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GLRE > SEC Filings for GLRE > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for GREENLIGHT CAPITAL RE, LTD.


30-Oct-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References to "we," "us," "our," "our company," or "the Company" refer to Greenlight Capital Re, Ltd. ("GLRE") and its wholly-owned subsidiaries, Greenlight Reinsurance, Ltd, ("Greenlight Re"), Greenlight Reinsurance Ireland, Ltd. ("GRIL") and Verdant Holding Company, Ltd. ("Verdant"), unless the context dictates otherwise. References to our "Ordinary Shares" refers collectively to our Class A Ordinary Shares and Class B Ordinary Shares.

The following is a discussion and analysis of our results of operations for three and nine months ended September 30, 2013 and 2012 and financial condition as of September 30, 2013 and December 31, 2012. The following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes, which appear in our annual report on Form 10-K for the fiscal year ended December 31, 2012.

Special Note About Forward-Looking Statements

Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements generally are identified by the words "believe," "project," "predict," "expect," "anticipate," "estimate," "intend," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors" (refer to Part I, Item 1A) contained in our annual report on Form 10-K for the fiscal year ended December 31, 2012. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned not to place undue reliance on the forward looking statements which speak only to the dates on which they were made.

We intend to communicate certain events that we believe may have a material adverse impact on our operations or financial position, including property and casualty catastrophic events and material losses in our investment portfolio, in a timely manner through a public announcement. Other than as required by the Exchange Act, we do not intend to make public announcements regarding reinsurance or investments events that we do not believe, based on management's estimates and current information, will have a material adverse impact on our operations or financial position.

General

We are a Cayman Islands headquartered global specialty property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us from most of our competitors. Our goal is to build long-term shareholder value by selectively offering customized reinsurance solutions, in markets where capacity and alternatives are limited, which we believe will yield favorable long-term returns on equity.

We aim to complement our underwriting results with a non-traditional investment approach in order to achieve higher rates of return over the long term than reinsurance companies that employ more traditional, fixed-income investment strategies. We manage our investment portfolio according to a value-oriented philosophy, in which we take long positions in perceived undervalued securities and short positions in perceived overvalued securities.

Because we employ an opportunistic underwriting philosophy, period-to-period comparisons of our underwriting results may not be meaningful. In addition, our historical investment results may not necessarily be indicative of future performance. Due to the nature of our reinsurance and investment strategies, our operating results will likely fluctuate from period to period.


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Segments

We manage our business on the basis of one operating segment, property and casualty reinsurance, in accordance with the qualitative and quantitative criteria established by U.S. GAAP. Within the property and casualty reinsurance segment, we analyze our underwriting operations using two categories:

? frequency business; and
? severity business.

Frequency business is generally characterized as contracts containing a potentially large number of small losses emanating from multiple events. Clients generally buy this protection to increase their own underwriting capacity and typically select a reinsurer based upon the reinsurer's financial strength, service and expertise. We expect the results of frequency business to be less volatile than those of severity business from period to period due to greater predictability. We also expect that over time the profit margins and return on equity of our frequency business will be lower than those of our severity business.

Severity business is generally characterized as contracts with the potential for significant losses emanating from one event or multiple events. Clients generally buy this protection to remove volatility from their balance sheets, and accordingly, we expect the results of severity business to be volatile from period to period. However, over the long term, we also expect that our severity business will generate higher profit margins and return on equity than those of our frequency business.

