Earnings Call Transcript - GLRE Q2 2020

Operator, Operator

Good day and thank you for joining the Greenlight Re Conference Call for the Second Quarter of 2020 Earnings. The company wants to remind you that any forward-looking statements made during this call are intended to be protected by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but reflect the company's current expectations, estimates, and predictions about future results and events that involve risks, uncertainties, and assumptions, including those listed in the company's Form 10-K/A for the year ended December 31, 2019, and other documents filed with the SEC. If one or more risks or uncertainties occur, or if the company's underlying assumptions are incorrect, actual results could differ significantly from the company's projections. The company has no obligation to publicly update or revise any forward-looking statements due to new information, future events, or otherwise, except as required by law. After the prepared remarks, we will have a question-and-answer session. I would now like to turn the conference over to Greenlight Re's CEO, Mr. Simon Burton. Please go ahead, sir.

Simon Burton, CEO

Good morning and thank you for joining our call today. I am pleased to report that we made solid progress on several fronts during the quarter. Our underwriting results, excluding the impact of COVID-19, which I'll discuss shortly, generated a combined ratio of 95.7%. This result continues the trend of improved underlying performance and reflects the repositioning of our underwriting business over the past three years. During this time, we have expanded the lines of business we write and increased our participation in excess of loss contracts when the economics support it, thereby replacing some of our lower-performing quota share contracts with higher-margin business. It is notable that over the past three years, we have decided to not renew approximately two-thirds of the premium that was enforced as of July 2017, so we have been acutely selective regarding the business that we keep. Looking forward, the improvement in market conditions that started last year is now accelerating. Over the past few months, we have seen risk placements in specialty classes with significantly improved terms. We have also seen that attempts to place risks with only modest pricing improvements are often met with shortfalls in capacity, a clear sign of a healthy market. Given the recent timing of these more significant pricing movements, the impact on our income statement this quarter is negligible, although we are optimistic that we will see the benefit over the next year. Our exposure to the pandemic continues to be manageable and small in comparison to the industry as a whole, a result that reflects several factors. We have minimal exposure to some of the highly exposed lines of business, where coverage is uncontested, such as event cancellation, travel insurance, trade credits, directors' and officers' liability, and long-term life. While the mortgage market has seen an increase in delinquencies, the financial impact on our portfolio has been offset by reductions in profit commissions we paid to our cedents. Additionally, over the last two years, we cut back on the amount of mortgage business we write, which reduces our exposure to the newer and therefore riskier underlying mortgage contracts. And as we anticipated, our auto business has shown a reduction in claim frequency through the lockdown period in the US. Our second quarter COVID-19 net loss estimate of $6 million contributed 5.5 points to our total combined ratio of 101.2%. This loss estimate relates primarily to our Lloyd's multi-class contracts and certain property catastrophe contracts with identifiable business interruption exposure. Regarding our key financial metric, we grew book value per share by 1.5% as we took advantage of the opportunity to repurchase shares at a significant discount to book. On the investment side, David will discuss Solasglas and the broader environment in a moment, but it's notable that contributing to our overall investment result this quarter is a gain of $3.3 million in the valuation of certain strategic investments made by our innovations unit. The pandemic has exposed both winners and losers among our innovation partners. Overall, I'm pleased with our progress and excited about the division's potential. Finally, AM Best recently concluded our annual review with the decision to affirm our A minus rating. Ratings pressure has been a common theme in the industry in recent months, with several notable ratings downgrades. We are pleased with AM Best's decision, and I look forward to executing our plans to build shareholder value as we move into much improved market conditions. Now I'd like to turn the call over to David.

