Greenlight Capital Re, Ltd. (GLRE) Q4 2020 Earnings Report, Transcript and Summary

Good day and thank you for joining Greenlight Re Conference Call for the Fourth Quarter of 2020 Earnings. Today, the company reminds you that forward-looking statements that may be made in this call are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect the company's current expectations, estimates and predictions about future results and events and are subject to risks, uncertainties and assumptions, including those enumerated in the company's Form 10-K for the year ended December 31, 2020, and other documents filed by the company with the SEC. If one or more risks or uncertainties materialize or if the company's underlying assumptions prove to be incorrect, actual results may differ materially from what the company projects. The company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. After the prepared remarks, we will be conducting a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Greenlight Re's CEO, Mr. Simon Burton. Please go ahead, sir.

Good morning, everyone and thanks for joining the call. We are now over a year into a pandemic that has caused tremendous suffering and immense challenges globally. As workers in the insurance industry, we continue to do our jobs remotely if necessary, unlike many in less fortunate situations. Insurance has had an important financial role to play through the pandemic, but the claim situation is complex and a clear picture of the ultimate cost of COVID-19 to the industry is elusive. However, as compared to the industry as a whole, our exposure to highly impacted classes, such as event cancellation, directors and officers and business interruption is quite limited. Putting aside COVID-19 claims, 2020 was the fifth costliest year of natural and manmade catastrophes in the history of the insurance industry. This was driven not by large hurricanes and earthquakes, but by a high frequency of wind storms and secondary perils, such as wildfires and convective storms. The recent frequency and severity of these events have tested the credibility of exposure modeling that the industry relies on for pricing. It seems to us that the industry is not properly paid for certain types of catastrophe tail scenarios, and we owe capital to minimize this exposure in our portfolio. These numerous challenges combined to make 2020 a difficult year for the reinsurance industry. Our performance relative to this difficult industry backdrop was in my view, very good. The underwriting results, including reserved provisions for COVID-19 on catastrophes was just slightly worse than breakeven, that’s a 100.4% combined ratio. We had a positive investment contribution from both the Solasglas fund and evaluation uptick in several of our strategic investments. With further contribution to shareholder value from share buybacks, given the immense challenges of 2020, high growth in book value per share of 4.2% is a good outcome. In a few minutes, Neil will take us through the components of our results in more detail. As we look forward to the market opportunities of 2021 and beyond, it's worth recapping our strategy and the key drivers of shareholder value. Our underwriting business has steadily transformed over the past three years with less concentration of risk in individual counterparties and from systemic sources and focus on higher margin business and maximizing the return on risk capital. This shift positions us well to benefit from the rapidly improving market conditions that were evidence of the recent January 1 renewals. We will provide more details on our 2021 portfolio next quarter, but I'm confident that we saw a significant step forward in January in both the composition of the underwriting portfolio and the overall margin potential. Notwithstanding this high level of underwriting activity, we continue to focus on overall efficiency and expense management. Our innovations business is growing and is increasingly a source of attractive and sticky underwriting opportunities, as well as investment gains. We generally enter into partnerships at an early stage of development of an insurtech, giving us a prominent role as a strategic partner, provider of risk capacity and investor. We launched this initiative in 2018 and after a couple of years of sideways glances from our more traditional peers, we have made a total of 14 investments and we are now seen as a market leader in this rapidly growing sector. Investor interest in insurtech at a later stage of development has surged in 2020, perhaps in part because of the pandemic has proven the concept to some key insurtech themes such as online insurance purchasing, disintermediation and emphasis on low friction customer experience. This emerging investor interest suits our early stage investment strategy well. Our public markets’ investment capability managed by Greenlight Capital was seen as after fashioned by the reinsurance industry as we entered 2020. As we left 2020, traditional investment strategies favored by the industry all left with bleak prospects of low yields on capital-rich balance sheets that historically have relied on healthy investment returns to satisfy the cost of capital. We have worked hard to retain our investment flexibility and we expect this to create opportunities that are uncorrelated to our reinsurance business. In operational changes, we established a service company in London during the fourth quarter, currently with a single employee working in a marketing capacity. We are already seeing the benefits of this initiative with a significant increase in our visibility and access to one of our key markets. Now I'd like to turn the call over to David.

