Greenlight Capital Re, Ltd. — Q2 2023 Form 10-Q
Business and period: Global specialty property and casualty reinsurer with an investment strategy centered on underwriting and the related-party Solasglas Investments, LP (SILP). This filing covers the three and six months ended June 30, 2023; financial statements are unaudited. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross premiums written | $154.9m | $134.8m | $341.4m | $280.7m |
| Net premiums earned | $139.9m | $110.2m | $282.6m | $236.1m |
| Total revenues | $189.7m | $121.4m | $344.7m | $254.4m |
| Net income | $49.9m | $14.8m | $55.7m | $9.1m |
| Diluted earnings per share | $1.32 | $0.37 | $1.49 | $0.23 |
| Net underwriting income (non-GAAP) | $5.4m | $9.3m | $5.8m | $1.7m |
| Combined ratio | 96.2% | 91.6% | 98.0% | 99.3% |
Balance sheet at June 30: Total assets were $1.716bn, total liabilities $1.155bn and shareholders’ equity $561.1m, compared with $1.580bn, $1.077bn and $503.1m, respectively, at year-end 2022. Basic and fully diluted book value per share, non-GAAP measures, were $16.29 and $16.21; fully diluted book value per share rose 11.0% from December 31, 2022.
Cash flow and liquidity: Six-month operating cash flow was $0.6m, versus an outflow of $14.0m in 2022. Cash, cash equivalents and restricted cash totaled $683.3m, down from $706.5m at year-end; only $55.6m was reported as unrestricted cash and cash equivalents. Restricted cash was $627.7m, primarily supporting cedent collateral. Management said expected operating cash flows, financing arrangements and SILP redemptions as needed should cover foreseeable requirements.
Debt: Convertible notes had a $63.1m carrying value at June 30, including accrued interest. The company repurchased $17.5m principal during the first half. After quarter-end, it drew a $75m delayed-draw term loan and used $63.4m to repay all remaining notes, including accrued interest, on August 1. The loan matures August 2026, bears adjusted Term SOFR plus 3.50%, and has quarterly amortization. The filing reported compliance with note and letter-of-credit facility covenants at June 30.
Material changes and drivers
- Gross premiums written increased 15.0% in Q2 and 21.6% in the first half. Six-month property premiums rose 48.1%; management attributed growth to market pricing, new business and mix changes. Net premiums earned rose 27.0% in Q2 and 19.7% in the first half.
- Net income rose substantially year over year, driven principally by investment and other income rather than underwriting: total investment income was $42.2m in Q2 and $47.4m in the first half, versus $17.2m and $24.9m. SILP contributed $32.8m and $29.6m, respectively. Other income included foreign-exchange gains, including $9.7m for the first half.
- Underwriting income was lower in Q2 despite higher premiums. Q2’s combined ratio worsened to 96.2%, mainly as catastrophe losses raised the loss ratio; the six-month combined ratio improved to 98.0% from 99.3%.
- First-half net loss and loss-adjustment reserves increased 11.8% to $621.1m. Prior-year incurred losses included $13.8m adverse development, including $10.6m of attritional losses and adverse development related to Winter Storm Elliott. Current-year catastrophe losses were $16.4m for the first half.
Outlook, risks and unusual items
- Outlook: No specific earnings or premium guidance was provided. Management described reinsurance pricing conditions as especially favorable, with improvements in property catastrophe, aviation, war and terror, and marine markets continuing into July renewals. It expects underwriting volatility and says interim results may not predict full-year results.
- Claims and inflation: Management cited U.S. severe storms, inflation-related claim-cost uncertainty and reserve estimation as important concerns. The company reduced participation in a homeowners program after higher-than-expected storm volatility and describes its reserve payout duration as under three years.
- Catastrophe exposure: At July 1, modeled net North Atlantic hurricane probable maximum loss at a 1-in-250-year return period was $80.3m for a single event and $87.7m in aggregate. Actual catastrophe losses may differ materially from estimates.
- Investment and related-party exposure: SILP is managed by an adviser affiliated with the board chair. GLRE’s SILP investment was $216.8m at June 30; investment returns can fluctuate, and the fund uses leverage. Q2 and first-half gains were supported by strong long positions, while short positions detracted during the first half. Management fees and performance allocations are payable to related parties.
- Other risks: The company cites market, equity-price, interest-rate, foreign-currency, credit and political risks; retrocessionaires’ failure to pay could leave the company liable to cedents. Management did not expect existing disputes to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
- Other developments: Shareholders approved eliminating the dual-class share structure on July 25. A $25m share repurchase authorization became effective July 1, 2023 through June 30, 2024; no shares were repurchased in the quarter.
Important facts for investors to verify
- Whether catastrophe losses and adverse prior-year reserve development are developing in line with estimates, especially for U.S. storms, Winter Storm Elliott and casualty attritional claims.
- How much future earnings and book-value growth depend on SILP returns, leverage, related-party fees and performance allocations, and the valuation of private or unlisted investments.
- Whether reinsurance receivables and funds held by cedents convert to cash as expected, and whether collateral and retrocession recoverables adequately protect the company.
- The post-quarter refinancing’s actual interest expense, repayment schedule, collateral requirements and covenant headroom.
- That the filing provides management commentary but no quantified forward earnings guidance; underwriting and investment results are described as volatile.