Greenlight.. Redlight?

Marrying reinsurance to speculative investment has held allure to many for more than two decades. Of course, everyone who has proceeded down this route has had a good reason, be it a tax roll-up, juiced-up returns, or outright tax avoidance. All have ended, if not in tears, then whimpering with their proverbial tails between their legs.

StocktonRe, founded by Princeton-based Commodities Corp, and subsequently  majority-owned by Japanese leasing giant ORIX, attempted to benefit from the roll-up marrying what was thought to be risk-less finite to a portfolio of CTAs. This was embarassingly-torpedoed by an underwriting accident so catastrophic, the venture was more-than-shuttered. Then, there was UPS affiliate OPL, which was the offshore benficiary of a higher-than-reasonble charge for insuring UPS packages, money that then would be invested and, benefit from the offshore roll-up until an exit strategy was conceived. Though they (rather luckily) won the IRS's challenge to the somewhat dubious logic unerpinning, their speculative investment portfolio fared rather more poorly, the combination of which forced the company into run-off. Louis Bacon, proprietor of Moore Capital liked the sound of an offshore tax dodge, providing locked-up capital to the mother-ship while benfitting from forecast underwriting profits and a more-than-pleasant Bermuda location and so decided to fund MaxRe, with son Zack as titular head. For six-years, MaxRe never missed an opportunity to miss an accident,  burning through several CEOs, and steppingb on BOTH underwriting AND investment mines. Eventually, having learned the hard way, that even the most alluring of finite is rarely risk-free (or even that attractive - even as a tax-dodge to satisfy scrutinizers that one is shouldering "real risk"), and, that in the world of Macro, "shit happens", shareholders tired of MXRE's travails and neutered, merged, and morphed it into an actual Reinsurance Underwriter with a traditionally- conservative investment portfolio.

Somewhat differently, Ken Griffin's Citadel tried their hand with a determined focus on underwriting profit, only to discover that as an insurance financier, shit outta' one's control also happens (like massive losses or willy-nilly redemptions by fickle investors) that might cause some errrr... ummm...  problems to a reinsurance underwriting operation (which it did). SAC Re, is also in the process of experiencing a mirror revelation of how deleterious "unexpected shit happening" (especially legal and regulatory problems) at the parent sugar-daddy, just might be.

So it was with some curiosity and considered amusement that I watched David Einhorn launch GreenlightRe - ostensibly for all the same reasons, seemingly undaunted by the chastening experiences of others. The lure of dedicated capital to the hedge fund to invest; offshore tax roll-ups, potential "double-alpha" via underwriting profit, double-dipping on fees, and an awesome bill-fishing venue in the Caymans. What could possibly go wrong?!?! For a while GLRE traded at a swanky premium to book - reflecting the desire of punters to gain access to Greenlight's Hedge Fund. Unsurprisingly, GLRE has seen finite deals spontaneously combust in their face. And Greenlight itself has not been immune to both controversy and accidents (i.e. insider trader, talking its book, HLF, it's sizable Gold pecadillo mirrored in GLRE). None of this should come as a surprise (or at least it wasn't to me). But what did shock me was the market's reaction to GLRE results earlier in the week. It essentially earned a miniscule underwriting profit and mediocre investment results on an investment  portfolio backing underwritten  risk comprised 90% of equities,  and some macro bets. The stock popped nearly 10% - perhaps in relief that their Gold "bet" didn't hammer them more, and that they didn't lose money on underwriting activities. Whatever. Oil and water just don't mix. With markets getting more volatile, Mr Einhorn's performance more erratic, coinciding with his increasing notoriety, and reinsurance markets soft and getting decidedly softer, one would be forgiven for wondering whether this is just another train-wreck (and we've seen three large ones in last month) waiting to happen...