Greenlight Capital Re, Ltd. — Q2 2014 Form 10-Q
Business context and period. Cayman Islands-based specialty property and casualty reinsurer; reports one operating segment. This unaudited filing covers the quarter and six months ended June 30, 2014, compared with the same 2013 periods. Amounts below are U.S. dollars.
Key financial results
- Q2 revenue and earnings: Total revenue was $201.8 million, up from $156.8 million. Net income was $109.6 million versus $28.5 million; diluted EPS was $2.89 versus $0.76. Results were driven primarily by investment income.
- First-half revenue and earnings: Total revenue was $303.7 million, down from $327.8 million. Net income increased to $100.7 million from $85.2 million; diluted EPS was $2.66 versus $2.27.
- Investment performance: Net investment income was $113.9 million in Q2 and $103.8 million for the first half, versus $24.2 million and $85.4 million, respectively, in 2013. DME-managed portfolio net returns were 8.1% for Q2 and 7.3% for the first half, compared with 2.0% and 7.9%. Q2 included $65.8 million of unrealized gains; first-half unrealized changes were a $36.7 million loss. First-half realized gains were $175.4 million.
- Underwriting and margins: Net premiums earned were $87.9 million for Q2 and $199.5 million for the first half, down 34% and 18% year over year. The composite ratio was 93.6% in Q2 and 93.9% for the first half. The first-half combined ratio, including internal and corporate expenses, was 100.7%, versus 98.3% in 2013.
- Balance sheet and liquidity: At June 30, total assets were $3.13 billion, total equity $1.19 billion, and cash and cash equivalents $5.7 million. Restricted cash was $1.32 billion, primarily supporting short positions, derivatives and letters of credit. Loss reserves were $303.1 million.
- Borrowings and cash flow: Due to prime brokers totaled $311.1 million, including $136.3 million borrowed for investment purchases and $174.8 million supporting letters of credit. First-half operating cash flow was negative $39.1 million; investing cash flow was positive $41.0 million. Ending unrestricted cash was $5.7 million.
- Equity: Total equity rose from $1.09 billion at year-end 2013 to $1.19 billion. Adjusted book value per share, a non-GAAP measure, was $30.95 basic and $30.47 fully diluted at June 30.
Material changes versus prior periods
- Q2 gross premiums written fell to $33.7 million from $135.2 million; first-half premiums fell to $152.6 million from $262.2 million. Management attributed much of the decline to reduced participation in Florida homeowners’ renewals and termination of a private passenger motor contract at year-end 2013. One catastrophe retrocession contract was also not renewed due to unattractive pricing.
- Q2 net investment income rose sharply, reflecting stronger investment returns and gains. First-half net income improved despite lower earned premiums, while investment results included substantial realized gains and a mark-to-market unrealized loss.
- First-half loss and acquisition expenses declined with the smaller earned-premium base. The first-half composite ratio improved from 94.3% to 93.9%, but the combined ratio worsened to 100.7%, partly reflecting higher corporate expenses and foreign-exchange losses.
- Shareholders’ equity increased, while restricted cash and letters of credit declined. Issued letters of credit were $337.7 million against $760 million of facility capacity.
Outlook, risks and unusual items
- Management described the reinsurance market as overcapitalized and competitive, with alternative capital pressuring catastrophe rates. It expects to reduce writings rather than accept inadequately priced risks if conditions soften; no numerical earnings or premium guidance was provided.
- Management’s stated investment objective was capital protection and positive returns; portfolio net long exposure was 47.5%. It expected to continue holding gold, currency options, short sovereign debt and sovereign CDS positions. Investment results may fluctuate materially.
- Material risks include investment-market movements, potentially unlimited losses on short positions, catastrophe claims, reserve-estimation uncertainty, foreign-currency exposure and counterparty/retrocessionaire credit risk. Maximum aggregate natural-peril loss exposure, net of retrocession, was reported as $99.7 million.
- A retrocessionaire-related dispute remained unresolved: $4.5 million of loss recoverables was uncollateralized, and an affiliated parent was delinquent on $11.0 million of ceding-commission adjustments. The company said it believed it would prevail in pending legal actions; it recorded no provision for uncollectible recoverables.
- Investment advisory compensation to related parties included a $24.0 million first-half performance allocation and $10.1 million management fees. A $4.5 million gain on sale of a note receivable contributed to investment income; that note had been impaired in 2013.
- Management said it had sufficient liquidity for foreseeable needs, no plans to issue debt, and expected to retain earnings rather than pay ordinary-share dividends. The reinsurance subsidiaries exceeded regulatory minimum capital requirements; A.M. Best ratings were A (Excellent) for Greenlight Re and A- (Excellent) for GRIL, both with stable outlooks.
Investor facts to verify
- Whether investment gains and the related-party performance allocation persist, and how returns compare with the company’s long-term objective.
- Premium renewal levels, pricing adequacy and the effect of the terminated motor contract on future earned premiums and underwriting profitability.
- Development of loss reserves, especially employer medical stop-loss and solicitors’ professional indemnity claims, and recoverability of disputed balances.
- Liquidity and collateral requirements given low unrestricted cash, large restricted-cash balances, short-sale exposure and prime-broker borrowings.
- Any changes in catastrophe exposure, retrocession protection, letters-of-credit capacity, regulatory capital or A.M. Best ratings.