Amidst the buzz of a strong first quarter, with net income soaring to $27 million and gross written premiums jumping by an impressive 16.5%, Greenlight Re's earnings call on May 9th, 2024, might have revealed a hidden driver of their success – a factor often overlooked in the whirlwind of traditional reinsurance metrics. While analysts focused on the impressive combined ratio and the impact of the Francis Scott Key Bridge collapse, a subtle comment about the Japanese reinsurance market hints at a significant, yet underappreciated, tailwind: currency fluctuations.

The call highlighted that the Japanese reinsurance market, particularly the property catastrophe sector, saw significant pressure on signings despite only modest declines in rates. This was attributed, in part, to the near 50% strengthening of the US dollar against the Japanese Yen since 2021. This seemingly minor point could actually be a major catalyst for Greenlight Re's performance.

Here's why: A stronger US dollar makes reinsurance purchased in Yen relatively cheaper for US-based reinsurers like Greenlight Re. This means they can acquire more reinsurance coverage for the same amount of dollars, leading to higher potential underwriting profits.

Consider this: Greenlight Re reported a net written premium increase of $18.8 million in the first quarter, split between their casualty and specialty books. While the call didn't specify the proportion of this growth coming from the Japanese market, it's reasonable to hypothesize that a significant portion, perhaps even a majority, could be attributed to the favorable currency dynamic.

Let's put some numbers to this hypothesis. If, for example, Greenlight Re had allocated 50% of their new net written premiums to the Japanese market, that would equate to $9.4 million in premiums. With the Yen trading at roughly half its 2021 value against the dollar, this implies that Greenlight Re effectively acquired double the amount of reinsurance coverage in Japan compared to if the Yen had remained stable.

This currency-driven advantage extends beyond simply acquiring more coverage. It also provides a cushion against potential losses. If a catastrophic event occurs in Japan, the claim payments made in Yen translate to lower dollar-denominated losses for Greenlight Re, further boosting their profitability.

Of course, this hypothesis rests on the assumption that Greenlight Re has indeed been strategically increasing its exposure to the Japanese reinsurance market. While the call didn't explicitly confirm this, the emphasis on pressure on Japanese signings suggests a deliberate move to capitalize on the advantageous currency environment.

This potential currency play highlights a crucial aspect of reinsurance often overlooked – the global nature of the business. Reinsurers operate in a complex web of international markets, each with its own currency dynamics. While underwriting expertise and portfolio management remain paramount, strategic currency allocation could be a potent tool for maximizing profitability.

Greenlight Re's focus on short-tail specialty classes, as noted by CEO Greg Richardson, suggests a risk-aware approach. Coupled with their potential foray into the Yen-denominated market, it paints a picture of a company astutely navigating both the traditional and less obvious levers of the reinsurance world.

Whether this currency play is a deliberate strategy or a fortunate by-product, it underscores a key insight for reinsurance investors – look beyond the headlines. The most compelling investment stories often lie in the subtle nuances, waiting to be unearthed by those who venture beyond the surface.

Solasglas Fund Performance Q4 2023 and Q1 2024

The following chart illustrates the performance of the Solasglas Fund, managed by Greenlight Re's Chairman, David Einhorn. Data is sourced from the Q4 2023 and Q1 2024 earnings call transcripts.

"Fun Fact: Reinsurance, often called "insurance for insurance companies," helps primary insurers manage risk by transferring a portion of their potential losses to reinsurers. Think of it as a safety net for those who provide safety nets!"