Outlook and Trends

We believe the reinsurance industry in general has been, and for the foreseeable future will remain, over capitalized. Over the past year there has been an influx of new capital for peak zone catastrophe risk from alternative capital market participants such as hedge funds, pension funds and other fixed income bond managers. Additionally, we believe that the slowdown in worldwide economic activity continues to weaken the overall demand for property and casualty insurance and, accordingly, reinsurance. Notwithstanding the foregoing, the over capitalization of the reinsurance industry may be countered by the introduction of more stringent capital requirements in the industry (particularly in Europe), the recalibration of catastrophe risk models to reflect recent catastrophic activity and a sustained low interest rate environment. We believe that we are well positioned to compete for frequency business due to our increasing market recognition, the development of strategic relationships and Greenlight Re's "A (Excellent)" rating by A.M. Best.
We believe we are currently in a gradually hardening insurance market, but due to poor economic conditions and industry over capitalization, we do not expect rate increases to significantly exceed loss trends. Meanwhile, the reinsurance industry remains over capitalized and competitive with many sectors continuing to operate at levels that we believe are economically irrational. The over capitalization of the market is not uniform. There are a number of insurers and reinsurers that have suffered and continue to suffer from capacity issues. We continue to assess the possibility of partnering with companies with this profile. If the reinsurance market continues to soften, our strategy is to reduce premium writings rather than accept mispriced risk, and conserve our capital for a more opportune environment. Significant price increases could occur if financial and credit markets experience adverse shocks that result in the loss of capital of insurers and reinsurers, or if there are major catastrophic events, especially in North America. The persistent low interest rate environment has reduced the earnings of many insurance and reinsurance companies and we believe that the continuation of low interest rates, coupled with the reduction of prior years' reserve redundancies, could cause the industry to adopt overall higher pricing.
As of September 30, 2013, our reinsurance portfolio was principally concentrated in four areas: Florida homeowners; U.S. employer health stop loss; catastrophe retrocession and non-standard private passenger automobile. While each of these areas is competitive, we believe we are supporting programs with good risk adjusted returns due in part to improving loss experience or rate increases that are in excess of loss trends. In particular, the Florida homeowners' insurance market continues to experience rate increases coupled with the positive impact of state legislation addressing sinkhole fraud. However, we anticipate the non-catastrophe reinsurance pricing in this market will become more competitive. While we believe the property catastrophe retrocession contracts on which we participate are attractively priced, we have observed significant flexible capital from non-traditional sources being deployed mainly in peak zone catastrophe excess of loss business which is putting downward pressure on rates. U.S. employer health stop loss and non-standard private passenger automobile are stable at what we believe are profitable levels.
We intend to continue to monitor market conditions to position ourselves to participate in future under-served or capacity-constrained markets as they arise and intend to offer products that we believe will generate favorable returns on equity


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over the long term. Accordingly, our underlying results and product line concentrations in any given period may not be indicative of our future results of operations.
Our investment portfolio was conservatively postured with a net long position of 35.0% as of September 30, 2013. Equity markets in the first nine months of 2013 increased despite lackluster growth in corporate earnings. The increase in stock prices seems driven by a more stable environment and continued monetary policy stimulus. In the face of a more challenging earnings backdrop, and a continuation of emergency policies, we believe the market's rapid advance is creating a potentially unstable condition, which could resolve itself in a number of ways and is difficult to predict. We ended the quarter with a reduced gross exposure, positioning us to ride out future volatility and to take advantage of new opportunities. Given the current investment environment, we anticipate, for the foreseeable future, to continue holding a combination of a significant position in gold, macro positions in the form of options on higher interest rates and foreign exchange rates, short positions in sovereign debt and sovereign credit default swaps.
Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We believe that the critical accounting policies set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2012 continue to describe the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. These accounting policies pertain to premium revenues and risk transfer, valuation of investments, loss and loss adjustment expense reserves, acquisition costs, bonus accruals and share-based payments. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material effect on our results of operations and financial condition.

Recently issued accounting standards and their impact to the Company have been presented under "Recently Adopted Accounting Standards" in Note 2 of the accompanying condensed consolidated financial statements.

