Greenlight Capital Re, Ltd. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results are presented against the comparable 2010 periods; balance-sheet changes are compared with December 31, 2010. The company is a specialty property and casualty reinsurer, with one operating segment.
Key financial results
| Metric | Q2 2011 | Six months 2011 | Comparable 2010 |
|---|---|---|---|
| Gross premiums written | $113.3 million | $214.0 million | Q2 $89.0 million; six months $155.8 million |
| Net premiums earned | $107.2 million | $212.3 million | Q2 $49.4 million; six months $104.7 million |
| Net investment income (loss) | $(19.5) million | $(55.6) million | Q2 $22.6 million; six months $5.8 million |
| Net income (loss) | $(16.0) million | $(59.0) million | Q2 $17.7 million; six months $5.3 million |
| Basic EPS | $(0.44) | $(1.63) | Q2 $0.48; six months $0.14 |
| Combined ratio | Not clearly stated for the quarter | 102.1% | Six months 2010: 99.6% |
Financial condition and liquidity
- At June 30, total assets were $2.285 billion, total liabilities $1.515 billion, and shareholders’ equity $770.2 million. Equity fell 8.2% from year-end, principally due to the six-month net loss and a $10.4 million withdrawal from the joint venture’s non-controlling interest.
- Cash and cash equivalents were $9.6 million, while restricted cash was $956.7 million. Restricted funds support short positions, derivatives and letters of credit and are not equivalent to freely available cash.
- Six-month operating cash flow was $1.9 million; investing cash flow was $(37.9) million and financing cash flow was nil. Cash declined by $35.9 million to $9.6 million.
- Amounts due to prime brokers were $309.5 million, including $251.1 million borrowed to collateralize letters of credit and $58.3 million relating to investment purchases. The filing reports compliance with investment leverage guidelines.
- Four letter-of-credit facilities totaled $610 million; $384.1 million was issued and $435.3 million of securities and cash was pledged as collateral. The company reported compliance with facility covenants and regulatory minimum capital requirements.
- Loss and loss adjustment expense reserves were $218.6 million, up from $186.5 million at year-end. Outstanding commitments totaled $21.2 million, including $18.0 million of private-equity commitments.
Changes and operating drivers
- Premium growth reflected expansion in frequency business, particularly Florida homeowners’ personal-lines contracts. Gross premiums written rose 27.3% in Q2 and 37.3% in the first half; net premiums earned more than doubled in both periods, partly reflecting premiums from contracts written in 2010 and 2011.
- Florida homeowners’ business accounted for a substantial share of earned-premium growth and generally had lower loss ratios but higher ceding commissions. Six-month acquisition costs increased to $84.9 million from $31.4 million; the acquisition-cost ratio rose to 40.0% from 30.0%.
- Six-month underwriting income before general and administrative expenses was $4.8 million, down from $8.7 million. The six-month combined ratio increased to 102.1% from 99.6%, indicating underwriting and internal expenses exceeded earned premiums on this measure.
- Investment performance drove the overall loss: the company reported a 5.2% investment-account loss for the first half, versus a 0.6% gain in 2010. Management said the long portfolio was positive, but short positions and derivatives more than offset those gains.
- Q2 underwriting income before general and administrative expenses improved to $7.5 million from a $0.6 million loss a year earlier. The improvement included a reversal of previously estimated catastrophe losses on a contract after updated information indicated losses were unlikely to reach the company’s coverage layer.
- For the first half, the company recorded a $5.0 million full-limit loss on a separate natural-peril contract following the New Zealand earthquake. Prior-period reserves increased by a net $6.3 million, including adverse development on run-off motor liability and Florida homeowners’ contracts, partly offset by favorable development elsewhere.
- Basic adjusted book value per share, a non-GAAP measure excluding joint-venture non-controlling interest, declined to $20.14 from $21.76 at year-end; fully diluted adjusted book value per share declined to $19.82 from $21.39.
Outlook, risks and other notable matters
- Management expected property and casualty pricing to be generally flat in the near term, with possible eventual improvement; it did not expect broad effects until 2012 or later. Catastrophe-related market hardening was emerging, but its durability and impact remained uncertain. Another major catastrophe could change the outlook materially.
- The company said it intended to pursue opportunities selectively, including Florida homeowners’ business and underserved or capacity-constrained markets. It characterized its investment portfolio as conservatively positioned, with 23% net long exposure at June 30, and expected to continue holding gold and macro hedges. Results may fluctuate materially; the filing provides no specific earnings or revenue guidance.
- Principal risks include investment-market and derivative volatility, catastrophe losses and reserve-estimation uncertainty, foreign-exchange effects, counterparty and retrocessionaire credit risk, and reliance on restricted or pledged collateral. Management reported $15.1 million of loss recoverables from unrated retrocessionaires, with collateral retained in excess of the recoverable amount.
- Natural-peril exposure as of August 1, 2011 was reported at a maximum aggregate net loss exposure of $94.1 million; the largest single-event exposure was $66.1 million in the United States, including the Caribbean.
- Management stated that it expected operating cash flow and liquid investments to meet foreseeable needs, had no current plan to issue debt, and did not expect to pay dividends. Subsidiary dividends remain subject to regulatory constraints and approvals. A.M. Best ratings for both reinsurance subsidiaries were A- (Excellent), stable outlook.
- Related-party investment manager DME Advisors received $7.6 million in management fees for the first half; no performance compensation was recorded because of investment losses. The company reported no material changes to previously disclosed risk factors, no material adverse effect expected from existing disputes, and effective disclosure controls.
Most important facts for investors to verify
- Whether the investment losses, especially losses on short positions and derivatives, persist or reverse, and how portfolio exposure changes.
- Whether Florida homeowners’ premium growth remains profitable after ceded premiums, higher commissions, claims and catastrophe protection costs.
- Subsequent development of catastrophe and prior-year loss reserves, including the separate New Zealand earthquake loss and the Q2 reserve reversal.
- Availability of liquidity after accounting for restricted cash, prime-broker borrowing, pledged collateral and letters of credit.
- Changes in reinsurance pricing, catastrophe exposure, retrocession recoverability and the subsidiaries’ A.M. Best ratings.