Greenlight Capital Re, Ltd. — Q2 2020 Form 10-Q
Business context and reporting period
Greenlight Capital Re is a specialty property and casualty reinsurer. This unaudited filing covers the quarter and six months ended June 30, 2020; financial amounts below are in U.S. dollars unless stated otherwise. Results were materially affected by COVID-19-related claims and investment-market volatility.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Gross premiums written | $116.7m | $152.3m | $226.5m | $314.9m |
| Net premiums earned | $108.4m | $120.4m | $219.4m | $245.8m |
| Underwriting income (loss) | $(1.3)m | $1.5m | $(0.1)m | $(20.3)m |
| Net investment result, including SILP | $5.5m | $18.8m | $(29.7)m | $51.1m |
| Net income (loss) | $(0.1)m | $15.3m | $(40.3)m | $21.2m |
| Combined ratio | 101.2% | 98.8% | 100.0% | 108.3% |
- For the first half, the loss ratio was 75.1% versus 81.9% a year earlier; the acquisition cost ratio was 22.6% versus 23.9%. The resulting composite ratio was 97.7% versus 105.8%, before the underwriting expense ratio.
- At June 30, total assets were $1.279bn, total liabilities $849.6m and shareholders’ equity $429.9m, down from $477.2m at year-end 2019. Fully diluted book value per share was $11.81, down 8.3% from $12.88 at year-end.
- Cash and cash equivalents were $7.3m and restricted cash was $731.3m. Restricted cash primarily collateralizes cedent trusts and letters of credit and is not equivalent to unrestricted liquidity. Operating cash flow was $(42.7)m for the first half; investing cash flow was $21.3m and financing cash flow was $(7.8)m. Cash, cash equivalents and restricted cash totaled $738.6m at period-end.
- Investments totaled $199.7m, including $177.7m invested in related-party fund SILP. The company reported $94.6m carrying value of convertible notes; the notes have $100m face value, bear 4% interest and mature August 2023.
- Loss and loss adjustment expense reserves were $467.7m, including $259.9m of IBNR. Reinsurance balances receivable were $251.2m. The company reported $731.7m of collateral provided to cedents, supported by $731.3m of restricted cash.
Material changes versus comparable periods
- Gross premiums written fell 23.4% in Q2 and 28.1% in the first half year over year, mainly because the company did not renew certain motor contracts and had lower volumes in some in-force business. Growth in workers’ compensation and other specialty lines partly offset the declines.
- Q2 underwriting results shifted to a $1.3m loss from $1.5m income; COVID-19 reserves contributed $6.0m to the Q2 underwriting loss. Q2 combined ratio increased to 101.2% from 98.8%, including 5.5 points from pandemic losses.
- First-half underwriting loss narrowed to $0.1m from $20.3m, with a lower combined ratio, primarily reflecting less adverse prior-year development than in 2019. Prior-year net loss development was unfavorable by $5.7m in 2020, versus $29.9m in 2019.
- First-half net investment result swung to a $29.7m loss from $51.1m income. SILP returned negative 7.8% versus positive 9.1%; the filing attributes the loss principally to pandemic-related market disruption. SILP’s contribution to company results was a $40.5m loss.
- General and administrative expense declined 12.3% in the first half to $12.9m. The company repurchased 1.16m Class A shares during the first half for $7.8m, at a reported average price of $6.69 per share.
Outlook, commentary and risks
- Management said pandemic losses increased in mortgage and multi-line business; possible retroactive legislative or judicial expansion of business-interruption coverage could increase losses. It expects reduced motor claims in the short term from shelter-in-place measures and believes its overall pandemic exposure is relatively small compared with the industry.
- Management sees improving reinsurance pricing and tighter capacity, and expects improved market conditions to benefit future underwriting results. It is shifting some lower-performing quota-share business toward excess-of-loss contracts where economics support it. No quantified earnings or premium guidance was provided.
- Management considers COVID-19 reserve estimates adequate based on information available at June 30, but emphasizes that ultimate losses are highly uncertain and future adjustments could be material. Estimates depend on coverage interpretation, economic contraction, government actions and cedent/insured loss mitigation.
- Management expects liquidity needs over the next 12 months to be met from operating and investing cash flows, including SILP redemptions if needed. SILP redemptions are available with three business days’ notice, but investment results and claims-related cash flows may fluctuate.
- Greenlight Re and GRIL held A.M. Best ratings of A- (Excellent) with a negative outlook; the ratings were affirmed July 22, 2020. A downgrade below A- or withdrawal could constrain new underwriting. The company reported compliance with relevant note and letter-of-credit covenants.
- As of July 1, modeled 1-in-250-year natural catastrophe PML was $90.9m for a single event and $109.7m in aggregate, net of retrocession and reinstatement premiums. The filing cautions actual losses may differ materially from modeled estimates.
- On August 5, 2020, after quarter-end, the company amended its SILP letter agreement to cap deployed gross long exposure at 50% of GLRE surplus and to exclude specified cash and short-term U.S. government securities from fees and performance allocation through June 30, 2021. The board had determined in April to pursue a standalone strategy following its strategic review.
- The company adopted the expected-credit-loss accounting standard in Q1 2020, recording a $0.9m reduction to opening retained earnings. Management reported effective disclosure controls and no material changes to internal control over financial reporting. It did not believe existing disputes would have a material adverse effect.
Important facts for investors to verify
- How COVID-19 claims develop, particularly in mortgage, multi-line and business-interruption exposures, and whether reserve assumptions require material revisions.
- Whether the decline in premiums reflects deliberate portfolio repositioning and whether improved pricing and excess-of-loss business translate into sustainable underwriting profits.
- SILP’s investment performance, exposures and related-party fee arrangements; the amended exposure cap and fee treatment apply after the reporting date.
- Liquidity available after accounting for collateral restrictions, claim payments and reinsurance recoverables, and the subsidiaries’ regulatory capital and dividend constraints.
- The A.M. Best negative outlook, modeled catastrophe exposures, and the terms and maturity obligations of the convertible notes.