Greenlight Capital Re - Q2 2023

Transcript

Operator (participant)

Thank you for joining the Greenlight Capital Re's second quarter earnings conference. At this time, participants are in a listen-only mode. A question and answer session will follow the formal remarks. You may press star one at any time during the call to be placed in the question queue. 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. It is now my pleasure to turn the call over to David Sigman, General Counsel at Greenlight Re. You may begin.

David Sigmon (General Counsel)

Thank you, Diego. Joining us on the call today will be Chief Executive Officer, Simon Burton, Chairman of the Board, David Einhorn, and Chief Financial Officer, Faramarz Romer. On behalf of the company, I'd like to remind you that forward-looking statements may be made during this call and are intended to be covered by the safe harbor provisions of the Federal securities laws. These forward-looking statements 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 reports that are filed by the company with the SEC from time to time. Additionally, management may refer to certain non-GAAP financial measures.

The reconciliations to these measures can be found in the company's filings with the SEC, including the company's Form 10-Q for the second quarter ended June 30th, 2023. The company undertakes no obligation to publicly update or revise any forward-looking statements. With that, it is now my pleasure to turn the call over to Simon.

Simon Burton (CEO)

Thanks, David. Good morning, everyone. Thank you for joining us. For the second quarter of 2023, we reported strong growth in book value per share of 9.9% and net income of $49.9 million. This result was led by outperformance in the SILP Fund, along with contributions from our underwriting operations and other investment income. Starting with the underwriting results, the combined ratio of 96.2% was impacted by 7.3 points of catastrophe losses, primarily severe storm losses in the US. Individually, these storms aren't large enough to attach to catastrophe layers. Instead, as we mentioned on our Q1 call, we are seeing these claims through our exposure to a single homeowner's property program.

The severe storm activity in the US has been extraordinarily high since late December of 2022, although we expect to see a rapid performance improvement in this class as rate increases accelerate and severe storm frequency abates in the second half of the year. Severe storms aside, our performance is exactly as I would expect. We have taken full advantage of the hard market conditions, and we are starting to see the improvement in rates reflected in our combined ratio, excluding catastrophes. We expect to see continued improvements as business written in 2023 earns through over the next few quarters. Turning to our top-line production, we grew net written premium in the second quarter to $145.2 million, an increase of 13.8% compared to the second quarter of 2022.

Important to note, however, is that the growth is not spread evenly across all classes. We have identified exceptional margin opportunities in specific areas such as commercial property, which includes property catastrophe, and in marine and other specialty lines. In these classes, we grew net written premium by an average of 67% compared to the second quarter of 2022. Conversely, our net written premium reduced materially in two areas. First, in workers' compensation, we are more cautious about future inflationary risk than the market clearing price seems to imply. Second, the reduction in the financial class is driven more by our timing in mortgage business, which can be lumpy from a top-line perspective as we periodically replace maturing tranches of exposure. We are still generally positive about the mortgage class and expect to add new exposure over the coming year.

As we consider our underwriting outlook, it is excellent overall. We have not seen a significant increase in the supply of rated or ILS capital, which appears to be constrained by historic performance concerns. We believe that there is latent demand for catastrophe reinsurance due to affordability issues, which should unlock as property insurance rates increase. This demand will be bolstered by upwards revisions in vendor cat model assumptions. Turning to a brief update on our innovations business. We made three new investments during the quarter, each characterized by a vision for differentiated insurance products that we believe could ultimately strengthen our underwriting business. Our investment carried values did not change materially during the quarter as there were few measurement events, although our partners continued to execute their business plans.

Our innovations platform is an attractive and differentiating driver of our business model, and it is a key element of our long-term strategy. Finally, I'd like to thank our shareholders for the vote of confidence reflected in all of our annual general meeting proposals passing last week. This included re-election of all directors, approval of a new stock incentive plan that will continue to promote the interests of the company and our shareholders by directly linking compensation with company performance for years to come, and elimination of the company's previous dual-class share structure, which simplifies and improves our capital structure. We also welcome Daniel Roitman, who brings decades of financial services and senior leadership experience as a valuable addition to our board.

Dan is, of course, already intimately familiar with our company, thanks to his years of service as an alternate director, as well as a director of our Irish subsidiary. I congratulate Dan and look forward to working with him in this new capacity. Now I'd like to turn the call over to David.

David Einhorn (Chairman of the Board)

Thanks, Simon, and good morning, everyone. Our loans contributed 18% and macro added 0.3%. Our single-name short portfolio and index shorts detracted 4.3% and 1.2%, respectively. During the quarter, the S&P 500 index advanced 8.7%. Longs and Green Brick Partners, CONSOL Energy, Tenet Healthcare, and our U.S. interest rate derivatives were the largest positive contributors to the quarterly result. In S&P 500 index short, two single-name short positions in gold were our largest detractors. Green Brick shares advanced another 62% in the second quarter, bringing its 2023 first half return to 134%. The company posted exceptional first quarter results, beating on new orders, closings, and bottom line EPS.

