Business context and reporting period
Greenlight Capital Re, Ltd. filed this Form 10-K for the fiscal year ended December 31, 2014. The Cayman Islands-based holding company writes global property and casualty reinsurance through Greenlight Re and its Irish subsidiary, GRIL. It pairs opportunistic underwriting with a long/short investment strategy managed by DME Advisors, an affiliate of Chairman David Einhorn. The company reports one operating segment.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Gross premiums written | $324.0 million | $535.7 million |
| Net premiums earned | $354.2 million | $547.9 million |
| Net investment income | $122.6 million | $218.1 million |
| Net income | $109.6 million | $225.7 million |
| Diluted EPS | $2.89 | $6.01 |
| Combined ratio | 102.9% | 97.1% |
| Operating cash flow | $(133.7) million | $(92.7) million |
| Total equity | $1,194.0 million | $1,086.3 million |
| Fully diluted adjusted book value per share | $30.76 | $27.91 |
Underwriting income before general and administrative expenses was $11.6 million, versus $37.5 million in 2013. The 2014 loss ratio was 66.3%; acquisition cost ratio was 30.4%. The combined ratio above 100% indicates underwriting costs, including operating expenses, exceeded premiums earned.
Net investment return, after fees and expenses, was 8.7%, down from 19.6%. Realized investment gains of $353.3 million were partly offset by $172.4 million of net unrealized losses. Total assets were $2,995.3 million and liabilities $1,801.3 million at year-end. Cash and cash equivalents were $12.0 million; restricted cash was $1,296.9 million. Loss reserves were $264.2 million, down from $329.9 million.
The company reported $211.1 million due to prime brokers, including $76.1 million borrowed for investment purchases and $135.0 million borrowed to collateralize letters of credit. Letter-of-credit facilities totaled $760.0 million, with $273.7 million issued. Management said it expected liquidity needs over the next 12 months to be met from operating and investing cash flows and had no current plan to issue debt. Cash flow from underwriting activities, excluding investment-related expenses, was negative $77.1 million.
Material changes versus the prior comparable period
- Gross premiums written fell 39.5%, mainly after termination of a large private-passenger motor contract at year-end 2013 and reduced participation in Florida homeowners’ contracts. Net premiums earned declined 35.3%.
- Net income fell by $116.1 million, reflecting lower investment income and weaker underwriting contribution. The 2013 comparison benefited from a $12.4 million net reserve reversal related to Superstorm Sandy.
- Prior-year loss reserves increased by $18.2 million in 2014, primarily for general liability, commercial motor, solicitors’ professional indemnity and employer medical stop-loss claims. Favorable private-passenger auto development partly offset increases.
- The combined ratio worsened from 97.1% to 102.9%. Fully diluted adjusted book value per share nevertheless rose 10.2% to $30.76.
- Letters of credit issued declined from $379.1 million to $273.7 million; restricted cash declined from $1,334.1 million to $1,296.9 million.
Outlook, commentary, risks and unusual items
Management described the reinsurance market as overcapitalized and competitive, with soft pricing pressure, especially in peak-zone catastrophe excess-of-loss business. It said it may maintain or reduce writings rather than accept inadequately priced risks, and expects underwriting mix and results to vary. Management cited opportunities in customized business, Florida homeowners, employer health stop-loss and non-standard auto; it also noted a shift in catastrophe retrocession toward quota-share contracts and new longer-tail casualty and professional-liability business. No numerical earnings or premium guidance was provided.
For 2015, management’s investment objective was capital protection and positive returns from long and short positions. It described equity valuations as stretched and expected to retain significant gold exposure, foreign-exchange options, sovereign-debt shorts and sovereign credit-default swaps. Historical investment results are not necessarily indicative of future performance.
- Key risks include reserve estimation uncertainty, catastrophe and other claims volatility, market losses, short-sale and derivative exposures, foreign-exchange movements, and liquidity/collateral needs.
- Three brokers generated 81.5% of 2014 gross written premiums; the largest alone accounted for 49.8%. Reinsurance balances receivable were $151.2 million, mostly uncollateralized.
- The company relies on DME Advisors under an exclusive investment arrangement through December 31, 2016, subject to limited early termination rights. Fees include a 1.5% annual management fee and a 20% performance allocation, subject to loss carry-forward provisions. The related-party relationship and potential conflicts merit attention.
- An unrated retrocessionaire and affiliate had disputed or delinquent amounts, including $8.9 million of uncollateralized loss recoverables and $10.3 million of past-due ceding commission adjustments. After year-end, the company reached a settlement providing for payment in full, with interest; collection remains important to verify.
- Solvency II was expected to apply to GRIL from January 1, 2016. Both reinsurance subsidiaries held A (Excellent), stable ratings from A.M. Best; a downgrade could constrain business and trigger collateral or termination rights.
- The filing reports effective internal controls and unqualified audit opinions. The company had not paid cash dividends and did not expect to do so in the foreseeable future.
Most important facts for investors to verify
- Whether the post-year-end settlement with the retrocessionaire and affiliate resulted in full, timely collection of all disputed and past-due balances.
- How reserve development in the identified casualty, professional-liability and medical stop-loss contracts evolves, and whether further strengthening is needed.
- Whether premium reductions and competitive pricing pressure persist, and whether new business meets management’s return hurdles.
- The investment portfolio’s performance, leverage, liquidity and collateral requirements, including the risks associated with shorts, derivatives and gold exposure.
- Broker concentration, available letter-of-credit capacity, regulatory capital headroom and the effect of Solvency II on GRIL.