Greenlight Re: Proving the pundits wrong

Market experts have repeatedly criticised the hedge fund reinsurance model, calling it unsustainable and predicting that it would soon fail. Greenlight Re has probably given the critics ammunition as its performance has stuttered at times, but more than a decade after it was incorporated in the Cayman Islands, the company seems far from succumbing to the gloomy forecasts. Instead it is looking to expand the business and market offering.

Greenlight Re writes property and casualty risks including marine, professional liability and property catastrophe through its offices in Grand Cayman and Dublin. Greenlight Capital Re operates as a standalone hedge fund reinsurer without a dedicated sponsor or backer.

In August, S&P Global Ratings warned that a time of reckoning will come very soon for many reinsurers backed by hedge funds as many remain unprofitable and with many promises unfulfilled.

In 2016, a report by S&P Global Market Intelligence: Hedge Fund Reinsurers: Dead or Alive? suggested that the potential for hedge fund reinsurers may be waning as a challenging investment environment, a soft market and sophisticated clients challenge the business model.

Brendan Barry, chief underwriting officer, of Greenlight Re, admits that the company has had its doubters ever since it was formed. “When we started the business, people said that the model was not sustainable,” says Barry.

“But we have built a solid reinsurance underwriting platform over the last 13 years and have created shareholder value over that time. There were many things people felt could not be achieved with our business model but today we are a multiline reinsurance company writing $600 million of business.

“We have delivered many milestones along the way and shown that the model is sustainable and that underwriting is an essential part of the franchise.”

Back in the black

The company made a net profit of $44.8 million in 2016, a significant improvement on the loss of $326.4 million it reported in 2015.

Greenlight Re’s gross written premiums increased to $536.1 million in 2016 from $502.1 million in 2015; net written premiums also grew to $526 million in 2016 from $493.1 million over the period.

Greenlight Re’s combined ratio for the full year 2016 was 103.6 percent, an improvement on the 110.3 percent that the company reported in 2015. The underwriting loss was $18.8 million compared to an underwriting loss of $41.9 million reported for 2015.

Greenlight Re has been working on improving the underwriting side of the business. In a process that started in 2012, the company resolved some unprofitable lines it wrote in 2009/2010. It put a poorly performing commercial automobile book into run-off and exited a book of construction defect contracts for which it bought a loss portfolio transfer to cover any future claims in 2016.

In the second quarter of 2017, Greenlight Re recorded an underwriting profit of $4.8 million, compared to an underwriting loss of $24.5 million in the second quarter of 2016.

The reinsurer is looking to write more classes of business and in different parts of the reinsurance towers, Barry says.

“We are happy where the business is today, but it will continue to evolve,” he says.

Greenlight Re is looking to expand into marine, energy, aviation and other specialty reinsurance in London. The aim is to diversify the book away from the US motor liability market. Among other lines of business, it wants to enter terrorism, political violence and space reinsurance.

“That will be the next evolution of the portfolio,” Barry notes. “We will see some of that in the January renewals for sure.

“We have developed a solid platform that is well positioned to service London Market specialty business delivering a broader product offering to our broker and client partners,” he says.

The move comes as Greenlight Re believes that it has reached a critical mass with $600 million of gross written premium.

So far, Greenlight Re has focused on higher-frequency, more predictable business—a low margin, high volume business.

“Growing our higher margin severity business will be a natural next step in the development of our portfolio.

“One of the things we are looking to do now is expand that portfolio with the addition of higher-margin syndicated transactions, using the critical mass of the portfolio to sustain and manage individual account volatility,” Barry explains.

Growth in Europe

Underwriting in the London Market will mostly be done from Greenlight Re’s Dublin operation, which has been writing London business over the last couple of years in a limited fashion. The reinsurer has expanded its capabilities there, adapted the strategy and now believes that the unit is well positioned to build up the portfolio and has the capital to do that.

“They have the rating we need and we provide support to the Dublin company as well,” Barry notes.

“The underlying book has been solid and has, on an underwriting basis, been performing well for the last number of years.”

