Business Context and Reporting Period
Company: Greenlight Capital Re, Ltd. (GLRE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: GLRE is a Cayman Islands-based specialist property and casualty reinsurer. It operates through its wholly-owned subsidiary, Greenlight Reinsurance, Ltd., and employs a non-traditional, value-oriented investment strategy involving long and short positions in equities, debt, and derivatives.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Premiums Written | $151.3 million | $134.1 million |
| Net Premiums Earned | $104.7 million | $95.5 million |
| Net Investment Income | $5.8 million | $116.0 million |
| Total Revenues | $110.0 million | $213.6 million |
| Net Income | $5.3 million | $120.0 million |
| Earnings Per Share (Diluted) | $0.14 | $3.29 |
| Total Assets | $1,651.6 million | $1,634.4 million (Dec 31, 2009) |
| Total Shareholders' Equity | $735.3 million | $729.2 million (Dec 31, 2009) |
| Combined Ratio | 99.6% | 96.7% |
Liquidity and Debt: As of June 30, 2010, the company held $16.0 million in unrestricted cash and $524.0 million in restricted cash. Indebtedness to prime brokers totaled $21.0 million. The company maintains letter of credit facilities totaling $510.0 million (increased to $560.0 million effective July 1, 2010), with $245.5 million utilized.
Material Changes vs. Prior Period
- Significant Decline in Net Income: Net income dropped from $120.0 million in the prior year period to $5.3 million. This decrease is primarily attributed to a sharp decline in net investment income, which fell from $116.0 million to $5.8 million.
- Investment Performance: The investment portfolio returned 0.6% for the six months ended June 30, 2010, compared to 19.1% in the same period in 2009. Gross gains on short investments (2.5%) were offset by gross losses on long investments (1.0%).
- Underwriting Results: Underwriting income decreased to $8.7 million from $13.0 million in the prior year. The decline was driven by adverse loss development on a motor liability contract and a 2007 casualty clash contract related to California wildfires.
- Loss Ratios: The frequency business loss ratio increased to 69.0% from 58.2% due to unfavorable reserve adjustments. The severity business loss ratio decreased to 22.1% from 50.8%, aided by the reversal of reserves on a medical malpractice contract.
Guidance, Outlook, and Risks
Management Commentary:
- Market Outlook: Management expects property and casualty pricing to remain relatively flat in the near term, with potential price increases not expected until at least 2011. They anticipate opportunities in lines of business experiencing significant losses or where competitors face financial distress.
- Investment Strategy: The portfolio is conservatively postured with a small net long position. Management maintains significant positions in gold and macro hedges (interest rate options, credit default swaps) due to concerns over government stimulus and economic recovery sustainability.
- Strategic Moves: The company entered the credit and surety markets in 2010, viewing recent dislocations as profit opportunities.
Risks and Contingencies:
- Catastrophe Exposure: Maximum aggregate loss exposure to natural peril events is $108.0 million. A weather derivative swap provides up to $10.0 million in recovery for specific U.S. earthquake events.
- Counterparty Risk: Exposure to credit risk from prime brokers and retrocessionaires. The company monitors these closely and holds collateral.
- Regulatory: The company is monitoring the impact of the U.S. Health Care Reform Bill and the Dodd-Frank Act, though the magnitude of impact is currently uncertain.
Key Facts for Investor Verification
- Investment Volatility: Verify the composition of the investment portfolio, specifically the exposure to short positions and derivatives, given the significant year-over-year variance in investment income.
- Loss Reserve Adequacy: Review the specific details of the adverse loss development on the motor liability and casualty clash contracts, as these drove the underwriting loss.
- Related Party Transactions: Note the Investment Advisory Agreement with DME Advisors (affiliated with Chairman David Einhorn), including the $89.1 million loss carry-forward balance affecting performance compensation.
- Liquidity Constraints: Confirm the status of the $26.7 million letter of credit drawn by a ceding insurer and the company's ability to meet future collateral requirements.
- Private Equity Commitments: Verify the $19.2 million in unfunded commitments for private equity investments and the timing of potential calls.