Greenlight Capital Re, Ltd. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Greenlight Capital Re is a Cayman Islands-based specialty property and casualty reinsurer, operating through entities in the Cayman Islands and Ireland. Its single operating segment is property and casualty reinsurance; investment results are also a major driver of earnings.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Gross premiums written | $524.0 million | $567.5 million |
| Net premiums earned | $483.6 million | $508.4 million |
| Net investment income (loss), including SILP | $52.3 million | $(323.1) million |
| Net income (loss) attributable to Greenlight Capital Re | $(4.0) million | $(350.1) million |
| Basic and diluted loss per share | $(0.11) | $(9.74) |
| Underwriting income (loss), non-GAAP | $(33.5) million | $(14.4) million |
| Combined ratio | 106.9% | 102.8% |
| Operating cash flow | $1.6 million | $(59.3) million |
| Total equity | $477.2 million | $477.8 million |
| Total assets / total liabilities | $1.355 billion / $878.0 million | $1.435 billion / $956.0 million |
Net investment return was 9.3% in 2019, following a 30.3% loss in 2018. Adjusted book value per share, a non-GAAP measure, fell 1.7% to $12.88 fully diluted (from $13.10). The 2019 fourth quarter attributable net loss was $30.3 million.
Cash and cash equivalents were $25.8 million, while restricted cash and cash equivalents were $742.1 million, primarily pledged for client collateral. Total investments were $256.4 million. The company reported $100 million face value of senior convertible notes due August 2023, bearing 4.0% interest; their carrying value was $93.5 million at year-end. It reported no material off-balance-sheet financing arrangements.
Changes versus 2018
- Gross premiums written declined 7.7%; net premiums earned fell 4.9%. Casualty represented 69.2% of gross premiums written. Management attributed lower written premiums mainly to non-renewed motor contracts and a medical stop-loss contract.
- Underwriting results weakened: the combined ratio rose to 106.9%, indicating an underwriting loss, from 102.8%. Net prior-year loss development was adverse by $31.3 million, led by Florida automobile claims affected by adverse rulings; catastrophe events added $17.4 million to the 2019 underwriting loss.
- Investment results rebounded sharply from 2018’s loss. However, to limit near-term volatility amid the strategic review, the company de-risked the portfolio; most investable assets were in cash and short-term Treasuries at the report date.
- Operating cash flow improved to $1.6 million from cash use of $59.3 million. Cash withdrawals from SILP of $78.3 million helped fund collateral and claims. Restricted cash rose 8.3% to $742.1 million.
- Reinsurance balances receivable declined 23.3% to $230.4 million, primarily as premiums on a large non-renewed motor contract were collected. General and administrative expenses increased 18.5% to $29.8 million, mainly from legal and professional fees, personnel, and IT costs.
Outlook, risks and unusual items
- The board’s strategic review, announced in August 2019 with Credit Suisse assisting, remained ongoing; no timetable or transaction outcome was provided. Management said a prolonged negative rating outlook could impair execution of the 2020 business plan.
- A.M. Best maintained the subsidiaries’ A- (Excellent) financial strength rating but changed its outlook from stable to negative in the second quarter of 2019. A downgrade could constrain new underwriting, trigger client cancellation or collateral rights, and affect business capacity.
- Management expected improved underwriting opportunities in selected markets following catastrophe and other loss activity, but expected motor premiums to be lower after certain contracts were not renewed. It planned to keep most investable assets in cash and short-term Treasuries until the strategic review concluded. These are expectations, not assurances.
- Key risks include reserve uncertainty and long-tail casualty claims; catastrophe exposure; broker concentration (the largest broker generated 56.7% of 2019 gross premiums written); reliance on related-party investment manager DME Advisors and limited control over SILP; investment volatility and short-selling/derivative risks; and dependence on collateral facilities.
- At December 31, 2019, one letter-of-credit facility had $400 million capacity, with $204.5 million issued; total collateral provided through letters of credit and trusts was $733.2 million. The company reported compliance with facility covenants and regulatory capital requirements.
- COVID-19 was identified as an emerging risk in the filing, with potential effects described as uncertain and not then estimable. The annual report was signed March 9, 2020, so subsequent events and developments are not reflected in year-end results.
- Other notable items: a $6.0 million increase in the valuation allowance on notes receivable; a $5.0 million performance allocation to DME II; and no share repurchases in 2019. The company said existing legal disputes were not expected to have a material adverse effect. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Developments and any outcome of the strategic review, including consequences for underwriting capacity and the A.M. Best outlook or rating.
- Subsequent emergence of Florida automobile claims and other prior-year reserve development, and the sensitivity of reserves to adverse assumptions.
- Actual portfolio allocation, liquidity and performance after de-risking, including related-party fees, performance allocations and SILP governance.
- Availability and cost of collateral capacity, client collateral demands, and the amount of restricted cash needed to support the business.
- Whether premium volume, pricing and underwriting profitability improve, particularly in motor business and the lines management identified as offering better opportunities.
- Debt-service and conversion or repurchase obligations on the $100 million notes, and the company’s ability to fund holding-company needs from regulated subsidiaries.
- Potential COVID-19 losses and tax or regulatory developments affecting the company or U.S. shareholders; the filing does not quantify these potential impacts.