Greenlight Re, the Cayman Islands domiciled, hedge fund manager David Einhorn and Greenlight Capital, Inc. backed reinsurance firm, has pulled back from some of its catastrophe retrocession business this year citing low pricing and competition.
Greenlight Re has always had a focus on some areas of the retrocessional reinsurance market which now puts it directly in competition with some of the lower cost-of-capital collateralized retro alternatives in the market. The reinsurer is clearly feeling the competitive pressures from this, hence pulling back from certain areas of the market.
During the firms first quarter earnings call, CEO Bart Hedges said that the property catastrophe retro part of Greenlight Re’s business continues to perform well, particularly in the current low catastrophe loss environment. However the firm has not been able to build on this book due to high levels of competition.
Hedges explained; “There were no significant property catastrophe events during the quarter and so our catastrophe retro account continues to perform well. This business is under severe competitive pressure, we have had to walk away from some accounts due to low pricing that was supported by the market.”
Greenlight Re operates a typical hedge fund backed reinsurer model, looking to underwrite business which gives it a predictable source of capital float which can be invested in hedge fund manager Einhorn’s strategies. This means it cannot underwrite business at any cost and has always said it will pull back from business it deems unattractive.
Hedges continued; “We continue to believe it is better to reduce premiums when competition forces pricing below the risk-adjusted returns that we find acceptable.”
Greenlight Re reported a net loss for the first quarter, predominantly due to an investment loss on the asset portfolio, and also reported lower premiums written as it reigned back on some areas of its underwriting.
“Our underwriting portfolio performed adequately during the first quarter of 2014,” commented Bart Hedges. “We continue to focus our underwriting efforts on creating long-term relationships in areas of the market that we feel provide attractive returns to our shareholders.”
“Our investment portfolio had a small loss as we continue to be defensively positioned in an uncertain investment environment,” said David Einhorn, Chairman of the Board of Directors. “Our underwriting team continues to proceed carefully under challenging reinsurance market conditions.”
Einhorn also recognised that it is not just the investment environment that is a challenge. Greenlight Re faces the same difficulties in navigating the reinsurance market as other, more traditional, reinsurers. At the same time reinsurance start-ups are emerging which seek to copy the Greenlight Re, hedge fund backed, reinsurer model and traditional reinsurers are also looking at more aggressive investment strategies.
Einhorn said; “The reinsurance market continues to be very soft and our team remains disciplined in trying to find good risk-adjusted opportunities. Despite the environment, our dual-engine strategy is working well and several new entrants are emulating our business model.”