Greenlight Capital Re, Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The company is a specialty property and casualty reinsurer and manages its investment portfolio using long and short positions. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Gross premiums written | $129.7 | $118.9 |
| Net premiums written | $128.1 | $113.0 |
| Net premiums earned | $94.8 | $111.7 |
| Net investment income (loss) | $(24.8) | $(10.2) |
| Total revenue | $71.6 | $101.7 |
| Net loss | $(24.0) | $(8.9) |
| Loss per share, basic and diluted | $(0.65) | $(0.24) |
| Operating cash flow | $7.7 | $(10.3) |
Net investment loss reflected unrealized investment losses, investment-related foreign-exchange losses, and expenses. The DME-managed portfolio returned negative 1.8%, versus negative 0.7% in Q1 2014: the short portfolio lost 4.4%, while the long portfolio gained 3.9%.
Underwriting, balance sheet and liquidity
- The combined ratio was 101.5%, up from 99.6%; the underwriting composite ratio was 95.0%, versus 94.1%. Underwriting income before general and administrative expenses was $4.7 million, down from $6.5 million.
- Loss and loss adjustment expenses incurred were $63.2 million, versus $67.4 million. Acquisition costs were $26.8 million, versus $37.8 million; general and administrative expenses were broadly unchanged at $6.2 million.
- At March 31, total assets were $3,253.2 million, total liabilities $2,082.6 million, and total equity $1,170.6 million. Cash and cash equivalents were $11.5 million; restricted cash was $1,525.0 million. The restricted balance primarily collateralized short positions, derivatives and letters of credit and is not freely available for general use.
- Investments totaled $1,452.7 million. Securities sold, not yet purchased, were $1,327.6 million, up from $1,090.7 million at year-end. Due to prime brokers was $255.7 million, including $120.8 million borrowed for investment purchases and $134.9 million borrowed to collateralize letters of credit.
- There was no reported operating-company debt issuance or planned debt issuance; management said it expected to fund the next 12 months from operating cash flow. The company had $760 million of letter-of-credit capacity, of which $281.3 million was issued. It reported compliance with facility covenants.
- Fully diluted adjusted book value per share, a non-GAAP measure, fell 2.2% to $30.09 from $30.76 at year-end.
Changes, outlook and risks
- Premiums written increased, but earned premiums fell, mainly because Florida homeowners’ business renewed at a smaller ceded share and a motor contract had run off. New casualty and quota-share contracts contributed to written-premium growth.
- Frequency-business loss ratio rose to 69.5% from 62.8%, including $2.8 million of adverse prior-period Florida homeowners’ development associated with sinkhole deterioration and water-damage claims. Severity loss ratio increased to 29.8% from 18.8%, partly reflecting a different mix of contracts.
- Management described the reinsurance market as overcapitalized and competitive. It said it would avoid inadequately priced risk and could maintain or reduce writings if market conditions softened. The company had repositioned catastrophe retrocession toward quota-share contracts and cited opportunities in customized casualty and other business. No quantified earnings or premium guidance was provided.
- Management’s investment objective for 2015 was capital protection and finding opportunities on both sides of the portfolio. It expected to retain significant gold holdings, foreign-exchange options, short sovereign debt and sovereign credit-default swaps. Net long exposure was 15.5% at quarter-end; short exposure had increased.
- Key exposures include investment-market volatility, potentially unlimited losses on short sales, catastrophe losses, reserve-estimation uncertainty, counterparty and retrocessionaire collectability, and foreign-currency risk. Maximum aggregate natural-peril loss exposure, net of retrocession and ILWs, was reported as $213.5 million as of April 1.
- A settlement with a ceding insurer converted certain reinsurance receivables into a ten-year note. Notes receivable were $30.1 million at quarter-end; $25.7 million was on non-accrual status. Management said recorded note values were expected to be fully collectible. The company also reported $8.0 million of unfunded private-equity commitments.
- The company reported no existing contractual dispute expected to have a material adverse effect and no material changes to the risk factors in its 2014 Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Florida homeowners’ adverse development continues and how updated actuarial estimates affect reserves and the combined ratio.
- The collectability, payment terms and impairment status of the $25.7 million non-accrual note and the broader settlement-related receivable conversion.
- How rising short exposure and collateral requirements affect liquidity, borrowing needs and potential losses in a market rally or short squeeze.
- Whether catastrophe exposure, retrocession protection and the $12 million maximum ILW recovery remain consistent with the company’s stated risk limits.
- Whether written-premium growth converts into earned premiums and underwriting profitability, given market competition and management’s stated pricing discipline.