Greenlight Capital Re, Ltd. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited financial statements; amounts below are U.S. dollars unless stated otherwise. The company is a specialty property and casualty reinsurer whose investment strategy includes long and short positions.
Financial performance and position
| Metric | Q3 2015 | Nine months 2015 | Comparable 2014 period |
|---|---|---|---|
| Gross premiums written | $134.6 million | $357.2 million | $97.2 million; $249.8 million |
| Net premiums earned | $102.0 million | $288.5 million | $79.5 million; $279.0 million |
| Net investment income (loss) | $(191.3) million | $(236.5) million | $(54.0) million; $49.8 million |
| Net income (loss) | $(219.7) million | $(283.3) million | $(51.8) million; $48.9 million |
| Loss per share, basic | $(5.98) | $(7.73) | $(1.40); $1.31 |
Q3 and nine-month combined ratios were 127.0% and 117.4%, respectively; the nine-month ratio was 100.6% in 2014. A ratio above 100% indicates underwriting losses after expenses. Nine-month net investment returns managed by DME Advisors were down 16.9%, versus a 3.2% gain in 2014; Q3 return was down 14.2%, versus down 3.7%.
At September 30, total assets were $2.514 billion, total liabilities $1.623 billion, and total equity $891.6 million. Cash and cash equivalents were $99.4 million and restricted cash was $1.046 billion. Investments totaled $1.104 billion. Shareholders’ equity fell from $1.165 billion at year-end 2014, principally reflecting the nine-month loss and $17.7 million of share repurchases.
Operating cash flow was $(18.6) million for the first nine months, compared with $(86.2) million in 2014; investing activities provided $123.6 million and financing activities used $17.7 million. The company reported $267.0 million due to prime brokers, including $63.1 million of investment-related borrowing and $203.9 million borrowed to collateralize letters of credit. It reported no plans to issue debt and said it expected to fund operations over the next 12 months from operating cash flow.
Material changes and notable items
- Gross premiums written increased 43% year over year for the nine months, while net premiums earned rose 3%. Growth included professional liability, motor, health and other casualty lines; personal property premiums declined, partly because a Florida homeowners’ contract was not renewed.
- Underwriting results deteriorated mainly because of adverse development on run-off general liability construction-defect contracts. The filing cites $36.9 million of additional reserves in Q3 and $51.6 million of adverse development for the nine months on two contracts. Management’s detailed discussion identifies $14.7 million on the second contract.
- Equity-market losses drove investment performance down: the long portfolio lost 20.5% in Q3, partly offset by a 7.5% gain on shorts. Long investments and financial-contract receivables declined 24.3% from year-end, to $1.118 billion.
- Loss and loss adjustment expense reserves increased to $302.2 million from $264.2 million at year-end; frequency reserves rose to $266.0 million, primarily due to prior-period adverse development.
- A ceding-insurer settlement converted amounts previously recorded as reinsurance receivables into a ten-year note; notes receivable were $27.5 million, of which $23.9 million was on non-accrual status. Management nevertheless expected the recorded balance to be collectible.
Outlook, risks and contingencies
No specific earnings or premium guidance was provided. Management said it would avoid inadequately priced risks if market conditions softened and described a pipeline of customized underwriting opportunities. It highlighted competitive pressure in catastrophe excess-of-loss business and a shift toward catastrophe quota-share contracts. Investment aims for 2015 were to protect capital and seek positive returns; management anticipated maintaining gold exposure, foreign-exchange options, short sovereign debt and sovereign credit-default swaps.
On October 23, 2015, A.M. Best affirmed Greenlight Re’s “A (Excellent)” rating but changed the outlook from stable to negative. Management did not expect current business to be affected, but acknowledged possible marginal impact on new business. A downgrade below “A-” or withdrawal of the rating could materially constrain new underwriting.
Principal risks include volatile investment results and short-sale losses, which can theoretically be unlimited; reserve-estimation uncertainty; catastrophe exposure; counterparty and retrocessionaire credit risk; and restricted cash and collateral requirements. Maximum aggregate natural-peril exposure as of October 1 was $243.8 million, net of retrocession. Letters of credit totaled $264.7 million against $720.0 million of facility capacity, supported by $294.1 million of pledged collateral; the company reported compliance with facility covenants. Management said existing legal disputes were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material changes in internal control reported.
Important facts for investors to verify
- Reserve adequacy and subsequent claims experience on the two run-off general liability construction-defect contracts, including the precise adverse-development amounts.
- Investment-portfolio composition, leverage, short exposure, and the drivers of the 2015 losses; reconcile reported return figures with portfolio and cash flows.
- Collectibility and terms of the $27.5 million notes receivable, especially the $23.9 million on non-accrual status.
- Effect of the negative A.M. Best outlook on new business, collateral demands, and subsidiary capital and dividend flexibility.
- Liquidity available after restricted cash, broker borrowing, letters of credit, and potential claims or collateral calls.