Greenlight Capital Re, Ltd. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; balance-sheet comparisons are against December 31, 2012. Amounts below are U.S. dollars unless noted. The company is a specialty property-and-casualty reinsurer and manages a value-oriented long/short investment portfolio.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Gross premiums written | $148.8m | $67.6m | $410.9m | $303.9m |
| Net premiums earned | $163.9m | $116.6m | $406.4m | $348.2m |
| Net investment income | $49.4m | $96.5m | $134.8m | $131.2m |
| Income before tax | $58.4m | $48.1m | $147.6m | $80.4m |
| Net income attributable to shareholders | $56.5m | $46.1m | $141.8m | $75.2m |
| Diluted EPS | $1.50 | $1.23 | $3.78 | $2.01 |
| Underwriting composite ratio | 90.3% | 137.6% | 92.7% | 110.5% |
At September 30, total assets were $2.934bn, total liabilities $1.933bn and total equity $1.001bn. Shareholders’ equity was $966.6m. Cash and cash equivalents were $83.7m, with a further $1.317bn of restricted cash, largely collateral supporting short securities and letters of credit. Investments totaled $1.150bn.
For the first nine months, operating cash flow was negative $56.8m, versus negative $34.7m a year earlier; investing activities provided $118.0m and financing activities provided $0.5m. Cash and cash equivalents increased $61.8m to $83.7m. Management said underwriting activities generated approximately $10.6m of cash after excluding investment-related operating expenses.
The company reported no planned debt issuance and no material indebtedness other than temporary investment-related borrowing. Amounts due to prime brokers totaled $239.1m, including $235.2m borrowed to collateralize letters of credit and $3.8m for investment purchases. Letter-of-credit facilities totaled $760m, of which $377.3m was issued and secured by $418.7m of pledged assets.
Material changes and drivers
- Nine-month gross premiums written rose about 35%, driven largely by non-standard automobile and Florida homeowners’ business. Net premiums earned rose about 17%.
- Nine-month net income increased to $141.8m from $75.2m, while net investment income increased only modestly. Underwriting results improved: the nine-month composite ratio fell to 92.7% from 110.5%, and the combined ratio fell to 96.8% from 114.4%.
- Q3 net investment income declined to $49.4m from $96.5m, despite a 4.0% net return on the DME Advisors-managed portfolio versus 8.8% a year earlier. Q3 underwriting income before general and administrative expenses was $16.0m, compared with a $43.9m loss in Q3 2012.
- Reported nine-month underwriting results included a $15.0m reversal of Superstorm Sandy reserves (with related reinstatement-premium reversals), after updated client information indicated losses would not reach the company’s coverage layer. Prior-period general-liability losses developed adversely by $17.7m, partly offset by favorable development in other lines.
- Investment exposures shifted: securities sold short increased to $1.065bn from $908.4m; reported short exposure rose to 71% from 64%. Restricted cash increased 9.1% to $1.317bn, mainly to support the larger short position.
Outlook, risks and unusual items
- Management described the reinsurance market as overcapitalized and competitive, with a gradually hardening market but expected rate increases not necessarily exceeding loss trends. It said the company may reduce premium writings rather than accept mispriced risk.
- Portfolio focus included Florida homeowners, U.S. employer health stop loss, catastrophe retrocession and non-standard private passenger automobile. Management cited rate improvement or favorable loss experience in these areas but noted competitive pricing pressure, particularly from alternative capital in catastrophe business.
- Management reported a 35.0% net-long investment position, reduced gross exposure during the quarter, and expected to maintain gold, interest-rate and foreign-exchange macro positions, sovereign-debt shorts and sovereign credit-default swaps. It cautioned that investment results and underwriting results may fluctuate materially; no quantified earnings guidance was provided.
- Key risks include catastrophe losses, reserve-estimation uncertainty, counterparty/retrocession recoverability, market and currency movements, and short-sale exposure, which can have theoretically unlimited losses. The company estimated a 10% decline in listed equities and equity-based derivatives would reduce portfolio fair value by $40.9m.
- A $6.0m impairment was recorded in the nine months on a note receivable placed on non-accrual; $10.5m of the note balance remained on non-accrual at quarter-end. DME Advisors, an affiliate of the board chairman, received $33.8m in performance allocation and $13.4m in management fees for the nine months.
- Natural-peril exposure as of October 1, 2013 was capped at $149.8m aggregate net loss exposure across covered events. The company said it was in compliance with letter-of-credit covenants, and existing disputes were not expected to have a material adverse effect.
- Greenlight Re and GRIL held A (Excellent) and A- (Excellent) A.M. Best ratings, respectively, both with stable outlooks. Management warned that a downgrade below A- or withdrawal of a rating could constrain new underwriting.
Investor verification priorities
- Review the support for the Sandy reserve release and current reserve estimates, especially adverse general-liability development and the run-off commercial-auto book.
- Assess the collectability and valuation of the $10.5m non-accrual note, along with the remaining private and unlisted investments valued using less-observable inputs.
- Track short-position size, collateral needs, prime-broker borrowing and liquidity available after restricted cash and letter-of-credit collateral.
- Examine the sustainability of underwriting profitability, premium growth, commission costs and exposure concentration in the principal business lines.
- Review DME Advisors’ related-party fees and performance-allocation terms, and the effect of investment returns on reported earnings.
- Confirm catastrophe and retrocession exposure, counterparty credit quality, regulatory capital and rating status, and any subsequent changes to market conditions or commitments.