However, the 2017 performance will be impacted by the hurricane season in North America. For Hurricane Irma, which hit Florida on September 10, total insured and uninsured losses for both residential and commercial properties, including damage from flood and wind, is estimated to be between $42.5 billion and $65 billion, according to data provider CoreLogic.

In July 2017, Greenlight Re sealed a multiyear $1.1 billion premium capacity quota share transaction deal with Miami-based personal lines insurer Windhaven Insurance.

Apart from cat quota shares, Greenlight Re also writes some marine business in Florida.

“We are still working on what those numbers will be. It will be well within our comfort zone,” Barry says.

“We haven’t been a big cat writer in the past, but we’ve always supported the Florida market in a small way.”

There is also Hurricane Harvey, which hit Texas at the end of August and may cause insured losses—including those paid by the private industry and by the US National Flood Insurance Program—in excess of $10 billion. Although Barry does not expect the hurricanes to have a major effect on the reinsurer, they are likely to distort the numbers.

At the same time, the hurricane season is likely to result in new opportunities as reinsurance rates rise in the affected regions, Barry notes.

“The decision of how much we will want to participate is the next question for us,” he says.

“It’s a given that there will be some rate increases regionally after what happened. The question is, will they be sufficient?

“There will be an opportunity. Whether the opportunity is enough for us to change the dynamic of our portfolio significantly is yet to be seen.”

Both sides of the coin

Greenlight Re has been writing a predominantly frequency-driven portfolio as it aimed to manage risk appropriately on both sides of the balance sheet, Barry explains.

While other reinsurers have taken a lot more cat risk on their balance sheets creating an underwriting margin whenever there isn’t a major cat event, Barry notes that it is debatable if this is a better strategy.

The investment side of the business has supported profitability in the past and it will continue to support the underwriting franchise in the future, he notes.

“I’d say we are cautiously optimistic that it will support us again for the year 2017 but that can all change fairly quickly,” he says.

While Greenlight Re continues to face criticism for its hedge fund investment model, Barry notes that traditional reinsurers are increasingly using investment management elements on the asset side of their balance sheet, particularly as yields have been low on the bond side of the business.

The advantage of Greenlight’s model is that the reinsurer’s asset side is extremely liquid, Barry explains. This may be a competitive advantage.

“If there is a financial crisis, bond portfolios are not always liquid,” he says.

Overall, Greenlight Re has achieved significantly more than the critics predicted, Barry notes.

“I believe that the hedge fund model is very sustainable and can absorb shocks differently from maybe the traditional model.”

In order to continue improving the competitiveness of Greenlight Re, the company created the position of chief operating officer in August 2017 for which it hired former Validus and Endurance chief actuary Michael Belfatti.

Belfatti is responsible for oversight of the company’s pricing, actuarial and risk management functions, and will be spearheading data collection, analytics and technology efforts across the company. As a member of the executive team he will also assist with the development and execution of the company’s overall strategy.

“We see enormous pressure on the cost base in insurance and reinsurance channels,” Barry explains as the reason for creating the new position. In addition, there is the evolving role of technology in the re/insurance business, he adds.

“Bringing in the chief operating officer is to help to continue to ensure that our platform is as efficient and effective as possible, and to create faster delivery times at a lower cost than our peer groups,” Barry explains.

Has the business grown up?

“Part of me would say yes,” Barry responds, pointing to the development of the platform, the relationships and the trading partners. However, he notes that any entity that says it is fully grown up isn’t acknowledging the constant need for change.

While the business matured in the past four to five years as the underwriting portfolio was restructured, it is now entering a new phase with the expansion into new lines of business.

“I don’t think we would ever say we are a fully matured business because that ignores the constant drive for improvement and the need for flexibility and knowledge,” Barry notes.

“We are in this interesting situation as a reinsurance company providing stability and consistency to the clients at the front end, while constantly evolving the organisation to move service levels and costs.”

Barry is satisfied with what the company has achieved so far, but there is potential for improvement.

“We think we can do a lot better,” he says.