Hedge fund losses hit Greenlight Re’s Q2, but reinsurance premiums up

Greenlight Re, a Cayman Islands domiciled hedge fund strategy reinsurance firm backed by David Einhorn’s Greenlight Capital, Inc., has again seen a quarterly loss due to its investment strategy, but the premiums written at the reinsurer continue to grow.

When the investment strategy struggles at hedge fund backed reinsurance firms the results can look discouraging very quickly and Greenlight Re’s Q2 and first-half of 2015 are a prime example.

David Einhorn’s Greenlight Capital hedge fund has been reporting significant losses due to positions in commodities and gold in recent months, with the Greenlight Re investment portfolio suffering as a result.

Greenlight Re reports a quarterly investment loss of $20.3m or 1.5% on its investment portfolio which is managed by Einhorn’s DME Advisors, LP. For the first-half the investment loss was $45.1m or 3.2%. In the prior year periods the investment portfolio saw positive gains of 8.1% in Q2 2014 and 7.3% for H1 2014.

It’s clear just how volatile the investment strategy at a hedge fund reinsurer can be in times of macroeconomic uncertainty or stress and Greenlight has really suffered in recent weeks. In fact July 2015 alone saw a negative investment return of -5.9% due to an impact from declining gold prices, taking the year to date to -8.9%.

But the investment strategy is but one side of an investment-oriented or hedge fund backed reinsurance firm, with the underwriting also playing an important role in the results.

Greenlight Re suffered here as well in Q2, with an underwriting loss reported due to negative development on a contract in run-off. Greenlight Re reported an underwriting loss of $8.9m in Q2, with a combined ratio of 102.2%, compared to an underwriting profit of $5.6m and a combined ratio of 93.9% in Q2 2014.

The first-half underwriting result is also not so good, with a 109.2% combined ratio in 2015 compared to 99.8% in the first-half of 2014.

However, Greenlight Re continues to add reinsurance business underwritten, which is really the primary goal, enabling it to build premiums and also investment float meaning that, when the investment returns do perform, the chances of future profit are increasing.

In the quarter Greenlight Re underwrote gross premiums of $93m, up from $37m in Q2 2014 and in the first-half the figures were $222.7m in H1 2015, compared to $152.6m in H1 2014.

However the reduction in reinsurance pricing is also filtering through into the Greenlight Re results, with premiums earned of $186.5m in H1 2015 lower than the $199.5m earned in H1 2014.

“We are pleased with the new business and relationships we have developed this year,” commented Bart Hedges, Chief Executive Officer of Greenlight Re. “Unfortunately, our second quarter results were impacted by a small loss in our investment portfolio and adverse development in a contract in run-off that negatively impacted our combined ratio.”

“Our investment portfolio continues to be defensively positioned as we remain cautious due to an uncertain investment environment,” added David Einhorn, Chairman of the Board of Directors. “While we are disappointed with the underwriting loss from legacy business this quarter, we remain encouraged by the current portfolio and new relationships.”

It will be interesting to track how the Greenlight Capital investment portfolio does through the rest of this year, whether it can recover from its recent loss. The hedge fund adjusted to a more defensive portfolio in the last year, but to date it hasn’t defended it from recent commodity and gold losses.

While the investment losses are concerning for investors in the reinsurer in the short-term, the hedge fund backed reinsurance strategy has to be looked at over a longer horizon. From 2011 to 2014 inclusive the investment returns at Greenlight Re averaged 13.4%, with a high of 19.6% in 2013.

In years where the combined ratio can be kept under 100% and an average investment return be achieved, it makes Greenlight Re a very profitable proposition, particularly if investors adopt the total-return view.

For the hedge fund managers, the opportunity to manage the more permanent capital from the reinsurance premium float makes involvement in the sector compelling and if Einhorn can achieve these returns again it’s also compelling for the reinsurers shareholders as well.

It’s also vital that premiums growth continues, as that helps to grow the float and provide greater potential to the investment strategy. If Einhorn can get this back to the longer-term averages of the last few years then the reinsurer could be seen to revert back to a strong performance very quickly.

Of course, in a reinsurance market where pricing and returns on underwriting are challenged, the investment portfolio is increasingly important. When the asset side fails to perform as well, the investment oriented reinsurance strategy can look bad very quickly indeed. It will be interesting to see if Einhorn can turn this result around in the second-half.