Greenlight Capital Re, Ltd. — Q2 2012 Form 10-Q
Business context and period: Cayman Islands-based property and casualty reinsurer; results cover the three and six months ended June 30, 2012. Financial statements are unaudited and prepared under U.S. GAAP. Amounts below are in U.S. dollars.
Financial performance and position
- Q2: Net loss attributable to shareholders was $36.1 million ($0.98 per share), versus a $16.0 million loss in Q2 2011. Total revenue was $92.9 million; net premiums earned were $130.0 million. Net investment loss was $36.9 million.
- First half: Net income attributable to shareholders was $29.1 million ($0.80 basic and $0.78 diluted per share), versus a $59.0 million loss in first-half 2011. Revenue was $265.9 million, including $231.6 million of net premiums earned and $34.7 million of net investment income.
- Underwriting: First-half combined ratio was 100.8%, improved from 102.1% a year earlier; the composite ratio was 96.9% versus 97.7%. Q2 composite ratio rose to 96.4% from 93.0%, and underwriting income before general and administrative expenses declined to $4.8 million from $7.5 million.
- Cash flow: First-half operating cash flow was a $0.1 million use, compared with $1.9 million provided in 2011. Investing activities used $30.9 million, including a $34.0 million withdrawal by the joint-venture non-controlling interest. Unrestricted cash fell to $11.3 million from $42.3 million at year-end; restricted cash was $922.9 million.
- Balance sheet and borrowings: Total assets were $2.477 billion and total equity was $845.7 million at June 30. Investments totaled $1.206 billion. Liabilities included $663.5 million of securities sold, not yet purchased, and $365.0 million due to prime brokers, up from $260.4 million at year-end. Prime-broker balances included $126.9 million borrowed for investment purchases and $238.1 million supporting letters of credit.
- Capital and liquidity: Letters of credit issued totaled $395.8 million under $760.0 million of facilities, secured by $404.8 million of pledged assets. The company reported compliance with facility covenants and regulatory minimum capital requirements. It said it expected liquidity needs over the next 12 months to be met from operating cash flow and had no current plan to issue debt.
Changes versus prior comparable periods
- Q2 gross premiums written decreased 25.9% to $84.0 million; first-half gross premiums written increased 10.4% to $236.2 million. First-half net premiums written rose to $229.8 million from $193.3 million.
- Premium mix shifted toward motor liability and physical damage, including newer non-standard automobile business, while Florida homeowners’ premiums fell after contract termination, lower underlying premiums, and a reduced quota share on a renewal.
- First-half investment results swung to a $34.7 million gain from a $55.6 million loss. Q2 investment results worsened to a $36.9 million loss from a $19.5 million loss.
- First-half net loss reserves on prior-period contracts increased by $10.9 million, including adverse development on commercial motor/general liability, Florida homeowners, and a 2010 New Zealand earthquake contract. Total loss reserves rose to $294.6 million from $241.3 million at year-end.
- Basic adjusted book value per share, a non-GAAP measure, increased 3.5% during the first half to $22.74; it declined 4.1% during Q2.
Outlook, risks, and unusual items
- Management described the reinsurance market as slightly improving but still overcapitalized, with competition tempering rate increases. It cited rate increases in Florida homeowners and catastrophe retrocession, and said it was pursuing selective underwriting opportunities. No numerical earnings or premium guidance was provided.
- Management characterized the investment portfolio as conservatively positioned, with a reported net long exposure of 51%. It expected to maintain significant gold and macro-hedge positions amid economic, geopolitical, and market uncertainty. Investment performance may fluctuate substantially.
- Investment leverage, short positions, derivatives, equity and currency movements, interest rates, and credit/counterparty exposures present market risks. A hypothetical 10% decline in listed equity and equity-based derivative prices was estimated to reduce portfolio fair value by $52.8 million.
- Retrocession recoverables included $36.8 million due from unrated counterparties; the company held $34.7 million of their cash collateral, along with other collateral. Retrocession does not relieve the company of obligations to insureds, and recoverability depends on counterparties’ ability to pay.
- Maximum aggregate natural-peril loss exposure was $110.6 million as of July 27, 2012. Loss reserve estimates are inherently uncertain and may be revised as new information emerges.
- DME Advisors, an affiliate of the board chairman, receives investment management fees and performance compensation. First-half performance compensation of $7.9 million was accrued; Q2 investment losses caused a $9.1 million reversal of previously accrued performance compensation. Management fees were $8.3 million for the first half.
- The company reported no existing dispute expected to have a material adverse effect, no material change to previously disclosed risk factors, and effective disclosure controls. It does not currently expect to pay dividends and intends to retain earnings to support growth.
Important facts for investors to verify
- Whether the growing automobile business can sustain acceptable loss experience, and how reserve development evolves, particularly for prior-year motor, homeowners, and catastrophe contracts.
- How investment gains and losses, short exposure, derivatives, restricted cash, and prime-broker borrowing affect earnings and usable liquidity.
- The collectability and collateral coverage of retrocession recoverables, especially amounts due from unrated counterparties.
- The assumptions and valuation inputs for private investments and other less-liquid assets, including $19.3 million of private equity fund values based on earlier manager-reported net asset values.
- The effects of related-party investment fees and performance allocations, and the terms and capacity available under the letter-of-credit facilities.