressive, as despite underwriting $502.1 million of premiums, significantly more than the $324 million in 2014, the combined ratio for 2015 was 111.8% resulting in an underwriting loss of $24.9 million.

“While reserving actions taken earlier in the year on certain legacy contracts negatively impacted our full year 2015 fiscal results, we are encouraged by our current underwriting portfolio and the strong and growing client relationships we continue to develop,” Hedges continued.

But even the underwriting loss could have been balanced out if the investment returns had been better. However for the full-year 2015 the investment loss at Greenlight Re was reported as $281.9 million, a massive -20.2% return. That compares to positive investment income of $122.6 million and a return of 8.7% in 2014.

“Our 2015 investment results were negatively impacted by losses on three of our largest holdings and the lack of other positive contributors,” added David Einhorn, Chairman of the Board of Directors. “It was a challenging investment environment for value investors. We continue to believe the Company is well
positioned to grow book value per share from both underwriting and investment activities over the long term.”

The figures really shows the volatility in this hedge fund backed reinsurer strategy, but also highlights how it can perform as well. With the growing float, added to by the impressive premium growth, a positive investment year can see these hedge fund reinsurers outperform.

2015 was a particularly bad year for hedge funds in many strategies, particularly those operated by the types of funds that seek to sponsor reinsurers. It’s going to be interesting though to see whether they can bounce back and take advantage of lower positions, which could recoup some of the losses.

We agree with A.M. Best who calls for the hedge fund reinsurance model to continue to evolve into a hybrid, total return reinsurer model. The ability to leverage the investment float more actively provides additional leeway for reinsurers, but the key is in finding a way to control that volatility, something that has not been easy for any of these hybrid firms in 2015.