Greenlight Capital Re, Ltd. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Greenlight Capital Re is a specialty property and casualty reinsurer operating through subsidiaries in the Cayman Islands and Ireland. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Gross premiums written | $128.7 | $135.6 | $440.2 | $362.1 |
| Net premiums earned | $135.5 | $115.5 | $403.4 | $335.0 |
| Total revenues | $139.2 | $124.0 | $424.2 | $314.7 |
| Net income (loss) | $(13.9) | $2.2 | $(6.7) | $(38.2) |
| Diluted earnings (loss) per share | $(0.42) | $0.06 | $(0.20) | $(1.07) |
| Combined ratio | 109.3% | 100.4% | 102.4% | 100.1% |
| Adjusted combined ratio | 90.3% | 93.6% | 93.0% | 94.5% |
| Net underwriting income (loss), non-GAAP | $(12.6) | $(0.4) | $(10.0) | $(0.5) |
Q3 underwriting included an estimated $25.9 million of catastrophe losses, principally from Hurricane Ida, European floods and hailstorms, and South African riots. Catastrophes added 19.1 percentage points to the quarterly combined ratio. For the first nine months, catastrophe events added 7.9 points. The adjusted ratio excludes prior-year development, catastrophe events, and specified infrequent adjustments; it is a non-GAAP measure.
Financial position, cash flow and capital
- Assets and equity: Total assets were $1.414 billion at September 30, 2021, versus $1.358 billion at December 31, 2020. Shareholders’ equity was $450.5 million, down from $464.9 million, reflecting the period loss and share repurchases. Fully diluted book value per share was $13.25, down 1.3% from year-end.
- Cash and liquidity: Cash and cash equivalents were $37.4 million; restricted cash was $692.5 million, for total cash, cash equivalents and restricted cash of $729.9 million. Restricted balances collateralize trusts and letters of credit and are not freely available for general use. Operating cash flow was negative $18.8 million for the nine months; investing cash flow was positive $4.4 million and financing cash flow was negative $10.0 million, primarily for share repurchases.
- Investments: Total investments were $222.7 million, including $180.2 million in related-party fund Solasglas Investments, LP (SILP). The company’s share was 78% of SILP’s net assets. SILP investment results were a $6.2 million loss in Q3 and a $4.2 million loss for the nine months. Other investment income included a $14.2 million pre-tax realized gain from the sale of AccuRisk and unrealized gains on Innovations investments.
- Reserves and receivables: Loss and loss adjustment expense reserves were $540.8 million, up from $494.2 million at year-end; reinsurance balances receivable were $380.4 million, up from $330.2 million. Funds held by cedents totaled $201.3 million.
- Debt: Convertible senior notes had a $96.5 million carrying value, including accrued interest, and mature August 1, 2023. The $100 million principal bears 4% interest. The company reported compliance with note covenants.
- Capital returns: The company repurchased 1.08 million Class A shares for $10.0 million during the first nine months. A repurchase authorization of up to $25 million runs from July 1, 2021 through June 30, 2022. Management said it did not currently expect to pay dividends.
Material changes and management commentary
- Gross premiums written fell 5.1% in Q3 year over year, mainly as the company reduced or did not renew motor business; first-nine-month premiums rose 21.6%, primarily from increased Lloyd’s syndicate multi-line and other casualty business. Management cited improved rates in most classes and greater portfolio diversification.
- Q3 net loss reversed the prior-year profit, reflecting catastrophe-driven underwriting losses and a $6.2 million SILP loss. For the nine months, the net loss narrowed substantially versus 2020, helped by improved investment results, including the AccuRisk sale gain; underwriting nevertheless remained loss-making.
- Prior-year reserve development was favorable by $1.3 million for the nine months, mainly from catastrophe, COVID-related mortgage, and health contracts, partly offset by adverse development on certain workers’ compensation and multi-line casualty contracts.
- Management said the adjusted combined ratio had improved over recent quarters, indicating better underlying underwriting results, but described Q3 as a period of unusually high industry catastrophe losses. For 2022, it expected catastrophe losses to support favorable conditions in many classes, while anticipating limited rate increases in “pure catastrophe” business. No quantified earnings or premium guidance was provided.
- Innovations business accounted for approximately 6% of year-to-date written premiums; management sees potential for growth. Management expects available operating and investing cash flows to fund the next 12 months and said recent catastrophe events were not expected to materially affect operational liquidity.
Risks, contingencies and unusual items
- COVID-19 and other loss reserves rely on estimates and assumptions; the company cautioned that actual losses may differ materially and reserve adjustments could materially affect results or financial condition.
- At October 1, 2021, modeled 1-in-250-year natural catastrophe probable maximum losses were $84.5 million for a single event and $107.3 million in aggregate, net of retrocession and reinstatement premiums. These are estimates and actual losses may differ.
- Reinsurance recoverables depend on cedents and retrocessionaires meeting obligations. Retrocession does not release the company from its obligations to cedents. Most collateral for unrated retrocessionaires’ recoverables was secured, according to the filing.
- Restricted cash supports $688.6 million of collateral provided to cedents; the $275 million letter-of-credit facility had $138.4 million issued. Regulatory capital and approvals constrain subsidiary dividends to the parent.
- SILP is managed by an affiliate of Chairman David Einhorn; GLRE has limited control over its investment manager, and SILP may have concentrated positions. Related-party management fees and performance allocations apply, subject to loss carry-forwards.
- The company’s subsidiaries held A.M. Best financial strength ratings of A- (Excellent), stable outlook. A downgrade below A- or withdrawal could constrain new underwriting. Existing contractual disputes were not expected by management to have a material adverse effect.
- The company expects to adopt convertible-debt accounting guidance in Q1 2022; it estimates an approximately $2.5 million reduction in opening equity, with no material impact on net income or cash flows.
Important facts for investors to verify
- How catastrophe claims and COVID-19-related losses develop, and whether the $540.8 million reserve estimate proves adequate.
- Whether underlying underwriting improvement persists after excluding catastrophe and prior-year effects, and how the elevated acquisition-cost ratio affects profitability.
- SILP’s subsequent performance, liquidity and concentration exposures, and the implications of the related-party investment-management structure.
- Availability of unrestricted liquidity after considering collateral needs, loss payments, and regulatory constraints on subsidiary dividends.
- Progress under the share repurchase authorization and the company’s capacity to meet the 2023 convertible-note maturity.