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Original Risk: A Society for Change Agents

Better to reduce underwriting than accept mispriced risk: David Einhorn


Greenlight Re, the Cayman Islands domiciled, hedge fund manager David Einhorn and Greenlight Capital, Inc. backed reinsurance firm, has continued its approach of non-renewing contracts which it felt were mispriced at recent renewals.

The result of this strategy, as well as some renewals which shrank significantly as cedents retained more risk or adjusted their risk transfer programmes, is a huge decline in premiums written at the hedge fund backed reinsurer, which reported that it had underwritten just $33.7m of gross premiums in Q2 2014, compared to $135.2m a year earlier.

David Einhorn, Chairman of the Board of Directors at Greenlight Re and founder and President of hedge fund Greenlight Capital, said that while his firm faces challenges due to the highly competitive reinsurance market and the recent declines in pricing, it was; “Better to reduce the amount of business we write than to accept mispriced risk.”

CEO Bart Hedges said he was pleased with the quarterly performance and explained the decline in premiums written; “Our written and earned premiums decreased significantly compared to the prior year period. The decrease is mainly attributable to our decision, at the end of 2013, to exit some business that no longer met our return hurdles, as well as reduced shares, in 2014, on renewal transactions with clients that decided to retain more of their business. The competitive market conditions are making it challenging to find new business that meets our return hurdles, but we have a pipeline of attractive opportunities that we hope to underwrite over the intermediate term.”

Strong investment results on the Greenlight hedge fund side helped the reinsurer to still report an increase in fully diluted adjusted book value per share or 10.4% for the quarter and 9.2% for the year to date. Net income of $109.6m was reported, compared to net income of $28.5m for the same quarter in 2013. These numbers demonstrate the boost that an active and more aggressive investment strategy brings to the hedge fund reinsurer business model.

The investment portfolio returned 8.1% for the second quarter, bringing the year to date net return to 7.3%, said Einhorn, helping to offset some of the gloom in the reinsurance market and the shrunken portfolio of risk the firm is now managing.

The reduction in premiums written is explained to a degree by the way the reinsurance market has been changing as a result of the cheaper pricing and higher competition. Greater levels of retention and adjustments to catastrophe reinsurance programmes at primary insurers, particularly Florida homeowners, meant that Greenlight Re lost volume from some quota shares.

Couple this lost premium volume with a continued selective approach to underwriting, as Einhorn said a reluctance to accept what the firm views as mispriced risk, and the large decline in premiums written this quarter is more understandable. Greenlight Re pulled back from many of its large retrocession accounts in Q1 and in Q2 that pull-back seems to have broadened to other reinsurance business it deemed unprofitable.

CEO Hedges explained during the firms earnings call; “We believe that disciplined underwriting during periods of heightened competition will pay off in the long-run. Though the drop in premiums was significant, in the second quarter, our strategy is to be disciplined and to avoid accepting risks that don’t provide adequate compensation.”

Greenlight is focusing on maintaining the growth in its share value to satisfy its investors. Hedges continued; “We believe this discipline is the best means of growing our book value per share over the long-term. Even so we have a pipeline of attractive opportunities that we hope to underwrite over the intermediate term.”

Going forwards, Greenlight Re has a number of new product initiatives and opportunities which it hopes will boost premiums written in quarters to come, while still enabling it to avoid badly priced risks. It will be interesting to watch whether this strategy works and the firm can boost premiums coming in.

Greenlight Re has also agreed terms on some business for the latter quarters of this year already, which it hopes, along with the new product initiatives, will generate more impressive premiums written figures at the next earnings juncture.

Of course, as a hedge fund strategy reinsurer, Greenlight Re needs to bring premiums in so that it can generate the float required for its investment strategy. Without inward premiums the firm would find the investment assets shrinking over time, which will have the effect of also shrinking its investment returns, the one area which is likely keeping its shareholders happy right now.

So for a reinsurer with the investment float strategy of Greenlight Re pulling-back is a very sensible strategy, while the market remains competitive and unattractive, but it remains important for it to find new avenues to underwrite premiums in order to keep the investment float flowing in.

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