Greenlight Capital Re, Ltd. — Q1 2018 Form 10-Q
Business context and reporting period
Greenlight Capital Re is a specialty property and casualty reinsurer, with operations in the Cayman Islands and Ireland. This unaudited report covers the three months ended March 31, 2018; financial results are not necessarily indicative of the full year. The company combines reinsurance underwriting with a value-oriented long/short investment strategy.
Key financial results
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Gross premiums written | $175.1 million | $197.2 million, down 11.2% |
| Net premiums written | $145.3 million | $193.8 million |
| Net premiums earned | $145.8 million | $151.9 million, down 4.0% |
| Net investment income (loss) | $(145.2) million | $11.6 million |
| Net income (loss) attributable to shareholders | $(142.8) million; $(3.85) per share | $8.4 million; $0.22 per share |
| Net underwriting income (non-GAAP) | $2.5 million | $(0.2) million |
| Composite ratio / combined ratio | 96.0% / 98.3% | 97.4% / 100.1% |
| Operating cash flow | $(29.2) million | $15.4 million |
The investment portfolio return was a loss of 11.8%, versus a 0.9% net gain in Q1 2017. The long portfolio lost 5.2% and the short portfolio lost 6.0%. Reported net investment loss included $140.3 million of realized losses. Management identified short positions in a “bubble basket” and Netflix, and a long position in General Motors, among the largest detractors.
Financial position, liquidity and changes
- Total assets were $2.88 billion and total liabilities were $2.17 billion at March 31, 2018. Total equity was $700.9 million, down from $844.3 million at year-end, primarily reflecting the quarterly loss. Fully diluted adjusted book value per share, a non-GAAP measure, fell 17.4% to $18.35 from $22.22.
- Cash and cash equivalents were $37.5 million; restricted cash was $1.254 billion. Cash, cash equivalents and restricted cash combined declined $239.6 million during the quarter. The large restricted balance primarily supports short positions, derivatives, trusts and letters of credit and is not equivalent to freely available cash.
- Amounts due to prime brokers and other financial institutions were $574.8 million, down from $672.7 million. Separately, $30.0 million was drawn on a $50.0 million revolving credit facility, collateralized by gold; its stated rate was 2.87% and it matures November 8, 2018.
- Investment assets fell to $1.045 billion from $1.363 billion, while securities sold short declined to $676.9 million from $912.8 million. The portfolio had 30.0% net long exposure at quarter-end. Reinsurance balances receivable rose 8.1% to $326.3 million, and loss reserves rose 4.4% to $484.6 million.
- Premiums ceded increased to $29.8 million from $3.4 million, mainly due to a quota-share retrocession arrangement for private passenger auto exposure. Gross premiums written declined, particularly in property and casualty; other business increased modestly.
Management outlook, risks and unusual items
- Management described the first quarter as difficult for its investment portfolio and value-investing style. It intends to protect capital and seek risk-adjusted opportunities; given global uncertainty, it expects comparatively lower net equity exposure and significant gold and other macro positions. No specific earnings or revenue guidance was provided.
- Management cited continuing reinsurance rate and expense pressure, despite some positive rate movement at January 2018 renewals. Industry catastrophe losses in 2017 provided limited positive rate impact, and future pricing may depend on loss estimates or further capacity shocks. Underwriting opportunities and results may vary materially between periods.
- Prior-year loss development was favorable by a net $2.7 million, including favorable development on 2017 hurricanes and mortgage insurance, offset by adverse development in professional indemnity, general liability and surety. The net negative effect of prior-period reserve revisions on underwriting income was $1.7 million.
- As of April 1, estimated net probable maximum loss for a 1-in-250-year natural catastrophe was $66.9 million for a single event and $80.1 million in aggregate. These are modeled estimates and actual losses may differ materially. The reported net annual aggregate loss exposure to natural peril events was $206.8 million.
- Short selling can create theoretically unlimited loss exposure if prices rise. Other material risks include volatile investment valuations, catastrophe claims and reserve uncertainty, retrocessionaire collectability, counterparty and credit exposure, and restrictions on subsidiary dividends. The company reported compliance with facility covenants and regulatory minimum capital requirements; its reinsurance subsidiaries were rated A- (Excellent), stable, by A.M. Best.
- Letters of credit had aggregate facility capacity of $450.0 million, with $193.8 million issued. The company had $363.0 million in regulatory trust collateral for cedents. Remaining private investment commitments were $7.1 million. Management said existing disputes were not expected to have a material adverse effect and believed liquidity would meet foreseeable needs; it reported no plans to issue debt.
- After quarter-end, on April 25, 2018, the board renewed the share repurchase plan through June 30, 2019 and raised authorization to 2.5 million Class A shares. No shares were repurchased during Q1.
Most important facts for investors to verify
- Whether subsequent investment performance reversed or extended the 11.8% quarterly portfolio loss, and how the long, short and macro exposures evolved.
- Whether the $484.6 million loss reserve estimate and the favorable/adverse development trends are supported by later claims experience and cedent reporting.
- How much of the $1.254 billion restricted cash balance is operationally available, and whether collateral requirements or prime-broker borrowing could change materially.
- Whether premium trends, the auto quota-share retrocession and the non-renewed medical stop-loss contract affect future earned premiums and underwriting profitability.
- Whether modeled catastrophe exposures, retrocession recoverables, letters of credit and revolving-facility obligations remain manageable under adverse market or claims conditions.
- The company’s related-party investment management fees and arrangement with DME Advisors, including the 1.5% annual management fee and performance-allocation terms.