Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Increased market capacity and competition offset strengths of Greenlight Re


Greenlight Re is considered one of, if not the, originator of the hedge fund supported reinsurer model. This model see’s a hedge fund set up a reinsurance vehicle in order to put the resulting premium income to work within their hedge fund investment strategies. Through this strategy they aim to profit both from attractive reinsurance premiums as well as from the investment return they can make by investing the premium income within their hedge fund.

It’s a sensible strategy which is growing in popularity. The hedge fund gets access to a new source of capital to invest and the reinsurance industry benefits from additional capacity with slightly different motives to typical reinsurance capacity. The differing of motives can have an impact on rates, products and ways of working, all of which are no bad thing in an industry as old as reinsurance.

Of course the strategy comes with its risks as well. In fact just recently we wrote about the risk of correlation within the hedge fund backed reinsurer strategy. The correlation comes from the fact that any investment losses at the hedge fund can impact the reinsurers share price. If the reinsurer is relying on investment assets as collateral then that could be bad if a major catastrophe occurred, although most hedge fund backed reinsurers have plenty of available capital they could call on. Greenlight Re themselves have not been immune to these investment losses with their Q2 financials revealing a loss due to investment losses on the hedge fund side.

Greenlight Re are seen as a strong reinsurance partner though, the backing they have from Greenlight Capital means that collateral will likely never prove to be a problem under even the most extreme of loss circumstances. Yesterday, rating agency A.M. Best affirmed Greenlight Reinsurance Ltd’s rating citing their “Excellent risk-adjusted capitalization, experienced management team and the disciplined implementation of its overall business strategy. The ratings also recognize the company’s exceptional enterprise risk management as it aggressively manages risks on both sides of the balance sheet.”

The only slight negative in the report from A.M. Best is down to one of our favorite topics of the moment; the competitive nature of the influx of capital and competitors into the collateralized and convergence reinsurance space.

A.M. Best says that Greenlight Re’s strengths are partially offset by the challenges they face underwriting profitable business in a market which has seen increasing capacity and increasing competition from reinsurance companies with similar investment strategies.

It’s telling that even the reinsurers who were seen as the competition just a few years ago are now being faced with their own competition in the form of new sources of capital market backed reinsurance capacity and reinsurers launched by other hedge funds. This is good for the market as it should force the companies who see reinsurance as a long-term strategy to be innovative and client focused, while those opportunists may not be so inclined to stick around. It offers more choice to cedents, the wealth of different types of reinsurance strategy which are now available means that programs can become more tailored to cedents needs. For investors, the breadth of reinsurance-linked investment opportunities keeps growing.

For companies like Greenlight Re, it means that renewals could become more competitive, rates may be tempered by the influx of capital and they may need to be more diligent with their underwriting practices to ensure they are writing the type of business that allows their investment strategy to continue.

The capital influx should not be seen as a threat to any companies who see reinsurance as a long-term strategy. There will always be a place for quality reinsurance underwriting and risk transfer, no matter what strategy the company takes or what form the capital backing the company takes. One thing is for sure, it is going to force reinsurers to sit up, take note, underwrite diligently, look after their customers and perhaps even to operate differently.

Here are a few recent articles which cover this topic:

Direct investment into reinsurance transactions better than equity: Twelve Capital

Goldman Sachs goes neutral on reinsurance, capital flow into alternatives a factor

Multi-Strat Re to make it easier for hedge funds to get into reinsurance

The reinsurance market has converged: Guy Carpenter

New capital and ‘competitive convergence’ credit negative for reinsurers: Moody’s

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