Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Hedge fund reinsurers hit on investment side again in September


Financial market volatility has again hit the two most prominent hedge fund reinsurance firms, with both Greenlight Re and Third Point Re reporting another negative month on the investment side of their businesses in September.

Both firms suffered badly in August, as global financial market volatility hit their asset portfolios resulting in Greenlight Re, backed by hedge fund manager David Einhorn’s Greenlight Capital, Inc., sufferng a -5.5% investment loss in August, while Third Point Re, backed by hedge fund manager Daniel Loeb and his Third Point LLC firm, saw  -5.1% investment performance.

September has followed suit, albeit not quite as negatively, with Greenlight Re reporting -3.5% for the month and Third Point Re -4.4%.

So this year’s financial volatility, from ongoing sovereign issues such as in Greece, Chinese stock market volatility, commodity price declines and uncertainty around interest rates, continue to make things difficult for reinsurance firms with a more active or aggressive investment strategy, such as the hedge fund backed players.

Year-to-date Greenlight Re’s investment portfolio is now down -16.9% to the end of September, a decline that is going to be very hard to claw back in the last quarter of the year for David Einhorn’s investment strategy.

Third Point Re meanwhile is down much less, at -4.2% to the end of September, which could be reversible in the final quarter if conditions improve or the portfolio is re-weighted by Daniel Loeb to assets which perform much more strongly.

For the third-quarter, which is where the declines have really kicked in, Greenlight Re’s investment portfolio declined -14.2%, while Third Point Re saw -8.7%, very difficult quarters for both of the hedge fund reinsurers.

Analysts at Keefe, Bruyette & Woods said that they believe that Third Point Re’s investment decline in the third-quarter alone could translate into an investment loss of as much as $184.5 million. Greenlight Re’s quarterly investment loss is likely to be much higher, given the more negative performance reported.

The third-quarter results calls for these two hedge fund reinsurance firms are likely to be difficult, with losses expected on the asset side that underwriting business is unlikely to compensate for alone. With reinsurance underwriting returns depressed, it could make Q3 results very poor for these firms.

Of course Greenlight Re and Third Point Re may not be the only reinsurers to suffer, there are others following hedge fund strategies and even more traditionally allocated investment portfolios may find the last two months difficult to achieve positive returns from.

It will be interesting to see the results of Watford Re, in the Arch results for Q3, as it too could have suffered from the recent investment climate.

As we said previously, the hedge fund reinsurance strategy is prone to bad quarters due to macro financial market volatility. However, when financial markets rebound, which they tend to do, the hedge fund managers will be aiming to be on the right side of trades in order to recoup some of these investment declines.

But for the moment these reinsurers will be preparing for difficult investor calls and meetings in the coming weeks, while also hoping they can reposition themselves to ride out any remaining volatility while staying focused on benefiting from any bounce back.

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