Greenlight Capital Re, Ltd. — 2011 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2011, with comparisons to 2010 and 2009. Greenlight Re is a Cayman Islands-based property and casualty reinsurer operating through entities in the Cayman Islands and Ireland. It combines selective reinsurance underwriting with a value-oriented long/short investment strategy managed exclusively by DME Advisors, an affiliate of Chairman David Einhorn. The company reports one operating segment.
Financial performance and position
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Gross premiums written | $397.7 million | $414.9 million | Down 4.1% |
| Net premiums earned | $379.8 million | $287.7 million | Up 32.0% |
| Net investment income | $23.1 million | $104.0 million | Investment returns were 2.1%, versus 11.0% |
| Total revenues | $403.1 million | $390.6 million | Includes earned premiums and investment income |
| Net income | $6.8 million | $90.6 million | Diluted EPS $0.18, versus $2.44 |
| Combined ratio | 103.8% | 102.8% | Above 100% indicates an underwriting loss |
| Net cash from operating activities | $(26.4) million | $38.5 million | Cash use chiefly reflected claims paid on the maturing book |
Loss and loss adjustment expenses were $241.7 million, up from $177.0 million; the loss ratio rose to 63.6% from 61.5%. Net adverse development on prior-year reserves was $26.0 million, compared with $8.7 million in 2010. Acquisition costs increased to $138.8 million from $102.6 million, while general and administrative expenses declined to $13.9 million from $16.2 million.
At year-end, total assets were $2.34 billion, total liabilities $1.50 billion, and total equity $845.7 million. Adjusted book value per share, a non-GAAP measure, was $21.98 basic and $21.61 fully diluted; fully diluted adjusted book value per share increased 1.0% during 2011. Loss reserves were $241.3 million, including $138.0 million of IBNR.
Cash and cash equivalents were $42.3 million, while restricted cash was $957.5 million and was not freely available for general use. Investment assets were $1.03 billion; short securities sold, not yet purchased were $683.8 million. Amounts due to prime brokers totaled $260.4 million, including $256.1 million borrowed to collateralize letters of credit and $4.3 million of investment-related borrowing. Letter-of-credit facilities totaled $760.0 million, of which $382.8 million had been issued and $410.5 million of assets pledged. Management said it expected operating cash flow to fund the next 12 months and had no current plans to issue debt.
Material changes versus prior periods
- Net income fell sharply as investment income declined by $80.9 million year over year, while underwriting shifted from $8.0 million of income before general and administrative expenses in 2010 to a $0.7 million loss in 2011.
- Earned premiums grew despite lower written premiums, reflecting the earning of prior-year contracts. Frequency business represented 95.8% of gross written premiums, up from 94.5%; severity business declined to 4.2%.
- Prior-year reserve development turned materially adverse. Commercial motor liability run-off contracts accounted for $15.7 million of adverse development; multi-line quota-share contracts added $9.7 million net of related retrocession recoveries.
- Gross premiums written were concentrated: four brokers sourced 87.3%, compared with 79.2% in 2010. U.S. risks represented 89.0% of written premiums.
- Greenlight Re’s A.M. Best financial strength rating was upgraded from A- to A (Excellent) in September 2011; GRIL remained rated A-.
Outlook, commentary, risks and unusual items
Management expected property and casualty reinsurance pricing to be broadly flat in the near term, while anticipating moderate price increases during 2012. It cited the 2011 catastrophes in Japan, New Zealand and Thailand, but judged the industry remained overcapitalized. For January 1, 2012 renewals, property catastrophe retrocession rates increased approximately 15%; management expected rates to hold or rise further for loss-affected or worldwide programs. The company said it would continue to pursue underserved markets and opportunities it believed could meet its long-term return requirements.
Management described the investment portfolio as neutrally positioned, with a 37% net long exposure at year-end, and noted continuing equity-market volatility and European debt concerns. Results were uneven within 2011: the first three quarters recorded net losses, followed by fourth-quarter net income of $70.2 million, alongside $77.7 million of fourth-quarter net investment income. Annual investment returns and earnings remain sensitive to markets and are not presented as predictive of future performance.
- Key risks: reserve estimation uncertainty and adverse loss development; catastrophe and other large-loss exposure; volatile long/short, derivative and commodity investments, including theoretically unlimited short-sale losses; reliance on DME Advisors; broker and counterparty concentration; and access to, collateral requirements for, and renewal of letter-of-credit facilities.
- Other exposures: regulatory and rating changes, foreign-currency movements, potential conflicts involving the related-party investment adviser, and uncertainty around U.S. tax status and the insurance-company exception from PFIC rules. Maximum aggregate natural-peril loss exposure reported as of January 31, 2012 was $98.6 million, before potential retrocession or swap recoveries.
- Related-party fees: DME Advisors received $15.2 million in management fees and $5.4 million in performance compensation in 2011. The advisory agreement provides for a 1.5% annual management fee and a performance allocation, and Greenlight Re has limited early termination rights.
- The company reported no legal proceeding it believed would have a material adverse effect. BDO USA, LLP issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the $26.0 million of adverse prior-year reserve development, especially motor liability run-off claims, continues or worsens.
- Whether underwriting performance improves from the 103.8% combined ratio and the company can earn adequate returns on its growing premium base.
- Investment portfolio performance, exposures and liquidity, including short positions, derivatives, gold and the fourth-quarter contribution to full-year results.
- Availability and renewal terms of the $760.0 million letter-of-credit facilities, related collateral requirements, and the liquidity of restricted assets.
- Broker concentration, dependence on DME Advisors and related-party compensation, as well as the status of ratings, regulatory capital and material tax assumptions.