Greenlight Capital Re, Ltd. — Q2 2021 Form 10-Q
Business context and period. Greenlight Capital Re (GLRE) is a specialty property and casualty reinsurer. This unaudited report covers the three and six months ended June 30, 2021, compared with the same 2020 periods. Amounts below are U.S. dollars; financial statement amounts are rounded to millions. The company reports one operating segment: Property & Casualty Reinsurance.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Gross premiums written | $141.6m | $116.7m | $311.5m | $226.5m |
| Net premiums earned | $132.5m | $108.4m | $267.9m | $219.4m |
| Total revenues | $134.5m | $114.7m | $284.9m | $190.7m |
| Net income (loss) | $0.6m | $(0.1)m | $7.1m | $(40.3)m |
| Net underwriting income (loss), non-GAAP | $4.6m | $(1.3)m | $2.6m | $(0.1)m |
| Combined ratio | 96.5% | 101.2% | 99.0% | 100.0% |
| Adjusted combined ratio, non-GAAP | 93.0% | 94.7% | 94.5% | 95.0% |
For Q2, investment income was $2.0m versus $5.5m in 2020. For H1, total investment income was $20.7m versus a $29.7m loss in 2020. The 2021 H1 result included a $14.2m pre-tax realized gain on the sale of AccuRisk; SILP, the related-party investment fund, contributed $2.0m versus a $40.5m loss in H1 2020. The company reported diluted EPS of $0.02 for Q2 and $0.21 for H1, versus $0.00 and a loss of $1.12, respectively.
Balance sheet at June 30, 2021: total assets were $1,422.5m; total liabilities $955.7m; and shareholders’ equity $466.8m. Loss reserves were $514.6m, up from $494.2m at year-end 2020; unearned premium reserves were $244.6m. Investments totaled $206.6m, including $175.1m in SILP. Reinsurance balances receivable were $392.2m, up from $330.2m. Basic and fully diluted book value per share were $13.66 and $13.60, respectively.
Cash flow and liquidity: H1 operating activities used $19.8m of cash, compared with $42.7m used in H1 2020. Investing activities provided $17.2m and financing activities used $6.7m, principally for share repurchases. Cash and cash equivalents were $35.2m; restricted cash was $709.7m, primarily securing cedent trusts and letters of credit. Management said it expects operating and investing cash flows to fund the next 12 months and considers liquidity sufficient for foreseeable needs. The $100m face-value convertible notes bear 4% interest and mature August 1, 2023; their carrying value was $96.9m. The company reported compliance with debt and facility covenants.
Material changes versus comparable periods
- H1 gross premiums written increased 37.5% year over year, led by casualty, particularly Lloyd’s syndicate multi-line business; net premiums written increased 38.1%.
- Underwriting improved from a loss to income in both Q2 and H1, and the combined ratio improved. Comparisons benefited from COVID-19-related losses in the 2020 periods.
- H1 earnings turned positive, substantially reflecting the AccuRisk sale gain and the improvement in SILP’s investment result versus 2020.
- Acquisition costs rose to $71.0m from $49.6m in H1; the acquisition cost ratio increased to 26.5% from 22.6%. General and administrative expenses increased 18.1% to $15.3m.
- Class A share repurchases totaled 725,133 shares in H1 for $6.7m. A new plan effective July 1, 2021 authorizes up to $25m of purchases through June 30, 2022.
Outlook, risks and unusual items
- Management cited improved rates across many classes and plans to selectively expand specialty and Innovations-related opportunities. It expects to reduce motor exposure over the next 6–12 months, anticipating higher claim frequency as commuting returns, and expects workers’ compensation exposure may also decline. It reduced pure catastrophe writings, while stating overall catastrophe exposure remained largely consistent with the prior year.
- H1 included losses from winter storm Uri; it added 2.1 percentage points to the H1 combined ratio. Prior-year reserve development was favorable by $0.6m net, including favorable COVID-19-related mortgage and catastrophe development, partly offset by adverse development on certain casualty contracts.
- COVID-19 reserve estimates remain uncertain and depend on coverage interpretations, legal and regulatory actions, economic effects, and cedent and insured mitigation. Management considers reserves adequate based on available information but warns actual losses could differ materially.
- SILP is managed by an affiliate of the board chairman; GLRE has limited control over its investment decisions. GLRE’s SILP investment was $175.1m, or 76.8% of SILP’s net assets. Investment returns can fluctuate, and the fund may have concentrated positions.
- Subsidiaries held A.M. Best ratings of A- (Excellent) with a negative outlook. A downgrade below A- or withdrawal could constrain new underwriting. Much of reported cash is restricted as collateral; retrocessionaire default, reserve estimation, catastrophe, currency, market, and counterparty risks remain relevant.
- Management reported no existing contractual dispute expected to have a material adverse effect and no material changes to the risk factors disclosed in the 2020 Form 10-K. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- ASU 2020-06 is expected to be adopted in Q1 2022. Management estimates it will reduce equity by about $2.5m and increase diluted share count by about 5.8m shares in profitable periods, with no material expected impact on net income or cash flows.
Investor facts to verify
- Whether premium growth and the planned reduction in motor and workers’ compensation exposure improve underwriting profitability, especially as post-pandemic claims frequency changes.
- How COVID-19, winter storm Uri, and other catastrophe and prior-year losses affect reserve adequacy and future development.
- The sustainability of earnings excluding the $14.2m AccuRisk sale gain, and the volatility and related-party governance of SILP returns.
- Liquidity available after accounting for restricted cash, collateral requirements, and potentially variable claims payments.
- The negative outlook on the A.M. Best rating, the August 2023 convertible note maturity, and the terms and actual use of the new repurchase authorization.