Greenlight Capital Re, Ltd. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company is a specialty property and casualty reinsurer, with investment results also materially affecting earnings. Amounts below are in U.S. dollars.
Key financial results
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Gross premiums written | $135.2 million | $262.2 million |
| Net premiums earned | $133.0 million | $242.5 million |
| Total revenues | $156.8 million | $327.8 million |
| Net investment income | $24.2 million | $85.4 million |
| Net income attributable to shareholders | $28.5 million; diluted EPS $0.76 | $85.2 million; diluted EPS $2.27 |
| Combined ratio | 91.2% | 94.3% |
| Operating cash flow | Not separately presented for the quarter | Use of $51.8 million |
At June 30, total assets were $2.76 billion, total liabilities $1.81 billion, and total equity $941.2 million. Cash and cash equivalents were $177.8 million; restricted cash was $1.23 billion. The company reported $249.7 million due to prime brokers, including $228.7 million borrowed to collateralize letters of credit and $21.0 million for investment purchases. The filing reports no planned debt issuance; these broker borrowings are distinct from conventional long-term debt.
Material changes versus prior periods
- Q2 net income of $28.5 million compared with a $36.1 million loss in Q2 2012; six-month net income rose to $85.2 million from $29.1 million.
- Investment results improved: net investment income was $24.2 million for Q2 versus a $36.9 million loss, and $85.4 million for the first half versus $34.7 million. The DME-managed portfolio returned 2.0% net for Q2 and 7.9% for the first half, versus -3.3% and 3.0%, respectively.
- Gross premiums written increased 61% in Q2 and 11% for the first half. Growth was concentrated in non-standard automobile and personal lines, including Florida homeowners; commutations and returned premiums reduced certain liability and workers’ compensation writings.
- The combined ratio improved from 96.4% to 91.2% for Q2 and from 96.9% to 94.3% for the first half. First-half results included a $15.0 million reversal of Superstorm Sandy loss reserves, partly offset by adverse development in general liability and a casualty clash contract.
- Operating cash flow was a use of $51.8 million, versus a $0.1 million use in the prior-year half. Investing activities provided $207.2 million, primarily from net investment sales; ending unrestricted cash rose from $21.9 million at year-end to $177.8 million.
- Shareholders’ equity attributable to shareholders increased to $909.0 million from $821.7 million at year-end. Fully diluted adjusted book value per share, a non-GAAP measure, rose 10.0% in the first half to $24.20.
Outlook, commentary, and risks
- Management described the reinsurance market as overcapitalized and competitive, with gradual market hardening but rate increases generally not expected to materially exceed loss trends. It said it would reduce writings rather than accept mispriced risks if market conditions softened. No earnings or premium guidance was provided.
- The portfolio was reported net long 43.0%. Management said it had reduced gross exposure and expected to maintain gold, macro positions tied to interest and foreign exchange rates, and short sovereign debt and sovereign credit default swaps. Investment gains and losses may fluctuate substantially.
- The board changed investment leverage limits effective July 24, 2013: up to 15% net margin leverage for extended periods and 30% for periods under 30 days. Temporary waivers permitting up to 20% extended-period leverage ended on that date.
- Key exposures include equity-price, foreign-currency, interest-rate, counterparty and catastrophe risk. A 10% decline in listed equities and equity derivatives was estimated to reduce portfolio fair value by $44.4 million. Maximum aggregate natural-peril exposure was reported at $143.9 million as of July 1, 2013.
- Retrocession does not release the company from obligations to policyholders; $20.1 million of loss recoverables were due from unrated retrocessionaires, with collateral and guarantees held. Management recorded no provision for uncollectible recoverables.
- Other notable items include a $6.0 million first-half impairment on a note receivable placed on non-accrual, and $21.9 million of first-half performance compensation payable to related-party investment adviser DME Advisors. Management reported compliance with letter-of-credit covenants and regulatory minimum capital requirements. It said existing disputes were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the $15.0 million Sandy reserve reversal and the $17.7 million adverse general-liability development are supported by subsequent claims information and actuarial estimates.
- Claims development and reserve adequacy, especially for general liability run-off, casualty clash, and catastrophe business.
- Investment portfolio performance, short-position exposure, valuation assumptions for Level 3 assets, and the implications of the revised leverage limits.
- Collectability of the impaired note and recoverables from unrated retrocessionaires, including the sufficiency of collateral.
- Liquidity and collateral needs: $1.23 billion of restricted cash, $950.1 million of securities sold short, and $378.8 million of letters of credit issued against $760.0 million of facility capacity.
- Related-party investment fees and performance allocations, and whether underwriting growth and reported profitability persist without reserve releases or favorable investment results.