The performance of hedge fund backed reinsurers Third Point Re and Greenlight Re continues to diverge, while investment returns remain the driver of profitability for market participants that adopt a total-return strategy.
Investment-oriented reinsurance companies, such as Third Point Re and Greenlight Re, seek to bolster poor underwriting returns by optimising the investment side of the balance-sheet, a strategy that can be reversed if market conditions favour underwriting profitability.
However, financial market volatility over recent years and low interest rates has dampened investment returns for the hedge fund backed reinsurers, at the same time a softened re/insurance market landscape has lowered underwriting returns, essentially making profits increasingly difficult to come by on both sides of the balance-sheet.
Both Third Point Re and Greenlight Re have now reported their third-quarter 2017 financial results, which reveals a different story for the pair in terms of the impact of losses from recent catastrophe events, quarterly and year-to-date investment returns, and overall profitability for Q3 and the first nine months of the year.
Third Point Re actually recorded its best investment return since its inception for the first nine months of the year, which as at the end of September was 14.4%. However, the company’s website tracks monthly and year-to-date investment returns, revealing that year-to-date, the company has an investment return of 17.6%.
This is substantially higher than the year-to-date investment return reported by Greenlight Re, which, according to its website is currently at 2.3%.
A closer look at the investment returns of both players throughout 2017 shows that Greenlight Re has recorded a positive investment gain for just three months of the year, while Third Point Re has recorded an investment gain in every month this year, as at the end of October, something the firm hasn’t achieved in any previous year of operations.
Despite an underwriting loss of $12.6 million in Q3 and $33.3 million for the first nine months of the year, net investment income of $89 million for the quarter and $324.8 million for the nine month period helped Third Point Re post net income of $54.7 million (Q3) and $233.4 million (first nine months of the year).
In comparison, Greenlight Re recorded an underwriting loss of $38.5 million in the third-quarter, while it’s nine month underwriting performance wasn’t included in its recent financial results. However, the firm does report net investment income of $64 million for the third-quarter and $36.4 million for the first nine months of the year, with the latter being substantially lower than that recorded by Third Point Re.
As a result, and despite net income of $19.9 million in Q3, Greenlight Re posted a net loss for the first nine months of the year of $7.2 million.
Apart from the clear differences in investment performance in the first nine months of the year, Greenlight Re also suffered far greater losses from catastrophe events in the third-quarter. Compared to Third Point Re, which posted Q3 cat losses of $5.2 million, Greenlight Re experienced cat losses of $37.9 million from third-quarter events, including hurricanes Harvey, Irma, and Maria, and the two Mexico earthquakes.
It’s worth noting that Third Point Re was never expected to suffer a major loss from recent catastrophe events, given the lines of business it targets are not property catastrophe focused and its focus is on underwriting longer-tailed lines of reinsurance in order to accumulate the investment float for hedge fund manager, Daniel Loeb, to invest in his Third Point LLC strategies.
The divergent performance of hedge fund reinsurers isn’t anything new, and monthly investment return metrics highlight the volatility that has been challenging for those companies that utilise a total-return strategy. As things stand, Third Point Re is on track to record its best ever yearly investment return, while Greenlight Re is set to record its lowest ever positive yearly investment return, although that could all change in the weeks ahead.
