Earnings Call Transcript - GLRE Q1 2022

Operator, Operator

Thank you for joining the Greenlight Re Conference Call for the First Quarter of 2022 Earnings. The company would like to remind you that any forward-looking statements made during this call are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but rather reflect the company's current expectations, estimates, and predictions about future results and events, and they are subject to risks, uncertainties, and assumptions, including those outlined in the company's Form 10-K for the year ended December 31, 2021, and other documents filed by the company with the SEC. If any of the risks or uncertainties arise, or if the company's assumptions prove incorrect, actual results may differ significantly from what is projected. The company is not obligated to publicly update or revise any forward-looking statements except as required by law. Following the prepared remarks, we will have a question-and-answer session. I will now turn the call over to Greenlight Re's CEO, Mr. Simon Burton. Please go ahead, sir.

Simon Burton, CEO

Good morning everyone and thanks for joining the call. The first quarter of the year used to be considered a benign period for the reinsurance industry, with only the occasional large loss; those days seem destined now. Two years ago, we were contemplating the impact from the onset of COVID, last year Winter Storm Uri set new weather records, and this year, Ukraine has experienced a massive ground invasion, while Russia is facing extensive economic sanctions. During the first quarter, we recognized $13.6 million of losses from the Russian-Ukrainian conflict, which contributed 10.8 percentage points to our 106.2% combined ratio. While the conflict's impact on our combined ratio is substantial, it reflects the growth in our short-tailed specialty business that is otherwise performing well. The Russian-Ukrainian conflict is highly complex, particularly as it relates to the impact of Russian sanctions. I'd like to highlight a few points about our reserve estimates. The loss estimate relates to an IBNR provision on losses incurred up to March 31, 2022. We have not received any reported losses to date. Our estimate includes an assessment of losses incurred in both Ukraine and Russia. A portion of our exposure to the conflict, including marine, energy, political violence, terror, and whole account risks, is protected by a retrocessional policy that attaches at $10 million and provides $20 million of coverage to us. The first quarter loss estimate does not reach the attachment point of this cover. At the start of my remarks, I referred to the apparent disappearance of periods without significant industry events. Not surprisingly, we are seeing the withdrawal of reinsurance capacity in response to the poor profitability of the industry over the past few years. The other side of this picture is that market conditions continue to improve. Market studies have suggested that rates overall have improved in each of the last 17 quarters. The Russian-Ukrainian conflicts and reduction in underwriting capital are likely to continue supporting that trend, at least with respect to the short tail-specialty classes. Despite the scarcity of event-free quarters we've seen recently, we believe that no trends continue forever. Looking forward, as our non-renewed lower margin business runs off over the next few quarters, we are expecting to see the impact of a better business mix and continued rate improvement reflected in our results. In April, we launched the Greenlight Innovation Syndicate 3456 under the Lloyd's syndicates-in-a-box initiative. Our innovations unit is central to the company's strategy, and the syndicate will help us support our existing partnerships as well as grow our insurtech portfolio. During the first quarter, we made additional investments and generated $4 million of unrealized gains reflecting the continued strong market interest in our innovation partners. Now I'd like to turn the call over to David.

David Einhorn, CIO

Thanks, Simon, and good morning everyone. The Solasglas fund returned 1.7% in the first quarter. Shorts, including index positions contributed 4.9%, macro contributed 3.5% and longs detracted 6%. During the quarter the S&P 500 Index declined by 4.6%. Our long positions in CONSOL Energy, Rheinmetall, and Teck Resources, and our macro position in inflation swaps were our largest positive contributors. Green Brick Partners, our largest long position, was our largest detractor. CONSOL Energy and Teck Resources stock prices advanced 66% and 42% respectively, following price surges for metallurgical and thermal coal. Rheinmetall stock price climbed by 131% in the first quarter as Russia's invasion of Ukraine dramatically changed the outlook for European defense spending. About three quarters of Rheinmetall's business is military-related. Our position in long inflation swaps benefited as the market began to price in its doubts about the Fed's ability to return inflation to its 2% target. Even as the Fed adjusted the market's expectation to a faster tightening cycle, inflation expectations continue to increase. This benefited our gold position as well. Green Brick shares fell 35% during the first quarter, with nothing company-specific to account for the drop. In fact, the blowout earnings released last night indicate that current business performance is excellent. However, the homebuilding sector derated as the market formed a view that the sharp rise in interest in mortgage rates will lead to a repeat of the 2008 housing crisis. We believe that the comparison and the fear accompanying that to be misguided. Due to a decade of underdevelopment, the US is experiencing a severe shortage of housing. Further, homebuilders currently have low financial leverage, there is significantly less speculation, and lending underwriting standards are tighter. While higher mortgage rates might have an impact on demand, at this point, homebuilders are more constrained by supply. We continue to be focused on the global inflation problem, and now at least we believe that the Fed understands the problem. While it sounds serious about fighting it, the Fed has done little to help the problem other than talk about it. It's kind of like the opposite of the main rule from the movie Fight Club. If the Fed were serious about stopping the inflation problem, we believe it would be as aggressive and creative in tightening as it was when it was easing. While inflation is set to drop from its current 8.5% year-over-year rate, we do not expect the Fed to be sufficiently aggressive in fighting it. I believe inflation will remain persistently above the 2% target. The Solasglas portfolio returned 6.9% in April and has returned 8.7% year-to-date. Net exposure was approximately 26% net long at the end of the first quarter and roughly 30% at the end of April. Now I'd like to turn the call over to Neil to discuss the financial results.

