Greenlight Re is in capital-preservation mode. The Cayman-based reinsurer, which has a dual engine strategy, split between liabilities and equity, is playing it safe in both the volatile stock markets and softening reinsurance environment. Mairi Mallon reports.

Greenlight Reinsurance Company was set up in 2004 by David Einhorn’s hedge fund Greenlight Capital. It bucked the trend of other reinsurance start-ups by both relying on a two-pronged model of investments and underwriting, but also in setting up in Grand Cayman, rather than Bermuda. The company was able to take advantage of the high pricing and good stock market conditions in 2006, and floated a year later.

“One of the catchphrases I get on both the asset side and liability side of our strategy is that we focus on downside risk and on capital preservation,” says Bart Hedges, chief underwriting officer and president of Greenlight Re. “At this point in the market, both parts of the strategy are more in the capital preservation mode than anything else. It is a difficult environment and we don’t want to make big mistakes now.”

In Max’s footsteps

Greenlight Re was launched in 2004 with approximately $210m in capital. In round numbers about $50m was raised from Einhorn and employees of Greenlight Capital, plus an additional $160m from other investors. “At the time – and this was back in 2004, so this was pre-Hurricanes Katrina, Rita and Wilma – the reinsurance market was in a great place,” says Hedges. He adds that because of the timing, unlike many of the other start-ups at the end of 2005, Greenlight Re was not set up to take advantage of what happened after the terrible round of hurricanes to batter the United States. “This was a long-term strategy,” adds Hedges.

While the company was incorporated in the Cayman Islands and funded by August 2004, the company did not, as yet, have a management team. They did have a business plan that the investors had bought into however. They were going to have a differentiated view of the marketplace and a differentiated asset strategy with equity investments instead of fixed income investments. They were also going to have an underwriting strategy that was not a “typical” catastrophe strategy but instead would be multi-line.

Avoiding a direct hit

“At this point in the market, both parts of the strategy are more in the capital preservation mode than anything else

It took until August 2005 before the company managed to woo Len Goldberg to join as chief executive officer. This meant it not only missed the costly 2004 cat season but did not write any cat business in 2005 as the wind season was well under way by the time Goldberg joined. “We didn’t begin underwriting, technically, until April of 2006,” says Hedges. “So by luck – or by great planning – we missed the 2004 and 2005 hurricane seasons.”

Shortly after Goldberg joined, Hedges was recruited from his job at Platinum Underwriters in Bermuda. Now they had management, capital and underwriting capabilities and were ready to write business. Goldberg took on an opportunistic underwriting strategy to take advantage of the soaring reinsurance prices. They went into property catastrophe and retrocession business in particular and made a small fortune in their first year. “There were very few people that had capacity for the business and pretty much everybody was running the other way,” explains Hedges. “So there was a need for capacity.”

During 2006 the company started to build up its platform. It hired a chief financial officer and an actuary, and started looking for more members of the underwriting team. In August 2006 Greenlight was awarded its all-important “A-” AM Best rating and in 2007 it floated on the NASDAQ. The total net proceeds of approximately $258m from the initial public offering (IPO) and private placement would be used to increase the underwriting capacity of Greenlight Re’s reinsurance operations, said the company.

Despite going public, the reinsurer retains a close relationship with its founder. “Technically our relationship with Greenlight Capital is they are an investment advisor for the company. Almost every insurance or reinsurance company uses outside investment experts,” says Hedges. “We have entered into a legal agreement with Greenlight Capital. They give us advice, they invest the assets for us, and so technically that is their role. Hedges says Einhorn, while not taking an interest in the day-to-day running of the company is very involved, as is the board.

Since the IPO, the company has been writing a diverse portfolio and with the downturn of the markets, has become a lot more conservative in both underwriting and asset management. For the year ended 31 December 2007, net income was $35.3m, compared to $57m for 2006. “It is certainly easier to find really good deals in a really good market like those that existed in 2002/2003 or 2003/2004, but there are still good deals out there to be found,” says Hedges. “We are very cautious to only enter relationships where we think we have been able to do enough homework.”

Truly multi-line

“There will be people who did not recognise how difficult an environment it was and they are going to see some really significant pain

The company describes itself as being made up of generalist underwriters. Greenlight brings in outside experts to help it assess and write specific lines of business, and has taken on risk in sectors such as property catastrophe, retrocession, casualty (including first dollar casualty business produced by smaller regional companies) and casualty classed business, among others. “We have done medical malpractice, we’ve done personal lines business with homeowners and automobile and we have also done some health reinsurance,” says Hedges. “So we truly are multi-line.”

He says that as the entire market is difficult, the company has to make sure everything meets their criteria for a good deal. He adds: “If pricing is difficult everywhere, then it is hard to find deals that you honestly believe are going to make you a bunch of money.” But business has not stopped. Clients are renewing with them and they are still writing some new business. Chief financial officer, Tim Curtis, also spoke to Global Reinsurance about the preservation of capital on the assets side.

“On the reinsurance side, you can talk about [preservation of capital], but it actually takes a couple of years before you have the proof in the pudding,” says Curtis. “That is not the same on the investment side. Clearly our investment engine is, hopefully, designed to create superior returns over the long term. But again the focus is on the preservation of capital. We would say that in a very tough investment environment, certainly in the first quarter 2008 and even parts of 2007, that strategy has been proven. When major indexes in the first quarter of 2008 were down – sometimes double digits – we showed a loss of 1.1%. So given our exposure to upside, we believe that type of result is proof our strategy works.”

While other reinsurers, such as Max Re, have bailed out of this asset/liability format to become a more “pure” reinsurer, Greenlight says that it has found a better formula as its assets are more liquid and not invested in funds of funds. “One of the issues that Max came up against is primarily its alternative strategy was invested in funds,” explains Curtis. “We are not invested in funds. We own the actual securities and so liquidity and other types of concerns you have when you invest in a fund we do not have. We believe the investment engine is perhaps a better one than some of the others that have been used.”

While it is undoubtedly a difficult market in both investment and underwriting terms, Greenlight Re management say they have the right strategy to make sure they stay around for a long time. “There are opportunities out there, but it is a difficult market,” says Hedges. “When you look back in a couple of years there will be people who did not recognise how difficult an environment it was and they are going to see some really significant pain. Unfortunately we are going to have to ride it out for a little while because until that pain is felt, the market won’t turn – unless there is some kind of big event.”

Mairi Mallon is a freelance journalist.

Greenlight Re: David Einhorn - founder and chairman

Einhorn gained a name for his successful hedge fund Greenlight Capital. He set up Greenlight Reinsurance in July 2004 and became chairman in August of the same year. Einhorn is also president of Greenlight Capital, which he co-founded in January 1996, and senior managing member of DME Advisors. Greenlight Capital and DME Advisors are Greenlight Re's affiliates. Einhorn graduated summa cum laude with distinction from Cornell University in 1991 where he earned a BA from the College of Arts and Sciences.