GREENLIGHT CAPITAL RE, LTD. quarterly report, Q1 FY2013

Greenlight Capital Re, Ltd. — Q1 2013 Form 10-Q

Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Greenlight Re is a specialty property and casualty reinsurer operating through subsidiaries in the Cayman Islands and Ireland. Results are unaudited and quarterly results may not indicate full-year performance.

Key financial results

Metric	Q1 2013	Q1 2012
Total revenue	$171.0 million	$173.0 million
Net premiums earned	$109.5 million	$101.6 million
Net investment income	$61.1 million	$71.6 million
Net income	$56.7 million	$65.1 million
Diluted earnings per share	$1.52	$1.75
Net cash from operating activities	$(18.5) million	$2.7 million

Underwriting income before general and administrative expenses was $1.9 million, versus $2.3 million. The composite ratio was 98.2% (97.8%); the combined ratio, including internal and corporate expenses, was 101.7% (102.4%).
Gross premiums written fell 16.6% to $127.0 million. Net premiums earned rose 7.8%, reflecting growth in frequency premiums earned.
Total assets were $3.02 billion and total equity was $910.8 million at March 31. Restricted cash was $1.38 billion; unrestricted cash and cash equivalents were $11.0 million.
Investments totaled $1.27 billion. Securities sold, not yet purchased were $1.09 billion, and amounts due to prime brokers were $366.7 million, including $111.9 million borrowed for investment purchases and $254.7 million used to collateralize letters of credit.
Operating cash flow was negative despite positive net income; management attributed the decrease in underwriting cash generation partly to claims payments on older business and growth in non-standard auto, where claims are paid over a shorter period. Investing activities provided $7.3 million.
Fully diluted adjusted book value per share, a non-GAAP measure, increased 6.5% to $23.45 from $22.01 at year-end.

Material changes and unusual items

Net income declined 12.9%, primarily alongside lower net investment income; DME Advisors’ portfolio returned 5.8% after fees and expenses, versus 6.5% a year earlier. Gross portfolio return before advisor compensation was 7.2%, versus 8.1%.
General liability incurred adverse development of $16.8 million, primarily associated with California construction-defect claims. This was partly offset by a $15.0 million reserve reversal for Superstorm Sandy after updated client information indicated the insured losses would not reach the company’s coverage layer. A separate casualty-clash contract had $4.0 million of adverse development.
The total loss ratio was 60.5%, versus 62.3%; the frequency loss ratio rose to 71.2% from 65.2%. Excluding the general-liability adverse development, the 2013 frequency loss ratio was 54.6%.
A $6.0 million impairment was recorded on a note receivable previously placed on non-accrual status. The note remains subject to uncertainty over collection; the filing reports $10.5 million of non-accrual notes at quarter-end.
Investment results included $13.4 million of realized gains and $65.7 million of net unrealized gains. Higher interest, dividend and other expenses, including the note impairment, partly offset investment gains.
The company accrued $16.1 million of performance allocation payable to related-party investment adviser DME Advisors; management fees were $4.3 million. Performance allocation terms include a loss carry-forward provision.

Outlook, liquidity and risks

Management described the reinsurance industry as overcapitalized and competitive, with weak economic conditions limiting demand. It reported a gradually hardening insurance market but expected rate increases generally not to exceed loss trends. If markets soften, the company said it may reduce writings rather than accept inadequately priced risk.
The portfolio was described as conservatively positioned, with a 38.0% net long position at quarter-end. Management expected to maintain gold, macro positions including options on higher interest and foreign-exchange rates, and short positions in sovereign debt and sovereign credit default swaps. Investment results are expected to fluctuate.
Management said it expected liquidity to be sufficient for foreseeable needs, planned to fund operations over the next 12 months from operating cash flow, and had no current plans to issue debt. The company generally retains earnings and does not currently expect to pay dividends.
Four letter-of-credit facilities had $760 million aggregate capacity, with $432.7 million issued and $468.7 million of collateral pledged. The company reported compliance with facility covenants and regulatory minimum capital requirements.
The Board temporarily waived the 5% extended-period investment leverage limit, permitting aggregate net margin leverage of up to 20% for an extended period. The waiver was due to end at the earlier of the next Board meeting or July 25, 2013. Management reported compliance under the waiver.
Key exposures include investment-market volatility, short-sale losses (which can be theoretically unlimited), foreign exchange and interest-rate movements, counterparty and retrocessionaire credit risk, and uncertainty in actuarial loss reserves. The company reported $21.1 million of recoverables from unrated retrocessionaires and said no provision for uncollectible recoverables was considered necessary.
Maximum aggregate natural-peril loss exposure was $135 million, net of retrocession, as of April 1, 2013. Management did not believe existing contractual disputes would materially adversely affect the company. No material changes to the risk factors in the 2012 Form 10-K were reported.

Most important facts for investors to verify

Whether adverse general-liability development continues, and whether the current reserve estimates and recoverables remain adequate.
Whether the Sandy reserve reversal is supported by subsequent claims experience and whether other catastrophe exposures develop.
Collection prospects for the impaired, non-accrual note receivable and the basis for the recorded value of remaining notes.
Investment portfolio positioning, short-sale exposure, restricted-cash needs, prime-broker borrowings, and the duration or renewal of the temporary leverage waiver.
Cash generation from underwriting and the company’s ability to meet claims and collateral needs while maintaining capital and letter-of-credit capacity.
Actual underwriting pricing, premium volumes, and investment returns versus management’s outlook; management cautioned that quarterly results may be volatile.