Neil Greenspan, CFO

Thank you, David. And good morning. At the end of the first quarter, our fully diluted book value per share was $13.65, a decrease of 2.4% from December 31, 2021. Our net loss for the quarter was $5.7 million or $0.17 per share. We reported an underwriting loss of $7.7 million during the first quarter and a combined ratio of 106.2%. The Russian-Ukrainian conflict contributed $13.6 million or 10.8% to the combined ratio. The quarter's underwriting results included adverse prior year development with the net financial impact of $2.6 million. Adjustments to our COVID-19 estimates represented roughly half of this development. Gross premiums written were $145.9 million for the quarter, a decrease of 14% from the first quarter of 2021, due primarily to our decision to reduce our participation in motor and workers' compensation contracts. This decrease was partially offset by growth in specialty, general liability, and multiline business, including premium generated by the company's innovations partners. Premiums ceded were $6.0 million in the first quarter of 2022 and were insignificant for the three months ended March 31, 2021. During 2022, we entered into new retrocession agreements, primarily to reduce our exposure to large marine and energy loss events and certain property losses. We reported total net investment income of $7.7 million during the first quarter. We earned $4.1 million from our investment in the Solasglas fund and recognized an additional $3.7 million of other investment income, primarily from our innovations investments. Total general and administrative expenses incurred during the quarter were $7.2 million, down slightly from $7.5 million in the first quarter of 2021. Now I'll turn the call back to the operator and open it up to questions.

Operator, Operator

We will now start the question-and-answer session. Our first question will come from David Bail with Enobia Investments. Please proceed.

Unidentified Participant, Analyst

Hello, thank you for the opportunity to ask questions. I wanted to start with the insurtech. I see it's grown from about 7% of the premiums to 10%. I was wondering if you could provide an indication of where we might be in the next 12 to 24 months. It seems like great progress.

Simon Burton, CEO

Hey Dave, it’s Simon. So the insurtech, the innovations unit is substantial to the organization, to our operations as I’ve mentioned today and in the last several quarters. It is growing, we are growing it steadily and carefully on the insurance side. I can't indicate where it will be; we never forecast our financial metrics in any case. But I will tell you that it is my objective that innovation is increasingly important in the context of our overall operations if that helps.

Unidentified Participant, Analyst

Okay. A little bit. The 10% is it focused in one or two of the larger ones or is it kind of spread out? I imagine it's in the more mature ones. Can you comment on that?

Simon Burton, CEO

We currently have about 20 partnerships, which are at various stages of development. Our first partnership in the investment area began in early 2018, and we have been gradually expanding our portfolio since then. The timing of maturity for these partnerships will vary; some partners are no longer in the early stages but are instead developing their capabilities, including building teams and launching products. As a result, growth will occur at different rates. However, we do have a significant portfolio, and most of these partnerships are expected to offer us opportunities in the insurance sector over time. Regarding our current volume, there are some technical issues.

Operator, Operator

Pardon me ladies and gentlemen, it appears that we have reconnected our speaker line. Speaker, please go ahead and proceed.

Simon Burton, CEO

David, I apologize for that. It’s Simon here. We were discussing the insurtech business as it develops over time and the components of our current portfolio. We currently have about 20 partnerships in innovation-related investments, and a significant number of these will eventually allow us to engage in the insurance business as it evolves, although they are all at different stages of development. We made our initial investments in 2018 and our latest investments a few weeks ago. Presently, there is some inconsistency in our current portfolio, but that will greatly stabilize in the coming quarters. I anticipate that as more of our partners launch their products and bring their MGAs online, we will be able to tap into the insurance opportunities. Does that clarify things?

Unidentified Participant, Analyst

Okay. It does help. Thank you. Yeah. My other question was to the bond debt. Can you comment or at least talk as much as you can about the plan to refinance it or pay it down? And how that looks over the next 12 months? Thank you.

David Einhorn, CIO

Sure, David. This is David and nice to hear from you. We're quite aware of the bond maturing in August and we've begun thinking about what to do about it. We will approach it in an orderly and timely fashion.

Unidentified Participant, Analyst

Okay. My other question is regarding the net position, and I’m looking for clarification. On your website, you mention the April increase of $16 million, which is a 6.9% rise. When you divide 6.9% by $16 million, it suggests you have approximately $231 million net invested. However, the balance sheet indicates $151 million. Can you explain the discrepancy between the net assets and the GLRE LP share, particularly regarding the net assets?

