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GLRE > SEC Filings for GLRE > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for GREENLIGHT CAPITAL RE, LTD.

Form 10-Q for GREENLIGHT CAPITAL RE, LTD.


5-May-2014

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 the three months ended March 31, 2014 and 2013 and financial condition as of March 31, 2014 and December 31, 2013. 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, 2013.

Special Note About Forward-Looking Statements

Certain statements in Management's Discussion and Analysis, 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, 2013. 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) 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 continuing development of strategic relationships and Greenlight Re's "A (Excellent)" and GRIL's "A- (Excellent)" ratings 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 March 31, 2014, 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 in 2014. U.S. employer health stop loss and non-standard private passenger automobile are stable at what we believe are profitable levels. 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.
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 vary, perhaps significantly, and are not necessarily indicative of our future results of operations.
Our investment portfolio had a net long exposure of 52.4% as of March 31, 2014. Equity markets traded in a tight range in the first quarter of 2014 with some indexes slightly up while others slightly down. Our net exposure increased during the quarter as we found new long and short investment opportunities. Our goal in 2014 remains to protect capital in an uncertain environment and to find investment opportunities on both our long and short portfolios that will generate positive returns. 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 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, 2013 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, if any, are presented under "Recently Adopted Accounting Standards" in Note 2 of the accompanying condensed consolidated financial statements.

Results of Operations

Three months ended March 31, 2014 and 2013

For the three months ended March 31, 2014, we reported a net loss of $8.9 million, compared to net income of $56.7 million reported for the three months ended March 31, 2013. Our net investment loss for the three months ended March 31, 2014 was $10.2 million, compared to a net investment income of $61.1 million reported for the same period in 2013. Our investment portfolio managed by DME Advisors, LP reported a loss of 0.7% for the three months ended March 31, 2014, compared to a gain of 5.8% for the same period in 2013. The underwriting income before general and administrative expenses for the three months ended March 31, 2014 was $6.5 million, compared to underwriting income of $1.9 million reported for the three months ended March 31, 2013. The increase in underwriting income for the three months ended March 31, 2014 was primarily due to a decrease in the loss ratio of our frequency business during the period. For the three months ended March 31, 2014, our overall composite ratio decreased to 94.1%, compared to 98.2% during the same period in 2013. General and administrative expenses increased for the three months ended March 31, 2014 to $6.5 million from $3.8 million for the three months ended March 31, 2013, primarily as a result of non-investment related foreign exchange loss of $0.3 million compared to a foreign exchange gain of $2.0 million for the same period in 2013. To a lesser extent, the increases in general and administrative expense related to increased personnel costs mainly related to employee bonuses.

Our primary financial goal is to increase the long-term value in fully diluted adjusted book value per share. For the three months ended March 31, 2014, the fully diluted adjusted book value per share decreased by $0.30 per share, or 1.1%, to $27.61 per share from $27.91 per share at December 31, 2013. For the three months ended March 31, 2014, the basic adjusted book value per share decreased by $0.34 per share, or 1.2%, to $28.05 per share from $28.39 per share at December 31, 2013.

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.


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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,
                                     March 31, 2014      December 31, 2013         2013         June 30, 2013      March 31, 2013
                                                         ($ in thousands, except per share and share amounts)
Basic adjusted and fully diluted
adjusted book value per share
numerator:
Total equity (U.S. GAAP)            $     1,073,194     $       1,086,304     $  1,000,595     $      941,216     $      910,802
Less: Non-controlling interest in
joint venture                               (29,512 )             (34,709 )        (33,959 )          (32,218 )          (31,326 )
Basic adjusted book value per share
numerator                                 1,043,682             1,051,595          966,636            908,998            879,476
Add: Proceeds from in-the-money
stock options issued and
outstanding                                  20,297                16,028           18,462             18,528             18,768
Fully diluted adjusted book value
per share numerator                 $     1,063,979     $       1,067,623     $    985,098     $      927,526     $      898,244
Basic adjusted and fully diluted
adjusted book value per share
denominator:
Ordinary shares issued
and outstanding for basic adjusted
book value per share denominator         37,213,693            37,046,814       36,877,407         36,872,110         36,822,176
Add: In-the-money stock options and
RSUs issued and outstanding               1,326,596             1,210,731        1,451,408          1,457,408          1,477,908
Fully diluted adjusted book value
per share denominator                    38,540,289            38,257,545       38,328,815         38,329,518         38,300,084
Basic adjusted book value per share $         28.05     $           28.39     $      26.21     $        24.65     $        23.88
Fully diluted adjusted book value
per share                                     27.61                 27.91            25.70              24.20              23.45