Results of Operations

Three and nine months ended September 30, 2013 and 2012

For the three months ended September 30, 2013, we reported a net income of $56.5 million, compared to a net income of $46.1 million reported for the same period in 2012. Our net investment income for the three months ended September 30, 2013 was $49.4 million, compared to a net investment income of $96.5 million reported for the same period in 2012. Our investment portfolio managed by DME Advisors, LP reported a gain of 4.0% for the three months ended September 30, 2013, compared to a gain of 8.8% for the same period in 2012. The underwriting income before general and administrative expenses for the three months ended September 30, 2013 was $16.0 million, compared to underwriting loss of $43.9 million for the same period in 2012. The increase in underwriting income for the three months ended September 30, 2013 was primarily due to a decrease in the composite ratio for the period. For the three months ended September 30, 2013, our overall composite ratio (the sum of losses incurred and acquisition costs, as a percentage of premiums earned) was 90.3%, driven by profitable performance in each of our four core areas of concentration, specifically Florida homeowners, non-standard automobile, employer stop loss and catastrophe retro. By comparison, our composite ratio for the third quarter of 2012 was 137.6%, primarily attributable to strengthening of loss reserves relating to commercial automobile business. The general and administrative expenses for the three months ended September 30, 2013 were $7.1 million compared to $4.6 million for the three months ended September 30, 2012. The increase was partially due to the non-investment related foreign exchange loss of $2.1 million reported during the third quarter of 2013, compared to $0.7 million for 2012, and partially due to an increase in personnel costs.

For the nine months ended September 30, 2013, we reported net income of $141.8 million, compared to net income of $75.2 million reported for the nine months ended September 30, 2012. Our net investment income for the nine months ended September 30, 2013 was $134.8 million, compared to a net investment income of $131.2 million reported for the same period in 2012. Our investment portfolio managed by DME Advisors, LP reported a gain of 12.2% for the nine months ended September 30, 2013, compared to a gain of 12.1% for the same period in 2012. The underwriting income before general and administrative expenses for the nine months ended September 30, 2013 was $29.6 million, compared to underwriting loss of $36.9 million reported for the nine months ended September 30, 2012. The underwriting income for the nine months ended September 30, 2013 included a reversal of $9.7 million of loss reserves (net of reinstatement premiums) relating to super-storm Sandy due to revised loss estimates during the first quarter of 2013. Based on updated information received from the insurer during the first quarter of 2013, claims relating to super-storm Sandy were no longer expected to breach into the coverage layer provided by our contract.


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For the nine months ended September 30, 2013, our overall composite ratio was 92.7%, compared to 110.5% during the same period in 2012. General and administrative expenses increased for the nine months ended September 30, 2013 to $16.8 million from $13.6 million for the nine months ended September 30, 2012, primarily as a result of higher personnel costs, partially offset by a decrease in non-investment related foreign exchange loss of $0.2 million compared to $0.8 million for the same period in 2012.

Our primary financial goal is to increase the long-term value in fully diluted adjusted book value per share. For the three months ended September 30, 2013, the fully diluted adjusted book value per share increased by $1.50 per share, or 6.2%, to $25.70 per share from $24.20 per share at June 30, 2013. For the three months ended September 30, 2013, the basic adjusted book value per share increased by $1.56 per share, or 6.3%, to $26.21 per share from $24.65 per share at June 30, 2013.

For the nine months ended September 30, 2013, the fully diluted adjusted book value per share increased by $3.69 per share, or 16.8%, to $25.70 per share from $22.01 per share at December 31, 2012. For the nine months ended September 30, 2013, the basic adjusted book value per share increased by $3.82 per share, or 17.1%, to $26.21 per share from $22.39 per share at December 31, 2012.

Basic adjusted book value per share is a non-GAAP measure as it excludes the non-controlling interest in a joint venture from total equity. In addition, fully diluted adjusted book value per share is also a non-GAAP measure and represents basic adjusted book value per share combined with the impact from dilution of all in-the-money stock options and RSUs issued and outstanding as of any period end. We believe that long-term growth in fully diluted adjusted book value per share is the most relevant measure of our financial performance. In addition, fully diluted adjusted book value per share may be of benefit to our investors, shareholders and other interested parties to form a basis of comparison with other companies within the property and casualty reinsurance industry.

