Greenlight Capital Re, Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018. The company is a specialty property and casualty reinsurer with one operating segment. Amounts are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or prior period |
|---|---|---|
| Gross premiums written | $162.6 million | $175.1 million; down 7.2% |
| Net premiums written | $141.2 million | $145.3 million |
| Net premiums earned | $125.4 million | $145.8 million |
| Total revenues | $158.8 million | $0.1 million |
| Net income (loss) attributable to GLRE | $5.9 million; $0.16 per diluted share | $(142.8) million; $(3.85) per diluted share |
| Net investment-related income (loss) | $32.3 million | $(145.2) million |
| Net underwriting income (loss) | $(21.8) million | $2.5 million |
| Combined ratio | 117.4% | 98.3% |
| Operating cash flow | $(7.1) million | $(29.2) million |
| Investing cash flow | $43.1 million | $(211.7) million |
The 2019 investment-related gain included $30.8 million from the related-party Solasglas Investments, LP (SILP), partly offset by other investment items. The 2018 loss reflected severe investment losses. The large year-over-year earnings swing therefore reflects investment performance as well as underwriting results.
At March 31, 2019, total assets were $1.479 billion, total liabilities $994.9 million, and shareholders’ equity $484.3 million. Equity increased from $477.8 million at year-end 2018. Cash and cash equivalents were $9.5 million; restricted cash was $730.2 million, largely pledged to cedents and unavailable for general use. Total cash, cash equivalents and restricted cash were $739.7 million. The company reported a $90.8 million carrying value for its convertible notes, issued with $100 million face value; they bear 4% interest and mature August 1, 2023. The company said it was in covenant compliance.
Adjusted book value per share, a company-defined non-GAAP measure, increased 0.5% during the quarter to $13.16 fully diluted and $13.19 basic. These measures are not substitutes for GAAP book value.
Material changes and unusual items
- Adverse auto loss development: Prior-year incurred losses increased $35.1 million, primarily due to Florida court rulings affecting private-passenger automobile claims from 2015 through early 2018, including claims previously considered closed. The filing reports a $25.7 million net financial impact after related premium, acquisition-cost and deposit-contract adjustments; MD&A separately describes approximately $24.5 million of additional reserves associated with the auto losses.
- Losses and loss adjustment expenses rose to $122.9 million from $95.8 million. The loss ratio increased to 98.0% from 65.7%; the combined ratio increased to 117.4% from 98.3%, indicating underwriting losses.
- Acquisition costs fell to $21.5 million from $44.2 million, partly due to reversals of sliding-scale ceding commissions following adverse auto development and lower mortgage profit commissions.
- Gross premiums written declined 7.2%. Casualty premiums increased, while “Other” premiums decreased, chiefly because a medical stop-loss quota-share contract was not renewed and a mortgage contract was commuted in 2018.
- The prior Joint Venture was terminated on January 2, 2019, with assets transferred to SILP. GLRE held $246.4 million of SILP, or 82.8% of its net assets, at quarter-end. SILP’s reported Q1 net income was $39.7 million; GLRE’s share was $30.8 million after management fees and performance allocation.
Liquidity, outlook and risks
Management stated it expects operating cash flow to fund operations for the next 12 months and believes operating and investing cash flows will meet foreseeable liquidity needs. GLRE can request SILP redemptions on three business days’ notice; management said most SILP holdings were readily liquidated. However, restricted cash is substantial and supports collateral arrangements. The company reported $728.7 million of collateral provided to cedents, against $730.2 million of restricted cash and cash equivalents.
Management described improving reinsurance pricing in recent months, while noting industry cyclicality, continuing competitive pressure and potential constraints on near-term premium growth from the reduced capital base. It said it intended to continue using retrocession to manage private-passenger auto exposure and to maintain cash or high-grade fixed income equivalent to net loss reserves. The filing gives no specific earnings or premium guidance; management cautions that quarterly results fluctuate and are not necessarily indicative of full-year results.
- Reserving and claims: Loss reserves rose to $507.9 million, including $310.4 million of incurred-but-not-reported reserves. Actual claims and inflation may differ from estimates.
- Investment and related-party exposure: SILP is managed by DME entities affiliated with Chairman David Einhorn. DME II received a $3.4 million performance allocation in Q1, in addition to $2.0 million of management fees paid by SILP. SILP uses leverage and holds long and short positions; investment values and returns can fluctuate.
- Retrocession and counterparty risk: Retrocession does not discharge GLRE’s obligations to insureds. Recoverables included $34.6 million from unrated retrocessionaires, secured by cash or collateral, and $11.6 million from A- or higher-rated counterparties.
- Catastrophe and market risks: Estimated net 1-in-250-year natural-catastrophe exposure as of April 1 was $91.8 million for a single event and $118.8 million in aggregate. The filing also quantifies sensitivity to equity prices, gold, interest rates and foreign exchange; modeled sensitivities are not forecasts.
- Liquidity and capital: Subsidiary dividends are subject to regulatory constraints and approvals. The company noted possible financing alternatives but gave no assurance that financing would be available on acceptable terms. Letter-of-credit facilities contain restrictive covenants.
Other items: the board renewed a share repurchase authorization of up to $2.5 million, effective July 1, 2019; no shares were repurchased in Q1. Management reported no material adverse effect expected from existing contractual disputes and no material change to previously disclosed risk factors. GLRE reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How the Florida auto rulings affect ultimate claim severity, reserve adequacy and any further prior-year development.
- Whether underwriting pricing and risk selection can restore a combined ratio below 100%, particularly in motor liability and other underperforming lines.
- SILP’s subsequent returns, leverage, liquidity and exposures, and the full economic cost and governance of its related-party management and performance fees.
- Whether restricted cash and collateral needs, claims payments and reinsurance recoveries leave adequate usable liquidity.
- Whether premium growth, capital adequacy and subsidiary dividend restrictions affect execution of the business plan; also monitor ratings and compliance with letter-of-credit and note covenants.