David Einhorn, CIO

Yeah. We're investing about 50% of the surplus. So just look at the shareholder equity and divide it by two.

Unidentified Participant, Analyst

How was there a $16 million gain, though on a 6.9% mark?

David Einhorn, CIO

If you take the surplus and divide it by two and compare that to the profit, it was about 6.9%.

Unidentified Participant, Analyst

Okay. So the equity is roughly $460 million. Okay.

David Einhorn, CIO

Sure.

Unidentified Participant, Analyst

Thank you. Okay. I'll get back in the queue. I'm sure there are other questions. But I appreciate your guys' hard work. And David, amazing monthly outperformance, and on the insurance side, just touching on the Ukraine-Russian situation is tough for everybody. Anyway, thank you very much.

Simon Burton, CEO

Thank you, David.

Operator, Operator

Our next question will come from Daniel DeYoung, a private investor. Please go ahead.

Unidentified Participant, Private Investor

Hi, my question is regarding the Solasglas fund and how much surplus is in that. I think on the last call you said you're looking at increasing the percentage managed, has there been any progress on that? And is the lack of share buybacks related to the idea of managing a larger percentage of surplus?

David Einhorn, CIO

Yeah, this is David. I raised the question again with the Board, and as yet there hasn't been a change in that determination. I expect it will come up again at subsequent Board meetings. No, it's not related to the share repurchase.

Operator, Operator

Our next question is a follow-up from David Bail with Enobia Investments. Please go ahead.

Unidentified Participant, Analyst

I have another question on the insurance side. I was wondering if you all internally look at the return on allocated capital either in the past three years or five years, that's not investment related, just insurance.

Simon Burton, CEO

Yes, David. We spend a great deal of time thinking about that through both the strategy work that we do, and the business planning and capital allocation is a critical theme there. We think we've got a pretty good balance, as you can see; we've allocated a fair amount of our capital to our innovations partners on the investment side and increasingly on the insurance side, and that's worked out tremendously well. I suppose you could argue that a greater allocation would have resulted in even better results, but given the illiquid and private nature of these partnerships, we think we've got that allocation about right. While in the insurance portfolio, keep in mind, of course, you're seeing some volatility here from Ukraine, but remember that the flavor of our book tends to be shorter tail in nature. So some catastrophic and idiosyncratic events like Ukraine, but generally not highly exposed to long-term inflation. We're seeing that pickup in the marketplace right now. So the duration of our reserves is about two years, which is tremendously short across the industry. So I just want to remind you that as we think about allocating capital, we generally stay away from the long-term inflationary side of risk. And again, we believe that serves us quite well on the capital side.

Unidentified Participant, Analyst

Thank you. Is there any forecast regarding insurance for the quarter ending in March? Can you provide any insights about developments in April and May related to the Ukraine situation or other policies? I understand there may not be a forecast, but I'm focusing on the insurance aspect since we lack information.

Simon Burton, CEO

No, David, we don't publish interim forecasts; the event is ongoing, obviously, you're aware of that. We are monitoring it very carefully. I'd say that we've had no specific data on any emerging losses since March 31; let's call it the fog of war, but that information will steadily make its way to us through our partners, reinsurance partners, and of course, it will be reflected in our financial statements at the earliest opportunity to the extent that the ongoing events present new exposure, but we are monitoring the situation very closely.

Unidentified Participant, Analyst

Okay. And then, switching back to insurtech. Just one more question, it will be my last question for today. But do you expect in 2022 or 2023 one of the more mature ones to exit an IPO?

Simon Burton, CEO

We're not anticipating any concrete plans from our partners at this time. It's always an option, and founders at a certain level of maturity may consider liquidity for themselves and their shareholders. So while it is a possibility, we are not expecting it or counting on it.

Unidentified Participant, Analyst

If one were to occur, how would you all reallocate the $50 million? Would you reshuffle the insurance? Would you pivot into the investment portfolio? That is really my last question.

Simon Burton, CEO

The IPO event is not the only way to achieve some liquidity from our partnership investments; there may be other opportunities through different capital raises as we progress. At every stage, we evaluate our position. Is it still appropriate for our portfolio? How optimistic are we about the partnership's prospects? Generally, we are very optimistic. This consideration occurs at all stages. You inquired about how we might redeploy that capital over time. Again, that will depend on the conditions we observe, such as Solasglas buybacks, insurance opportunities, or other new innovative partnerships, which can change quickly. We make those decisions in real time.

Unidentified Participant, Analyst

Okay. Thank you.

Simon Burton, CEO

Thank you.

Operator, Operator

This concludes our question-and-answer session, which also concludes our conference for today. Should you have any follow-up questions, please direct them to Karin Daly of The Equity Group at 212-836-963 and she will be happy to assist you. We also remind you that a replay of this call and other pertinent information about Greenlight Re is available on our website at www.greenlightre.com. Thank you for attending today's presentation. You may now disconnect.