Business context and reporting period
Greenlight Capital Re, Ltd. filed this Form 10-K for the fiscal year ended December 31, 2015. The Cayman Islands-based holding company writes property and casualty reinsurance through Greenlight Re and its Ireland-based subsidiary, GRIL. It pairs opportunistic underwriting with a value-oriented investment strategy of long and short positions managed primarily by DME Advisors. Figures below are U.S. dollars unless stated otherwise.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Gross premiums written | $502.1 million | $324.0 million |
| Net premiums earned | $408.4 million | $354.2 million |
| Net investment income (loss) | $(281.9) million | $122.6 million |
| Net income (loss) | $(326.4) million | $109.6 million |
| Basic and diluted EPS | $(8.90) | $2.94 basic; $2.89 diluted |
| Combined ratio | 111.8% | 103.6% |
| Cash and cash equivalents | $112.2 million | $12.0 million |
| Restricted cash and cash equivalents | $1,236.6 million | $1,296.9 million |
| Total equity | $848.8 million | $1,194.0 million |
| Basic adjusted book value per share | $22.29 | $31.17 |
| Fully diluted adjusted book value per share | $22.17 | $30.76 |
Underwriting produced a $24.9 million loss before general and administrative expenses, versus $11.6 million of income in 2014. The 2015 composite ratio was 106.1% before internal and corporate expenses; the 111.8% combined ratio includes them. Net losses and loss adjustment expenses were $317.1 million, and acquisition costs were $116.2 million. Net loss reserves stood at $306.0 million, including $194.5 million of incurred-but-not-reported reserves.
Net cash used in operating activities was $59.9 million, compared with $133.7 million used in 2014. Investing activities provided $177.7 million, principally reflecting borrowings under prime-broker margin arrangements; financing activities used $17.6 million, including share repurchases. The filing says the company expected operating and investing cash flows to meet foreseeable needs. No conventional debt issuance was planned, but liabilities included $396.5 million due to prime brokers, of which $301.4 million related to collateral for letters of credit and trusts and $95.0 million to investing activity. Securities sold, not yet purchased were a further $882.9 million liability, matched by restricted cash held as collateral.
Letter-of-credit facilities totaled $720.0 million, with $245.6 million issued at year-end; the company also had $78.6 million pledged in trust arrangements. Greenlight Re reported statutory capital and surplus of $788.9 million against a $466.5 million prescribed capital requirement. Both reinsurance subsidiaries met applicable capital requirements. The filing reports no cash dividends paid and no anticipated dividends in the foreseeable future.
Material changes versus prior comparable period
- Gross premiums written increased 55.0% to $502.1 million, reflecting new contracts and growth in renewals. Net premiums earned rose 15.3% to $408.4 million. Motor liability was the largest 2015 line, at 40.6% of gross premiums written; frequency business represented 92.5% of written premiums.
- The investment portfolio returned negative 20.2%, after positive 8.7% in 2014. Net investment loss included $265.4 million of net unrealized losses. Management attributed much of the decline to three large long positions—CONSOL Energy, Micron Technology and SunEdison—which together accounted for a 14.9% investment loss.
- Prior-year reserve development was adverse by $50.3 million, versus $18.2 million adverse in 2014. The principal drivers were construction-defect claims on legacy general liability contracts written in 2008–2011, including $36.9 million and $14.7 million reserve increases on two contracts.
- The combined ratio deteriorated by 8.2 percentage points, while adjusted book value per share fell 28.5% on a basic basis and 27.9% on a fully diluted basis. Total equity declined $345.3 million.
- The company repurchased 613,540 Class A shares for approximately $17.7 million. It also reclassified non-investment foreign-exchange gains and losses from general and administrative expenses to other income (expense); the reclassification did not change prior-period net income.
Outlook, management commentary, risks and unusual items
Management said competitive conditions made attractive underwriting opportunities difficult to find, and stated it would maintain or reduce premium writings rather than accept inadequately priced risk. It expected to continue emphasizing non-standard automobile business, modestly grow health stop-loss and specialty casualty, and reduce property-catastrophe business while pricing remained under pressure. Florida homeowners’ writings could be reduced further if rates and expected profitability weakened. These are strategic comments, not formal numeric earnings or premium guidance.
For 2016, management’s stated investment aim was to protect capital and seek positive returns, with comparatively lower gross and net equity exposure and significant gold and other macro positions in an uncertain market. A.M. Best affirmed both subsidiaries’ “A (Excellent)” ratings in October 2015 but changed the outlook from stable to negative; management warned that this could constrain new business in rating-sensitive markets.
Key risks include investment volatility and concentration, short-sale and derivative exposure, potential losses beyond reserves, long-tail casualty claim development, catastrophe exposure, broker and cedent concentration, and dependence on DME Advisors. DME’s investment-management agreement was due to expire December 31, 2016, with automatic renewal provisions; Greenlight Re had limited ability to terminate early. Two brokers generated 77.4% of gross written premiums. At January 1, 2016, modeled net probable maximum loss for a 1-in-250-year natural catastrophe was $113.0 million for a single event and $143.9 million in aggregate; management cautioned these estimates may differ materially from actual losses. The company also disclosed $187.9 million of reinsurance balances receivable, most not collateralized, and a $25.1 million note receivable converted from a cedent balance, of which $23.0 million was on non-accrual status.
Other material considerations include Solvency II requirements applying to GRIL from January 1, 2016; collateral and facility renewal needs; regulatory limits on subsidiary dividends; and tax uncertainty, including possible U.S. PFIC or trade-or-business issues. The company reported no unresolved SEC staff comments and stated that existing contractual disputes were not expected to have a material adverse effect. Its financial statements and internal control over financial reporting received unqualified audit opinions.
Important facts for investors to verify
- Whether construction-defect and other legacy casualty reserves develop further, and how the $50.3 million prior-year adverse development affects future underwriting results.
- Whether investment performance, portfolio concentration and exposure to shorts, derivatives and gold change materially after the 2015 loss.
- Whether broker concentration, collateral availability and renewal of the $720.0 million letter-of-credit facilities affect premium growth or liquidity.
- Whether A.M. Best’s negative outlook changes to a rating action, and the effect on clients, new business and collateral terms.
- Whether the DME Advisors agreement is renewed or altered, and how related-party fees, allocation conflicts and investment results are managed.
- Whether the $23.0 million non-accrual note and other largely unsecured receivables are collected, and whether GRIL meets Solvency II requirements.