 Gross Premiums Written

Details of gross premiums written are provided in the following table:
                   Three months ended March 31,
                    2014                   2013
                         ($ in thousands)
Frequency   $ 102,085     85.9 %   $ 114,790     90.4 %
Severity       16,816     14.1        12,174      9.6
Total       $ 118,901    100.0 %   $ 126,964    100.0 %

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

For the three months ended March 31, 2014, our frequency gross premiums written decreased by $12.7 million, or 11.1%, compared to the same period in 2013. The decrease primarily related to the motor liability and physical damage lines which together decreased by $24.2 million as a result of our decision to not renew a significant non-standard automobile contract due to highly competitive reinsurance pricing and uncertainty about the ceding insurer's ability to continue producing profitable business. Additionally, we wrote no workers' compensation premiums during the quarter since we had commuted a multi-line contract during 2013, which accounted for $3.3 million of the decrease in gross written premiums during the three months ended March 31, 2014. The decreases were offset by an increase of $7.6 million in the specialty health line, exclusively relating to employer health stop-loss contracts, and an increase of $4.1 million in the personal line, exclusively relating to the Florida homeowners' insurance contracts.

For the three months ended March 31, 2014, the severity gross premiums written increased by $4.6 million, or 38.1%, to $16.8 million, compared to $12.2 million during the same period in 2013. The severity premiums written during the first quarter of 2013, included a $3.5 million reversal of reinstatement premiums in conjunction with the elimination of loss reserves relating to super-storm Sandy in the first quarter of 2013. There were no severity premium reversals during the first quarter of 2014.


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During the first quarter of 2014, we renewed several of our existing catastrophe retro contracts and entered into two new relationships. We also decided to not renew an expiring catastrophe retro contract due to inadequate pricing.

Premiums Ceded

For the three months ended March 31, 2014, premiums ceded were $5.9 million compared to negative $4.0 million for the three months ended March 31, 2013. The negative premiums ceded for the three months ended March 31, 2013 were primarily due to retroceded contracts that we novated and returned the premiums ceded relating to those contracts. During the three months ended March 31, 2014, the increase in ceded premiums were primarily due to a new retroceded contract entered into in order to reduce our net exposure to natural peril catastrophe events.

Net Premiums Written

Details of net premiums written are provided in the following table:
                   Three months ended March 31,
                    2014                   2013
                         ($ in thousands)
Frequency   $  99,898     88.4 %   $ 118,768     90.7 %
Severity       13,063     11.6        12,174      9.3
Total       $ 112,961    100.0 %   $ 130,942    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 March 31,
                    2014                   2013
                         ($ in thousands)
Frequency   $ 105,418     94.4 %   $ 107,912     98.6 %
Severity        6,271      5.6         1,559      1.4
Total       $ 111,689    100.0 %   $ 109,471    100.0 %

Premiums relating to quota share contracts and excess of loss 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 March 31, 2014, the frequency net premiums earned decreased by $2.5 million, or 2.3%, compared to the same period in 2013. The decrease primarily related to the workers' compensation line and general liability line which decreased by $11.3 million and $3.5 million, respectively, as a result of a multi-line contract commuted during 2013. The decreases were offset by increases of $4.0 million relating to solicitors' professional indemnity contracts, $3.0 million relating to non-standard motor liability contracts, $2.9 million relating to employer health stop-loss contracts and $2.6 million relating to Florida homeowners' insurance contracts. While we did not renew a significant non-standard motor liability contract during the first quarter of 2014, we expect the impact on earned premiums will be more prominent in future quarters of 2014.

