Greenlight Capital Re, Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. The company is a specialty property and casualty reinsurer with an investment portfolio managed using a long/short strategy. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $102.0 million | $171.0 million |
| Net premiums earned | $111.7 million | $109.5 million |
| Net investment income (loss) | $(10.2) million | $61.1 million |
| Net income (loss) | $(8.9) million | $56.7 million |
| Diluted earnings (loss) per share | $(0.24) | $1.52 |
| Net cash used in operating activities | $(10.3) million | $(18.4) million |
| Cash and cash equivalents | $4.3 million | $3.7 million at Dec. 31, 2013 |
| Restricted cash and cash equivalents | $1,228.9 million | $1,334.1 million at Dec. 31, 2013 |
| Total investments | $1,343.0 million | $1,393.7 million at Dec. 31, 2013 |
| Total assets / liabilities | $2,941.3 million / $1,868.1 million | $3,095.3 million / $2,009.0 million at Dec. 31, 2013 |
| Total equity | $1,073.2 million | $1,086.3 million at Dec. 31, 2013 |
| Combined ratio | 99.9% | 101.7% |
Net premiums written were $113.0 million, down from $130.9 million. Underwriting income before general and administrative expenses was $6.5 million, versus $1.9 million. The company reported a $0.6 million income tax benefit in Q1 2014, compared with $0.3 million expense in Q1 2013.
Management’s non-GAAP fully diluted adjusted book value per share declined 1.1% to $27.61 from $27.91 at year-end; basic adjusted book value per share fell 1.2% to $28.05 from $28.39.
Material changes and management commentary
- The investment portfolio managed by DME Advisors returned negative 0.7% net of fees and expenses, versus positive 5.8% in Q1 2013. Long-portfolio gains of 3.9% were offset by losses in short positions and macro positions. The overall investment loss drove the swing from prior-year profit to a quarterly net loss.
- Underwriting improved: the composite ratio fell to 94.1% from 98.2%, primarily due to a lower frequency-business loss ratio. The total combined ratio remained below 100%, at 99.9%.
- Gross premiums written decreased 6.4%. The company declined to renew a significant non-standard automobile contract because of competitive pricing and concerns about the cedent’s ability to produce profitable business. It also wrote no workers’ compensation premiums, while health stop-loss and Florida homeowners’ premiums increased.
- General and administrative expenses rose to $6.5 million from $3.8 million, mainly reflecting foreign-exchange losses rather than gains in the prior year and higher personnel costs, including bonuses.
- At March 31, the investment portfolio had 52.4% net long exposure. Management said its 2014 investment goal was capital preservation while pursuing opportunities in both long and short portfolios.
Outlook, liquidity, risks and contingencies
- Management described reinsurance markets as overcapitalized and competitive, with alternative capital pressuring catastrophe pricing. It said it would reduce premium writings rather than accept mispriced risk if markets soften. It characterized the market as gradually hardening but did not provide quantified earnings or premium guidance.
- The portfolio remained concentrated in Florida homeowners, U.S. employer health stop-loss, catastrophe retrocession and non-standard private passenger automobile. Management noted downward rate pressure in peak-zone catastrophe excess-of-loss business.
- Prime-broker balances totaled $285.9 million, including $82.0 million borrowed for investment purchases and $203.9 million borrowed to collateralize letters of credit. These borrowings are distinct from conventional corporate debt. The company said it had no plans to issue debt and expected to fund operations over the next 12 months from operating cash flow.
- Letter-of-credit facilities had $760.0 million total capacity, with $382.8 million issued and $408.7 million of collateral pledged. The company reported compliance with facility covenants. Subsidiary dividends are subject to regulatory restrictions and approvals; management said both reinsurance subsidiaries exceeded regulatory minimum capital requirements.
- Natural-catastrophe exposure as of April 1, 2014 was reported at up to $91.3 million for a single event and $150.2 million in maximum aggregate losses, net of retrocession.
- A retrocessionaire had not posted contractually required collateral for $12.3 million of recoverables; its parent was also delinquent on $12.0 million of ceding-commission adjustments. The company had initiated legal proceedings and believed it would prevail. It recorded no provision for uncollectible recoverables. Management did not expect existing disputes to have a material adverse effect.
- Other commitments included $11.5 million of unfunded private-equity commitments. The company noted that reserve estimates and recoveries depend on management and actuarial judgments and may differ from ultimate outcomes.
- Key market risks include equity prices, commodities, currencies, interest rates, credit and political developments. The filing quantified hypothetical sensitivities, including a 10% decline in listed equities and equity-based derivatives reducing portfolio fair value by $67.1 million.
Important facts for investors to verify
- Whether investment performance and the portfolio’s long, short and macro exposures support management’s capital-preservation objective.
- Subsequent loss development, especially on employer medical stop-loss claims, and whether the favorable automobile reserve development persists.
- Recovery status of the $12.3 million collateral dispute and the separate $12.0 million delinquent ceding-commission balance.
- Liquidity available after accounting for restricted cash, short-sale collateral, prime-broker borrowings and letter-of-credit requirements.
- How premium volume, pricing and portfolio concentration evolve as catastrophe-market competition and the non-renewal of the automobile contract affect underwriting.
- The filing states that Q1 results are not necessarily indicative of full-year results; no numerical full-year guidance is provided.