Greenlight results show benefit of hedge fund reinsurer strategy

Greenlight Re, the Cayman Islands domiciled reinsurer backed by hedge fund manager David Einhorn, has shown how the aggressive investment strategies that hedge fund reinsurers can employ when necessary can help to offset any issues on the underwriting side of the business. In their latest quarterly results Greenlight revealed an underwriting hit from commercial auto liability policies they had written in a previous period.

The auto liability contracts have come back to haunt Greenlight, contributing to an underwriting loss of $43.9m in the third quarter of 2012.

Commenting on their earnings call, Hedges said; “Our thesis was that the pricing would improve due to the recent exit of a large carrier and the belief that the economic slowdown would result in fewer accidents and lower frequency of loss. Unfortunately, that thesis proved incorrect.”

However, demonstrating the benefits of having a hedge fund investment strategy on the flip side to their underwriting business, Greenlight reported net investment income of $96.5m for the third quarter, representing a gain of 8.8% on Greenlight Re’s investment portfolio.

“This quarter yielded solid results in our investment portfolio partially offset by a large underwriting loss caused primarily by our commercial motor liability contracts in run-off,” said Bart Hedges, Chief Executive Officer of Greenlight Re. “The ongoing reinsurance portfolio is performing as expected, and we remain disciplined as we assess new underwriting opportunities in the U.S. and Europe.”

“Our investment portfolio had a strong third quarter of 2012, aided by our highest conviction long positions and gold,” said David Einhorn, Chairman of the Board of Directors of Greenlight Re. “We remain disciplined in both our underwriting and investment activities and we continue to focus on providing customer-centric solutions for our reinsurance clients.”

For a more traditional reinsurer you would often find that the investment strategy is much more conservative and so when an underwriting loss occurs any investment gains are much lower and don’t allow them to come in at a profit for the quarter, in the way Greenlight Re just has. There in lies the attraction for hedge fund managers. They get premiums from reinsurance business to invest through their hedge fund strategies and if the investments do well it can offset bad underwriting years. Of course in good underwriting years they can be doubly profitable. Although it must be noted that in recent times the investment strategies have tended to be the lesser performing side of these businesses, Greenlight themselves took investment losses last year due to the global macro economic environment. But as a source of investment capital, reinsurance continues to be attractive to hedge fund managers and we don’t expect that to change any time soon.