Monday, July 18, 2016

S&P Questions The Sustainability of the Hedge Fund Reinsurance Model (Greenlight Re; Third Point Re et al)

The hedgies definitely have a more aggressive approach than, say, Berkshire Hathaway.
From Artemis:

S&P warns on longevity of hedge fund reinsurance model
The performance of hedge fund reinsurers diverged in the opening months of 2016 following investment market volatility. Consistently being outperformed by traditional reinsurers Standard & Poor’s (S&P) questions the longevity, and success of the hedge fund reinsurance business model.

Hedge fund reinsurers continue to struggle in the softening reinsurance marketplace, exacerbated by low interest rates and minimal investment profitability.

A lack of underwriting profit and continued top-line growth coupled with diminished returns on investments – the key focus area of the business model – sees traditional reinsurers continue to outperform the divergent hedge fund reinsurance strategies.

In a new report, ratings agency S&P explores the recent performance of hedge fund reinsurance firms, warning that to succeed in bridging the gap between reinsurers and hedge fund risk culture, the ability to increase capital-efficiency via diversification and prudent risk control, is key.

So far, the hedge fund model hasn’t endured the best of times, struggling to compete with traditional reinsurers as the pressures of a difficult investment environment hinder profits and performance.
Furthermore, the competitive reinsurance market is resulting in higher costs for all in the space, hedge fund reinsurers and traditional players alike, but the heavy focus on investment returns suggests the hedge fund players are feeling the force from both sides.

Stand-alone firms such as Greenlight Re and Third Point Re, and also sponsored entities such as ABR Re and the recently established Harrington Re, have aggressively increased their top-line in the last three years, says S&P, something that might not be the best route to success in a softening landscape.
As a result of their aggressive growth, the softening landscape and resulting lower pricing, S&P notes that since their inception, hedge fund reinsurers have largely underperformed their traditional peers.
Artemis discussed recently the divergence in performance among hedge fund reinsurers in the opening three months of 2016, with Greenlight Re reporting a profit while Third Point Re slumped to a loss in the quarter.

Prior to this both firms experienced a full-year 2015 investment loss, and highlighting just how volatile the marketplace is and also how the hedge fund model continues to evolve, Third Point Re returned to profit in Q2, while Greenlight Re saw its fortunes reverse, reporting a loss in the quarter....MORE