Business Context and Reporting Period
Company: Greenlight Capital Re, Ltd. (GLRE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: GLRE is a Cayman Islands-based specialist property and casualty reinsurer. It operates through a wholly-owned subsidiary, Greenlight Reinsurance, Ltd., and employs a non-traditional investment strategy managed by DME Advisors, LP, focusing on long positions in undervalued securities and short positions in overvalued securities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | As of Sep 30, 2009 |
|---|---|---|---|
| Net Premiums Written | $63.1 million | $197.2 million | N/A |
| Net Premiums Earned | $56.7 million | $152.2 million | N/A |
| Net Investment Income | $32.6 million | $148.7 million | N/A |
| Net Income | $32.3 million | $152.3 million | N/A |
| Earnings Per Share (Diluted) | $0.88 | $4.16 | N/A |
| Total Assets | N/A | N/A | $1,466.4 million |
| Total Investments | N/A | N/A | $771.1 million |
| Shareholders' Equity | N/A | N/A | $648.7 million |
| Cash and Cash Equivalents | N/A | N/A | $23.3 million (Unrestricted) |
| Restricted Cash | N/A | N/A | $493.8 million |
| Combined Ratio | N/A | 97.8% | N/A |
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported a net income of $152.3 million for the nine months ended September 30, 2009, a significant improvement from a net loss of $89.6 million in the same period of 2008. This shift was primarily driven by investment performance.
- Investment Performance: Net investment income swung from a loss of $92.5 million in the first nine months of 2008 to a gain of $148.7 million in 2009. The portfolio returned 24.2% for the nine-month period in 2009 compared to a 12.9% loss in 2008.
- Underwriting Growth: Gross premiums written increased 55.4% to $207.9 million for the nine months ended September 30, 2009, compared to $133.8 million in 2008. This growth was driven by frequency business, particularly in general liability, motor liability, and a new multi-year homeowners' personal lines contract.
- Loss Ratios: The frequency business loss ratio increased to 60.8% (nine months 2009) from 35.4% (nine months 2008), attributed to a more diverse mix of business and the absence of the exceptionally favorable loss development seen in 2008. The severity business loss ratio decreased to 49.0% from 64.3%.
- Balance Sheet Expansion: Total assets grew 53.1% to $1.47 billion, and shareholders' equity increased 32.0% to $648.7 million, largely due to retained earnings from the strong investment results.
Guidance, Outlook, and Risks
- Market Outlook: Management believes the rebound in financial markets has restored capacity in the P&C industry, potentially delaying price increases. However, they anticipate pricing will eventually need to rise due to reduced reserve redundancies and low interest rates, likely by late 2010 or 2011.
- Strategic Positioning: The Company expects to capitalize on market dislocations, particularly in lines experiencing significant loss activity or where competitors face financial distress. They are well-positioned for frequency business opportunities.
- Investment Strategy: The portfolio remains value-oriented with long and short positions. As of September 30, 2009, the portfolio (excluding CDS, gold, and currency) had a gross exposure of 90% long and 58% short.
- Key Risks:
- Investment Volatility: Results are heavily dependent on the performance of the investment portfolio, which utilizes derivatives and short selling.
- Underwriting Volatility: Severity business is expected to be volatile period-to-period.
- Credit Risk: Exposure to counterparty default on derivatives and corporate debt, as well as prime broker risk.
- Reserve Uncertainty: Loss reserves are estimates; final settlement may vary materially.
- Related Party Compensation: Performance compensation to DME Advisors is currently capped at 10% of net investment income (reduced from 20%) until a loss carry-forward balance of $142.6 million is recouped. $16.3 million was accrued for this in the nine months ended September 30, 2009.
Investor Verification Checklist
- Investment Portfolio Composition: Verify the specific long and short positions and the concentration of risk in the investment portfolio, particularly regarding Level 3 (unobservable) assets which totaled $20.2 million.
- Loss Reserve Adequacy: Review the actuarial assumptions used for the $131.6 million in loss and loss adjustment expense reserves, noting the increase in frequency business loss ratios.
- Derivative Exposure: Assess the notional amounts and fair value of credit default swaps (CDS) and total return swaps, including the specific CDS issued on a reference entity with a B3/Caa3 rating.
- Liquidity and Collateral: Confirm the status of the $263.1 million in letters of credit issued and the $331.0 million in assets pledged as collateral.
- Related Party Fees: Monitor the recovery of the $142.6 million loss carry-forward balance, which dictates the 10% performance fee cap for DME Advisors.