For the three months ended March 31, 2014, severity net premiums earned were $6.3 million compared to $1.6 million for the same period in 2013. The increase of $4.7 million, or 302.2%, was partially due to the reversal of reinstatement premiums in the first quarter of 2013, and partially due to the new and renewed catastrophe retro contracts bound during the first quarter of 2014.


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Losses Incurred

Losses incurred include losses paid and changes in loss reserves, including
reserves for IBNR, net of actual and estimated loss recoverables. Details of net
losses incurred are provided in the following table:

                   Three months ended March 31,
                   2014                   2013
                         ($ in thousands)
Frequency   $ 66,184     98.2 %   $ 76,823     115.9  %
Severity       1,179      1.8      (10,545 )   (15.9 )
Total       $ 67,363    100.0 %   $ 66,278     100.0  %

We establish reserves for each contract based on estimates of the ultimate cost of all losses, including losses incurred but not reported. These estimated ultimate reserves are based on reports received from ceding companies, industry data and historical experience as well as our own actuarial estimates. Quarterly, we review these estimates on a contract by contract basis and adjust as we deem appropriate to reflect our best estimates based on updated information and our internal actuarial estimates. We expect losses incurred on our severity business to be volatile depending on the frequency and magnitude of catastrophic events from year to year.
For the three months ended March 31, 2014, the total losses incurred on frequency contracts decreased by $10.6 million, or 13.8%, compared to the same period in 2013, as a result of a multi-line contract (workers' compensation and general liability) commuted during 2013. The decrease was partially offset by increases in losses incurred relating to the motor liability, specialty health and professional lines due to the increase in earned premiums for these lines. Losses incurred as a percentage of premiums earned (i.e. referred to as the loss ratio) fluctuates based on the mix of business, and the favorable or adverse loss development on our larger contracts. For the three months ended March 31, 2014 and 2013, the loss ratios for our frequency business were 62.8% and 71.2%, respectively. The lower loss ratio for the first quarter of 2014 was primarily attributable to the commuted multi-line contract for workers' compensation and general liability lines. However, during the first quarter of 2014, the loss ratio on the specialty health line increased significantly due to adverse loss development on a prior year employer medical stop-loss contract. For the three months ended March 31, 2014 and 2013, the loss ratios for our severity business were 18.8% and (676.4%), respectively. During the three months ended March 31, 2013, loss reserves of $15.0 million relating to super-storm Sandy were reversed which resulted in negative losses incurred and a negative loss ratio for the three months ended March 31, 2013. Excluding the effect of the loss reserve reversal (and the corresponding reversal of reinstatement premiums), the severity loss ratio for the three months ended March 31, 2013 was 99.9%. This included a $4.0 million increase in loss reserves on a casualty clash contract. By comparison, during the first quarter 2014, our severity business was not impacted by any catastrophe losses or adverse loss development. The severity loss ratio of 18.8%, and the incurred losses of $1.2 million, related to attrition loss reserves on non-catastrophe exposed business.

Losses incurred can be further broken down into losses paid (recovered) and changes in loss and loss adjustment expense reserves as follows:

                                                    Three months ended March 31,
                                             2014                                   2013
                               Gross        Ceded         Net         Gross        Ceded         Net
                                                          ($ in thousands)
Losses paid (recovered)      $ 68,728     $   (946 )   $ 67,782     $ 60,002     $ (1,851 )   $ 58,151
Change in loss and loss
adjustment expense reserves    (1,055 )        636         (419 )     (5,192 )     13,319        8,127
Total                        $ 67,673     $   (310 )   $ 67,363     $ 54,810     $ 11,468     $ 66,278

For the three months ended March 31, 2014, our net losses incurred on prior period contracts decreased by $1.5 million, which primarily related to the following:

?            $4.9 million of favorable loss development relating to non-standard
             automobile business, primarily as a result of better than expected
             loss development noted on all of our non-standard automobile
             contracts after a detailed


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review of existing claims data received from the clients, audits of claim files . . .

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