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Greenlight Re falls to Q3 loss on Einhorn hedge fund volatility


Greenlight Re, the Cayman Islands domiciled investment oriented reinsurance firm backed by hedge fund manager David Einhorn’s Greenlight Capital, Inc., suffered a $219.7m net loss for the third-quarter as investment volatility hit the firm.

Hedge fund reinsurance firms have been suffering in recent months as global financial market volatility saw the major hedge fund managers backing investment oriented reinsurers all face significant investment declines through the third-quarter.

Greenlight Re has suffered a -14.2% investment decline through the third-quarter, compared to -3.7% in the prior year period, as the portfolio managed by Einhorn’s DME Advisors, LP suffered due to a number of positions that saw major declines, including stakes in Consol Energy, SunEdison, Micron Technology and Apple.

The investment decline for the quarter translates into a third-quarter investment loss of $191.3m for Greenlight Re. For the first nine months of 2015 Greenlight Re’s investment loss has now hit -16.9% or $236.5m.

To make matters worse for the reinsurer, the underwriting side of the business also suffered in Q3 2015, with Greenlight Re reporting an underwriting loss of $27.6m, compared to underwriting income of $4m in the third quarter of 2014.

“We are disappointed with our third quarter results as we reported losses on both our underwriting and investment portfolios,” commented Bart Hedges, CEO of Greenlight Re. “We completed a review of our run-off book with the assistance of a third party expert and increased reserves on one contract. While these legacy contracts have negatively impacted our results, we are encouraged by the performance of our current underwriting portfolio.”

On the positive side Greenlight Re underwrote gross premiums of $134.6m, an increase from $97.2m in the third quarter of 2014. Net earned premiums were $102m, an increase from $79.5m a year earlier.

That shows that the underwriting side of the business continues to develop and grow, which means once legacy deterioration slows the performance on that side of the business will hopefully improve.

However the investment side is exposed to volatility in financial markets and that has hurt this hedge fund reinsurance strategy greatly in recent months. It’s become increasingly difficult to make the kind of bets that Einhorn is known for, but of course volatility can work both ways and active investment strategies can always bounce back in future quarters.

Einhorn commented; “During the third quarter of 2015, our investment portfolio was adversely affected by declining prices in three of our largest investments. With the recent market decline, we have added modestly to our net long exposure.”

Einhorn is already trying to reposition the portfolio to take advantage of market conditions, putting in a number of hedged positions on oil and natural gas in order to capitalise on any movement or rebound in prices, according to Bloomberg.

Greenlight Re’s investment returns so far this year are the worst it has seen since 2008, it’s only other negative year. The reinsurers average annual investment return sits around 12.7% since its formation, which shows just how bad things have been in 2015.

The underwriting side of Greenlight Re had been making steady progress, improving the combined ratio and increasing business written. The increase in business written has continued but unfortunately the combined ratio has slipped, due to the prior year reserve increase, with the firm reporting a combined ratio for the nine months ended September 30th 2015 of 117.4%, compared to 100.6% for the prior year period.

As a result of the poor quarterly performance, rating agency A.M. Best has revised Greenlight Re to negative from stable, largely due to its underwriting performance it seems.

A.M. Best explained:

The negative outlook is driven by Greenlight Re’s less favorable underwriting results in recent years, including results for the nine months ended Sept. 30, 2015, which have fallen short of A.M. Best’s expectations. The company is showing an underwriting loss, albeit modest but below most peers, on its five-year trend through 2014. A.M. Best recognizes the remediation actions taken by the company’s management and is looking for further certainty that these issues won’t detract from prospective operating performance.

A.M. Best also noted that it is “somewhat concerned with the asset risk represented by its equity-based investment portfolio.” However it says that the liquidity of the majority of positions and the hedged nature of the strategy mitigate this to a degree.

Greenlight Re needs to see improved performance on both sides of the business to turn this rating assessment from A.M. Best back to stable.

The hedge fund or investment oriented reinsurance strategy typically seeks to underwrite at just below 100%, on longer-tailed and low volatility business which gives access to more predictable longer-term capital assets to invest. The investment strategy is then supposed to make the difference, driving performance for these reinsurers.

When the financial markets are as volatile as they have been of late the results can turn sour very quickly, as has been the case here. Greenlight Re and David Einhorn will be hoping for more success from his recently added hedges and long positions to recoup some of the lost ground.

Also read:

Hedge fund reinsurers hit on investment side again in September.

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