Greenlight Re outlook better after corrective actions but doubt remains

Cayman Islands-based reinsurer  Greenlight Capital Re is benefitting from the recent re-underwriting and investment actions taken to stabilise its results, according to ratings agency  AM Best, which has revised its outlook to stable from negative after more than two years.

AM Best had turned negative on the reinsurer's outlook in June 2019 expressing concern over its " track record of negative underwriting performance".

Greenlight Re returned to underwriting profitability in its recently announced second quarter 2021 results. Its combined ratio improved almost 5 percentage points to 96.5 percent, gross premiums written rose to $141.6 million, and underwriting income increased to $4.6 million, compared to an underwriting loss of $1.3 million in the prior year. However, the results were somewhat impacted by reserving actions on certain legacy contracts and COVID-19 losses.

AM Best believes that the group’s operating performance will continue to benefit from the recent re-underwriting and investment actions taken to stabilise results. Additionally, it expects sustained improvement in operating performance metrics, given the adjustments the company has made to its strategy including significant investments in its innovation arm.

The agency has given a financial strength rating of A- and long-term issuer credit ratings of a- to the reinsurer, reflecting its balance sheet strength, which AM Best assesses as "very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management (ERM)".

It noted that the company's consolidated surplus has decreased materially over the past five years, primarily due to the outsized losses generated by its investment portfolio in 2018, coupled with marginal underwriting results. Despite the significant losses, Greenlight Re's risk-adjusted capital position has remained at the strongest level, and AM Best expects the company to maintain risk-adjusted capital levels in line with its current ratings.

AM Best views Greenlight Re’s operating performance as "marginal, given its historically marginal and volatile investment returns and marginal underwriting performance". The agency anticipates that changes made to its alternative investment portfolio following a significant mark-to-market loss event in 2018 will help partially mitigate shareholders’ equity volatility during future adverse capital market events. Additionally, the group’s 2020 combined ratio, inclusive of corporate expenses, improved to 104.0 percent — the lowest result over the past five years — and compared favorably with the composite.

The agency sees the company's business profile as neutral. The company was incorporated in the Cayman Islands in 2004 and is one of the longest-tenured total return reinsurers. Through its two operating subsidiaries, it provides property/casualty reinsurance on a global scale. Historically, Greenlight Re was concentrated somewhat by cedant, geographically and by line of business; however, the company has taken steps to diversify its platform, including through significant investments in its innovation-related operations.

Additionally, Greenlight’s enterprise risk management (ERM) is deemed appropriate for the company’s business complexity and overall risk profile.

AM Best warned that negative rating action could occur if the company's investment performance is subject to significant downside volatility or if its risk-adjusted capitalisation declines materially. Negative rating action could occur if planned improvements in underwriting performance fail to materialise.

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