4 November 2016Cayman analysis

AM Best downgrades Greenlight despite its return to profit in Q3

Greenlight Capital Re’s net profits in the third quarter of 2016 were $30 million, compared to a net loss of $219.7 million for the same period of 2015.

In spite of this, ratings agency AM Best downgraded the financial strength rating of Greenlight Re from A to A-, attributing it to underwriting weakness.

Greenlight Re reported gross written premiums of $128.2 million in the third quarter, a small decrease from $134.6 million in the same period a year ago. Its net earned premiums were $112.8 million, an increase from $102.0 million reported in the prior-year period.

The Cayman and Ireland based company operates as a standalone hedge fund reinsurer, which operates without a sponsor.

The company’s underwriting income was $0.6 million, compared to an underwriting loss of $31.7 million in the third quarter of 2015.

Its combined ratio for the nine months ended September 30, 2016, was 105.3 percent, an improvement compared with the 115.5 percent it posted for the prior year period.

“We are pleased to report positive performance from both our underwriting and investment operations during the third quarter,” said Bart Hedges, chief executive of Greenlight Re. “While we saw a slight reduction in our reported premiums written, primarily due to our non-renewal of certain Florida home-owners business, we continue to find attractive opportunities to grow profitably.”

AM Best, however, has downgraded the financial strength ratings of Greenlight Reinsurance and its affiliate, Greenlight Reinsurance Ireland, to ‘A-‘ from ‘A’ and its long-term issuer credit ratings to ‘a-’ from ‘a’.

AM Best said the downgrade reflects Greenlight Re’s “less favourable underwriting results” in recent years, including results through June 30, 2016, which have fallen short of its long-term expectations.

In spite of its efforts to take action to remediate problematic contracts, Greenlight Re has shown an underwriting loss that underperforms most peers on its five-year trend through 2015, AM Best said.

The rating agency suggested that Greenlight Re faces increasing challenges in writing profitable business in a market with excess capacity and further competition from new reinsurance companies with a similar alternative investment strategy.

Although Greenlight Re’s capital footprint entails 100 percent common equity with no use of debt, AM Best said it also recognises the asset risk represented by its equity-based investment portfolio.

Commenting on the AM Best ratings decision, Hedges said: “We have experienced several years of adverse development on construction defect contracts, which have negatively affected financial year results. We have novated these contracts to limit further exposure to this business. The remainder of our underwriting portfolio continues to perform in line with our expectations.”

David Einhorn, chairman of the board of directors, said: “Our investment portfolio performed adequately during the [third] quarter.

“While we are disappointed with the rating action taken by AM Best, we will continue to leverage our underwriting relationships and strong capital position and focus on identifying and fostering new profitable opportunities.”