Greenlight Capital Re Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 6 speakers on the call.

Operator

Hello, and thank you for joining the Greenlight Capital Re First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. It's now my pleasure to turn the call over to Karen Daly, Greenlight Re's Investor Relations Representative and Vice President at The Equity Group. You may please go ahead, Karen.

Speaker 1

Thank you, Kevin, and good morning. I would like to remind you that this conference call is being recorded and will be available for replay following the conclusion of the event. An audio replay will also be available under the Investors section of the company's website at www.greenlightre.com. Joining us on the call today will be Chief Executive Officer, Simon Burton Chairman of the Board, David Einhorn and Chief Financial Officer, Sarah Marz Romer. On behalf of the company, I'd like to remind you that forward looking statements may be made during the call and are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Speaker 1

These forward looking statements are not statements of historical fact, but rather reflect the company's current expectations, estimates and predictions about future results and are subject to risks and uncertainties. As a result, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may impact future performance, investors should review the periodic The reconciliations to these measures can be found in the company's filings with the SEC, including the company's Form 10 Q for 3 months ended March 31, 2023. The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise, except as required by law. With that, it's now my pleasure to turn the call over to Mr.

Speaker 1

Simon Burton.

Speaker 2

Thank you, Karen. Good morning, everyone. Thank you for joining us. I'd first like to welcome Faramad Rama, who is joining his first earnings call as CFO Since his promotion effective April 1st. The CFO transition went well, which is not surprising as Faramars has been an integral member of the team for the past 16 years.

Speaker 2

He is now fully up to speed. For the Q1 of 2023, we reported growth in book value per share of 1.1 percent And net income of $5,900,000 despite each of our three pillars of underwriting, innovations and Silpi performing below our expectations for the quarter. Starting with the underwriting results. The combined ratio of 99.8% was impacted by 5.7 points of winter storm and convective storm losses, along with 5.6 points The storm losses relate to a single innovation U. S.

Speaker 2

Homeowners program Written in 2022 that experienced higher than anticipated volatility from a winter storm in late December and from convective storms in March. We had identified these concentration issues leading up to the renewal of the homeowners program at January 1, when we restructured at favorable terms. So this volatility is contained to a single policy that's now running off. Otherwise, our book of innovations underwriting risks is running well, and we expect that this is an isolated situation. The reserve pressure we experienced in the Q1 is in part coming from the auto class where claims severity continues to escalate.

Speaker 2

Auto insurers as a whole have struggled with rate adequacy in the face of extraordinary repair cost inflation. You will recall that we had almost completely exited this class by the middle of 2022. So we expect This pressure to be short lived with respect to our reserves. The theme of claim inflation is also present elsewhere in our reserves and is responsible for another portion of the deterioration. Our reserve duration is relatively short at under 3 years And this inflationary pressure is generally confined to a minority block of reserves and runoff.

Speaker 2

We grew net written premium by 25% in the first quarter to $175,000,000 which is the highest first quarter volume we have achieved under our new underwriting strategy. Some of the increases from the portion of the book that was repriced at January 1 at significantly better terms, including property, marine, specialty and multiline, which includes our Lloyd's FAL positions. We were also able to expand and diversify the overall book into a market that is supply constrained in many of the classes that we write. Renewals at April 1 were similarly compelling. We grew our Japanese catastrophe book as we saw rate improvements that exceeded 20% That's just one example.

Speaker 2

Given that we continue to see increases in reinsurance demand as CEDENCE attempt to reduce their own volatility, Coupled with persistent supply constraints, I believe that the outlook for our underwriting model is excellent for the rest of 2023 and into 2024. Moving on to our innovations business. InsurTech valuations continue to be relatively depressed. This provides us an opportunity to access attractive underwriting business via our partnership approach at compelling valuations. We completed 2 new investments during the quarter and had a small write down on one of our positions.

Speaker 2

Our Lloyd's Syndicate 3,456 is proving to be an attractive option for partners seeking risk capacity despite some bumps in navigating the Lloyd's onboarding processes. We have a strong pipeline of opportunities for the Seneca. Finally, we are pleased to welcome David Sigman, who joined last month as General Counsel. David comes to us with significant reinsurance experience and we are excited to have him on the team. Now, I'd like to turn the call over to David.

Speaker 3

Thanks, Simon, and good morning, everyone. The solid glass portfolio lost 1.1% in the Q1. Our longs contributed 8.9 To the gross return, shorts and macro cost us 9.0% and 0.3% respectively. During the quarter, the S and P 500 index advanced 7.5%. The Q1 was a challenging investment environment as many investments that performed well in 20 22 reversed in 2023.

