Greenlight Capital Re, Ltd. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are against December 31, 2011. The company is a specialty property and casualty reinsurer with an investment strategy incorporating long and short positions. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Gross premiums written | $152.2 million | $100.7 million |
| Net premiums earned | $101.6 million | $105.2 million |
| Net investment income (loss) | $71.6 million | $(36.2) million |
| Net income (loss) | $65.1 million; $1.78 basic EPS and $1.75 diluted EPS | $(43.0) million; $(1.19) EPS |
| Combined ratio | 102.4% | 107.4% |
| Operating cash flow | $2.7 million | $7.9 million |
| Total assets | $2,603.4 million | $2,343.5 million |
| Total equity | $881.3 million | $845.7 million |
| Cash and cash equivalents | $5.4 million; restricted cash $1,021.0 million | $42.3 million; restricted cash $957.5 million |
| Due to prime brokers | $315.3 million | $260.4 million |
Underwriting income before general and administrative expenses was $2.3 million, versus a $2.7 million loss. Net premiums written rose to $141.2 million from $97.3 million, while net premiums earned fell, reflecting changes in unearned premium reserves and the timing of earnings. The loss ratio was 62.3% (62.5% prior year); the acquisition cost ratio improved to 35.5% from 40.1%. The combined ratio remained above 100%, indicating an underwriting loss after internal expenses.
The investment account returned 6.5% net of fees and expenses, compared with a 3.4% loss in Q1 2011. Management reported a 15.6% gross gain on the long portfolio, partly offset by a 7.2% gross loss on shorts. The investment gain was the principal driver of the swing to net income. Basic adjusted book value per share, a non-GAAP measure, rose 7.9% to $23.72; fully diluted adjusted book value per share rose 7.8% to $23.29.
Material changes and balance-sheet developments
- Gross premiums written increased 51%, led by motor business. Motor liability and motor physical damage premiums rose by $58.7 million year over year. Frequency business represented 89.7% of gross written premiums.
- The company reported no natural-peril severity losses in Q1 2012, compared with $8.8 million of estimated New Zealand and Japan earthquake losses in Q1 2011. However, frequency-business loss ratios increased to 65.2% from 57.1%, including adverse development and higher large-loss activity in commercial motor and general liability.
- Long investments, including financial-contract receivables, increased to $1,212.4 million from $1,053.8 million. Short securities liabilities rose to $745.5 million from $683.8 million. Management reported net long exposure of 33% at quarter-end.
- Prime-broker borrowings for investment purchases increased to $72.2 million from $4.3 million; a further $243.1 million was borrowed to collateralize letters of credit. The company had $390.1 million of letters of credit outstanding against $760.0 million of total facilities, supported by $413.5 million of pledged collateral.
- Equity increased by $35.6 million, reflecting $65.1 million net income partly offset by a $34.0 million withdrawal from the investment joint venture’s non-controlling interest.
Outlook, risks and unusual items
- Outlook: Management described the reinsurance market as slightly improving or hardening, but still overcapitalized, with new alternative capital tempering price increases. It cited rate increases in Florida homeowners and catastrophe retrocession and said it was pursuing selected opportunities. These are management views, not quantified earnings guidance; the filing provides no specific financial forecast.
- Investment strategy and volatility: Management intended to maintain significant gold and macro hedges, including options on higher interest rates and foreign exchange, sovereign-debt shorts and sovereign CDS. Results may fluctuate materially with investment markets and underwriting activity.
- Related-party compensation: DME Advisors, an affiliate of the chairman, received $4.1 million in quarterly management fees and accrued $17.0 million of performance compensation, payable under an investment advisory arrangement. The performance amount was recorded as a liability and reduced reported investment income.
- Reserving and recoverables: Loss reserves were $277.9 million, including $165.6 million of IBNR. Management recorded $5.3 million of adverse prior-period development, net of retrocession recoveries, principally on commercial motor and general liability contracts. Loss recoverables were $36.7 million, largely from unrated retrocessionaires; the company reported collateral and said no provision for uncollectibility was considered necessary.
- Catastrophe exposure and commitments: As of April 27, 2012, maximum aggregate natural-peril loss exposure was $102.7 million, net of retrocession. Remaining private-equity commitments were $15.8 million. The company said it was in compliance with letter-of-credit covenants and regulatory minimum capital requirements.
- Liquidity and capital: Management believed cash flow and liquid investments were sufficient for foreseeable needs and expected to fund the next 12 months from operating cash flow; it had no current plan to issue debt. Most reported cash was restricted, and insurance-subsidiary dividends are subject to regulatory constraints. The company does not currently expect to pay ordinary-share dividends.
- The filing states that existing legal disputes were not expected to have a material adverse effect and that there were no material changes to the risk factors in the 2011 Form 10-K. Management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of the $71.6 million investment gain was unrealized, and how sustainable are investment returns after the related-party performance compensation?
- Whether increased frequency-business losses and the $5.3 million adverse reserve development persist; review subsequent loss emergence and reserve updates.
- The availability of liquidity given only $5.4 million of unrestricted cash, $1,021.0 million of restricted cash, substantial short positions, prime-broker borrowing and pledged letter-of-credit collateral.
- The collectability and collateral protection of the $36.7 million in loss recoverables, particularly amounts due from unrated retrocessionaires.
- The terms, allocation and governance of DME Advisors’ management and performance compensation, including the loss-carryforward provisions.
- Actual premium growth, pricing, catastrophe exposure and capital-market conditions versus management’s qualitative outlook; quarterly results are not necessarily indicative of full-year performance.