Greenlight Capital Re, Ltd. — Q3 2014 Form 10-Q
Business context and reporting period. The Cayman Islands-based company provides specialty property and casualty reinsurance through Greenlight Re and its Irish subsidiary. Its investment strategy combines long and short positions with derivatives. This unaudited filing covers the quarter and nine months ended September 30, 2014; amounts below are U.S. dollars unless noted.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Gross premiums written | $97.2m | $148.8m | $249.8m | $410.9m |
| Net premiums earned | $79.5m | $163.9m | $279.0m | $406.4m |
| Net investment income (loss) | $(54.0)m | $49.4m | $49.8m | $134.8m |
| Net income (loss) | $(51.8)m | $56.5m | $48.9m | $141.8m |
| Basic earnings (loss) per share | $(1.40) | $1.53 | $1.31 | $3.85 |
- Underwriting: Q3 underwriting income before general and administrative expenses was $4.0m versus $16.0m; the composite ratio was 95.0% versus 90.3%. For the first nine months, underwriting income before general and administrative expenses was $16.2m versus $29.6m, and the composite ratio was 94.2% versus 92.7%. The nine-month combined ratio, including internal and corporate expenses, was 100.2% versus 96.8%.
- Investment performance: The DME-managed portfolio returned a net loss of 3.7% in Q3 and a gain of 3.2% for the nine months, compared with gains of 4.0% and 12.2% in the respective 2013 periods. Q3 investment losses were principally unrealized losses on equity holdings and equity-based swaps.
- Balance sheet at September 30: Total assets were $3,030.9m, total liabilities $1,896.1m and total equity $1,134.8m. Investments were $1,388.1m. Cash and cash equivalents were $8.8m, while restricted cash was $1,367.2m, primarily supporting short positions, derivatives and letters of credit.
- Borrowings and collateral: Amounts due to prime brokers were $266.7m, comprising $91.8m of investment-related borrowing and $174.9m borrowed to collateralize letters of credit. Securities sold, not yet purchased, were $1,113.3m, with corresponding restricted cash held as collateral. The filing states the company had no plans to issue debt and expected to fund operations from operating cash flow over the next 12 months.
- Cash flow: Net cash used in operating activities was $86.2m for the nine months, compared with $56.8m used in 2013; investing activities provided $91.3m versus $118.0m. Cash increased $5.1m from year-end to $8.8m.
- Book value: Fully diluted adjusted book value per share, a non-GAAP measure, was $29.16 at September 30, up 4.5% from $27.91 at December 31, 2013, but down 4.3% from $30.47 at June 30, 2014.
Material changes versus prior periods
- Gross premiums written fell 34% in Q3 and 39% for the nine months. Management attributed much of the decline to the termination at year-end 2013 of a private passenger motor contract and reduced participation in renewed Florida homeowners contracts.
- Net premiums earned declined 52% in Q3 and 31% for the nine months, reflecting the same contract changes and lower participation, partly offset by growth in other lines.
- Q3 results reversed from profit to loss as investment income swung to a $54.0m loss. For the nine months, net income fell to $48.9m from $141.8m, with investment income down to $49.8m from $134.8m and weaker underwriting income.
- Loss reserves declined to $278.5m from $329.9m at year-end, primarily reflecting paid losses and lower ceded shares on certain business. The company reported $3.8m of net adverse prior-period loss development in the first nine months of 2014.
Outlook, risks and unusual items
- Management described the reinsurance market as overcapitalized and competitive, with alternative capital pressuring catastrophe rates. It said it would reduce writings rather than accept inadequately priced risk, and cited a pipeline of potential business without providing numerical earnings or premium guidance.
- Management’s stated investment priority for the remainder of 2014 was capital protection amid increased market volatility. The portfolio had 40.0% net long exposure; the company expected to retain a significant gold position, foreign-exchange options, short sovereign debt and sovereign credit default swaps.
- Market risks include equity, commodity, foreign currency, interest rate, credit and political exposures. A 10% decline in listed equity and equity-based derivative prices was estimated to reduce portfolio fair value by $50.2m; a 10% fall in gold was estimated to reduce it by $9.9m. Short positions can have theoretically unlimited loss potential.
- Net natural-peril aggregate exposure was reported at a maximum of $102.7m as of October 1, 2014. Loss-reserve estimates are uncertain and may be materially revised; retrocessionaires may fail to pay recoverables.
- A retrocessionaire-related balance included $2.3m of uncollateralized loss recoverable, and its parent was delinquent on $11.0m of ceding commission adjustments. The company pursued legal remedies; a court entered judgment in the company’s favor on October 15, 2014, after quarter-end. Management said it had no provision for uncollectible loss recoverables at September 30.
- Related-party investment arrangements with DME included $15.4m of management fees for the nine months and a $10.9m performance allocation. The Q3 performance allocation was reversed by $13.2m following negative investment returns.
- The company reported compliance with letter-of-credit facility covenants and regulatory minimum capital requirements. Its reinsurance subsidiaries were rated “A (Excellent)” with stable outlook by A.M. Best; management cautioned that a downgrade below “A-” or withdrawal of the rating could materially constrain new business.
Important facts for investors to verify
- Whether premium volume and underwriting margins stabilize after the terminated motor contract and reduced Florida homeowners participation.
- How investment returns, particularly unrealized equity losses, short positions and derivative exposures, affect earnings and adjusted book value.
- Whether prior-period claims develop adversely, especially in employer medical stop-loss, solicitors’ professional indemnity and general liability business.
- The collection and collateral status of the disputed retrocession recoverable and delinquent ceding commission balance, including developments after the October 15 judgment.
- Liquidity available after accounting for restricted cash, prime-broker borrowing, letter-of-credit collateral and claims payments.
- Progress against management’s stated capital-protection approach and exposure to competitive pricing, natural catastrophes and rating-agency actions.