Earnings Call Transcript - GLRE Q3 2023

Operator, Operator

Thank you for joining the Greenlight Capital Re Limited Third Quarter 2023 Earnings Conference. Participants are currently in a listen-only mode, and there will be a question-and-answer session following the formal presentation. It is now my pleasure to turn the call over to David Sigmon, Greenlight Re's General Counsel. You may begin.

David Sigmon, General Counsel

Thank you, Alicia, 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 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 third quarter ended September 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, Executive Officer

Thanks, David. Good morning, everyone. Thank you for joining us. For the third quarter of 2023, we reported net income of $13.5 million and growth in book value per share of 2.3%. This brings our year-to-date performance to net income of $69.2 million and growth in book value per share of 13.7%. Third quarter net income was primarily driven by strong underwriting performance, with a combined ratio of 91.2% and an underwriting profit of $14.4 million. This result includes a strengthening of reserves that relate to our legacy business, of approximately four combined ratio points, which indicates that the ongoing book performed around an 87% combined ratio. This result can be further broken down into an open market book performing around the mid-80s combined ratio and an innovations book performing around mid-90s. Recall that we have identified our Innovations business as strategically important to the company in the long term, although it has come with a lower margin underwriting trade-off in the short term as we execute on that strategy. The work we have done over the last few years has repositioned the overall underwriting business to be both more balanced and to contain higher margin potential, and the results of that work are now evident. We grew net written premium in the third quarter to $168.3 million, an increase of 15% compared to the third quarter of 2022 as we take advantage of the attractive market conditions. As we are now in early November, our underwriting focus is turning to the important January 2024 renewals. We believe the underwriting outlook for 2024 is excellent. We have not seen a material increase in reinsurance capacity and demand for our core products remains strong. In recent weeks, we met with many of our clients and brokers in Monte Carlo and Europe, and we are encouraged by their feedback in support of the upcoming January renewal. Turning to innovations. We made two new investments in the third quarter to bring our total portfolio to over 35 positions. While the market is challenging with many insurtechs struggling to raise capital, our positioning as a market leader in the early-stage insurtech space means we see a wide variety of opportunities that allow us a selective approach to growing the portfolio. During the first quarter of 2024 and subject to regulatory approval, we intend to establish a separately licensed segregated portfolio company, which will provide access to our insurtech partners, enabling them to retain more of their own risk. This enhancement to our existing insurtech ecosystem will bolster our position as a leader in this important and growing area for the industry. Now, I'd like to turn the call over to David.

David Einhorn, Chairman of the Board

Thanks, Simon, and good morning, everyone. The Solasglas fund returned negative 0.6% in the third quarter. Our loans declined 4.1% and our shorts gained 1.7% and macro contributed 2.8%. During the quarter, the S&P 500 declined 3.3%. The largest positive contributors were long investments in CONSOL Energy and Capri Holdings and a macro position that benefited from both declining stock prices and higher long-term interest rates. Our long position in Green Brick Partners was the largest detractor. CONSOL Energy shares have 55% in the quarter. The most notable development was that the company updated its capital allocation policy and formally abandoned its dividend in favor of buybacks with a large buyback; the PE expanded from about three times to about five times, and we expect to see this PE multiple continue to pick up from its current five times as the company uses the majority of its cash flow to continue aggressively repurchasing its shares. Capri advanced 50% after agreeing to be sold to Tapestry for $57 per share. We used this as an opportunity to exit our position as the company's fundamentals have been deteriorating since the last holiday season. We developed a thesis in early August that long-term interest rates would continue rising and the stock market would fall, thus reversing the typical negative correlation between stock and bond prices. We implemented a position consistent with our thinking, which benefited as the S&P 500 moved lower and 30-year rates moved higher. Green Brick Partners shares fell 27% during the quarter. The company announced second quarter earnings that far exceeded consensus estimates. However, the market has become concerned about the impact of higher mortgage rates, and most homebuilding stocks, including Green Brick, reversed a portion of the gains achieved earlier this year. Last week, the company announced its third quarter results and again exceeded analyst expectations due to its record high margins, better-than-expected home sale closings and the lowest cancellation rate among publicly traded peers. The economic outlook and the outbreak of war has added to our worry about the direction of the market, and we've been reducing our overall gross exposure as a result. We have net long exposure to the energy sector, and we've added a macro position that would benefit from higher crude oil prices throughout 2024. The Solasglas portfolio returned 2.1% in October and has returned 11.3% year-to-date in 2023. Net exposure in the investment portfolio was approximately 33% at the end of the third quarter. I would like to take a few moments to discuss our CEO transition. Simon joined us over six years ago. He led the company through some tough times, and we got through and has successfully changed the overall strategy of Greenlight Re over a number of years. He's done a nice job and is leaving the company in much better shape than when he joined. In the last year, the Board started having discussions with Simon about a planned succession during the course of 2024. We mutually agreed to accelerate the succession to this year-end as a particularly good candidate fit became immediately available. Simon will continue as CEO through year-end, focused on overseeing our underwriting activity and will be available in the new year to ensure a smooth transition. I want to take this opportunity to thank Simon for all his hard work and dedication to Greenlight Re. Lastly, I want to say a few words about Greg Richardson, who will join Greenlight Re as its new CEO at the beginning of 2024. We met Greg while conducting an extensive recruiting process. He has extensive experience in underwriting, risk management, and strategic planning. The Board and I are excited we were able to snag someone of Greg's caliber as our next leader. I'm confident the Greenlight Re team will capitalize on our significant growth opportunities with Greg at the helm. I look forward to Greg joining me on our next conference call. And now I'd like to turn the call over to Faramarz to discuss the financial results.

