Greenlight Capital Re, Ltd. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. All dollar amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company is a specialty property and casualty reinsurer and manages its investment portfolio using long, short and macro positions.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross premiums written | $174.9 | $92.2 | $372.1 | $259.0 |
| Net premiums earned | $160.3 | $125.6 | $312.2 | $263.7 |
| Total revenues | $121.5 | $87.8 | $285.0 | $254.1 |
| Net investment income (loss) | $(39.1) | $(38.1) | $(27.5) | $(9.6) |
| Net income (loss) | $(35.5) | $(63.0) | $(27.1) | $(34.3) |
| Loss per share, basic and diluted | $(0.96) | $(1.69) | $(0.73) | $(0.92) |
| Composite ratio | 94.4% | 117.0% | 95.9% | 104.8% |
- Underwriting: Non-GAAP net underwriting income was $4.8 million in Q2 and $4.6 million for the half, versus losses of $24.5 million and $20.8 million, respectively, in 2016. Lower composite ratios drove the improvement; Q2 2016 included substantial adverse loss development.
- Investment performance: The DME-managed portfolio returned negative 3.4% in Q2 and negative 2.5% for the half. Half-year long positions gained 4.9%, while short positions lost 5.5% and macro positions lost 1.1%. Management attributed the half-year investment loss largely to realized/unrealized market results and foreign exchange.
- Cash flow: Operating activities provided $47.8 million in the first half, versus using $1.1 million in 2016. Investing activities used $45.5 million; financing activities used $2.3 million for share repurchases. Unrestricted cash was $41.7 million at June 30.
- Balance sheet and liquidity: Total assets were $3,012.2 million, total liabilities $2,148.4 million and total equity $863.9 million. Restricted cash was $1,352.8 million. Reinsurance balances receivable were $266.7 million; loss reserves were $359.4 million and unearned premium reserves $277.3 million.
- Borrowing and market exposures: Amounts due to prime brokers rose to $543.6 million from $319.8 million at year-end, principally for investment margin and collateral supporting trusts and letters of credit. Securities sold, not yet purchased, were $878.7 million. Management reported net long exposure of 29.9% and said short selling can have theoretically unlimited loss potential.
- Book value and capital: Fully diluted adjusted book value per share fell 3.2% from year-end to $22.64; total equity fell $27.8 million. The company repurchased 109,924 Class A shares in the first half for $2.3 million. The subsidiaries exceeded regulatory minimum capital requirements; both held A.M. Best ratings of A- (Excellent), stable outlook.
Material changes versus comparable periods
- First-half gross premiums written increased 43.7%, mainly from frequency business, particularly private passenger motor, personal property, workers’ compensation and financial lines. Management cautioned that it does not expect premiums to grow at the same rate in future periods.
- Improved underwriting results reflected lower loss ratios and the absence of certain large 2016 losses, including construction defect and catastrophe-related losses. However, first-half 2017 included $6.9 million of adverse development on prior-year reserves, mainly Florida homeowners’ assignment-of-benefits claims, large surety claims and a legacy motor contract.
- Investment results worsened for the first half: portfolio return was negative 2.5%, compared with negative 1.0% in 2016, and GAAP net investment loss increased to $27.5 million from $9.6 million.
- Restricted cash rose $150.2 million from year-end, as collateral needs increased. Letters of credit issued declined to $160.9 million from $255.4 million, while collateral in regulatory trusts increased to $284.0 million from $86.4 million.
Outlook, risks and unusual items
- No specific earnings or premium guidance was provided. Management expects underwriting opportunities to remain selective, intends to avoid inadequately priced risk, and expects near-term premium concentration in non-standard automobile business. It sees potential growth in health stop-loss and U.S. mortgage reinsurance, while casualty business is expected to remain near 2016 levels absent attractive opportunities.
- Management described continued pricing pressure in property catastrophe reinsurance and weakening Florida homeowners’ conditions, including rising water-damage and assignment-of-benefits claims; the company says it has significantly reduced Florida homeowners’ exposure. It also identified competitive markets, catastrophe losses, reserve-estimation uncertainty, investment volatility, short-position risk, collateral demands and counterparty credit risk as important exposures.
- As of July 1, estimated net probable maximum loss for a 1-in-250-year natural catastrophe was $107.3 million for a single event and $124.5 million in aggregate. Management emphasized that these are modeled estimates, not guarantees of actual losses.
- Management said it believed liquidity would be sufficient for foreseeable needs, had no plans to issue debt and expected to fund the next 12 months from operating cash flow. The company generally retains earnings and does not currently expect to pay ordinary-share dividends.
- The investment advisory and joint venture agreements with related party DME Advisors became effective January 1, 2017 and run through December 31, 2019, subject to renewal. The advisory fee is 1.5% annually on managed assets; first-half management fees were $8.6 million. David Einhorn is affiliated with DME and chairs the company’s board.
- The filing reports no material change to previously disclosed risk factors and says existing legal disputes are not expected to have a material adverse effect. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How investment performance and exposure have changed since June 30, especially short, macro and derivative positions, and the resulting impact on earnings and collateral requirements.
- Whether reserve development—particularly Florida homeowners’ assignment-of-benefits claims, surety and motor—continues, and how loss reserves compare with subsequent claims experience.
- The sustainability and profitability of rapid premium growth, given the concentration in frequency business and motor, and management’s stated expectation that growth will not continue at the first-half rate.
- Prime-broker borrowing, restricted-cash availability, collateral and letter-of-credit requirements, and compliance with facility covenants and regulatory capital rules.
- The filing gives inconsistent descriptions of 2016 prior-period reserve development: the reserve note reports $27.7 million, while MD&A later states $22.7 million. Verify the intended comparative figure.