Greenlight Capital Re, Ltd. — Q1 2016 Form 10-Q
Business context and reporting period
Greenlight Capital Re is a specialty property and casualty reinsurer operating through subsidiaries in the Cayman Islands and Ireland. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The company also invests its capital using a value-oriented long/short strategy. Management cautions that quarterly results may fluctuate and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Gross premiums written | $166.8 million | $129.7 million |
| Net premiums earned | $138.1 million | $94.8 million |
| Total revenues | $166.3 million | $71.6 million |
| Net investment income (loss) | $28.4 million | ($24.8 million) |
| Net income (loss) | $28.7 million; $0.77 per diluted share | ($24.0 million); ($0.65) per diluted share |
| Net underwriting income | $3.7 million | $0.8 million |
| Composite ratio | 93.8% | 95.0% |
| Combined ratio | 97.3% | 99.8% |
| Operating cash flow | ($8.2 million) | ($18.2 million) |
| Cash and cash equivalents | $196.1 million | $112.2 million at Dec. 31, 2015 |
| Total investments | $1.199 billion | $1.064 billion at Dec. 31, 2015 |
| Total assets / total liabilities | $2.930 billion / $2.051 billion | $2.713 billion / $1.864 billion at Dec. 31, 2015 |
| Total equity | $879.0 million | $848.8 million at Dec. 31, 2015 |
The investment portfolio managed by DME Advisors returned 2.5% net of fees, versus a 1.8% loss in Q1 2015. Fully diluted adjusted book value per share, a non-GAAP measure, rose 3.2% to $22.88 from $22.17 at year-end 2015.
Investing activities provided $92.2 million of cash, primarily reflecting increased prime-broker margin borrowing; cash increased by $84.0 million during the quarter. Restricted cash was $1.158 billion, down from $1.237 billion at year-end. Borrowings from prime brokers for investment activity were $285.0 million, up from $95.0 million; a further $259.5 million was borrowed under term margin arrangements to collateralize trusts and letters of credit. The filing reports no planned debt issuance and no financing activities in the quarter.
Material changes versus the prior comparable period
- Net income improved by $52.7 million, principally as investment results swung from a $24.8 million loss to $28.4 million of income. Management attributed investment gains mainly to long positions in Michael Kors and CONSOL Energy and a macro position in gold, partly offset by SunEdison.
- Gross premiums written rose 28.6%, and net premiums earned rose 45.7%. Frequency business represented 91.6% of gross premiums, versus 87.8% a year earlier; specialty premiums grew while severity premiums declined.
- Losses incurred increased to $90.7 million from $63.2 million, while the total loss ratio improved to 65.6% from 66.7%. Acquisition costs increased to $39.0 million from $26.8 million; the total acquisition cost ratio was essentially flat at 28.2% versus 28.3%.
- General and administrative expenses increased to $7.0 million from $6.2 million, mainly due to personnel costs, partly offset by lower professional fees and share-based compensation.
- Loss and loss adjustment expense reserves increased to $341.1 million from $306.0 million at year-end, primarily reflecting growth in frequency-business IBNR reserves.
Outlook, commentary, and risks
- No specific numerical earnings or premium guidance is provided. Management says it will pursue business where pricing meets its return objectives and may maintain or reduce writings rather than accept inadequately priced risk.
- Management describes severe competitive pricing pressure in property catastrophe and expects to keep reducing focus there absent improved market conditions. It sees opportunities in health stop-loss and expects modest growth in casualty business. Non-standard auto rates and profitability were described as stable and favorable; Florida homeowners’ profitability was weakening.
- The investment objective for 2016 is capital protection and positive returns; management said it considered lower gross and net equity exposure and significant gold and other macro positions appropriate amid global economic and political uncertainty. Portfolio net long exposure was 18.0% at quarter-end.
- A.M. Best affirmed the subsidiaries’ “A (Excellent)” ratings but changed the outlook to negative in October 2015. Management sees potential harm to new business in rating-sensitive markets; a downgrade below A- or withdrawal could severely constrain underwriting.
- Investment and liquidity risks include substantial short positions, whose losses can theoretically be unlimited, and prime-broker borrowing and collateral requirements. Securities sold, not yet purchased totaled $876.2 million; restricted cash included an equal amount supporting these positions.
- Net natural-peril probable maximum loss estimates at a 1-in-250-year return period were $103.2 million for a single event and $129.3 million in aggregate. Management emphasizes these are estimates and actual losses could differ materially. Reserve estimates, including IBNR, may also change as claims develop.
- Retrocessionaires’ failure to pay could leave the company responsible for claims; the filing reports no provision for uncollectible recoverables was considered necessary. Management did not believe existing disputes would have a material adverse effect.
- Related-party investment arrangements with DME Advisors generated $4.2 million of management fees and a $3.1 million performance allocation in Q1 2016. The performance allocation remains subject to a loss carry-forward mechanism.
- After quarter-end, the company gave notice to cancel a $120 million Bank of America letter-of-credit facility, of which $19.6 million was used at March 31. It also extended and reinstated its share repurchase authorization; no shares were repurchased in Q1.
Important facts for investors to verify
- Whether investment gains, particularly unrealized gains, persist; assess the concentration and market sensitivity of the long, short, gold, and derivative positions.
- Whether premium growth can be sustained at adequate pricing and whether the frequency-heavy underwriting mix produces acceptable loss and combined ratios.
- Development of Florida homeowners’ claims, including assignment-of-benefits exposure, and adequacy of loss reserves and IBNR assumptions.
- Prime-broker borrowing, restricted cash, collateral requirements, and the impact of the letter-of-credit facility cancellation on liquidity and underwriting capacity.
- Progress of the negative A.M. Best outlook and any effect on client relationships, ratings-sensitive business, or capital requirements.
- Collection prospects for the $22.0 million of notes receivable on non-accrual status and the timing of $5.3 million in private-equity commitments.