Business Context and Reporting Period
Company: Greenlight Capital Re, Ltd. (GLRE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: GLRE is a Cayman Islands-headquartered global specialty property and casualty reinsurer. It operates through wholly-owned subsidiaries, primarily Greenlight Reinsurance, Ltd. and Greenlight Reinsurance Ireland, Ltd. The company employs an opportunistic underwriting strategy and a non-traditional, value-oriented investment approach involving long and short equity positions, derivatives, and commodities.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Premiums Written | $97.3 million | $66.3 million |
| Net Premiums Earned | $105.2 million | $55.3 million |
| Total Revenues | $68.7 million | $38.3 million |
| Net Investment Loss | $(36.2) million | $(16.8) million |
| Net Loss | $(43.0) million | $(12.4) million |
| Loss Per Share (Basic & Diluted) | $(1.19) | $(0.34) |
| Total Assets | $2,336.5 million | $2,338.0 million (Dec 31, 2010) |
| Total Shareholders' Equity | $785.7 million | $839.2 million (Dec 31, 2010) |
| Cash and Cash Equivalents | $37.0 million | $45.5 million (Dec 31, 2010) |
| Restricted Cash | $938.2 million | $977.3 million (Dec 31, 2010) |
| Combined Ratio | 107.4% | 92.6% |
Material Changes vs. Prior Period
- Net Loss Increase: Net loss increased to $43.0 million from $12.4 million in Q1 2010. This was driven by a significant increase in net investment losses and higher underwriting losses.
- Investment Performance: Net investment loss widened to $36.2 million (3.4% loss) from $16.8 million (1.9% loss). The loss was attributed to short positions and derivatives, specifically losses on consumer cyclical stocks, energy-technology stocks, and Moody's Corp, which offset gains in the long portfolio.
- Underwriting Results: Underwriting income turned negative, reporting a loss of $2.7 million compared to income of $9.3 million in Q1 2010. The deterioration was primarily due to $8.8 million in estimated losses from the 2011 New Zealand and Japan earthquakes/tsunami, as well as losses on commercial motor contracts in run-off.
- Premium Growth: Gross premiums written increased 50.6% to $100.7 million, driven largely by a 76.4% increase in frequency business premiums, specifically new Florida homeowners' personal lines contracts.
- Equity Decline: Shareholders' equity decreased by $53.5 million (6.4%) to $785.7 million, reflecting the net loss and a $10.4 million withdrawal by the non-controlling interest in the joint venture.
Guidance, Outlook, and Risks
- Market Outlook: Management expects pricing in the property and casualty industry to remain relatively flat in the near term, though they believe current levels are not economically rational. Price increases are not expected until 2012 or later unless financial markets experience adverse shocks or further major catastrophes occur.
- Catastrophe Exposure: As of April 29, 2011, the maximum aggregate loss exposure to any series of natural peril events was $83.0 million. The company estimates a combined loss of approximately $5.0 million from the 2011 New Zealand and Japan events on a 2010 aggregate catastrophe contract.
- Investment Strategy: The portfolio remains conservatively postured with a net long position of 34%. Management intends to hold significant positions in gold and macro hedges (interest rate options, FX options, sovereign CDS) due to global economic headwinds and inflationary pressures.
- Liquidity: The company believes it has sufficient cash flow to meet foreseeable liquidity requirements. It has $610.0 million in available letter of credit facilities, with $396.1 million issued as of March 31, 2011.
- Risks: Key risks include volatility in severity business results, credit risk from prime brokers and retrocessionaires, and market risk from equity price fluctuations and foreign currency movements.
Investor Verification Checklist
- Catastrophe Loss Estimates: Verify the finality of the $8.8 million loss estimate related to the 2011 New Zealand and Japan earthquakes, as these are based on preliminary client reports and actuarial estimates.
- Investment Portfolio Composition: Review the specific short positions (consumer cyclicals, energy-tech, Moody's) that drove the $36.2 million investment loss to assess ongoing exposure.
- Florida Homeowners' Exposure: Confirm the underwriting profitability and loss ratios of the new Florida homeowners' contracts, which now comprise nearly 50% of frequency earned premiums.
- Letters of Credit Collateral: Monitor the $485.1 million in assets pledged as collateral for letters of credit and ensure compliance with covenants to avoid restrictions on dividend payments.
- Private Equity Commitments: Track the $19.0 million in unfunded commitments for private equity investments and their potential impact on liquidity.