David Einhorn, President

Thanks Simon, and good morning, everyone. The Solasglas fund returned 0.3% in the second quarter. Longs contributed 7.6%, while the shorts detracted 7.3% and macro was essentially flat. During the quarter, the S&P 500 Index returned 20.5%. Long positions in Green Brick Partners, The Chemours Company, and Brighthouse Financial were the biggest winners. Green Brick Partners returned 47% as the company reported record-breaking Q1 results and margin growth despite COVID-related disruptions. Over the past couple of years, Green Brick has strategically diversified both the geographic footprint and product line, including growing its entry-level segment. Management expects the improved affordability of its product line to allow the company to maintain or even grow its market share in the current economic climate. Green Brick reported very strong second quarter earnings on Tuesday, and the stock appreciated, putting August off to a good start. Shares of Chemours climbed 73% in the second quarter as the broader market rallied and fears over the company's liquidity position abated. On its first-quarter earnings call, management announced significant cost cuts and CapEx reductions in anticipation of several challenging quarters ahead. Additionally, resilient demand in some of Chemours US end markets, including do-it-yourself paint and single-family homebuilding, have helped to offset weaknesses in other markets such as automotive paint. Brighthouse Financial returned 15% in the second quarter, yet remained down 29% on the year as of June 30. In May, the company announced first-quarter GAAP earnings per share of $47, much more than the entire price of the company's shares due to its market hedges. Brighthouse accelerated its share repurchases, buying back a total of 12% of the stock during the first four months of the year. Management reiterated its target, repurchasing $1.5 billion total by the end of 2021, implying that the company intends to purchase roughly an additional quarter of the current shares outstanding over the next 18 months. Book value at the end of the first quarter was $172 per share, yet the stock trades at only 16% of that amount and just 3.3 times adjusted earnings. Our Tesla short detracted from performance as the stock more than doubled in the quarter. The company surprised the market by reporting a first-quarter profit in April despite a weeks-long shutdown of its production facilities due to the pandemic. The profit was largely driven by a sharp increase in regulatory credit sales, the accounting for which we doubt conforms to GAAP, as it doesn't match the expense recognized by its customer, Tesla's cash collections, or relate to car sales that generate the credits. Absent these regulatory credit sales, Tesla would have reported a loss. Solasglas returned 1.3% in July, bringing the 2020 year-to-date result for Solasglas to negative 6.6%. Net exposure was approximately 18% long in the investment portfolio at the end of the second quarter and roughly 16% at the end of July. While the COVID-19 pandemic has brought much uncertainty to the financial markets, we're excited about the hardening reinsurance market, coupled with the opportunities in our investment portfolio. We plan to increase the investment in the portfolio throughout the rest of the year from roughly one third of Greenlight Re surplus to 50% of surplus, while diversifying the composition further. As Tim will discuss, we made substantial share repurchases during the quarter because we believe that at 55% of book value, as our markets are improving, this is the best investment we can make. Now I'd like to turn the call over to Tim to discuss the financial results.

Tim Courtis, CFO

Thanks, David. For the second quarter of 2020, Greenlight Re reported a small net loss of $63,000 compared to net income of $15.3 million for the comparable period in 2019. For the six months ended June 30, 2020, we reported a net loss of $40.3 million compared to net income of $21.2 million for the first six months of 2019. The net loss per share was $1.12 compared to net income of $0.58 per fully diluted share for the same period in 2019. Net premiums earned were $219.4 million for the first six months of 2020, a decrease of 11% from the prior year period. Both gross and ceded premiums written decreased from the prior year, primarily due to the nonrenewal of certain auto business. Partially offsetting the gross premium decrease was new business being written in several specialty lines, including crop, energy, and cyber business. The company reported a small underwriting loss of $1.3 million during the quarter and a combined ratio of 101.2%. As Simon mentioned, the quarter's results included COVID-19 net loss estimates of $6 million, which added 5.5 percentage points to the combined ratio. The combined ratio for the year-to-date was 100%, which includes 2.7 percentage points of estimated losses from COVID-19. General and administrative expenses incurred during the first half of 2020 were $12.9 million, which is a decrease of $1.8 million or approximately 12% over the prior year period. This decrease was primarily due to lower personnel costs and to a lesser extent, lower travel, office, and related costs incurred during the second quarter from shelter-in-place orders. We grew total net investment income of $5.5 million during the second quarter of 2020, which includes net investment income of $1.6 million on our investment in Solasglas, reflecting a net gain of 30 basis points on the Solasglas fund. Other net investment income contributed $3.9 million during the quarter. A significant reduction in investment income on collateral assets, resulting from interest rate reductions in March, was more than offset by valuation gains on certain innovation investments during the quarter. During the second quarter, the company repurchased approximately 1.16 million shares at an average cost of $6.69 per share, on average a discount of approximately 43% from the company's March 31 fully diluted book value. The fully diluted book value per share as of June 30, 2020, was $11.81, a 1.5% increase from $11.63 per share reported at March 31, 2020, and a decrease of 13% from $13.58 per share reported at June 30, 2019. Our annual shareholders' meeting, which usually takes place in the second quarter of the year, will now take place on October 29, 2020. The meeting was moved due to the logistics of shelter-in-place orders in the Cayman Islands. Now I'll turn the call back to the operator and open it up for questions.

Operator, Operator

Thank you. The first question will come from Mikel Abasolo with Solo Capital Management. Please go ahead.

Mikel Abasolo, Analyst

Well, thank you for taking my question. This is a short and concise one. I believe that you are far from completing the buyback authorization, but I would like you to give first some color on what is your intention if the discount remains where it is today. Will you be completing the authorization soon? And will you renew it to keep on buying? Thank you.

Simon Burton, CEO

Mikel, thanks for the question. This is Simon. So as David said, the opportunity to buy back shares at the current discount is tremendous. Of course, we'd like to see the discount reverse ultimately. It is a balance between competing interests of using the capital to support our business, whereas you've heard, there are a tremendous amount of opportunities, and the market opportunities are only improving. But for now, the buyback is continuing, and we'll evaluate that as it goes.

Mikel Abasolo, Analyst

Okay, thank you.

Operator, Operator

At this time, it appears there are no questions in the queue, and this concludes the question-and-answer session as well as today's conference. Thank you for attending, and you may now disconnect.