The following table presents a reconciliation of the non-GAAP basic adjusted and fully diluted adjusted book value per share to the most comparable GAAP measure.

                                  September 30,
                                       2013         June 30, 2013      March 31, 2013     December 31, 2012     September 30, 2012
                                                         ($ in thousands, except per share and share amounts)
Basic adjusted and fully diluted
adjusted book value per share
numerator:
Total equity (US GAAP)            $  1,000,595     $      941,216     $      910,802     $         860,410     $         894,215
Less: Non-controlling interest in
joint venture                          (33,959 )          (32,218 )          (31,326 )             (38,702 )             (13,113 )
Basic adjusted book value per
share numerator                        966,636            908,998            879,476               821,708               881,102
Add: Proceeds from in-the-money
stock options issued and
outstanding                             18,462             18,528             18,768                18,975                19,294
Fully diluted adjusted book value
per share numerator               $    985,098     $      927,526     $      898,244     $         840,683     $         900,396
Basic adjusted and fully diluted
adjusted book value per share
denominator:
Ordinary shares issued
and outstanding for basic
adjusted book value per share
denominator                         36,877,407         36,872,110         36,822,176            36,702,128            36,678,653
Add: In-the-money stock options
and RSUs issued and outstanding      1,451,408          1,457,408          1,477,908             1,491,290             1,514,290
Fully diluted adjusted book value
per share denominator               38,328,815         38,329,518         38,300,084            38,193,418            38,192,943
Basic adjusted book value per
share                             $      26.21     $        24.65     $        23.88     $           22.39     $           24.02
Fully diluted adjusted book value
per share                                25.70              24.20              23.45                 22.01                 23.57


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 Gross Premiums Written

Details of gross premiums written are provided in the following table:
                Three months ended September 30               Nine months ended September 30
                  2013                   2012                   2013                   2012
                       ($ in thousands)                              ($ in thousands)
Frequency $  146,414     98.4 %   $ 67,644    100.0 %   $ 387,328     94.3 %   $ 284,957     93.8 %
Severity       2,351      1.6            -        -        23,599      5.7        18,893      6.2
Total     $  148,765    100.0 %   $ 67,644    100.0 %   $ 410,927    100.0 %   $ 303,850    100.0 %

We expect quarterly reporting of premiums written to be volatile as a result of our opportunistic underwriting philosophy. Additionally, the composition of premiums written between frequency and severity business may vary from year to year depending on the specific market opportunities that we pursue.

For the three months ended September 30, 2013, our frequency gross premiums written increased by $78.8 million, or 116.4%, primarily as a result of $46.9 million increase in our non-standard automobile premiums (motor liability and motor physical damage). The increase in non-standard automobile premiums was a result of our existing ceding insurers experiencing hardening market conditions, with higher underlying insurance rates and premium retention levels which resulted in higher premiums ceded to us. Additionally, on some of these contracts our quota share participation was higher than the comparable period which also contributed to the increase in gross premiums written. We wrote no commercial automobile premiums during the three months ended September 30, 2013. Personal lines contributed $36.0 million of the increase in frequency gross premiums written driven partially by our existing Florida homeowners' insurance business partners and partially as a result of a new contract entered into during 2013. The written premiums relating to personal lines for the comparative third quarter of 2012 were negatively impacted by a novation of a contract which resulted in the reversal of both gross written premiums and ceded premiums during the three months ended September 30, 2012. The increases in frequency gross premiums were partially offset by decreases in the general liability and workers' compensation lines of $3.8 million and $1.8 million, respectively. During 2013, we commuted and exited a multi-line contract which resulted in returned premiums relating to workers' compensation and general liability lines. To a lesser extent, the decrease in general liability premium was due to contracts we canceled during the fourth quarter of 2012.

