Greenlight Capital Re, Ltd. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Greenlight Re is a specialty property and casualty reinsurer; it also manages a value-oriented long/short investment portfolio. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2016 | First half 2016 | Comparable 2015 period |
|---|---|---|---|
| Net premiums earned | $125.6 | $263.7 | $91.7 Q2; $186.5 first half |
| Total revenues | $87.8 | $254.1 | $67.6 Q2; $139.2 first half |
| Net investment income (loss) | $(38.1) | $(9.6) | $(20.3) Q2; $(45.1) first half |
| Net income (loss) | $(63.0) | $(34.3) | $(39.6) Q2; $(63.6) first half |
| Loss per share, basic and diluted | $(1.69) | $(0.92) | $(1.06) Q2; $(1.71) first half |
- First-half gross premiums written increased 16.3% to $259.0 million; net premiums earned rose 41.4%. Growth reflected mainly motor, general liability, mortgage insurance and other frequency business. Q2 gross premiums written were nearly flat year over year at $92.2 million.
- Underwriting results weakened: first-half net underwriting loss was $20.8 million versus income of $13.1 million a year earlier. The first-half composite ratio was 104.8%, compared with 102.2%; Q2 composite ratio was 117.0%, compared with 109.7%. The six-month combined ratio was 107.8% versus 107.0% under the company’s revised presentation.
- At June 30, total assets were $2.705 billion, total liabilities $1.889 billion and total equity $816.2 million, down from $848.8 million at year-end 2015. Fully diluted adjusted book value per share, a non-GAAP measure, fell 4.4% during the first half to $21.20.
- Cash and cash equivalents were $45.6 million, while restricted cash was $1.078 billion. First-half operating cash use was $4.3 million, investing cash use was $62.3 million, and cash declined $66.6 million. Restricted cash is substantially encumbered for shorts, derivatives, trusts and letters of credit.
- Due to prime brokers was $415.5 million, including $149.1 million borrowed for investing activities and $266.4 million borrowed to collateralize letters of credit and trust accounts. Securities sold, not yet purchased totaled $797.8 million. These investment-related borrowings and short positions expose the company to market and liquidity risk.
Material changes and unusual items
- In April 2016, the company transferred remaining legacy construction-defect liabilities through a loss portfolio transfer. The $71.5 million consideration exceeded $52.5 million of liabilities transferred, producing a $19.0 million charge; the transaction provides $58.5 million of protection above the current actuarial best estimate. A further $67.0 million settlement payable was paid on July 11, 2016.
- Q2 underwriting losses also included $4.4 million of estimated reserves for Canadian wildfires and $4.5 million of losses paid on a U.S. sub-prime-related contract. First-half Florida homeowners’ losses included $3.8 million of adverse development related to sinkhole and assignment-of-benefits claims.
- Investment returns managed by DME Advisors were down 3.4% in Q2 and 1.0% in the first half. Q2 realized investment losses were $73.7 million, partly offset by unrealized gains. Short positions were a significant detractor; gold and certain long positions contributed.
- The company did not renew its remaining Florida homeowners quota-share relationships effective June 1, citing declining rates and worsening water-damage and assignment-of-benefits trends. It expects mortgage reinsurance to grow during the rest of 2016 and intends to maintain a high concentration in non-standard automobile business.
Outlook, risks and contingencies
- No numerical earnings or premium guidance was provided. Management plans to pursue targeted business only at economically rational terms, and may maintain or reduce writings if pricing is inadequate. It also stated a 2016 investment objective of protecting capital while seeking opportunities, with comparatively lower gross and net equity exposure and significant gold and other macro positions.
- Management believes liquidity is sufficient for foreseeable needs and expects to fund operations for the next 12 months from operating cash flow; it had no current plans to issue debt. The company generally retains earnings and does not currently expect to pay ordinary-share dividends.
- A.M. Best affirmed the subsidiaries’ “A (Excellent)” ratings but revised the outlook to negative in October 2015. Management warned that a downgrade below “A-” or withdrawal of the rating could constrain new business.
- Retrocession recoverables were $72.3 million, including $71.7 million due from unrated retrocessionaires. Of that amount, $68.7 million was backed by a parent guarantee; a $52.7 million trust account was established on July 12, 2016. Management recorded no provision for uncollectible recoverables. Retrocessionaires’ failure to pay could leave the company responsible for claims.
- Natural-catastrophe net probable maximum loss estimates as of July 1 were $90.6 million for a single event and $116.3 million in aggregate at a 1-in-250-year return period; these are estimates, not limits on actual losses. Short-sale losses can be theoretically unlimited. Other risks include volatile investment values, reserve-estimation uncertainty, counterparty credit risk, and regulatory restrictions on subsidiary dividends.
Important facts for investors to verify
- Track whether the construction-defect transfer fully limits future reserve deterioration, including the recoverability and collateral supporting related amounts.
- Monitor reserve development, catastrophe claims, Florida homeowners exposure and the effect of the non-renewals on earned premiums and underwriting profitability.
- Assess investment performance and risk from shorts, derivatives, gold exposure, prime-broker borrowing and the substantial restricted-cash balance.
- Review the collectability and collateralization of retrocession recoverables from unrated counterparties, and any change in the A.M. Best outlook or rating.
- Compare future liquidity and capital disclosures with management’s stated ability to fund operations without new debt; the filing notes results for the first half are not necessarily indicative of full-year results.