Greenlight Capital Re, Ltd. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the same 2010 periods unless stated otherwise. Greenlight Re provides global specialty property and casualty reinsurance and invests using a value-oriented long/short strategy. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $91.6 | $112.8 | $247.9 | $222.8 |
| Net premiums earned | $90.3 | $79.4 | $302.7 | $184.1 |
| Net investment income (loss) | $1.1 | $33.9 | $(54.6) | $39.7 |
| Net income (loss) | $(4.5) | $29.0 | $(63.4) | $34.3 |
| Basic loss/earnings per share | $(0.12) | $0.80 | $(1.75) | $0.94 |
- Investment returns were 0.1% for Q3 2011 versus 3.6% in Q3 2010, and negative 5.1% for the first nine months versus positive 4.2%. YTD investment losses on long holdings were partly offset by gains on shorts.
- YTD underwriting income fell to $0.9 million from $9.0 million. The combined ratio rose to 103.3% from 101.4%, indicating an underwriting loss including internal expenses. The Q3 underwriting result before general and administrative expenses was a loss of $3.9 million, versus income of $0.3 million.
- YTD gross premiums written were essentially flat at $307.2 million. Net premiums written declined to $277.2 million from $298.9 million, while net premiums earned increased as prior-period and new contracts earned through.
Financial position, cash flow and liquidity
- At September 30, total assets were $2.279 billion, total liabilities $1.513 billion and shareholders’ equity $766.0 million. Equity declined 8.7% from year-end 2010, principally due to the YTD net loss and a $10.4 million joint-venture investor withdrawal.
- Investments were $1.016 billion, unrestricted cash and equivalents $32.7 million, and restricted cash and equivalents $940.8 million. Restricted cash supports short positions, derivatives and letters of credit and is not equivalent to freely available cash.
- Cash used in operating activities was $7.3 million and cash used in investing activities was $5.6 million for the nine months. Cash and equivalents decreased by $12.9 million to $32.7 million; there were no financing cash flows.
- Amounts due to prime brokers were $319.3 million, including $273.7 million borrowed to collateralize letters of credit and $45.6 million related to investment purchases. The filing reports compliance with investment leverage limits and letter-of-credit covenants.
- Four letter-of-credit facilities totaled $610 million; approximately $401 million was issued and $426.1 million of securities and cash was pledged as collateral. Management said it expected operating cash flow to fund the next 12 months and had no current plan to issue debt.
- Basic adjusted book value per share, a non-GAAP measure, was $20.05, down 7.9% from $21.76 at December 31, 2010; fully diluted adjusted book value was $19.74, down 7.7%.
Material changes and management commentary
- Management attributed the YTD underwriting decline mainly to $15.7 million of adverse development on a commercial motor liability contract in runoff, additional adverse development on other contracts, and a $5 million full-limit loss from the 2011 New Zealand earthquake. Total net prior-period reserve development increased reserves by $19.9 million.
- YTD earned premiums rose substantially, led by Florida homeowners’ business. Florida homeowners’ contracts accounted for more than half of frequency earned premiums; management noted these contracts generally have lower loss ratios but higher acquisition costs as a proportion of reported net premiums.
- Greenlight Re’s A.M. Best rating was upgraded to “A (Excellent)” with a stable outlook on September 26, 2011; GRIL’s “A- (Excellent)” rating was reaffirmed. Management said the upgrade could improve market access and submissions.
- Management viewed the market as generally overcapitalized, with pricing likely relatively flat near term; it expected any broader pricing improvement from 2012 or later, subject to catastrophe losses or financial-market shocks. It reported some hardening in catastrophe and retrocession pricing and continued to pursue selected opportunities, particularly in Florida homeowners’ insurance.
- The investment portfolio had a reported net long position of 35% at quarter-end. Management described plans to maintain significant gold and macro hedges, including interest-rate and foreign-exchange options and short sovereign debt/sovereign CDS positions, amid volatile markets and economic uncertainty.
Risks, contingencies and unusual items
- Key exposures include volatile equity, currency, interest-rate and credit markets; catastrophe losses; reserve-estimate uncertainty; and potential failure of retrocessionaires or other counterparties. A 10% fall in listed equity and equity-based derivative prices was estimated to reduce portfolio fair value by $33.0 million.
- As of October 28, 2011, maximum aggregate natural-catastrophe loss exposure was $94.1 million, net of retrocession. The filing cautions that some quota-share contracts may not have aggregate limits.
- Loss and loss adjustment expense reserves were $241.1 million, up from $186.5 million at year-end 2010. Recoverables from unrated retrocessionaires were $21.6 million; the company reported holding collateral in excess of those recoverables and no provision for uncollectible losses.
- Private-equity commitments totaled $20.9 million, and none of the referenced private-equity funds were redeemable at quarter-end. Total scheduled commitments and contingencies were $23.9 million, excluding the separately presented reserve obligations.
- The company reported ordinary-course contractual disputes but did not expect existing disputes to have a material adverse effect. It reported no material changes to the risk factors in its 2010 Form 10-K.
- The CEO transition followed the former CEO’s August 15 retirement; related forfeitures resulted in reversals of share-based compensation expense. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much further adverse development may arise from the runoff commercial motor contract and other reserve-sensitive business.
- Whether the investment loss, concentrated long/short exposures and macro hedges change materially after quarter-end, including the liquidity and collateral effects of market volatility.
- The quality, collectibility and collateral coverage of retrocession recoverables, particularly the $21.6 million due from unrated counterparties.
- Whether catastrophe claims, Florida homeowners’ growth and acquisition costs alter underwriting profitability and the reported combined ratio.
- Availability of unrestricted liquidity after collateral needs, letter-of-credit requirements and the $20.9 million private-equity commitment; restricted cash should not be treated as freely available.
- Whether market pricing, A.M. Best ratings and regulatory capital constraints support the company’s stated underwriting and growth outlook. The filing provides no quantified earnings or premium guidance.