For the nine months ended September 30, 2013, our frequency gross premiums written increased by $102.4 million, or 35.9%, primarily as a result of a $79.6 million increase in our non-standard automobile premiums (motor liability and motor physical damage) and $57.1 million increase in our personal lines Florida homeowners' business driven by the reasons explained above. The increases were offset by decreases in the general liability and workers' compensation lines of $20.9 million and $13.5 million, respectively, primarily due to the commutation of a multi-line contract and to a lesser extent, the decrease in general liability due to contracts we canceled during the fourth quarter of 2012. For the nine months ended September 30, 2013, there were no commercial motor premiums as all commercial motor contracts were canceled during 2012.

For the three months ended September 30, 2013, the increase in severity premiums written of $2.4 million, compared to the same period in 2012, was primarily due to a new multi-line severity contract written during the first quarter of 2013 for which the underlying business incepts at various dates throughout the year. Accordingly, premiums written are recorded based on the period in which the underlying risk incepts.

For the nine months ended September 30, 2013, the increase in severity premiums written of $4.7 million, or 24.9%, compared to the same period in 2012 was primarily due to new severity contracts written during the first quarter of 2013. This increase was partially offset by the reversal of reinstatement premiums written of $3.5 million in conjunction with the reversal of loss reserves relating to super-storm Sandy during the first quarter of 2013. Reinstatement premiums and additional premiums based on contractual terms are recognized as written premiums at the time losses are recorded, and, if required, adjusted in the period that changes in loss estimates are recorded.

Premiums Ceded

For the three and nine months ended September 30, 2013, premiums ceded were $2.4 million and $0.9 million, respectively. By comparison, premiums ceded for the three and nine months ended September 30, 2012 were $(30.6) million and $(24.2) million, respectively. The negative premiums ceded for the three and nine months ended September 30, 2012, were primarily due to Florida homeowners' personal lines contracts novated during those periods. During the nine months ended


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September 30, 2013, we novated some of our retroceded contracts and returned the premiums ceded relating to those contracts, which offset the majority of the premiums ceded for three and nine months ended September 30, 2013.

Net Premiums Written

Details of net premiums written are provided in the following table:
                Three months ended September 30               Nine months ended September 30
                  2013                   2012                   2013                   2012
                       ($ in thousands)                              ($ in thousands)
Frequency $  144,025     98.4 %   $ 98,281    100.0 %   $ 386,403     94.2 %   $ 309,201     94.2 %
Severity       2,351      1.6            -        -        23,599      5.8        18,893      5.8
Total     $  146,376    100.0 %   $ 98,281    100.0 %   $ 410,002    100.0 %   $ 328,094    100.0 %

 Net Premiums Earned

Net premiums earned reflect the pro-rata inclusion into income of net premiums
written over the life of the reinsurance contracts. Details of net premiums
earned are provided in the following table:
                Three months ended September 30               Nine months ended September 30
                  2013                   2012                   2013                   2012
                       ($ in thousands)                              ($ in thousands)
Frequency $ 156,724     95.6 %   $ 111,886     96.0 %   $ 392,527     96.6 %   $ 333,931     95.9 %
Severity      7,167      4.4         4,671      4.0        13,835      3.4        14,228      4.1
Total     $ 163,891    100.0 %   $ 116,557    100.0 %   $ 406,362    100.0 %   $ 348,159    100.0 %

Premiums relating to quota share contracts are earned over the contract period in proportion to the period of protection. Similarly, incoming unearned premiums are earned in proportion to the remaining period of protection.

For the three months ended September 30, 2013, the frequency premiums earned increased by $44.8 million, or 40.1%, primarily as a result of our non-standard automobile contracts (motor liability and motor physical damage), which increased net premiums earned by $51.9 million. The increase was partially offset by a decrease of $4.9 million in commercial motor premiums earned as all commercial motor coverages were canceled during 2012. For the three months ended September 30, 2013, our personal lines premiums earned increased by $2.6 million primarily as a result of a new Florida homeowners' contract bound during the second quarter of 2013. For the three months ended September 30, 2013, our . . .

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