Faramarz Romer, Chief Financial Officer

Thank you, David, and good morning, everyone. Our net income for the third quarter of 2023 was $13.5 million or $0.39 per diluted share compared to a net loss of $18.5 million or $0.56 per diluted share in the comparable period in 2022. For the year-to-date 2023, we earned net income of $69.2 million or $1.99 per diluted share compared to a net loss of $9.4 million or $0.28 per diluted share in the comparative period in 2022. We reported an underwriting income of $14.4 million during the third quarter and a combined ratio of 91.2% compared to an underwriting loss of $18.9 million and a combined ratio of 115.4% during the equivalent 2022 period. The third quarter 2023 underwriting income was impacted by $13.1 million or 8.1 combined ratio points of catastrophe events, including a Mexican state-owned oil platform fire loss and two satellite losses. By comparison, during the same quarter of 2022, we had suffered $25.9 million or 21.2 combined ratio points of catastrophe losses, primarily related to Hurricane Ian and two super typhoons in the Pacific. Adjusting for catastrophe event losses, our current year loss ratio for the third quarter improved by 1.3 percentage points to 53.3% compared to 54.6% during the comparable period in 2022. Our net premiums written increased by $21.9 million or 15% to $168.3 million compared to the same quarter in 2022. Our net earned premiums increased by $41.2 million or 33.8% compared to the same quarter in 2022. The composite ratios improved across all three categories of business: Property, Casualty, and Specialty. I will now discuss each of these individually. Within our Property book, we saw an increase in net premiums written of $9.3 million or 60%, mainly driven by commercial Property business, where we have seen significant rate increases. The composite ratio for the Property business was 71.8% for the third quarter compared to 139.1% during the comparable period in 2022. The improvement was mainly driven by fewer natural catastrophe losses and improved margins from rate increases and higher attachment points. Moving to our Casualty book, net premiums written grew by $15.5 million or 17.7%, primarily driven by general liability business. The growth in general liability business was partially driven by our innovations partners and partially through new contracts bound in 2023. This increase was net of the reduction in the workers' compensation line, where we continue to move away from proportional business and are finding pockets of attractive non-proportional business. The composite ratio for the Casualty business decreased to 99.3% compared to 111.2% and during the comparable period in 2022. The improvement was driven by a decrease in catastrophe losses on our multiline contracts, which was partially offset by 9.2 percentage points of adverse development on legacy workers' compensation, motor, and professional liability classes. Turning to our Specialty book, net premiums written declined by $2.9 million or 6.7%, mainly within Accident & Health and Financial Lines. However, this decrease was mostly offset by growth in other Specialty businesses. The composite ratio for the Specialty business decreased to 73.8% compared to 90% during the comparable period in 2022. The Specialty composite ratio in the third quarter of 2023 included 23.6 percentage points of catastrophe losses from the Mexican oil platform fire and the two satellite losses. These losses were partially offset by 21.3 percentage points of favorable loss development on prior year specialty contracts. Now, a few words on our expenses. Excluding the impact of interest expense on deposit accounted contracts in the prior year, the underwriting expense ratio increased to 3% for the third quarter of 2023 compared to 2.7% in 2022. The increase primarily related to higher headcount as we invest in talent to take advantage of the hard market. Total general and administrative expenses incurred during the quarter was $7.9 million, up 7% from $7.4 million in the third quarter of 2022. We reported total net investment income of $5.1 million during the third quarter of 2023 compared to $11.6 million in 2022. We earned $9.5 million of interest income on our restricted cash and cash equivalents. Our investment in the Solasglas fund reported a loss of $1.9 million or 0.6%, and our innovation investments reported an unrealized loss of $2.5 million due primarily to a downward adjustment on the carrying values of two investments. At the end of the third quarter, our fully diluted book value per share was $16.58, an increase of 2.3% from June 30, 2023, and an increase of 13.6% from December 31, 2022. Now, I'll turn the call back to the operator, who will open it up for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Anthony Mottolese with Dowling & Partners. Please go ahead with your question.

Anthony Mottolese, Analyst

Hi, good morning and congrats on the great quarter and the great quarter. I guess my first question is, I just kind of wanted to think about is the low 90s combined ratio that we saw in Q3, is that a reflection of the business mix shift over time in the recent period, a result of the recent growth in the new areas of business? Or were there any unusually low loss trends you might have observed in the quarter that were perhaps more one-time in nature?

