Hedge fund reinsurers’ Q4 returns differ, but positive so far in 2016

by Artemis on December 1, 2016

The investment returns of the two main hedge fund reinsurance firms, being Greenlight Re and Third Point Re, reveal a reversal of the negative trend witnessed throughout last year with both firms’ year-to-date figures showing an investment gain, despite differing performance so far in Q4 2016.

The hedge fund reinsurance, or investment oriented business model has endured a relatively difficult time in the softening landscape. Struggling to make returns on the underwriting side of the business due to reinsurance market headwinds, and dangerously low interest rates hindering profit on the investment side of the balance sheet.

Artemis reported that both firms recorded an investment gain in the third-quarter of 2016, with Third Point Re’s 4% return outpacing the 3.1% recorded by Greenlight Re. And according to data on the firms’ respective websites, year-to-date (as at November 30th 2016), both hedge fund reinsurers are reporting positive investment returns.

The investment return of Third Point Re in November was -1.1%, the same as it saw in October so -2.2% for Q4 so far, but with positive returns March through September the company’s year-to-date investment return is 3.7%.

For Greenlight Re the story is slightly different, after a 1.9% investment gain in November and 3.6% so far in Q4 helped the firm’s year-to-date investment return increase to 5.8%.

So while both hedge fund reinsurance companies have seen their investment fortunes reverse from the negativity witnessed throughout 2015, from the end of the third-quarter of 2016 to the end of November 2016, Greenlight Re has gone from trailing Third Point Re, in terms of investment gains, to outpacing the firm by 2.1%, year-to-date.

The fluctuations with investment returns for the two main hedge fund reinsurers underlines the challenges with an investment oriented business model at times of investment market turmoil.

At the same time, substantial and ongoing headwinds in the global reinsurance market has meant that both Greenlight Re and Third Point Re have struggled to make any underwriting gains to offset the difficult investment market landscape.

But despite year-to-date investment returns being positive for the companies, analysts at Keefe, Bruyette & Woods (KBW) predict Third Point Re to record an investment loss of $25.5 million in the fourth-quarter, compared to their previous projections for an investment gain of $21.8 million.

As noted earlier, for November Third Point Re recorded an investment return of -1.1%, and further losses in the final month of the year could push the company’s full-year 2016 investment return near, or into negative territory.

With Greenlight Re reporting an investment gain of 3.6% so far in the fourth-quarter and reporting a higher year-to-date return, it’s likely the company will have more room to manoeuvre and navigate any investment loss in the final month of the year, suggesting it could well be on track for a full-year investment gain.

The question then will be whether the underwriting performance will be sufficiently positive to enable the firms to report full year profits, or whether these lower than targeted investment returns will fail to boost the underwriting side sufficiently to help them to profits deemed acceptable by their shareholders.

It’s also worth highlighting that year-to-date the S&P 500 has returned 7.6%, so despite an improvement of fortunes for both, the hedge fund reinsurance firms are lagging behind key financial market indicators in 2016.

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