Greenlight Capital Re, Ltd. - 10-Q Summary
Business Context and Reporting Period
Company: Greenlight Capital Re, Ltd. (GLRE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Filing Date: November 4, 2008
Business Overview: GLRE is a Cayman Islands-based specialty property and casualty reinsurer. It operates through a wholly-owned subsidiary, Greenlight Reinsurance, Ltd., and employs a value-oriented investment strategy involving long and short positions in securities and derivatives. The company manages its business as a single operating segment.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sept 30, 2008 | Nine Months Ended Sept 30, 2008 | Nine Months Ended Sept 30, 2007 |
|---|---|---|---|
| Net Premiums Written | $38,853 | $120,092 | $94,789 |
| Net Premiums Earned | $28,597 | $80,771 | $76,605 |
| Net Investment (Loss) Income | $(117,809) | $(92,546) | $707 |
| Total Revenues | $(89,212) | $(11,775) | $77,312 |
| Total Expenses | $30,433 | $78,721 | $71,228 |
| Net (Loss) Income | $(118,433) | $(89,645) | $6,084 |
| Basic EPS | $(3.29) | $(2.49) | $0.21 |
| Total Assets | $1,116,700 (Sept 30, 2008) $1,094,145 (Dec 31, 2007) |
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| Total Shareholders' Equity | |||
| Cash and Cash Equivalents | $216,137 (Sept 30, 2008) $64,192 (Dec 31, 2007) |
Underwriting Ratios (Nine Months Ended Sept 30, 2008):
- Combined Ratio: 97.5% (vs. 93.1% in 2007)
- Loss Ratio: 44.9% (vs. 41.1% in 2007)
- Acquisition Cost Ratio: 38.8% (vs. 40.1% in 2007)
Material Changes vs. Prior Period
- Investment Performance: The company reported a significant net investment loss of $117.8 million for the quarter and $92.5 million for the nine months ended September 30, 2008. This contrasts sharply with a net investment loss of only $4.8 million for the quarter and net investment income of $0.7 million for the nine months in 2007. The losses were driven by a volatile market environment in September 2008 and restrictions on short selling.
- Net Income: Net loss widened to $118.4 million for the quarter and $89.6 million for the nine months in 2008, compared to a net loss of $2.1 million and net income of $6.1 million in the respective 2007 periods.
- Underwriting Results: Underwriting income decreased to $1.6 million for the quarter and $13.2 million for the nine months in 2008, down from $5.9 million and $14.5 million in 2007. This was primarily due to increased loss and loss adjustment expenses.
- Premiums Written: Gross premiums written increased significantly to $133.8 million for the nine months in 2008 from $123.3 million in 2007, driven by growth in frequency business (motor liability, health, workers' compensation).
- Equity: Total shareholders' equity decreased to $518.3 million from $605.6 million at year-end 2007, primarily due to the net loss incurred.
Guidance, Outlook, and Risks
- Outlook: Management expects to see an increase in frequency business written in 2008. They believe the current financial and credit crisis creates opportunities in lines of business experiencing poor loss experience or where market participants face financial distress (e.g., property catastrophe, general liability, D&O, E&O).
- Investment Strategy: Despite recent disappointing results, management envisions no changes to their overall value-oriented investment strategy, believing that higher risk premiums in the market create long-term opportunities.
- Subsequent Event: For the month ended October 31, 2008, the investment portfolio generated an additional loss of approximately $78.9 million (12.7% return).
- Risks:
- Market Risk: Significant exposure to equity price risk and foreign currency risk (net exposure of $236.3 million). A 10% decline in listed equity prices would result in a $1.8 million decline in portfolio value.
- Credit Risk: Exposure to counterparty default on financial contracts and prime brokers. The company holds $128.8 million in outstanding letters of credit.
- Underwriting Volatility: Severity business results are expected to be volatile due to the potential for significant losses from single events.
- Capital Resources: The company has a $400 million letter of credit facility. A share repurchase plan authorizing up to 2 million Class A shares was adopted in August 2008, but no shares had been repurchased as of the filing date.
Key Facts for Investor Verification
- Investment Loss Magnitude: Verify the specific composition of the $117.8 million Q3 investment loss, particularly the impact of short-selling restrictions and unrealized losses on specific positions.
- Subsequent October Loss: Confirm the impact of the additional $78.9 million loss reported for October 2008 on the company's year-end financial position.
- Loss Reserve Adequacy: Review the actuarial assumptions used for Incurred But Not Reported (IBNR) reserves, which totaled $64.5 million, given the volatility in severity business.
- Counterparty Exposure: Assess the creditworthiness of prime brokers and swap counterparties holding the company's assets and derivatives, especially given the broader financial crisis.
- Share Repurchase Activity: Monitor whether the company executes its authorized $2 million share repurchase plan to support book value per share.