Greenlight Capital Re, Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company provides specialty property and casualty reinsurance through subsidiaries in the Cayman Islands and Ireland. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Gross premiums written | $109.8m | $162.6m |
| Net premiums earned | $111.0m | $125.4m |
| Net income (loss) | $(40.3)m | $5.9m |
| Basic and diluted loss per share | $(1.11) | Basic and diluted earnings per share of $0.16 |
| Net underwriting income (non-GAAP) | $1.3m | $(21.8)m |
| Net investment result, including related-party fund | $(35.3)m | $32.3m |
| Cash used in operating activities | $(31.8)m | $(7.1)m |
| Total investments | $207.6m | $256.4m at Dec. 31, 2019 |
| Total shareholders’ equity | $436.9m | $477.2m at Dec. 31, 2019 |
The combined ratio improved to 98.9% from 117.4% in Q1 2019 (below 100% indicates underwriting profit under the company’s measure). The loss ratio was 68.2% versus 98.0%, while the acquisition cost ratio rose to 28.6% from 17.2%. The company reported a 96.8% composite ratio before underwriting expenses, compared with 115.2%.
At March 31, total assets were $1.288bn and total liabilities were $851.2m. Cash and cash equivalents were $8.1m; restricted cash was $736.0m, primarily supporting collateral for cedents and letters of credit. The company reported $93.1m of convertible notes payable, with a 4.0% coupon and maturity in August 2023. Operating cash flow was negative, while investing activities provided $8.0m; cash, cash equivalents and restricted cash totaled $744.0m at quarter-end.
Material changes and drivers
- Net loss reversed Q1 2019’s profit, principally because the investment in related-party fund Solasglas Investments, LP (SILP) recorded a $42.1m loss, versus $30.8m of income a year earlier. SILP’s net return was negative 8.1%, driven largely by market volatility associated with COVID-19.
- Gross premiums written fell 32.5%; net premiums written declined 22.7%. Lower property and casualty premiums mainly reflected motor contracts the company chose not to renew and reduced premium volumes reported by cedents. Growth in “other” business partly offset the declines.
- Underwriting results improved from a $21.8m loss to $1.3m of income, substantially reflecting lower adverse prior-year loss development. Prior-year net incurred losses increased $4.2m in Q1 2020, versus $35.1m in Q1 2019, when adverse development was concentrated in private passenger auto. The net financial impact of prior-year development was a $3.9m loss in Q1 2020 versus $25.7m in Q1 2019.
- Book value per share fell during the quarter: fully diluted book value per share declined 9.7% to $11.63 from $12.88 at year-end; basic book value per share declined 9.5% to $11.67 from $12.90.
- The company adopted the expected-credit-loss accounting standard in Q1 2020, recording a $0.9m cumulative reduction to opening retained earnings. The filing reports a $1.0m allowance on notes receivable and small allowances on reinsurance assets.
Outlook, risks and contingencies
- Management expects COVID-19-related economic contraction to reduce cedents’ premiums and, in turn, company premiums, with a more significant effect in Q2 2020 and continuing through the rest of 2020 and beyond. The impact could not yet be quantified. Lower earned premiums may raise the underwriting expense ratio.
- Management expects possible adverse claims effects in mortgage, workers’ compensation, health and multi-line business; fewer motor claims could partly offset lower premiums. The company also flagged potential business-interruption losses if governments retroactively mandate coverage despite policy terms or exclusions.
- Management said it expects to hold most investable assets in cash and short-term Treasuries. De-risking reduced, but did not eliminate, exposure to market and economic uncertainty. SILP remains a material source of investment volatility.
- The subsidiaries’ A.M. Best rating was A- (Excellent) with a negative outlook. Management warned that a downgrade below A- or withdrawal could constrain or prevent new underwriting. The board completed its strategic review and concluded standalone operation was likely to enhance shareholder value more than a third-party transaction.
- Management stated that it expects sufficient operating and investing cash flow to meet foreseeable needs and fund operations for the next 12 months. However, substantial cash is restricted as collateral, and the company may explore financing alternatives. Subsidiaries exceeded regulatory minimum capital requirements; dividends to the parent are subject to regulatory constraints and approvals.
- The board extended the share repurchase authorization through June 30, 2021, allowing repurchases of up to 5.0m Class A shares and authorizing up to $25.0m face amount of notes repurchases. No repurchases occurred in Q1. The company reported compliance with debt and letter-of-credit covenants. It did not believe existing contractual disputes would have a material adverse effect.
Most important facts for investors to verify
- Subsequent premium volumes and underwriting expense ratios, given management’s expectation of COVID-19-related premium reductions.
- Reserve adequacy and the development of prior-year claims, especially longer-tail casualty exposures and pandemic-related claims.
- SILP’s subsequent performance, investment positioning and liquidity, including the effect of market movements on book value.
- Whether A.M. Best changes the subsidiaries’ A- rating or negative outlook and how that affects underwriting capacity.
- Availability of unrestricted liquidity, collateral requirements, regulatory capital and the company’s ability to meet claims and debt obligations.