Greenlight Capital Re, Ltd. — Q3 2019 Form 10-Q
Business context and period: Greenlight Capital Re (GLRE) is a specialty property and casualty reinsurer. This unaudited report covers the three and nine months ended September 30, 2019, compared with the same 2018 periods; balance-sheet comparisons are with December 31, 2018. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net premiums earned | $129.2m | $114.1m | $375.0m | $388.8m |
| Total revenues | $138.2m | $32.5m | $437.3m | $120.8m |
| Net income (loss) attributable to GLRE | $5.1m | $(89.1)m | $26.4m | $(269.2)m |
| EPS, diluted | $0.14 | $(2.48) | $0.72 | $(7.49) |
| Underwriting income (loss), non-GAAP | $2.6m | $(4.0)m | $(17.7)m | $3.6m |
| Combined ratio | 98.0% | 103.5% | 104.7% | 99.1% |
Q3 investment-related income was $9.9m, versus an $80.9m loss in Q3 2018. For the nine months, investment-related income was $61.0m, versus a $266.7m loss. The company reported a 10.4% net return on the DME-managed investment portfolio for the nine-month period, compared with a 22.3% loss in 2018.
At September 30, 2019, total assets were $1.42bn, total liabilities $915.6m and shareholders’ equity $506.5m. Loss reserves were $479.4m; reinsurance balances receivable were $273.3m. Cash and cash equivalents were $11.8m, with an additional $762.2m of restricted cash pledged primarily to support collateral arrangements. Operating cash flow was negative $8.7m for the nine months; investing activities provided $79.2m. Convertible notes had a $91.9m carrying value and $100m face amount, mature August 2023 and bear 4% interest. The company reported compliance with note and letter-of-credit covenants.
Basic adjusted book value per share, a non-GAAP measure, was $13.69 at September 30, up from $13.12 at year-end 2018; fully diluted adjusted book value was $13.67, up from $13.10.
Material changes versus prior periods
- Q3 returned to profitability, with underwriting income of $2.6m and a 98.0% combined ratio. Management attributed the improvement mainly to lower catastrophe losses; Q3 catastrophe events contributed 2.4 loss-ratio points versus 4.9 points a year earlier.
- Nine-month underwriting performance deteriorated: underwriting loss was $17.7m and the combined ratio rose to 104.7%. Prior-year loss development added $30.2m to incurred losses, primarily from private passenger automobile claims affected by Florida court rulings; the estimated net financial impact was a $27.7m loss. Favorable development in other lines partly offset this.
- Gross premiums written declined 1.6% to $425.5m for the nine months, while net premiums written increased 4.7% to $376.9m, in part because ceded premiums fell to $48.6m from $72.5m. Management said it did not renew certain motor business and reduced catastrophe retrocession.
- The prior-year investment comparison was substantially affected by investment losses in 2018. During 2019, GLRE de-risked the portfolio; most SILP assets were held in cash and short-term U.S. Treasuries by quarter-end.
- Equity increased $28.8m from year-end, primarily reflecting 2019 net income. Restricted cash increased $77.2m, mainly because of higher collateral needs.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management said industry conditions could create improved opportunities in certain reinsurance classes, but warned that reduced capital and the rating outlook could constrain capacity and access to business. The company expected motor premiums to be lower after choosing not to renew certain private passenger motor contracts; execution of the 2020 plan, including January renewals, could be adversely affected.
- A.M. Best revised the subsidiaries’ A- (Excellent) rating outlook from stable to negative. The Board’s strategic review was ongoing, with Credit Suisse engaged to evaluate potential alternatives; no completion timetable or outcome was assured. Management said most investable assets would remain in cash and short-term Treasuries until the review is complete.
- Key underwriting risks include reserve-estimation uncertainty, adverse automobile loss development, catastrophe exposure and satellite-launch losses. Q3 losses included approximately $3.1m from Hurricane Dorian and Typhoon Faxai and losses from two failed satellite launches.
- Other risks include reliance on retrocessionaires, counterparties and collateral arrangements; rating downgrades could limit the subsidiaries’ ability to write new business. The company estimated October 1 net 1-in-250-year catastrophe exposure of $87.6m for a single event and $111.1m in aggregate; these are modeled estimates, not guarantees.
- Management believed liquidity was sufficient for foreseeable needs and expected to fund the next 12 months from operating cash flow, with potential SILP withdrawals if needed. However, restricted cash is not freely available for general use, and dividends from regulated subsidiaries are subject to regulatory constraints. The company did not expect to pay ordinary-share dividends.
- Related-party investment arrangements with DME affiliates include management fees and performance allocations. For the nine months, SILP paid $4.2m in management fees and accrued $5.7m in performance allocation. The company also disclosed ordinary-course disputes, which it did not expect to have a material adverse effect.
Most important facts for investors to verify
- Whether Florida automobile claims continue to develop adversely, and whether the $27.7m estimated net prior-year reserve impact proves adequate.
- Progress and potential consequences of the strategic review, including effects on expenses, operations and share price.
- Whether the negative A.M. Best outlook leads to a rating action and how that could affect underwriting capacity and renewals.
- The sustainability and risk profile of investment returns, including SILP’s de-risked asset mix, related-party fees and performance allocations.
- Liquidity available after collateral requirements, reserve payments and other commitments; distinguish restricted cash from freely available cash.