Speaker 3

We repositioned the portfolio from bearish to neutral, while we await further economic developments. Long positions in Green Brick Partners, Kyndryl Holdings and Gold were the largest positive contributors to the quarterly result. Brighthouse Financial, A single name short position and a basket of housing sector shorts hedging some of our Green Brick exposure were the material detractors. Green Brick shares advanced 45% in the Q1, mostly as analysts' expectations for this year's earnings stopped coming down. It appears that the market is gaining confidence in the housing sector again after 2022's fear that higher interest rates would cause an imminent collapse.

Speaker 3

Greenberg remains well positioned. Its margins are the highest in the industry and it maintains an enviable land position in some of the country's best markets. Just last week, the company reported extremely strong new orders, revenues, gross margins and earnings that simply blew away consensus expectations that were formed During last year's housing slowdown, the stock appreciated another 40% so far this quarter. Kyndryl is an IT services business that was spun out to IBM in late 2021. Prior to the IBM positioned this unit as a loss leader in order to sell more hardware.

Speaker 3

This investment is a turnaround story as Kyndryl can now offer solutions from multiple vendors and is better positioned to raise pricing on the no margin contracts that are expiring in the next couple of years. With an enterprise value of 4,500,000,000 At $17,000,000,000 of revenue, Kyndryl trades for less than 0.3 times sales. Meanwhile, its peers trade for at least twice that multiple. We expect the shares to rerate over time as Kyndryl closes the margin gap with its peers. Gold advanced 8% in the quarter.

Speaker 3

The gain occurred after several bank failures as the market expectations for further rate hikes reversed into expectations of rate cuts Starting as soon as this summer, one concern is that the problems with the banks may force the Federal Reserve to prioritize preserving financial stability over Defeating inflation, causing the next leg up for inflation. A higher gold price appears to be taking some of that risk into account. Brighthouse Financial shares dropped by 14% in the quarter in response to the bank failures, partially caused by a few banks buying long duration bonds that sell in value when interest rates rose and the market sold off many companies in the insurance sector that also own long duration bonds. Even though Brighthouse is a beneficiary of higher rates by virtue of having very long duration liabilities, which are quite different from the short term The market decided to simply ignore this difference. We don't believe any of the concern is specific to Brighthouse.

Speaker 3

It is our view that rate cuts are unlikely to happen this And while the market is expecting them in the back half of the year, as such, we added to our interest rate positions by federal fund futures. Expressing this thesis directly means that we are only subject to the Central Bank's decisions for the balance of the year rather than being subject to the market's expectations. Tuesday, I presented our analysis on Vitesco Technologies at the SONE Conference. Vitesco is the Spin off of the powertrain unit from Continental AG. It is an auto parts supplier that is poised for enormous growth in its EV segment, where it supplies the key components of the drivetrain systems and other than batteries.

Speaker 3

Despite its leading edge technology position and important product wins With many leading EV makers, the shares trade cheaper than most other auto suppliers. The solid glass portfolio gained 3.4% in April and has returned 2.3% year to date through April. Net exposure in the investment portfolio was approximately 43% at the end of the Q1. We don't usually comment on mid month performance, but given the strong performance of Green Brick in May, this month is off to a strong start. Given the significant rate increases we achieved on the underwriting portfolio, we are cautiously optimistic that our combined ratio will continue to improve as Now I'd like to turn the call over to Farmer's to discuss the financial results.

Speaker 3

It is Farmer's first call as CFO, so many of you got to hear from him at our Investor Day last year.

Speaker 4

Thank you, David, and good morning, everyone. While I have been with Greenlight Re for several years, It is an honor to now serve as the company's Chief Financial Officer. I look forward to continue working closely with Simon and the rest of the highly talented team as we take advantage of the current market conditions to create value for our shareholders. Now turning to our results for the Q1 of 2023. Our net income for the quarter was $5,900,000 or $0.17 For diluted share, we reported underwriting income of $400,000 during the Q1 And a combined ratio of 99.8 percent compared to an underwriting loss of $7,700,000 And a combined ratio of 106.2 percent during the equivalent 2022 period.

Speaker 4

While the overall underwriting performance improved this quarter, the result was negatively impacted by $10,300,000 or 7.2 combined ratio points of catastrophe and weather related events. $4,100,000 of the cat losses related to winter storm Elliott, which hit the Northeast of the United States in late December 'twenty two. The severe convective storms in the month of March resulted in $4,100,000 of losses. The remaining $2,100,000 of catastrophe losses came from the earthquake in Turkey and Cyclone Gabriel in New Zealand. Adjusted for catastrophe event losses, our current year loss ratio decreased 7.4 percentage points to 55.1 percent compared to the same period in 2022.

