Business context and reporting period
Greenlight Capital Re, Ltd. (Nasdaq: GLRE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operates as a global specialty property and casualty reinsurer, with one operating segment. Its investment portfolio is managed through Solasglas Investments, LP (SILP), a related-party fund.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net premiums earned | $120.4 million | $128.8 million | $245.8 million | $274.7 million |
| Total investment-related income (loss) | $18.8 million | $(40.7) million | $51.1 million | $(185.9) million |
| Net income (loss) attributable to GLRE | $15.3 million | $(37.4) million | $21.2 million | $(180.1) million |
| Diluted earnings (loss) per share | $0.42 | $(1.01) | $0.58 | $(4.87) |
| Combined ratio | 98.8% | 96.0% | 108.3% | 97.3% |
- Premium trends: Gross premiums written were $152.3 million in Q2, up 7.2% year over year; for the first half they were $314.9 million, down 0.7%. Net premiums written rose 12.5% in Q2 and 3.9% for the half, while earned premiums declined in both comparisons.
- Underwriting: Underwriting income was $1.5 million in Q2 versus $5.1 million a year earlier. The first-half underwriting loss was $20.3 million, compared with $7.6 million of income in 2018. The first-half combined ratio included 12.2 percentage points of prior-year loss development.
- Investment results: SILP contributed $14.4 million in Q2 and $45.2 million for the first half. Its reported net investment return was 2.7% for Q2 and 9.1% for the first half, compared with a 15.2% loss for the first half of 2018.
- Cash flow: First-half operating cash flow was $(5.8) million; investing activities provided $63.5 million; financing activities were nil. Cash, cash equivalents and restricted cash totaled $760.8 million at June 30, including $745.9 million of restricted cash. Unrestricted cash and cash equivalents were $14.9 million.
- Balance sheet and debt: Total assets were $1.456 billion, total liabilities $955.1 million and shareholders’ equity $500.7 million at June 30. Convertible notes had a $92.4 million carrying value; the notes’ $100 million face amount bears 4% interest and matures in August 2023. The company reported compliance with the notes’ covenants.
- Reserves and liquidity: Loss and LAE reserves were $470.1 million, down from $482.7 million at year-end; reinsurance recoverables were $40.8 million. Restricted cash collateralized letters of credit and trust arrangements. Management said it expected to fund operations for the next 12 months from operating cash flow and investment income, including SILP withdrawals.
Material changes versus prior comparable periods
- The key underwriting deterioration was adverse development in private-passenger auto claims. First-half prior-year incurred losses increased $29.9 million, primarily due to Florida court rulings affecting claims from 2015 to early 2018, including claims previously considered closed. The net financial effect, including related premiums, acquisition costs and deposit-accounting adjustments, was a $27.7 million loss.
- Investment results reversed sharply from the large first-half 2018 loss. In 2019, assets and investment positions were transferred from the former joint venture to SILP; the joint venture was terminated in January.
- Equity increased to $500.7 million from $477.8 million at December 31, 2018, primarily reflecting first-half net income and elimination of the former joint-venture non-controlling interest.
- Restricted cash rose $60.9 million from year-end, primarily because of increased collateral provided to cedents. Gross premiums written shifted toward casualty, while “other” premiums declined, mainly reflecting non-renewal of a medical stop-loss contract and commutation of a mortgage contract.
Outlook, commentary, risks and unusual items
- Outlook: Management reported improving pricing in many markets but said reduced capital and the A.M. Best outlook change could constrain near-term premium growth. It expected to hold the majority of investable assets in cash and short-term U.S. Treasuries for the remainder of 2019 while a Board strategic review continued. No specific earnings or premium guidance was provided.
- Rating and strategy: A.M. Best revised the subsidiaries’ A- (Excellent) rating outlook from stable to negative in Q2. Management said a downgrade below A- could materially limit the ability to write new business; the Board initiated a strategic review to address downgrade risk.
- Investment and related-party matters: SILP was de-risked during Q2, with most investment assets held in cash and short-term Treasuries at quarter-end. SILP paid DME Advisors, an affiliate of the Board chair, $3.6 million in management fees for the first half; $5.0 million of performance allocation was also accrued to DME II. A June agreement waived fees and performance allocation on cash and cash equivalents from June 1 through December 31, 2019.
- Exposure and contingencies: Estimated net natural-catastrophe probable maximum loss at a 1-in-250-year return period was $91.0 million for a single event and $117.7 million in aggregate, as of July 1. The company noted uncertainty in reserve estimates, retrocessionaire credit risk, market and currency risks, and reliance on collateral arrangements. It reported no existing dispute expected to have a material adverse effect.
- Other items: The company had a $400 million letter-of-credit facility, with $248.1 million issued at June 30. It committed up to $6 million to an AccuRisk loan facility, with $2 million still available. Proposed U.S. PFIC regulations issued in July 2019 may affect future tax treatment; the company said it did not intend to rely on them for 2019.
Important facts for investors to verify
- How Florida auto claim rulings and any further adverse development may affect reserves, the combined ratio and future underwriting results.
- The status and outcome of the Board’s strategic review, A.M. Best’s negative outlook, and any effect on underwriting capacity or collateral requirements.
- SILP’s portfolio composition, performance, liquidity and risk controls after de-risking, including the related-party fee and performance-allocation arrangements.
- Availability of liquidity: most reported cash was restricted, and insurance-subsidiary dividends are subject to regulatory and facility constraints.
- Whether investment gains, reserve estimates, retrocession recoverables and catastrophe exposures remain consistent with the assumptions in the filing.