Thanks, Simon and good morning, everyone. The Solasglas fund returned 8.4% in the fourth quarter. Longs contributed 14.1%, shorts detracted 4.9% and macro was a small detractor. During the quarter, the S&P 500 Index returned 12.1%. Long positions in AerCap, Brighthouse Financial and Green Brick Partners were the biggest winners. AerCap shares rallied 81% in the fourth quarter as positive COVID-19 vaccine developments brightened the outlook for air travel considerably. While the recovery in passenger demand is likely to be gradual, as vaccination rates ramp up globally, airlines are increasingly prioritizing leasing aircraft to optimize fleet flexibility, a trend that benefits AerCap and is likely to persist even as the pandemic is over. AerCap maintains a strong balance sheet and ended 2020 with over $9 billion in liquidity if the stock currently trades at around 71% of book value. Brighthouse Financial returned 35% in the fourth quarter, as the yield curves deepened and value stocks broadly performed well. Since its spin out from MetLife in 2017, the company has bought back over quarter of its shares outstanding, after briefly pausing buybacks in May of last year, Brighthouse has since resumed repurchasing shares and we expect it to buyback around 10% to 15% of the shares outstanding this year. The stock remains undervalued at around 35% of adjusted book value and less than 4 times adjusted earnings. Green Brick Partner share surged 43% in the fourth quarter. The company reported record net new orders at all of its home builder brands during the quarter and ended the year with a highest backlog in the company's history. Management has been able to expand capacity to meet the very strong demand, and after growing earnings by over 90% in 2020, the company is well positioned for continued growth in 2021. In January, we sold a portion of Solasglas’ shares in a secondary offering to rebalance the position size after the stock doubled in 2020. After the sale Green Brick remains a large position in the portfolio. Our short book broadly detracted from performance in the fourth quarter as equity markets rallied. Year-to-date through February Solasglas has returned minus 5.3%. Please be aware that the starting in 2021, we changed the way in which we calculate the investment return by using the denominator of the asset of capital, the company is earmarking for investment in the Greenlight Capital strategy, this amounts currently 50% of surplus. The biggest detractors in 2021 have been Green Brick, where the market seems to be digesting our block sale in our short book. Net exposure was approximately 46% long in the investment portfolio to start the year and roughly 25% at the end of February. Our portfolio today is positioned for higher inflation, a stronger housing market, rising interest rates after a multi-year stretch of historic underperformance, value stocks finally experienced a reversal in the fourth quarter of last year and this is trend appears to be continuing. If this is the beginning of a durable shift in market sentiment, our investment portfolio should do well from here. I'm pleased with our underwriting results for the quarter and year. Despite a tough year for natural disasters, coupled with the pandemic Simon and the team's efforts over the last few years to reposition the underwriting portfolio have borne fruit. We hope to do even better in 2021, given the hardening market environment. Now I'd like to turn the call over to Neil to discuss the financial results.

Thank you, David; and good morning. Starting with the quarter’s results. Our fully diluted book value per share grew 11.6% during Q4 ending the quarter at $13.42 per share. Net income for the quarter was $42 million or $1.20 per share, driven primarily by gains in our investment in Solasglas that David described earlier. The company reported an underwriting loss of $1.1 million during the quarter and a combined ratio of 101%. The quarter's results included $1.1 million of losses from COVID-19, which were offset by favorable prior year development of approximately the same amount. You saw an elevated current year losses in a few contracts during the quarter, which drove the combined ratio slightly above 100%. Net written premiums were 170 – excuse me $117.7 million for the quarter, up 20% from the fourth quarter of 2019. The bulk of this increase related to new business written during 2020. These contracts which spanned our property, casualty and other lines of business included personal property and health business generated by our innovations initiatives. On a year-to-date basis, our net premiums written were up slightly from 2019. Total general and administrative expenses incurred during the quarter were $8.3 million, representing an increase of $1 million or approximately 13% from Q4 2019. This increase was primarily due to additional incentive compensation costs recognized during the fourth quarter of 2020. We reported total net investment income of $48.4 million during the quarter, which includes net investment income of $38.5 million on our investment in Solasglas. We also recognized $9.9 million of other investment income, which was driven primarily by our innovations and other strategic partnerships. Turning now – turning to our results for the full year. As Simon mentioned, our fully diluted book value per share grew 4.2% during 2020. Net income for the year was $3.9 million or $0.11 per share. While we had a small underwriting loss that I’ll discuss in a moment, our investments performed well. Our investments in the Solasglas fund generated $4.4 million during the year and there were other investment income produced $21.1 million. The primary drivers of the other investment income were markups and evaluations of our innovations investments and a $5.8 million gain on a note receivable settled above its carrying value. The company finished 2020 with an underwriting loss of $1.6 million and a combined ratio of 100.4%. Catastrophe events during the year ended December 31, 2020 included – including Hurricanes Laura, Isaias, and Sally, the Midwest derecho storms, and North American wildfires, contributed $9.0 million to the underwriting loss. COVID-19 contributed an additional $7.1 million. Excluding these events as well as adverse prior period development of $3.7 million, our adjusted combined ratio was 96.0%. We incurred total general and administrative expenses during 2020 of $26.4 million representing a decrease of $3.4 million or approximately 11% from 2019. The decrease was due primarily to reductions in personnel costs and corporate expenses including legal and other professional fees. I'll conclude with an update on our share repurchases. During the fourth quarter, we repurchased approximately 700,000 shares at an average cost of $7.60 per share, according to a discount of 43% of our December 31, fully diluted book value per share. Now I'll turn the call back to the operator and open it up to questions.

