Greenlight Capital Re, Ltd. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Greenlight Re is a specialty property and casualty reinsurer. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Gross premiums written | $135.6 | $110.6 | $362.1 | $425.5 |
| Net premiums earned | $115.5 | $129.2 | $335.0 | $375.0 |
| Investment income (loss), including SILP | $6.9 | $9.9 | $(22.8) | $61.0 |
| Underwriting income (loss), non-GAAP | $(0.4) | $2.6 | $(0.5) | $(17.7) |
| Net income (loss) | $2.2 | $5.1 | $(38.2) | $26.4 |
| Combined ratio | 100.4% | 98.0% | 100.1% | 104.7% |
- Q3 basic and diluted earnings were $0.06 per share; nine-month loss was $1.07 per share.
- At September 30, total assets were $1,296.1, total liabilities $869.2, and shareholders’ equity $426.9, down from $477.2 at year-end 2019. Fully diluted book value was $12.03 per share, down 6.6% from year-end.
- Cash from operating activities was negative $44.7 for the first nine months, versus negative $8.7 in 2019. Investing activities provided $20.8; share repurchases used $12.7. Cash, cash equivalents and restricted cash totaled $731.3, including $723.1 restricted for collateral.
- Convertible senior notes had a $94.2 carrying value and mature in August 2023; they bear 4% interest. The company reported covenant compliance. Loss reserves were $481.8, including $257.0 of IBNR.
Material changes versus prior periods
- Q3 gross premiums written rose 22.6%, while nine-month premiums fell 14.9%. Growth in Q3 casualty and other specialty business was partly offset by lower property premiums. Year-to-date declines reflected non-renewal of motor contracts and lower volumes; crop, energy, cyber, health and other specialty business partly offset the declines.
- Nine-month net premiums earned fell 10.7%. The combined ratio improved year over year for the nine-month period, but remained slightly above 100%, indicating an underwriting loss. Q3 underwriting performance weakened versus 2019, with an underwriting loss and a higher combined ratio.
- Nine-month results swung from investment income of $61.0 in 2019 to a $22.8 loss in 2020, principally because the related-party Solasglas Investments, LP (SILP) investment recorded a $34.1 loss. SILP’s nine-month net investment return was negative 6.5%, versus positive 10.4% in 2019.
- Year-to-date prior-year loss development was adverse by $5.4 before related underwriting adjustments; the net financial impact was a $4.8 loss, compared with a $27.7 loss in 2019. Q3 had a small net benefit from prior-year development.
- The company repurchased 1.9 million Class A shares for $12.7 during the nine months. Shareholders’ equity also fell due to the net loss.
Outlook, risks and unusual items
- Management sees tighter reinsurance capacity and improved terms in some specialty classes, and expects improved market conditions to benefit future underwriting results. It is diversifying business and increasing excess-of-loss participation where economics support it. No numerical earnings or premium guidance was provided.
- COVID-19 reserve estimates remain highly uncertain. Management said its pandemic loss estimate did not change in Q3 and believes it is adequate based on available information, but actual losses could differ materially. Exposure includes mortgage and multi-line claims and potential business-interruption losses, particularly if coverage is retroactively mandated.
- Q3 catastrophe losses from hurricanes Laura, Isaias and Sally, the Midwest derecho and North American wildfires contributed $8.1 to the underwriting loss. Management also noted unusually frequent small-to-medium natural catastrophes.
- Management reported sufficient liquidity for foreseeable needs and expects to fund operations for the next 12 months from operating and investing cash flows, including SILP withdrawals if needed. However, most cash is restricted collateral; regulatory constraints affect subsidiary dividends. Collateral provided to cedents was $720.6, backed by $723.1 of restricted cash.
- The subsidiaries held A.M. Best ratings of A- (Excellent) with a negative outlook. A downgrade below A- or withdrawal could materially constrain underwriting capacity. The company intends to limit gross long investment exposure to 50% of shareholders’ equity; its August 2020 SILP agreement also caps the deployed portfolio at that level.
- After quarter-end, a $13.3 promissory note was settled for $19.1; the resulting $5.8 gain is expected to be recognized in Q4 2020.
- Other notable matters: the letter-of-credit facility limit was reduced from $400.0 to $275.0; $133.0 was drawn as letters of credit at quarter-end. The board authorized repurchases of up to $25.0 face value of notes, but none occurred in Q3. Management stated existing contractual disputes are not expected to have a material adverse effect.
Important facts for investors to verify
- How pandemic claims, business-interruption coverage interpretations and subsequent catastrophe losses affect reserve adequacy and future loss development.
- Whether underwriting pricing and mix improvements translate into sustained combined ratios below 100%, particularly as casualty and specialty lines expand.
- SILP’s performance, concentration, liquidity and related-party fee arrangements; the filing notes GLRE has limited control over the fund’s investment decisions.
- Available unrestricted liquidity and regulatory capital after collateral requirements, claims payments and subsidiary dividend restrictions.
- The status of the A.M. Best negative outlook, the $94.2 convertible-note liability and the impact of share repurchases on capital and book value.