Sell side analysts have been taking up current year earnings expectations all year, as consensus estimates began 2023 at $3.17 per share, and as of yesterday, were $5.16 per share. The company reported second quarter numbers last night, again, dramatically exceeded consensus estimates. CONSOL Energy returned 19% during the second quarter. With its earnings release, the company updated its capital allocation strategy and guided to a new policy, returning at least 75% of its free cash flow to investors, with a preference for stock buybacks over cash dividends. Tenet Healthcare shares gained 37% during the quarter, as the company announced first quarter results that beat expectations and also raised estimates for the remainder of the year, as the ambulatory service center strategy continues to show progress.

During the quarter, the market came around to share our belief that the Federal Reserve is unlikely to cut interest rates this year, which benefited our U.S. rates macro position. We maintained our net exposure within a band that we deem to be neutral. The first half of 2023 was an extremely difficult period for shorting, as animal spirits returned to the anti-value pockets of the market. While inflation has been moderating, we expect that it will remain stickier than the market expects and has a reasonable chance to re-accelerate from here. If so, this will complicate the job of the Fed in the second half of the year and adds risks that the growing complacency on inflation could need to be reevaluated by the market. As a result, we've added some equity index shorts.

The Solasglas portfolio lost 0.7% in July and has returned 8.9% year to date in 2023. Net exposure in the investment portfolio was approximately 40% at the end of July. As a result of the shareholder vote, we collapsed the company's dual-class structure and further simplified the capital structure by repaying the convertible notes. I now hold 17.7% of the ordinary shares. We're pleased with the progress we've made at Greenlight Re in 2023, and while there's a wide range of potential outcomes in the equity markets at the current juncture, we remain constructive with our ability to generate good risk-adjusted returns. Now I'd like to turn the call over to Faramarz to discuss the financial results.

Faramarz Romer (CFO)

Thank you, David, and good morning, everyone. Our net income for the second quarter of 2023 was $49.9 million, or $1.32 per diluted share, compared to a net income of $14.8 million, or $0.37 per diluted share in the comparable period in 2022. For the first half of 2023, we earned net income of $55.7 million, or $1.49 per diluted share, compared to a net income of $9.1 million, or $0.23 per diluted share in the first half of 2022.

We reported an underwriting income of $5.4 million during the second quarter and a combined ratio of 96.2%, compared to an underwriting income of $9.3 million and a combined ratio of 91.6% during the equivalent 2022 period. The underwriting income was impacted by $10.2 million or 7.3 combined ratio points of catastrophe and weather events related to the severe storms in the U.S. during the second quarter of 2023. By comparison, we had no cat losses during the same quarter of 2022. Adjusting for catastrophe event losses, our current year loss ratio decreased 1.7 percentage points to 56.1%, compared to 57.8% during the comparable period in 2022.

Our net written premiums increased by $17.6 million, or 13.8% to $145.2 million compared to the same quarter in 2022. The net earned premiums increased by $29.7 million or 27% compared to the same quarter in 2022. I will now briefly discuss the second quarter performance for each category: property, casualty, and specialty. Within our property book, we saw an increase in net premiums written of $9.5 million, or 56.5%, mainly driven by commercial property business. The property book was negatively impacted by the US severe storms, primarily related to one program, as Simon mentioned. As a result, the composite ratio for the property business was 122.2% for the quarter, compared to 72.6% in 2022.

Our casualty net premiums written grew by $9 million, or 11.9%, primarily driven by general liability business. The growth in general liability business was partially driven by our innovation partnerships and partially through new contracts bound in 2023. This increase was net of the reduction in the workers' compensation line, as Simon mentioned. The composite ratio for the casualty business improved to 91.4% in this quarter, compared to 92.8% during the second quarter of 2022. Our specialty net premiums written was down slightly by $1 million, or 2.8%. The decrease was due to fluctuations in our mortgage premiums, as Simon mentioned earlier. This decrease was mostly offset by growth in our marine and energy business.

The composite ratio for the specialty business improved to 76.7%, compared to 84.0% during the second quarter of 2022. We reported total net investment income of $42.2 million during the second quarter of 2023, compared to $17.2 million for the second quarter of 2022. We earned $32.8 million from our investment in the Solasglas Fund and earned $9.4 million of other investment income, primarily from interest income earned on our restricted cash, which benefited from higher interest rates compared to the same period in 2022. Other non-underwriting income was $7.6 million during the second quarter of 2023.

