Hedge fund reinsurers Greenlight Capital Re and Third Point Re have now both reported their second-quarter and half-year 2018 financial results, which, continues to show divergent performance in a challenging marketplace.
The business model of the hedge fund reinsurance entities, of which Greenlight Re and Third Point Re are the most notable, is often put under the spotlight. Essentially, the business model seeks to offset poor underwriting results with investment gains, reversing this approach when market conditions are more favourable to making returns on the underwriting side of the business.
However, in recent times, the highly competitive reinsurance landscape has made achieving solid underwriting returns increasingly difficult, while the low interest rate environment has served to hinder the investment side of the balance sheet, a combination that has hindered the performance of the hedge fund reinsurer.
With regards to Greenlight Re and Third Point Re, it appears that while the former continues to improve its underwriting profitability, losses on the investment side are pushing the firm into unprofitable territory. At the same time, Third Point Re has struggled to get its combined ratio below the 100% mark, while its investment performance is positive, so far in 2018.
For the second-quarter of 2018, Greenlight Re recorded a net loss of $37.4 million, which is slightly up on the $35.5 million net loss reported in Q2 2017. The loss was mainly driven by an investment loss of $40.7 million in the quarter, which was only partially offset by a stronger underwriting performance.
In fact, the firm recorded underwriting income of $5.1 million and a combined ratio of 96% for the quarter, compared with $4.8 million and 96.9%, respectively, in Q2 2017.
For the first-half of the year, Greenlight Re’s combined ratio hit 97.3%, which is an improvement on the 98.5% recorded in the first-half of last year.
Simon Burton, the Chief Executive Officer (CEO) of Greenlight Re, said: “We are pleased to see our combined ratio at 96.0% for the quarter, marking consecutive quarters of improved underwriting profitability. Gross written premiums were lower during the period due to continued work on portfolio rebalancing. Greenlight is focused on underwriting profitability while also diversifying our portfolio and the results are beginning to materialize.”
Year-to-date, Greenlight Re has recorded an investment return of -15.4%, with only the month of May experiencing a positive return, and it’s clear that poor investment results are hitting the company’s performance in 2018.
However, a look at the firm’s investment returns over the last decade or so reveals that Greenlight Re has recorded more full-year positive investment returns than negative ones, suggesting that if it can find a way to generate the kind of positive investment returns it has previously, while continuing to keep its combined ratio under 100%, it could reap the rewards of the hedge fund reinsurer business model.
For Third Point Re the picture is different, highlighting the divergent performance of the hedge fund reinsurance business model.
For Q2 2018, Third Point Re recorded net income of $19.6 million, although for the first-half of the year it recorded a net loss of $6.4 million. At the same time, the company recorded an underwriting loss of $5.1 million for the second-quarter of 2018, and a combined ratio of 103.6%. For the first-half of the year, the firm recorded an underwriting loss of $11.4 million, and a combined ratio of 104%.
But despite the company’s underwriting performance falling into negative territory, net investment income of $31.2 million in the second-quarter of 2018 and $29 million for the first-half of the year, helped the firm record net income in Q2.
Year-to-date, Third Point Re has recorded an investment return of 0.6%, which is a substantial improvement when compared to Greenlight Re’s. However, the firm appears to struggle more on the underwriting side of the equation when compared with Greenlight Re, again underlining the divergent and erratic performance of the hedge fund reinsurers.
Looking forward, it will be interesting to see how both players perform in the second-half of the year, and whether either is able to produce a sub-100% combined ratio, while also reporting a positive investment return.
