Greenlight Capital Re, Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Figures are in U.S. dollars; financial statement amounts are generally shown in millions unless noted.
Business context
Greenlight Re is a global specialty property and casualty reinsurer, operating through subsidiaries in the Cayman Islands and Ireland. It reports one operating segment. The company combines opportunistic underwriting with a value-oriented investment strategy of long and short positions. Management cautions that quarterly results can fluctuate and are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q1 2017 | Q1 2016 or prior date |
|---|---|---|
| Gross premiums written | $197.2 million | $166.8 million |
| Net premiums earned | $151.9 million | $138.1 million |
| Total revenues | $163.5 million | $166.3 million |
| Net investment income | $11.6 million | $28.4 million |
| Net income | $8.4 million; $0.22 per diluted share | $28.7 million; $0.77 per diluted share |
| Net underwriting income (loss), non-GAAP | $(0.2) million | $3.7 million |
| Net cash from operating activities | $15.4 million | $(7.3) million |
Gross premiums written rose 18.2%, while total revenues declined 1.7% and net income fell approximately 71%. Management attributed the earnings decline mainly to lower investment income and higher loss ratios. The investment portfolio returned 0.9% net of fees and expenses, versus 2.5% in Q1 2016.
The total combined ratio was 100.1%, compared with 97.3% in Q1 2016; the composite ratio was 97.4%, versus 93.8%. The total loss ratio increased to 69.0% from 65.6%, and the acquisition cost ratio was 28.4% versus 28.2%. The underwriting loss reflects the combined effect of these costs and the underwriting expense ratio.
| Balance-sheet item | March 31, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $3,008.8 million | $2,664.7 million |
| Total investments | $1,202.0 million | $1,022.5 million |
| Cash and cash equivalents | $38.0 million | $39.9 million |
| Restricted cash and cash equivalents | $1,344.1 million | $1,202.7 million |
| Due to prime brokers | $558.8 million | $319.8 million |
| Total liabilities | $2,107.7 million | $1,773.0 million |
| Total equity | $901.2 million | $891.7 million |
Prime-broker balances include margin borrowing used for investments and to collateralize trusts and letters of credit; they are not presented as conventional long-term debt. Securities sold, not yet purchased, were $867.7 million, creating short-position exposure. Operating cash ended at $38.0 million; investing activities used $17.9 million, compared with providing $92.2 million in Q1 2016. The company reported no financing cash flows in either period.
Fully diluted adjusted book value per share, a non-GAAP measure, was $23.57, up from $23.38 at year-end 2016. Shareholders’ equity attributable to shareholders was $883.5 million; total equity includes $17.7 million of non-controlling interest.
Material changes and management commentary
- Frequency gross premiums written increased 21.8%, primarily from motor business growth and new workers’ compensation contracts. Casualty represented 57.3% of gross premiums, versus 44.5% a year earlier. U.S. and Caribbean risks accounted for 87.1% of premiums.
- Net prior-period loss reserves increased by $5.0 million, mainly due to adverse development on Florida homeowners’ contracts associated with assignment-of-benefits claims and two large surety claims. Management reported no significant change in reserve methodology or assumptions.
- Management said Florida homeowners’ rates remained under pressure and AOB claims were expected to continue in 2017; the company had reduced its exposure. It described property-catastrophe pricing as highly competitive and below expected losses in much of the market.
- Management cited stable, favorable underlying rates in non-standard automobile business and expected that line to remain a high premium concentration. It also saw potential growth in U.S. mortgage reinsurance and intended to pursue health stop-loss opportunities selectively. Casualty business was expected to remain around 2016 levels absent attractive opportunities.
- The stated investment objective for 2017 was capital protection and positive returns from long and short positions. Net long exposure was 27.3%; management said it intended to maintain comparatively lower net equity exposure and significant gold and other macro positions amid global uncertainty.
- Management believed liquidity was sufficient for foreseeable needs and expected to fund the next 12 months from operating cash flow, with no current plan to issue debt. It does not currently expect to pay ordinary-share dividends. Subsidiary dividends are subject to regulatory constraints and approvals.
Risks, contingencies and unusual items
- Restricted cash is substantial and supports short positions, derivative counterparties, regulatory trusts and letters of credit. The company had $600 million of letter-of-credit capacity, with $189.4 million issued, and $267.6 million provided to cedents through regulatory trusts.
- As of April 1, 2017, modeled net catastrophe probable maximum loss at a 1-in-250-year return period was $97.1 million for a single event and $112.4 million in aggregate. These are estimates, not guarantees of actual losses.
- Short sales can have theoretically unlimited loss potential if security prices rise. Market, commodity, currency, interest-rate, credit and political risks may affect investment results. The filing estimates that a 10% decline in listed equity prices would reduce portfolio fair value by $28.6 million, all else equal.
- Reinsurance estimates—including premiums, reserves, and recoverables—are subject to uncertainty. Retrocession does not remove the company’s obligations to policyholders; management reported no provision for uncollectible loss recoverables was needed.
- The company had $8.0 million of remaining private-equity commitments and $1.2 million of operating lease obligations. It reported compliance with letter-of-credit facility covenants and no existing dispute expected to have a material adverse effect.
- DME Advisors, an affiliate of the board chairman, manages investments under related-party agreements. Q1 included $4.3 million of management fees and $1.2 million of performance allocation. The agreements were amended and restated effective January 1, 2017, through December 31, 2019, with automatic renewal provisions.
- After quarter-end, shareholders approved an increase in the share incentive plan authorization from 3.5 million to 5.0 million shares; the repurchase plan was extended to June 30, 2018. No shares were repurchased during Q1.
Most important facts for investors to verify
- Whether underwriting profitability improves from the 100.1% combined ratio and how Florida AOB and surety losses develop.
- Whether premium growth—particularly in motor and casualty—produces adequate risk-adjusted returns and reserve adequacy.
- Investment performance, including short-position losses, leverage, collateral demands and the liquidity available after restricted-cash requirements.
- Prime-broker borrowing, letter-of-credit and trust collateral needs, and the effects of any changes in subsidiary financial-strength ratings or regulatory capital requirements.
- Material estimates and related-party investment fees, including the performance-allocation terms and future investment results.