Greenlight Capital Re, Ltd. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The company is a Cayman Islands-based property and casualty reinsurer operating through Greenlight Re and its Irish subsidiary, GRIL. It combines selective reinsurance underwriting with a value-oriented investment strategy of long and short positions managed by DME Advisors.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Gross premiums written | $535.7 million | $427.8 million |
| Net premiums earned | $547.9 million | $466.7 million |
| Net investment income | $218.1 million | $78.9 million |
| Net income | $225.7 million | $14.6 million |
| Diluted earnings per share | $6.01 | $0.39 |
| Combined ratio | 97.1% | 112.9% |
| Total equity | $1,086.3 million | $860.4 million |
- Gross premiums written rose 25.2%, led by motor liability and Florida homeowners’ business. Frequency business represented 95.6% of 2013 gross premiums written; 92.8% of premiums related to U.S. risks.
- The net investment portfolio returned 19.6% after fees and expenses, versus 7.1% in 2012. Net investment income included $142.0 million of realized gains, $154.8 million of unrealized gains and $19.3 million of investment-related foreign-exchange gains, partly offset by $72.5 million of investment-advisor compensation.
- Underwriting income before general and administrative expenses was $37.5 million, compared with an underwriting loss of $42.6 million in 2012. The 2013 combined ratio improved to 97.1% from 112.9%; the company’s composite ratio before internal and corporate expenses was 93.2%.
- Net favorable prior-year reserve development was $6.1 million, compared with $56.9 million of adverse development in 2012. A $15.0 million Sandy reserve was reversed after updated client information indicated losses would not reach the company’s coverage layer; related reinstatement premiums were also reversed.
- Operating cash flow was negative $92.7 million, including $97.9 million of investment-related expenses. Excluding those expenses, operating activities provided $5.2 million. Investing activities provided $74.0 million; financing activities provided $0.5 million.
- Year-end cash and cash equivalents were $3.7 million, while restricted cash was $1,334.1 million, principally supporting short positions and letters of credit. Total assets were $3,095.3 million and total liabilities were $2,009.0 million.
- Reported amounts due to prime brokers were $314.7 million, including $112.5 million of investment-purchase margin borrowing and $202.2 million borrowed to collateralize letters of credit. The company reported no plans to issue debt and expected to fund operations over the next 12 months from operating cash flow.
- Letter-of-credit facilities totaled $760.0 million; $379.1 million was issued at year-end, secured by $410.3 million of pledged assets. The subsidiaries exceeded their applicable regulatory capital requirements. Greenlight Re’s statutory capital and surplus was $988.7 million versus a $449.4 million prescribed capital requirement.
Material changes versus 2012
- Net income increased substantially, principally reflecting stronger investment results and improved underwriting results. Investment return rose to 19.6% from 7.1%.
- Gross premiums written grew by $107.9 million, with growth concentrated in private passenger automobile and Florida homeowners’ contracts. The company commuted a multi-line contract and terminated or reduced other business, including commercial motor contracts.
- Commercial motor results improved after significant adverse reserve development in 2012; the company reported favorable development in 2013 and canceled its remaining commercial motor-related contracts during the year.
- Net loss reserves fell to $329.9 million from $356.5 million, including the Sandy reversal. General liability and a casualty clash contract had adverse development during 2013, partly offsetting favorable development elsewhere.
- Prime-broker margin borrowing for investments increased from $73.7 million to $112.5 million, while letters of credit outstanding declined from $416.5 million to $379.1 million.
Outlook, commentary, risks and unusual items
- Management characterized the reinsurance market as overcapitalized and highly competitive. It expected gradual market hardening but did not expect price increases to significantly exceed loss trends; it said it would reduce writings rather than accept mispriced risk if conditions softened.
- Management saw potential pressure on catastrophe retrocession rates from alternative capital and anticipated more competitive non-catastrophe pricing in 2014. It described Florida homeowners’, employer health stop-loss and non-standard automobile business as areas it believed offered risk-adjusted returns.
- Management’s 2014 investment objective was capital protection and positive returns from long and short positions. It noted a potentially unstable equity-market backdrop and expected to maintain gold, foreign-exchange options, short sovereign debt and sovereign credit default swaps. These are stated objectives, not quantified earnings guidance.
- Investment exposure is material and can be volatile: year-end notional exposure was 123.7% long and 69.8% short, for 53.9% net long. Technology represented 46.6% net exposure. Apple and Micron were each more than 10% of shareholders’ equity.
- Key risks include uncertain loss-reserve estimates and long-tailed claims, catastrophe losses, investment-market and short-sale risk, reliance on DME Advisors, conflicts arising from related-party investment management, broker concentration, access to letters of credit, and ratings or regulatory changes. Greenlight Re and GRIL were rated A and A-, respectively, by A.M. Best, both with stable outlooks.
- A retrocessionaire had failed to post collateral for $12.8 million of recoverables, and its parent was delinquent on $12.0 million of ceding-commission adjustments. The company pursued legal remedies, including an arbitration award and a court-ordered security posting; management believed collection would succeed and recorded no allowance.
- The company recorded a $6.0 million impairment charge on a note receivable amid uncertainty about repayment. DME Advisors received $18.3 million in management fees and DME received $54.2 million in performance allocation for 2013. A new related-party venture and advisory agreement took effect January 1, 2014, with a term through December 31, 2016 and limited early termination rights.
- No cash dividends were paid, and the company did not intend to pay dividends in the foreseeable future. No shares were repurchased during 2013. The filing reported an unqualified audit opinion and effective internal control over financial reporting as of year-end.
Most important facts for investors to verify
- Whether reserve estimates remain adequate, particularly for general liability, casualty clash, commercial motor run-off and catastrophe exposures, and whether the Sandy reserve reversal is supported by subsequent claims experience.
- Whether the 2013 profit and book-value growth are sustainable given the substantial contribution from investment gains and the variability of the long/short portfolio.
- Whether the $12.8 million retrocession recoverable and $12.0 million commission receivable are collected, and the eventual outcomes of the related proceedings.
- Whether the company can maintain letter-of-credit capacity and collateral availability, especially during adverse investment-market movements; assess restricted cash and prime-broker borrowing alongside reported liquidity.
- How concentrated underwriting distribution remains: the two largest brokers sourced 74.9% of 2013 gross premiums written.
- How the DME-related fees, investment conflicts, termination restrictions and portfolio exposures affect risk, liquidity and shareholder returns.