Greenlight Capital Re, Ltd. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Greenlight Capital Re is a specialty property and casualty reinsurer with an investment strategy that combines long and short positions. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Nine months 2016 | Prior-year comparable |
|---|---|---|---|
| Net premiums earned | $112.8 million | $376.5 million | $102.0 million and $288.5 million |
| Net investment income (loss) | $32.9 million | $23.3 million | $(191.3) million and $(236.5) million |
| Net income (loss) | $30.0 million | $(4.3) million | $(219.7) million and $(283.3) million |
| Basic and diluted EPS | $0.80 | $(0.12) | $(5.98) and $(7.73) |
| Net underwriting income (loss), non-GAAP | $0.6 million | $(20.2) million | $(31.7) million and $(44.7) million |
- Q3 composite ratio was 95.1%, versus 127.0% in Q3 2015. The nine-month composite ratio was 101.9%, versus 111.0%; the nine-month combined ratio was 105.3%, versus 115.5%. The company’s composite ratio excludes general and administrative expenses; combined ratio includes allocated underwriting expenses.
- Gross premiums written were $128.2 million in Q3, down 4.7% year over year, and $387.2 million year to date, up 8.4%. Nine-month growth reflected motor, workers’ compensation and mortgage-related business; Florida homeowners’ and certain professional lines declined.
- Investment results improved sharply against the prior-year periods: the DME-managed portfolio returned 3.1% net in Q3 and 2.1% net year to date, compared with losses of 14.2% and 16.9%. Q3 gains were led by long positions; short positions detracted.
Financial position, cash flow and liquidity
- At September 30, 2016, total assets were $2.594 billion, total liabilities $1.755 billion, and total equity $838.6 million. Equity attributable to shareholders was $824.2 million. Fully diluted adjusted book value per share, a non-GAAP measure, was $22.04, down 0.6% from $22.17 at December 31, 2015.
- Cash and cash equivalents were $39.2 million; restricted cash was $1.099 billion. Restricted cash supports short positions, derivatives, regulatory trusts and letters of credit and is not freely available for general use.
- Operating cash outflow for the nine months was $72.5 million, versus $44.5 million in 2015. The company paid $67.0 million related to the construction-defect loss portfolio transfer. Management reported $5.1 million of cash generated from underwriting activities excluding that transaction.
- Due to prime brokers was $398.7 million, including $116.9 million of investment-related borrowing and $281.8 million borrowed to collateralize letters of credit and trusts. Securities sold, not yet purchased were $802.9 million. These financing and short-position exposures are distinct from conventional corporate debt; management said it had no plans to issue debt and expected to fund operations from cash flow over the next 12 months.
- Available letter-of-credit capacity was $600 million; $236.7 million was issued. Collateral provided to cedents through letters of credit and trusts totaled $334.1 million. The company reported compliance with facility covenants and regulatory minimum capital requirements.
Material changes, outlook and risks
- Effective September 30, the company novated legacy construction-defect run-off contracts. It said this limits further adverse development on those contracts unless aggregate losses exceed $130 million, providing $58.5 million of coverage above the current actuarial best estimate. The related loss portfolio transfer and subsequent novation contributed $19.0 million to nine-month losses; the company had paid $67.0 million on the transfer.
- Other nine-month prior-period loss development included $5.5 million on Florida homeowners’ business and $4.5 million on a U.S. sub-prime-related excess-of-loss contract. Canadian wildfire reserves were estimated at $4.4 million and could change.
- Management described competitive pressure across reinsurance markets and said it would avoid inadequately priced risks. It expected a high concentration in non-standard motor business, sought growth in mortgage reinsurance, and reduced Florida homeowners’ exposure after not renewing remaining quota-share relationships. Property catastrophe pricing remained under severe pressure.
- The investment portfolio had 25.4% net long exposure at quarter end. Management’s stated priority for the remainder of 2016 was capital protection while seeking positive-return opportunities, with comparatively lower gross and net equity exposures and significant gold and other macro positions.
- After quarter end, on November 3, A.M. Best revised Greenlight Re’s financial strength rating from A (Excellent) to A- (Excellent), with a stable outlook. Management said the change could make some new business more difficult; a further downgrade below A- or withdrawal could materially restrict new underwriting.
- Risks include investment-market volatility, short positions’ potentially unlimited loss exposure, catastrophe and reserve-estimation uncertainty, collectability of reinsurance recoverables, and collateral and liquidity demands. Notes receivable included $19.7 million on non-accrual status; management said recorded values were expected to be fully collectible. The filing reported no existing legal dispute expected to have a material adverse effect.
Most important facts for investors to verify
- Whether investment performance and the improvement in quarterly underwriting results persist, given the nine-month net loss and 101.9% composite ratio.
- Whether the construction-defect novation adequately caps remaining exposure and how actual losses compare with the $130 million threshold and actuarial estimate.
- The effects of the A.M. Best downgrade on renewals, new business, collateral requirements and subsidiary dividend capacity.
- Liquidity available after accounting for restricted cash, short-sale collateral, prime-broker borrowing and reinsurance claim payments.
- Changes in reserve estimates, catastrophe losses, Florida-related claims and the collectability of non-accrual notes and reinsurance recoverables.
- Related-party investment-management fees and performance allocation under the renewed DME agreements, including the 10% reduced allocation rate while the loss carry-forward condition applies.