Greenlight Capital Re, Ltd. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise stated. Greenlight Re and its subsidiaries write global specialty property and casualty reinsurance and invest using a value-oriented long/short strategy.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross premiums written | $181.6 | $128.2 | $553.7 | $387.2 |
| Net premiums earned | $172.7 | $112.8 | $484.9 | $376.5 |
| Net investment income | $64.0 | $32.9 | $36.4 | $23.3 |
| Total revenues | $236.1 | $145.5 | $521.1 | $399.6 |
| Net income (loss) attributable to shareholders | $19.9 | $30.0 | $(7.2) | $(4.3) |
| Basic and diluted EPS | $0.53 | $0.80 | $(0.20) | $(0.12) |
| Net operating cash flow | — | $75.3 | $(68.1) |
- Gross written premiums grew 41.6% in Q3 and 43.0% in the first nine months. Growth was principally in frequency business, including motor, personal property, workers’ compensation and health.
- Q3 net underwriting loss was $38.5 million, versus income of $0.6 million a year earlier. The nine-month underwriting loss was $33.9 million, versus a $20.2 million loss in 2016.
- Net catastrophe losses from Hurricanes Harvey, Irma and Maria and the Mexican earthquakes were $37.9 million for both the quarter and year-to-date period. Catastrophes added 21.9 points to the Q3 composite ratio and 7.8 points to the nine-month ratio.
- The Q3 composite ratio was 119.8%, compared with 95.1%. For the first nine months, the composite ratio was 104.4%, compared with 101.9%; the combined ratio was 107.0%, compared with 105.3%.
- Investment results helped offset underwriting weakness: the DME-managed portfolio returned 5.5% net of fees in Q3 and 2.9% for the nine months, versus 3.1% and 2.1%, respectively, in 2016. Nine-month long positions gained 14.0%, while short positions lost 8.4% and macro positions lost 1.0%.
Financial position and liquidity
- At September 30, 2017, total assets were $3.17 billion, total liabilities $2.28 billion, and total equity $885.7 million. Shareholders’ equity excluding joint-venture non-controlling interest was $867.5 million.
- Cash and cash equivalents were $31.9 million; restricted cash was $1.35 billion. Restricted cash is pledged or held for short-sale, derivative, trust and letter-of-credit collateral and is not freely available for general use.
- Investments totaled $1.34 billion, including $1.20 billion in trading equities. Securities sold, not yet purchased, were $890.0 million; these short positions carry potentially unlimited loss exposure.
- Amounts due to prime brokers rose to $547.7 million from $319.8 million at year-end 2016. Management described these as margin borrowings used for investment activity and collateral arrangements, and said it had no plans to issue debt. They should not be confused with a disclosed long-term debt balance.
- Operating cash flow was $75.3 million, investing cash outflow $82.6 million, and financing cash outflow $2.8 million for the nine months. Unrestricted cash declined by $8.0 million to $31.9 million.
- Net premiums written were $539.8 million, while loss reserves increased to $445.8 million from $306.6 million at December 31, 2016. Reinsurance balances receivable rose to $294.3 million from $219.1 million.
Material changes, outlook and risks
- Prior-year loss development added $19.6 million to losses in the first nine months, chiefly from motor, specialty health, Florida homeowners’ assignment-of-benefits claims and surety. Management estimated the net negative impact, after contractual offsets, at $16.7 million.
- Management said catastrophe losses may improve property-catastrophe pricing, but rate pressure and expense-reduction demands remain across the sector; large capital inflows could limit rate improvements. No specific earnings or revenue guidance was provided.
- Management’s 2017 investment aim was capital protection and adequate risk-adjusted returns. It expected comparatively lower net equity exposure and significant gold and other macro positions amid global economic, investment and political uncertainty. Net long exposure was 38.9% at quarter-end.
- Natural-catastrophe exposure as of October 1, 2017 included $205.4 million of estimated net annual aggregate contractual exposure. Separately, modeled 1-in-250-year net probable maximum loss was $99.7 million for a single event and $115.1 million in aggregate; these estimates depend on model and contract assumptions and may differ materially from actual losses.
- Retrocession reduces some exposures but does not release the company from obligations to policyholders. Recoverables from unrated retrocessionaires were $17.2 million and were collateralized; collectability and counterparty performance remain risks.
- Letter-of-credit capacity was $600 million, with $155.6 million issued at quarter-end; trust collateral for cedents was $289.8 million. The company reported compliance with facility covenants. A $100 million JPMorgan letter-of-credit facility was scheduled to terminate in January 2018.
- Related-party investment arrangements with DME Advisors, an affiliate of the board chairman, generated $13.1 million of management fees and $4.0 million of performance allocation in the first nine months. The agreements run through December 2019, subject to their terms.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It did not believe existing contractual disputes would have a material adverse effect; the filing reported no other material risk-factor changes from the 2016 Form 10-K.
Important facts for investors to verify
- How catastrophe claims develop, particularly the adequacy of reserves, the $37.9 million catastrophe-loss estimate, and recoveries under retrocession contracts.
- Whether premium growth and rate conditions can produce underwriting profitability, given the 104.4% nine-month composite ratio and adverse prior-year development.
- The liquidity and collateral implications of $1.35 billion in restricted cash, $547.7 million due to prime brokers, and $890.0 million in short securities.
- The sensitivity of investment results to long, short and macro positions, and the concentration, valuation and liquidity of investment holdings.
- The collectability and timing of reinsurance receivables and loss recoverables, plus compliance with letter-of-credit and regulatory capital requirements.
- The economics and governance of the related-party DME investment arrangements, including fees and performance allocation.