Greenlight Capital Re, Ltd. — Q2 2018 Form 10-Q
Business and reporting period. Greenlight Capital Re (GLRE) provides specialty property and casualty reinsurance and invests through a value-oriented long/short strategy managed by DME Advisors. This unaudited filing covers the quarter and six months ended June 30, 2018; financial amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net premiums earned | $128.8 million | $160.3 million | $274.7 million | $312.2 million |
| Net investment income (loss) | $(40.7) million | $(39.1) million | $(185.9) million | $(27.5) million |
| Total revenue | $88.1 million | $121.5 million | $88.2 million | $285.0 million |
| Net income (loss) attributable to shareholders | $(37.4) million | $(35.5) million | $(180.1) million | $(27.1) million |
| Loss per share, basic and diluted | $(1.01) | $(0.96) | $(4.87) | $(0.73) |
| Net underwriting income, non-GAAP | $5.1 million | $4.8 million | $7.6 million | $4.6 million |
| Composite ratio | 92.7% | 94.4% | 94.5% | 95.9% |
- Gross premiums written fell 18.7% in Q2 and 14.7% in the first half. Net premiums written fell 33.4% and 28.9%, respectively, reflecting lower writings and substantially greater retrocession.
- The managed investment portfolio returned negative 3.8% in Q2 and negative 15.2% in the first half. First-half investment loss included $129.1 million of realized losses and $56.9 million of unrealized losses.
- At June 30, total assets were $2.779 billion, total liabilities $2.111 billion, and total equity $661.7 million. Shareholders’ equity attributable to GLRE shareholders was $650.9 million, down from $831.3 million at year-end 2017. Adjusted book value per share was $17.40, down 21.8% from $22.25.
- Cash and cash equivalents were $65.4 million; restricted cash was $1.265 billion. Combined cash and restricted cash declined to $1.330 billion from $1.531 billion at year-end.
- Operating cash flow was negative $28.6 million for the first half, versus positive $47.8 million a year earlier. Investing activities used $167.1 million; financing activities used $2.8 million, including share repurchases.
- Amounts due to prime brokers and other financial institutions were $520.2 million, down from $672.7 million. Securities sold, not yet purchased, totaled $681.3 million, compared with $912.8 million at year-end; these short positions carry potentially unlimited loss exposure.
Changes, outlook, and risks
- Management attributed the first-half deterioration primarily to investment performance, while underwriting remained profitable and the combined ratio improved to 97.3% from 98.5%.
- Q2 premiums were lower chiefly because homeowners’ contracts were not renewed, a multi-line casualty contract renewed at a lower share, professional liability contracts were not renewed, and mortgage premium adjustments reduced other business. Ceded premiums rose following automobile quota-share retrocession arrangements and additional natural-peril protection.
- Prior-year reserves developed favorably by a net $3.5 million in the first half. Favorable development on 2017 hurricanes, mortgage insurance, and prior property years was partly offset by adverse development in automobile, professional indemnity, general liability, and surety. Total loss reserves rose to $474.3 million from $464.4 million.
- Management described reinsurance pricing as pressured, despite some positive movement at January 2018 renewals, and cited competition from lower-cost collateralized capital. It expects underwriting mix and results to fluctuate. For investments, management aims to protect capital, expects comparatively lower net equity exposure, and expects to maintain significant gold and other macro positions amid economic, political, interest-rate, and trade uncertainty. No quantitative earnings or return guidance was provided.
- As of June 30, net long investment exposure was 13.9%. Estimated net natural-peril probable maximum loss was $67.0 million for a single 1-in-250-year event and $80.2 million in aggregate; these are model-based estimates, not guarantees.
- Management said it expected sufficient liquidity for foreseeable needs and to fund operations for the next 12 months from operating cash flow, while noting possible exploration of financing alternatives. Reinsurance subsidiaries exceeded regulatory minimum capital requirements and were rated A- (Excellent), stable, by A.M. Best. Dividends remain subject to regulatory constraints; the company said it does not currently expect to pay ordinary-share dividends.
- Key exposures include investment-market volatility, short-sale risk, catastrophe losses, reserve-estimation uncertainty, retrocessionaire credit risk, collateral and liquidity requirements, and dependence on DME Advisors. Retrocession does not remove GLRE’s obligation to policyholders. Existing contractual disputes were not expected by management to have a material adverse effect.
- Commitments included $7.0 million of private-investment funding commitments and a $30.0 million joint-venture revolving borrowing; the joint venture gave notice after quarter-end to extend that facility for one year. The Cayman Islands office lease had expired and was on a monthly arrangement through December 31, 2018 while renewal discussions continued.
- A reinsurance contract could involve Iran-related shipping activity; premiums were described as negligible, and the cedent was winding down related activity to comply with reimposed U.S. sanctions. The filing reported no other material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether investment performance and the 21.8% first-half decline in adjusted book value per share persist or recover.
- How underwriting profitability, premium volumes, retrocession costs, and casualty reserve development evolve in subsequent quarters.
- Whether loss reserves and recoverables remain adequate and collectible, including amounts due from retrocessionaires.
- How restricted cash, short positions, prime-broker borrowing, and collateral needs affect available liquidity under stressed markets.
- Progress on the Cayman Islands lease, renewal and extension terms for credit facilities, and compliance with letter-of-credit and regulatory covenants.