The performance of hedge fund reinsurers continues to be impacted by the low interest rate environment and weak underwriting returns, and, the divergent performance of Third Point Re and Greenlight Re in 2017 underlines the volatility that exists when adopting a total-return strategy.
Third Point Re delivered net income of $277.8 million in 2017 driven largely by net investment income of $392 million, which resulted in the firm recording its highest full-year, end of year investment return of 17.8%.
In contrast, Greenlight Re reported a net loss of $45 million for 2017, as net investment income declined to $20.2 million from $76.2 million a year earlier, resulting in a year-end investment return of 1.5%.
Both Third Point Re and Greenlight Re struggled on the underwriting side of the business in 2017, possibly as a result of intense competition in the re/insurance market and the abundance of capacity from both traditional and alternative sources.
Third Point Re recorded a combined ratio for the year of 107.7%, compared with 108.5% a year earlier, while Greenlight Re reported a 2017 combined ratio of 108.6%, compared with 103.6% in 2016.
For both Third Point Re and Greenlight Re it’s clear that the underwriting side of the strategy is struggling, something highlighted by S&P last year when looking at the viability of the hedge fund reinsurer business model.
But with positive rate movements being seen at the January 1st, 2018 reinsurance renewals, driven by the large volume of Q3 and Q4 2017 catastrophe events, a trend that many in the space expect to persist through 2018, there could be an opportunity for hedge fund reinsurers to take advantage of improved market conditions.
This was something highlighted by Third Point Re President and Chief Executive Officer (CEO), Rob Bredahl, as part of the company’s Q4 and full-year 2017 earnings release.
“Third Point Re generated a market leading return for its shareholders in 2017. Our return on equity was 2.8% in the fourth quarter bringing the full year to 20.1%, driven largely by strong investment performance. Despite high levels of natural catastrophes throughout 2017, we produced a combined ratio of 107.1% in the fourth quarter and 107.7% for the year.
“We have been encouraged by recent improvements in reinsurance terms and conditions and underlying pricing and expect our underwriting results to improve over the next 12 to 24 months. We remain confident that the improving underwriting environment and our proven investment strategy will continue to produce attractive returns for our shareholders over time,” said Bredahl.
Both Third Point Re and Greenlight Re, the two main hedge fund reinsurers, operate investment-oriented business models, enabling them to optimise their balance sheet depending on market conditions.
However, while the underwriting side of the equation has struggled during the softened market landscape, the investment side has wrestled with low interest rates and inherent volatility, and the two have experienced divergent investment performance in recent times.
Third Point Re recorded an investment gain for every month of 2017 with December being the exception, with a recorded investment return of -0.1%. But despite the dip in the final month of the year, the firm recorded a 2017 investment return of 17.8%.
In comparison, Greenlight Re recorded an investment return of 1.2% in December, but combined with seven months of negative investment returns throughout 2017, the firm’s 2017 investment return hit just 1.5%, which is lower than the 7.2% recorded in 2016, but still an improvement on the -20.2% recorded in 2015.
Commenting on the company’s performance in 2017, Greenlight Re’s Chairman of the Board of Directors, David Einhorn, said: “2017 continued to be a challenging environment for our investment style as our managed portfolio returned 1.5% for the year. Despite the headwinds caused by natural catastrophic events and reserve strengthening, I am pleased with the proactive actions taken by our management team during the second half of 2017.”
The performance of the two main hedge fund reinsurers in 2017 shows the volatility in the business model, but also reveals that a sound investment strategy, combined with an improved underwriting environment could drive greater profits to shareholders.
With underwriting conditions expected to improve in the reinsurance industry throughout 2018, it will be interesting to see how both Third Point Re and Greenlight Re perform in the months ahead.
