Greenlight Capital Re, Ltd. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statement figures are in thousands unless noted. Greenlight Re underwrites specialty property and casualty reinsurance and manages an actively traded long/short investment portfolio.
Financial performance
- Q3 revenue and earnings: Total revenue was $213.2 million, versus $91.6 million a year earlier. Net income was $46.1 million, or $1.26 basic and $1.23 diluted per share, compared with a $4.5 million net loss.
- Nine-month results: Total revenue was $479.1 million, versus $247.9 million. Net income was $75.2 million, or $2.05 basic and $2.01 diluted per share, compared with a $63.4 million net loss.
- Investment results: Net investment income was $96.5 million in Q3 and $131.2 million for nine months, compared with $1.1 million and a $54.6 million loss, respectively, in 2011. Returns after fees and expenses were 8.8% and 12.1%, respectively. Investment performance was the principal driver of the reported profit.
- Underwriting: Net premiums earned rose 29.0% to $116.6 million in Q3 and 15.0% to $348.2 million for nine months. Net losses incurred rose to $126.6 million and $277.3 million, respectively. Underwriting loss before general and administrative expenses was $43.9 million in Q3 and $36.9 million for nine months.
- Ratios: Q3 composite ratio was 137.6%, versus 104.3% in 2011. For nine months, the composite ratio was 110.5% versus 99.7%; the combined ratio was 114.4% versus 103.3%. Ratios above 100% indicate underwriting losses.
- Premium mix: Gross premiums written fell 27.4% in Q3 to $67.6 million, but were down only 1.1% for nine months to $303.9 million. Nine-month growth in private automobile business largely offset lower Florida homeowners and other premiums.
Financial position, cash flow and liquidity
- Balance sheet at September 30: Total assets were $2.86 billion, total liabilities $1.96 billion, and total equity $894.2 million. Equity increased from $845.7 million at year-end 2011, primarily reflecting nine-month net income, partly offset by a $34.0 million joint-venture withdrawal.
- Investments and short positions: Investments totaled $1.22 billion. Securities sold, not yet purchased were $1.02 billion, up from $683.8 million at year-end. Restricted cash increased to $1.29 billion from $957.5 million, largely to support collateral needs associated with the larger short portfolio.
- Borrowings and facilities: Amounts due to prime brokers were $296.7 million, including $55.0 million borrowed for investment purchases and $241.7 million borrowed to collateralize letters of credit. The company reported no plans to issue debt; it was in compliance with investment leverage guidelines. Letter-of-credit facilities totaled $760 million, with $402.7 million issued and $422.8 million of assets pledged as collateral.
- Cash flow: Operating activities used $34.7 million for nine months, versus $7.3 million used in 2011. Investing activities provided $14.7 million. Cash and cash equivalents were $22.3 million, down from $42.3 million at year-end; restricted cash is reported separately.
- Book value: Non-GAAP basic adjusted book value per share was $24.02 and fully diluted adjusted book value per share was $23.57 at September 30, up from $21.98 and $21.61, respectively, at year-end 2011.
Material changes, outlook and risks
- Management attributed the sharp rise in Q3 underwriting losses mainly to reserve strengthening on commercial motor liability contracts in run-off, plus adverse development on a 2010 New Zealand earthquake contract. The two multi-line commercial motor contracts and a separate long-haul trucking contract were recorded at a 122% loss ratio; the earthquake contract was increased to its $10.0 million limit.
- Nine-month net reserves on prior-period contracts increased by $53.8 million. Reserves for loss and loss adjustment expenses reached $349.4 million, up from $241.3 million at year-end. Management cautioned that ultimate claims and settlements may differ materially from estimates.
- Management described the reinsurance market as gradually hardening but still overcapitalized, with competition and pricing pressure. It cited rate increases in certain Florida homeowners and catastrophe retrocession markets, while noting new alternative capital and weak economic conditions could constrain pricing.
- The investment portfolio was net long 26% at quarter-end, according to management. The company intended to maintain substantial gold and macro-hedge positions, including interest-rate and currency options, sovereign-debt shorts, and sovereign credit default swaps. Results may fluctuate significantly with markets and underwriting experience.
- Investment advisory compensation is material and related-party: DME Advisors received a 1.5% annual management fee and a performance allocation generally equal to 20% of qualifying net investment income, subject to a loss carry-forward. Nine-month performance allocation of $31.6 million was accrued as payable.
- Other risks include catastrophe exposure (maximum aggregate natural-peril exposure of $108.9 million as of October 30, 2012), retrocessionaire collectability, reserve uncertainty, market and currency movements, and reliance on A.M. Best ratings. Management reported no material change to previously disclosed risk factors, no material adverse effect expected from existing disputes, and effective disclosure controls.
- Management said it expected to fund operations for the next 12 months from operating cash flow and had no current dividend plans. It noted results for the nine months are not necessarily indicative of full-year results; no earnings guidance was provided.
Important facts for investors to verify
- Whether commercial motor and catastrophe reserve assumptions remain adequate as claims develop, particularly for run-off contracts and the New Zealand earthquake.
- How much reported earnings and book-value growth depend on unrealized investment gains, short positions, and fair-value estimates.
- Investment leverage, collateral requirements, restricted-cash availability, and the company’s ability to meet claims and letter-of-credit needs under stressed markets.
- Retrocession recoverability, including the $33.9 million due from unrated retrocessionaires, and collateral coverage for those balances.
- The impact of DME Advisors’ fees and performance allocation on net investment returns and the related-party relationship.
- Premium volume and profitability by line, particularly the growth in private automobile and the reduced Florida homeowners exposure.