Greenlight Capital Re, Ltd. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company is a specialty property-and-casualty reinsurer; its investment portfolio is managed by DME Advisors. Amounts below are in U.S. dollars unless otherwise stated.
Key financial results
| Metric | Q3 2018 | Nine months 2018 | Comparable 2017 period |
|---|---|---|---|
| Net premiums earned | $114.1 million | $388.8 million | $172.7 million; $484.9 million |
| Total revenues | $32.5 million | $120.8 million | $236.1 million; $521.1 million |
| Investment-related income (loss) | $(80.9) million | $(266.7) million | $64.0 million; $36.4 million |
| Net income (loss) attributable to shareholders | $(89.1) million | $(269.2) million | $19.9 million; $(7.2) million |
| Loss per share, basic and diluted | $(2.48) | $(7.49) | $0.53; $(0.20) |
| Net underwriting income (loss), non-GAAP | $(4.0) million | $3.6 million | $(38.5) million; $(33.9) million |
| Composite ratio | 100.9% | 96.4% | 119.8%; 104.4% |
Investment funds managed by DME reported net returns of negative 8.4% in Q3 and negative 22.3% year to date, versus positive 5.5% and 2.9%, respectively, in 2017. For the first nine months, the long portfolio returned negative 3.8%, short positions negative 16.2%, and macro positions negative 1.2%. Management identified short positions in Netflix and other technology and momentum-driven equities among the largest detractors.
Financial position, cash flow and liquidity
- At September 30, total assets were $1.704 billion, total liabilities $1.130 billion, and total equity $558.7 million. Shareholders’ equity attributable to shareholders was $557.0 million.
- Cash and cash equivalents were $43.9 million; restricted cash was $673.8 million. Combined cash, cash equivalents and restricted cash were $717.7 million, down from $1.531 billion at year-end 2017. Restricted cash supports reinsurance collateral and other obligations and is not freely available.
- Operating cash flow was negative $22.1 million for the nine months, versus positive $67.0 million in 2017. Investing activities used $868.4 million, primarily reflecting investment deleveraging and reduced prime-broker borrowing; financing activities provided $80.1 million, including convertible-note proceeds.
- Prime-broker and other financial-institution borrowings fell to $43.7 million from $672.7 million at year-end. The company reported no securities sold, not yet purchased at quarter-end, compared with $912.8 million at year-end.
- In August, the company issued $100 million of senior unsecured convertible notes due August 2023, bearing 4.0% coupon interest. The balance-sheet carrying amount, net of issuance costs, was $89.6 million; the notes’ liability component was estimated at $92.1 million before the $3.1 million unamortized issuance-cost deduction. The company repurchased 1.0 million shares at $13.75 using part of the proceeds.
- Management said it expected to fund operations for the next 12 months from operating cash flow and available liquidity, including potential SILP withdrawals. Greenlight Re and GRIL exceeded regulatory minimum capital requirements and had A.M. Best ratings of A- (Excellent), stable outlook. The company did not expect to pay ordinary-share dividends.
Material changes and management commentary
- Adjusted book value per share fell 31.2% year to date to $15.31 basic and $15.29 fully diluted, from $22.25 and $22.22, respectively, at December 31, 2017.
- Gross premiums written declined 36.6% in Q3 and 21.9% year to date. Management attributed the decreases mainly to non-renewed homeowners’ business, lower shares on casualty contracts, and mortgage-contract commutations. Net premiums earned decreased 33.9% in Q3 and 19.8% year to date. Ceded premiums increased, in part due to automobile quota-share and natural-peril retrocession coverage.
- Underwriting improved year over year: the nine-month combined ratio was 99.1%, versus 107.0% in 2017. Q3 included an estimated five percentage points of losses from Hurricane Florence; Q3 2017 included 21.9 points from the 2017 catastrophes. Year-to-date prior-year reserve development was net favorable by $1.5 million, but included adverse developments in non-standard auto, professional indemnity, general liability and surety.
- Effective September 1, Greenlight Re and GRIL transferred the economic rights to most investment assets to Solasglas Investments, LP (SILP), a related-party fund advised by DME Advisors, with DME II as general partner. Remaining legal transfers were expected by January 2, 2019. At quarter-end the company reported a $346.7 million SILP investment and a $111.7 million payable for assets whose legal title had not yet transferred. The transition itself generated no net gain or loss.
- Management said it reduced portfolio risk through deleveraging and expected to maintain cash and cash equivalents or high-grade fixed-income securities equivalent to net loss reserves. It described ongoing industry rate pressure, with limited improvement despite catastrophe losses, and cited competition from lower-cost collateralized reinsurance capital. No numerical earnings or return guidance was provided; management cautioned that results may fluctuate substantially.
Risks, contingencies and unusual items
- Investment losses were the principal cause of the period’s net loss. The SILP transition increases reliance on a related-party fund while leaving investment decisions largely with DME II and DME Advisors. The filing cites limited company control, conflicts of interest, manager dependence, leverage, short-sale losses that can be theoretically unlimited, derivatives, concentration and liquidity risks.
- At October 1, 2018, modeled net probable maximum loss for a 1-in-250-year natural-peril event was $67.1 million for a single event and $80.3 million in aggregate. These are estimates, not caps on actual losses.
- Loss and loss adjustment expense reserves were $474.9 million, including $296.6 million of IBNR. Reserve estimates may differ materially from eventual claims. Retrocessionaires’ failure to pay could leave the company liable; $31.5 million of recoverables were from unrated retrocessionaires, secured by cash and collateral, and management recorded no uncollectible provision.
- Letters of credit totaled $216.6 million under facilities with $450 million aggregate capacity. Restricted cash supporting letters of credit and regulatory trusts was significant. A facility default could constrain subsidiary dividends; the company reported covenant compliance.
- Other commitments included $6.8 million of private-equity funding commitments and $30 million drawn under a secured revolving credit facility. The filing disclosed no existing legal dispute expected by management to have a material adverse effect. Iran-related premiums under one shipping reinsurance contract were described as negligible; the cedent was winding down affected activity in response to sanctions.
Most important facts for investors to verify
- Whether investment performance and adjusted book value stabilize after the steep 2018 decline, particularly the performance and risk exposures of SILP.
- Completion of the remaining asset and liability transfers to SILP by the stated deadline, and the fund’s redemption liquidity, leverage and related-party fee terms.
- Development of casualty reserves and recoverables, including adverse trends in motor liability, professional indemnity, general liability and surety claims.
- Whether underwriting profitability is sustainable as premiums contract, retrocession costs rise and market pricing remains pressured.
- Liquidity available after collateral requirements, future note interest and potential cash obligations from note conversion or repurchase; also confirm compliance with credit and letter-of-credit covenants.