GREENLIGHT CAPITAL RE, LTD. annual report, FY2017

Greenlight Capital Re, Ltd. — 2017 Form 10-K Summary

Business context and reporting period

Fiscal year ended December 31, 2017. Greenlight Capital Re is a Cayman Islands-based property and casualty reinsurer operating through Greenlight Re in the Cayman Islands and GRIL in Ireland. It combines underwriting with a value-oriented investment strategy managed by DME Advisors, an affiliate of Chairman David Einhorn. The company reports one operating segment.

Key financial metrics

The 2017 loss ratio was 80.3% (74.2% in 2016); the acquisition cost ratio was 25.8% (26.2%). The combined ratio includes underwriting expenses and exceeds 100%, indicating an underwriting loss. Cash and cash equivalents were $27.3 million, while restricted cash was $1.50 billion. Borrowings due to prime brokers and other financial institutions were $672.7 million, up from $319.8 million; these borrowings supported investment activity and collateral needs. The company also reported $912.8 million of securities sold, not yet purchased.

Material changes versus 2016

• Gross premiums written rose 29.2%; net premiums written increased 20.9%, with growth led by motor, workers’ compensation and specialty lines. U.S. and Caribbean risks represented 87.6% of gross premiums, up from 80.6%.
• Catastrophe losses from Hurricanes Harvey, Irma and Maria, Mexican earthquakes and California wildfires totaled $42.9 million net of reinstatement premiums and commissions. Prior-year reserve development added $31.5 million to the underwriting loss; gross reserves increased to $464.4 million from $306.6 million.
• Investment results weakened: the long portfolio returned 19.5%, but the short portfolio lost 15.1%; macro positions lost 1.0%. Net investment income fell to $20.2 million from $76.2 million.
• Adjusted book value per share declined 5.0%. Reinsurance premiums ceded rose to $56.6 million from $10.0 million, primarily reflecting new quota-share retrocession for private passenger auto exposure.
• Restricted cash increased by $301.2 million, largely because collateral held in trusts and for letters of credit increased. Letters of credit issued declined to $188.5 million from $255.4 million, while trust collateral rose to $377.9 million from $86.4 million.

Outlook, commentary, risks and unusual items

Management described continued market-wide pricing pressure, with some limited improvement at January 2018 renewals, especially on loss-affected contracts. It intends to pursue business where it sees acceptable risk-adjusted returns and stated that its 2018 investment objective is capital protection in an uncertain environment, with comparatively lower net equity exposure and significant gold and other macro positions. No quantitative earnings or premium guidance was provided.

Management said it expected sufficient cash flow and capital for foreseeable needs, did not plan to issue debt, and expected to fund the next 12 months from operating cash flow. Greenlight Re and GRIL each held an A- (Excellent) A.M. Best rating with stable outlook. Available letter-of-credit capacity was $600 million at year-end; a $100 million facility was scheduled to terminate January 27, 2018.

• Tax uncertainty: The Tax Cuts and Jobs Act introduced a PFIC insurance-liability test. The company said it was restructuring its activities to meet the test, but cannot assure success; failure could expose U.S. shareholders to tax on undistributed earnings and could require further business changes.
• Investment and related-party risk: DME Advisors has exclusive management rights through December 31, 2019, subject to renewal and limited termination rights. Fees include a 1.5% annual management fee and performance allocation. The portfolio uses shorts, derivatives and leverage, and includes material single-name exposures.
• Concentration and reserving risk: Two brokers sourced 71.0% of gross premiums. Reserves depend on estimates and adverse development occurred across multiple lines; catastrophe and long-tail claims can produce volatility.
• Liquidity and collateral: Much cash is restricted or pledged, and the investment portfolio supports collateral for reinsurance obligations. A decline in asset values or reduced credit-facility availability could constrain underwriting capacity.
• Subsequent event: Investments in the DME-managed joint venture lost 5.5%, approximately $69.3 million net of non-controlling interest, in January 2018.
• The company reported no unresolved SEC staff comments and did not believe existing contractual disputes would have a material adverse effect. BDO issued unqualified opinions on the financial statements and internal control over financial reporting.

Most important facts for investors to verify

1. Whether catastrophe claims and the $31.5 million underwriting impact from prior-year development are fully reflected in reserves, and how subsequent development compares with estimates.
2. Whether the new PFIC insurance-liability test is met after restructuring, and the potential tax consequences for U.S. shareholders.
3. Whether investment performance, especially short positions and concentrated exposures, supports book value and liquidity in 2018.
4. Whether broker concentration, collateral requirements and available credit facilities remain adequate as the business grows.
5. The effect of the January 2018 investment loss and any resulting changes in capital, investment exposure or management outlook.