Greenlight Capital Re, Ltd. — 2016 Form 10-K
Business context and reporting period
Greenlight Capital Re is a Cayman Islands-based property and casualty reinsurer operating through Greenlight Re in the Cayman Islands and GRIL in Ireland. This annual report covers the fiscal year ended December 31, 2016; financial comparisons are primarily with 2015. The company uses a value-oriented investment strategy combining long and short positions, managed by DME Advisors.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Gross premiums written | $536.1 million | $502.1 million |
| Net premiums earned | $513.1 million | $408.4 million |
| Net investment income (loss) | $76.2 million | ($281.9 million) |
| Net income (loss) | $44.9 million; $1.20 per share | ($326.4 million); ($8.90) per share |
| Underwriting income (loss), non-GAAP | ($18.8 million) | ($41.9 million) |
| Combined ratio | 103.6% | 110.3% |
| Total equity | $891.7 million | $848.8 million |
| Adjusted book value per share, fully diluted, non-GAAP | $23.38 | $22.17 |
| Net cash used in operating activities | $35.8 million | $57.4 million |
Total expenses were $541.2 million, including $380.8 million of net losses and loss adjustment expenses, $134.5 million of acquisition costs, and $25.8 million of general and administrative expenses. The 2016 combined ratio reflects a revised calculation that includes only underwriting-related expenses; prior-period ratios were reclassified for comparison.
At year-end, cash and cash equivalents were $39.9 million and restricted cash was $1.203 billion. Total assets were $2.665 billion and total liabilities were $1.773 billion. Amounts due to prime brokers were $319.8 million; securities sold, not yet purchased, were $859.9 million. These balances largely relate to investment and collateral activities and should not be interpreted as conventional corporate debt alone. Letters of credit had $600 million of aggregate capacity, of which $255.4 million was issued; $86.4 million was pledged through trusts.
Fourth-quarter 2016 net income was $49.2 million, compared with a $43.1 million loss in fourth-quarter 2015. Fourth-quarter 2016 net investment income was $52.9 million.
Material changes versus 2015
- Net income rebounded from a substantial loss as the investment portfolio returned 7.2%, versus a 20.2% loss in 2015. The 2016 investment result included $210.0 million of net unrealized gains and $113.8 million of realized losses.
- Gross premiums written increased 6.8%; net premiums earned rose 25.6%, reflecting growth in motor and other business. Motor casualty represented 42.4% of gross premiums written.
- The underwriting loss narrowed to $18.8 million from $41.9 million, and the combined ratio improved to 103.6% from 110.3%, but underwriting remained unprofitable.
- The company recorded $19.0 million of losses associated with the legacy construction-defect liability transfer and novation. It reported $35.5 million of adverse development on prior-period reserves overall, versus $50.3 million in 2015.
- Greenlight Re’s A.M. Best rating was lowered from A to A- on November 3, 2016, with a stable outlook. Both reinsurance subsidiaries were rated A- at year-end.
Outlook, commentary, risks and unusual items
- Management gave no numerical earnings or premium guidance. It said it may maintain or reduce premium writings rather than accept inadequately priced risks. For 2017, it expected casualty business to remain near current levels absent attractive opportunities, while seeking growth in health stop-loss and U.S. mortgage reinsurance. It reduced Florida homeowners exposure amid declining rates and rising water-damage and assignment-of-benefits claims.
- Management’s stated 2017 investment priority was capital preservation, with comparatively lower gross and net equity exposures and significant gold and other macro positions. The investment portfolio’s year-end net long exposure was 26.6%.
- The construction-defect transaction is an unusual item requiring attention: a June 2016 retrospective reinsurance arrangement covered $52.5 million of liabilities for $71.5 million consideration, then was commuted and the affected contracts novated in September for no further consideration. The company reported $67.0 million paid during 2016 in connection with the transfer.
- Loss reserves are estimates subject to potentially material revision; reinsurance claims develop over time and the company relies substantially on cedent information. Florida homeowners, private-passenger motor, and legacy construction-defect losses were among the sources of adverse development.
- Investment results may be volatile and depend heavily on DME Advisors, an affiliate of Chairman David Einhorn. The advisory arrangement runs through December 31, 2019, with a 1.5% annual management fee and a performance allocation generally equal to 20% of profits, subject to loss carryforward terms. The filing describes potential conflicts, concentration, short-sale, leverage, derivative, liquidity and counterparty risks.
- Broker distribution is concentrated: the two largest brokers sourced 70.8% of 2016 gross premiums, including 51.3% from the largest. Letter-of-credit capacity fell from $720 million to $600 million after a facility was terminated; maintaining collateral capacity is important to writing business.
- Management stated that available cash flows and investments should meet foreseeable liquidity needs and that it had no plans to issue debt. Subsidiaries met applicable capital requirements. No cash dividends were paid, and the company did not intend to pay them in the foreseeable future.
- The company reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls. Existing contractual disputes were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Review the reserve-development disclosures and subsequent updates on construction-defect, Florida homeowners and motor claims, including the final accounting and recoverability implications of the transfer and novation.
- Assess whether underwriting can achieve profitability: the 2016 combined ratio remained above 100%, and results include a substantial investment contribution.
- Examine the concentration, valuation and downside exposure of the investment portfolio, including short positions, derivatives, gold, and the related-party DME Advisors fee and governance arrangements.
- Confirm the continued availability and terms of letter-of-credit facilities, collateral requirements and compliance with facility covenants, particularly after capacity declined to $600 million.
- Monitor the A.M. Best A- rating, regulatory capital and solvency positions, broker concentration, and the potential effect of any downgrade on renewals, collateral demands or contract termination rights.