Simon Burton, Executive Officer

Hi Anthony, it's Simon. Good morning. As we've mentioned before, there has been a significant effort over recent years to completely re-evaluate the Greenlight Re portfolio. These efforts have provided substantial support as the hard market has intensified over the past one to two years. We have completed this process, so I would ask you to adjust your expectations for Greenlight today and moving forward, without considering some of the underwriting challenges from the past. Our portfolio has changed entirely. That said, we still hold some legacy reserves, and there is still some impact from that. As I mentioned, we saw four points of reserve deterioration related to those discontinued lines. Without that impact, the figure would be closer to $87 million, which I believe better reflects the current underwriting conditions in the reinsurance market. I encourage you to view Greenlight as fully positioned and actively participating in the current reinsurance landscape.

Anthony Mottolese, Analyst

Thank you, Simon. And I guess just quickly, would you be able to kind of quantify the rate increases you're actually seeing across your different segments, if you have the time?

Simon Burton, Executive Officer

Yes, I have all the time you need. Rates are quite different when comparing quota shares with 23 points ceding commission and nine points of margin to an excess of loss deal that’s priced at 10% rates. They represent entirely different risks, so averaging rates across the entire portfolio with these different mechanisms isn't very helpful. Internally, our net written premium for the quarter was up 18%, that's where we landed. A reasonable estimate is that about half of that is due to rate increases and perhaps the other half is due to exposure. However, as I mentioned, calculating the rate to direct premium can be somewhat misleading, and we generally don't focus too much on that process.

Anthony Mottolese, Analyst

Well, thank you very much for the clarification there. And Simon, best of luck in any future endeavors.

Simon Burton, Executive Officer

Thanks, Anthony.

Operator, Operator

Thank you. Our next question comes from the line of Ben Billiard with Pergam. Please proceed with your question.

Ben Billiard, Analyst

Yes, hello. Hi, it's Benjamin. Thanks for the questions. Two questions, please. And the first one, just out of curiosity, I'd like to understand the disconnect in performance between the Solasglas fund and what used to be the performance of the Greenlight hedge fund. So that's the first one. The second one is on the innovation investors. Can you provide some color on the operational performance of these companies on aggregates, like the type of revenue growth? Have they seen some impact of the more difficult macro? How are they progressing towards profitability? And the second one related to that, what's your willingness or capacity to invest in subsequent funding rounds for some selected opportunities? That's it on my side. Thank you.

Simon Burton, Executive Officer

Sure, Benjamin. David, would you like to take the first part?

David Einhorn, Chairman of the Board

The main difference between the funds is related to the concentration of Green Brick Holdings. In the hedge funds, we were able to distribute a significant percentage of the Green Brick shares as of June 30th, which decreased the weighting of that stock within the hedge funds. In Solasglas, we don't have a way to distribute those shares, so we have to reduce the weighting more gradually. We couldn't do it all at once. The Green Brick stock underperformed during the quarter compared to most of the rest of the portfolio. Additionally, since it still represented a large weighting in the portfolio, the weightings of other stocks that the hedge funds had larger investments in were smaller in Solasglas. Moving forward in the near term, the higher allocation to Green Brick Partners will still noticeably impact the Solasglas funds, which is somewhat beneficial for now. It's contributing to performance in October and into early November as the Green Brick stock starts to recover. We intend to align these weightings over time, but it may not happen until the end of 2024.

Simon Burton, Executive Officer

Benjamin, regarding your second question, I want to start with a quick overview of our approach and strategy towards innovation. We focus on being an early-stage investor with the goal of fostering high-quality insurance businesses as our partners work through their execution phases. One of the benefits of this role is that we typically invest smaller amounts while still making a significant impact in funding rounds. Additionally, we often find ourselves as one of the few strategic partners, which gives us a greater influence on our partner's success and the potential for future profitable opportunities. However, being an early-stage investor also means we encounter our share of setbacks, as not every venture will succeed, which is a fundamental aspect of our strategy. Consequently, we accept a substantial amount of execution risk. We collaborate with partners that have strong management teams who are building up their cash reserves, allowing them sufficient time to navigate through the early stages and develop their risk profile. While some partners will find success and secure funding in subsequent rounds, we carefully evaluate the possibility of follow-on investments. We have made a few, but we do so with a disciplined approach. Each decision on follow-on investments is made based on the individual circumstances rather than trying to support a struggling position with the hope of recouping our investment, which would be a significant error. Our close relationship with these strategic partners affords us more data and insights into their performance, enabling us to make more informed decisions compared to outside investors looking to participate in follow-on funding. We leverage this advantage effectively. Does that clarify things?

Ben Billiard, Analyst

Yes, very much so. And yes, thank you, Simon, for massively improving the underwriting. That's great. And good luck for the future.

Simon Burton, Executive Officer

Thank you.

Operator, Operator

Thank you. There are no additional questions at this time. Should you have any follow-up questions, please redirect them to Karin Daly of the Equity Group at ir@greenlightre.ky, and she will be happy to assist you. This concludes Greenlight's third quarter 2023 earnings conference call. Thank you. You may disconnect.