Business Context and Reporting Period
Company: Greenlight Capital Re, Ltd. (GLRE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: GLRE is a Cayman Islands-based specialist property and casualty reinsurer. It operates through a wholly-owned subsidiary, Greenlight Reinsurance, Ltd., and employs a non-traditional investment strategy managed by DME Advisors, LP, focusing on long positions in undervalued securities and short positions in overvalued securities. The company also utilizes a subsidiary, Verdant Holding Company, Ltd., for strategic investments in U.S. insurers and agents.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Premiums Written | $134,087 | $81,239 |
| Net Premiums Earned | $95,540 | $52,174 |
| Net Investment Income | $116,040 | $25,263 |
| Total Revenues | $213,634 | $77,437 |
| Net Income | $120,005 | $28,788 |
| Earnings Per Share (Diluted) | $3.29 | $0.78 |
| Total Assets | $1,312,716 | $958,005 |
| Total Shareholders' Equity | $614,546 | $491,440 |
| Cash and Cash Equivalents | $133,472 | $94,144 |
| Restricted Cash | $387,172 | $248,330 |
| Combined Ratio | 96.7% | 92.5% |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased by 317% to $120.0 million for the six months ended June 30, 2009, compared to $28.8 million in the prior year period. This was primarily driven by a 359% increase in net investment income ($116.0 million vs. $25.3 million).
- Investment Performance: The investment portfolio returned 19.1% for the six months ended June 30, 2009, compared to 3.6% in 2008. Long equity positions recovered significantly, contributing to the gains.
- Underwriting Growth: Gross premiums written increased 47.6% to $141.9 million, driven largely by a new multi-year homeowners' personal lines contract and growth in motor liability and health coverage.
- Loss Ratios: The frequency business loss ratio increased to 58.2% from 42.3% in the prior year, attributed to a more diverse mix of business and the absence of exceptionally favorable loss development seen in 2008. The severity business loss ratio was 50.8%.
- Balance Sheet Expansion: Total assets grew 37% to $1.31 billion, and shareholders' equity increased 25% to $614.5 million, reflecting retained earnings from the strong investment performance.
Guidance, Outlook, and Risks
- Market Outlook: Management anticipates continued opportunities in 2009 and 2010 due to a lack of capacity in the P&C industry following 2008 capital losses. Pricing is expected to increase, particularly in volatile lines.
- Investment Strategy: The portfolio moved to a more defensive position in Q2 2009, ending with a net equity exposure of 7%. Management expects to maintain this posture until security selection becomes the primary performance driver.
- Performance Compensation: Due to a loss carry-forward provision from 2008, the investment advisor (DME Advisors) is currently entitled to a reduced performance fee of 10% (down from 20%) until the aggregate loss of $178.2 million is recouped plus an additional 150%.
- Risks:
- Market Risk: Exposure to equity price, interest rate, and foreign currency fluctuations. A 10% decline in listed equity prices would result in a $1.1 million decline in portfolio value.
- Credit Risk: Exposure to counterparty default, particularly regarding prime brokers and derivative counterparties. The company holds a Credit Default Swap (CDS) on a reference entity with a high risk of default (Moody's B3/Caa3 rating).
- Reserve Uncertainty: Loss reserves are estimates; final settlement may vary materially, impacting future earnings.
- Liquidity: The company maintains $425 million in letter of credit facilities to support reinsurance obligations. As of June 30, 2009, $223.1 million was utilized.
Key Facts for Investor Verification
- Investment Concentration: Verify the composition of the "Other Investments" category ($60.1 million), which includes commodities (physical gold) and private equity, and the specific valuation methodologies used for Level 3 assets ($16.3 million).
- Derivative Exposure: Review the details of the Credit Default Swap issued by the company on a reference entity with a B3/Caa3 rating, representing a potential liability of $13.9 million notional amount.
- Underwriting Volatility: Assess the sustainability of the combined ratio (96.7%) given the opportunistic nature of the underwriting strategy and the volatility inherent in severity business.
- Related Party Fees: Confirm the impact of the reduced 10% performance fee on future net income as the investment portfolio recovers the 2008 losses.
- Capital Structure: Note the two-class share structure (Class A and Class B) and the voting power limitations on Class B shares (capped at 9.5% of total voting power).