Earnings Call Transcript - GLRE Q2 2023

Operator, Operator

Thank you for joining the Greenlight Capital Re's Second Quarter Earnings Conference. 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 Sigmon, 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 30, 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 funds, 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 U.S. 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 homeowners’ property program. The severe storm activity in the U.S. 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. And second, the reduction in the financial class is driven more by our timing and 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. And 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 upward revisions in vendor cat model assumptions. Turning to a brief update on our innovation 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 continue 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 the 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 the elimination of the company’s previous dual-class share structure which simplifies and improves our capital structure. We also welcome Daniel Reitman, 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

Thanks, Simon, and good morning, everyone. The Solasglas fund gained 10.9% in the second quarter. 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%. Long positions in Green Brick Partners, CONSOL Energy, Tenet Healthcare, and our U.S. interest rate derivatives were the largest positive contributors to the quarterly result. An S&P 500 index short and 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 and again dramatically exceeded consensus estimates. CONSOL Energy returned 19% during the second quarter. With this earnings release, the company updated its capital allocation strategy and guided to a new policy of returning at least 75% of its free cash flow to investors with a preference for stock buybacks over cash dividends. The 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 reaccelerate 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 re-evaluated by the market. As a result, we’ve added some equity index shorts. The Solasglas portfolio lost 0.007% 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 percentage points of catastrophe and weather events related to the severe storms in the United States during the second quarter of 2023. By comparison, we had no catastrophe 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 U.S. 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 were down slightly by $1 million or 2.8%. The decrease was due to fluctuations in our mortgage premiums, as Simon mentioned earlier. However, 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 Deloitte 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 $10.0 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 3-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 22, 2023. Now, I’ll turn the call back to the operator, who will open it up for questions.

Operator, Operator

Our first question comes from Benjamin Billiard.

Unidentified Analyst, Analyst

I hope you can hear me well. I have two questions. The first one is about reserve development. You recorded a $12 million adjustment in Q1, which is more than 1.8 negative adjustments in Q2. I would like to get your thoughts on the level of prudence reflected in the new assumptions. My second question is regarding the update where you mentioned ongoing improvement in pricing during the July 1 renewal season. I’m interested to know if this represents a sequential improvement compared to the conditions from January 1, showing whether the environment has improved further from the favorable conditions noted in January. Lastly, I would like to know how you prioritize capital allocation between business growth and share buybacks. That's all from me.

Simon Burton, CEO

This is Simon. Regarding your first question about reserve adequacy or redundancy, we consistently estimate and evaluate our reserves to achieve the best estimate. This can change over time as we receive new data, leading us to adjust our best estimates. However, our goal remains to ensure consistency in the quality of reserves around our best estimate valuation. I want to point out that in a period of high inflation, like what we've seen over the past year, there may be upward pressure on reserves for valid reasons. Generally, everyone in our industry tends to underprice their reserves, as we did not account for excess inflation when we set prices for products four or five years ago. Now, concerning your second question about pricing improvements on July 1 compared to January, the characteristics of the business are different between these two periods, especially on the catastrophe (cat) side. The cat business in January is mainly global, while June and July focus on the Southeast, particularly Florida. Thus, comparing pricing quality between different segments is challenging. However, we did see notable improvements in Florida in June and July compared to last year. Subjectively, I might consider these changes to be an improvement over January. There is still upward pressure on pricing due to demand, and supply has not fully returned to the market as I mentioned earlier. We haven’t seen a full resurgence of Insurance-Linked Securities (ILS) capacity, which slightly hindered the June renewals in Florida. Many factors are contributing to the constrained supply and the sustained demand, fueled by improved affordability and updated model estimations. Overall, I am quite optimistic about our business going forward over the next six to twelve months. While renewals might not perform as strongly as last year, we are in a favorable position, and some segments, particularly satellite, may see improvements given the significant losses we’ve experienced recently which could provide us with a tailwind. On your final question regarding capital allocation and the balance between operational deployment and share buybacks, we regularly assess this to ensure we are acting in the best interests of our shareholders. This is an ongoing discussion with our Board of Directors. While share buybacks remain a strong option, operational opportunities have increased over the past year, improving our position relatively. Thus, our evaluation might lean more towards operational opportunities now than it did a year ago, but we will continue to assess these priorities with shareholder interests in mind.

Operator, Operator

There are no additional questions at this time. If you have any follow-up questions, please reach out to Karen Daily of the Equity Group at ir@greenlightre.ky, and she will be happy to assist you. This concludes Greenlight Re's second quarter 2023 earnings conference call. Thank you. You may now disconnect.