Other income primarily related to investment income on the funds withheld by the Lloyd's syndicates and foreign exchange gains, driven by the strengthening of the pound sterling during the quarter. Total general and administrative expenses incurred during the quarter were $10.10 million, up from $8.1 million in the second quarter of 2022. The increase related primarily to personnel costs, professional fees, and technology expenses. At the end of the second quarter, our fully diluted book value per share was $16.21, an increase of 9.9% from March 31, 2023, and an increase of 15% from June 30, 2022. As we previously announced, the company has secured a three-year Term Loan Facility for the primary purpose of repaying the Convertible notes that matured on August 1, 2023.

The details of the loan agreement were included in our Form 8-K, filed on June 22nd, 2023. Now I'll turn the call back to the operator, who will open it up for questions.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. If you would like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You can press star two to remove your line from the question queue. Our first question comes from Benjamin Billiard with Pergam. Please state your question.

Benjamin Billiard (Portfolio Manager)

Yes, hello, I hope you can hear me fine. Two questions, please. First question on reserve developments. You, you booked, you know, $12 million adjustment in Q1, a further $1.8 million negative adjustment in Q2. You try to like to get a comment from you on, you know, the, the, the level of, you know, prudency embedded in, into the new set of assumptions. So that's the first question. Second question, in the release you noted, you know, continued improvement in pricing in the July 1st renewal season. I, I was curious whether, you know, this was basically a sequential improvement compared to the January 1st conditions. So whether, you know, the, the environment is improving further from the good, the good environment, as noted in January.

Yeah, final question on capital allocation, can you rank for us, basically your priority between growing the business and, and the share buyback? That's, that's all for me. Thank you.

Simon Burton (CEO)

Good morning, Benjamin, this is Simon. On your first question on reserve adequacy, or redundancy, look, at every point in time, we estimate and evaluate our reserves at best estimate. And that is a consistent objective. They vary from time to time because we get new, new data, which causes us to, to amend our best estimates. But at every point in time, we strive for consistency in the quality of reserves around our best estimate valuation.

... I, I will add one observation, which is in a period of excess inflation, which is what we've experienced over the last year or more, I, I appreciate that inflation appears to be abating somewhat today. Everybody in our industry gets reserves wrong, usually on the low side. We're simply not pricing in that excess inflation, as we write products, you know, four or five years ago. All other things equal, in that period of excess inflation, you might expect a bit of upwards pressure on the reserves for all good reasons. Back to my original answer. At every point in time, we strive for best estimate. On the second question, the pricing at July 1st and whether there's a sequential improvement from January, it's a good one.

The, the fact is, the business that's placed in July is of a different characteristic to January, particularly on the cat side. The cat business in January tends to be in a global cats, except for Japan, which tends to be April first and July and June and July is Florida, Southeast. June and July were dominated by Southeast cat placements, Florida, primarily. It's very difficult to compare sequential changes in quality of pricing in different tranches of business. There was significant improvements in July and June in Florida, no doubts, over and above last year. Would I judge those to be sequentially better than January? Subjectively, perhaps. I think the upwards pressure on pricing still remains. There's all sorts of reasons for that.

Demand and supply is not flooded back into the market, as I said in my prepared remarks. We, we've not seen a full reemergence of ILS capacity. You know, vendor models are ticking up, although that did come a bit too late for the June renewals in Florida. There are a number of reasons why both supply is constrained from investor sentiment and demand is, is propped up by a combination of improved affordability and, you know, model re-estimation. We're, we're very optimistic across our book, not just in cat, about the prospects for our business as we go through the next six to twelve months.

Whether that will manifest as, you know, an equal sort of sequential assessment, in other words, renewals are as good as they were a year ago, that would be perfectly fine. We're in a great spot. There may be some improvements here and there. Certainly one or two areas of one or two smaller classes of business had some way to go, notably satellite. There was a very large satellite loss at the beginning of July, which I expect will, will give us significant tailwind in that, in that class, which currently is very small for us. Very optimistic overall. On your last question on capital allocation, and the priority over, I believe, operational deployment versus share buybacks.

I've we've had this question a number of times, and we've, we've always answered the same way, which is entirely truthfully, which is that we evaluate this equation for the benefit of our shareholders at all points in time. It's a, it's a, it's a standing conversation with the board of directors, and we determine what is in the best, the best interests of our shareholders at each, at each stage. We, we appreciate and we're mindful through that process that the share buyback proposition have been, has been exceptionally good. An observation I'd have over the last 6-12 months is the operational opportunity has only increased. There's no doubt about that. Multiple has improved somewhat.

On a relative basis, you might expect that conversation to be a little easier in favor of the operational opportunity relative to a year ago. Again, you know, we commit to performing that assessment on an ongoing basis, and we will always keep shareholder objectives and interests at the front of our minds.

Benjamin Billiard (Portfolio Manager)

Perfect. Thank you.

Simon Burton (CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, to ask a question, Press star one on your telephone keypad. We'll pause for a couple moments. 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 at [email protected], and she will be happy to assist you. This now concludes Greenlight Re's second quarter 2023 earnings conference call. Thank you. You may now disconnect.