Speaker 4

Excluding Winter Storm Elliott, We experienced $7,900,000 or 5.6 combined ratio points of unfavorable income of $5,200,000 during the Q1 of 2023. We lost $3,100,000 on our investment in the Solasglas Fund and earned $8,400,000 of other investment income, primarily from interest income earned on our restricted cash, which benefited from the higher interest rates compared to the same period in 2022. Total general and administrative expenses incurred during the quarter were $9,900,000 up From $7,200,000 in the Q1 of 2022. The increase was due primarily to non recurring expenses relating to legal fees And severance costs during the Q1 of 2023. We recognized $4,900,000 Foreign exchange gain in the Q1 of 2023 due primarily to a strong pound sterling.

Speaker 4

At the end of the first quarter, Our fully diluted book value per share was $14.75 an increase of 1.1% From December 31, 2022, and an increase of 8.1% from March 31, 2022. During the Q1, we repurchased $17,500,000 of our senior unsecured convertible notes. The remaining $62,000,000 of notes mature on August 1, 2023. We are actively working on plans Now, I'll turn the call back to the operator, who will open it up for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our Our first question is coming from Anthony Montalis from Dowling and Partners. Your line is now live.

Speaker 5

Hi, good morning. Simon, just a couple of questions for you on the underwriting side of the business. There was really strong property growth in Q1. Just wanted to know, is this a Good run rate for growth as we think about the rest of the year and that could be specific to property business or even broader for the whole portfolio.

Speaker 2

Hey, Anthony. So our property business is In part, some of the homeowners business that I mentioned earlier in the call and in part, Some of our cat retro positions that we established at oneone. So it's a bit lumpy In fairness, that's a considerable amount of that business is quota share, so should Right through the year, but I'm reluctant to guide you to any particular run rate on our property business Because it can come and go.

Speaker 5

That makes sense. And I appreciate the fact you were mentioning the reserve durations were relatively short term. Do you think these pressures are going to persist in future quarters, specifically on the auto? And I think there were pockets with workers' comp as well.

Speaker 2

Well, I think it's a good question and I think it's one that the entire industry is asking itself. So from an industry perspective, will these pressures I think so, yes. Although in fairness, I think we've already received The bulk of bad news on the inflationary pressure, and we should all be getting ahead of Re pricing our reserves based on the new inflationary outlook, temporary or long lived, whatever your view might be. With respect to our reserves though, and I think that's more your question, because the duration is so short and particularly on the auto side, We got out of that business almost entirely, almost a year ago, and it was tapering considerably before that. I would be surprised if that continues to kick for much longer.

Speaker 2

Quite apart from that answer, Look, at every point in time, we established our best estimate of reserves, and this is our best estimate of reserves. At no point Am I going to expect future deterioration? I think we've got it all.

Speaker 5

Okay. That's helpful. And if I may, I just have one more question. No, you pointed to underlying loss ratio improved 7 points in the quarter despite the reported combined ratio being Also improving 6 points, but on the underlying position, is this mostly due to the book Kind of shifting to property business or is there anything else to highlight here that would benefit the underlying results?

Speaker 2

Yes. I wouldn't say that it's necessarily a shift towards property. The property volume But a fair amount of that is rates and not exposure. If you look at our PML profile, it's not It's about the same for our peak perils. It's a little up in Japan where we did grow our book.

Speaker 2

So there's growth in the portfolio in property, but it's not that Considerable. A lot of it is rate, but there's growth pretty much everywhere through the book with the exception of perhaps workers' comp, Which we've taken a more cautious view of. The picture is really An underlying improvement in rates in almost every class that we write and the continuing diversification and build out I wouldn't necessarily focus on property or any individual class as being the driver of that.

Speaker 5

All right. Thank you so much. That's all I had to ask.

Speaker 2

You're welcome.

Operator

Thank you. Our next question is coming from David Schiff from Schiff Insurance Observer. Your line is now live.

Speaker 2

Hi, You had mentioned that you were going to looking into replacing the convertibles with fixed debt, Fixed rate debt. I was just wondering roughly what amount were you thinking? The other question is, is there really any reason that you need to have any debt whatsoever?

Speaker 4

Hi, David. It's Far Mars here. It's a good question. We started 5 years ago with convertible debts of $400,000,000 and we have now since then we purchased a And the remaining balance is about $62,000,000 So our current view is to look at Refinancing the outstanding debt balance. The discussions are progressing well, And we think we're going to close in the Q2.

Speaker 4

So size wise, we'll be looking to replace what our existing

Speaker 2

And I guess the second part of my question was, is there a reason that you need to have any debt?

Speaker 4

Look, I think we're in a market where we see opportunities on the underwriting side and we want You have as much liquidity and cash available to deploy in those markets. So, we are assessing until Always looking at opportunities for our capital structure. And at this time, we believe that this is the best option for us.

Operator

Thank you. There are no additional questions at this time. Should you have any follow-up questions, please direct them to Karen Daly of The Equity Group, Inc. At irgreenlightre. Ky.

Operator

And she will be happy to assist you. This now concludes Greenlight Re's Q1 2023 earnings conference call. Thank you. You may now disconnect.

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