[Operator Instructions] Today's first question comes from Kyle LaBarre with Dowling & Partners. Please go ahead, sir.

Great. Thanks. Good morning, everybody.

Simon, I wonder if you could talk a little bit about the winter storms that have affected Texas and much of the country, I recognize it's probably a bit early to have a sense of what the numbers might be, but curious in terms of sort of how you're thinking about where there could be some exposure in the book and just get your thoughts there, and maybe also just if you have any thoughts of how it might impact the rate environment going forward from here?

Sure, Kyle; good morning. So the winter storms are a bit complex and obviously unusual and to a degree unprecedented. In terms of how we're thinking about how this may develop an impact to us, there aren't really great precedents, Hurricane Harvey was Texas events a number of years ago, but we don't think that's necessarily going to line up to the storms. Our portfolio is relatively straightforward, we don't write a lot of personal and commercial property directly in Texas only through some of our cat relationships. So we're not expecting an outsized event for the company, but this is going to take some time to work through. I would like to make a comment on the models though. I have to admit that having observed the last three or four years, more actually of events that are occurring, that seem to endlessly break the models or indicate the tail modeling is not sufficient that the winter storm in Texas was simply not contemplated. The frequency of events last year was extraordinary. We had severity of events a number of years ago, which was unanticipated. This constant theme of models insufficiently contemplating tail exposure is a very big theme for us, it's something we're laser focused on in our portfolio and the way we assume our cat business, the way we write cat businesses is constantly with a focus on diminishing that tail exposure, when the models get things wrong.

Got it. That's helpful. Thanks. And then just sort of maybe just a more macro question, but if we look out at the underwriting environment Simon, you've been pretty favorable on market conditions in the lines that you're looking to grow, the investment environment seems like it's setting up better for the value investing philosophy of the Solasglas fund and obviously share repurchase is a consideration given the multiple. Just sort of curious how you guys are thinking about capital deployment from here and where we should expect more of that in 2021.

Well, the short answer Kyle is, so we see a great deal of opportunity in a lot of different areas. As you say, the underwriting environment is clearly very good and improving. And we're participating in that quite strongly. The investment environment, as you've heard from David is very interesting for us on the value side. Our innovations unit is seeing a great deal of opportunity, we have a strong pipeline, our performance is quite good there, and we're – that's our forward looking play on the industry, which I think is only going to sort of grow in importance at the company. So those – whereas innovations may historically have seemed like something that we dabble in a very minor way, internally here, we consider the value investing strategy, the open markets, underwriting opportunities and the innovations – forward-looking innovations, investments and strategic relationships in the business that comes off that, all in a very exciting areas.

Got it. And maybe just to dive into that just a bit more, just in terms of growth going forward. How much flexibility do you have for additional growth, given the leverage right now and given the makeup of the portfolio?

I do see opportunities for margin expansion. So that's a bit different to premium capacity, let's say. I wouldn't necessarily signal that our premiums could expand by 30% going forward, but I do see plenty of opportunity for the margin expansion within the portfolio, perhaps as we increasingly rebalance from some of our larger quota share relationships towards margin rich excessive loss opportunities, which in a hardening markets or in a really the place to be, that process started years ago. And we're quite a long way through that, but there is still some work to be done. So I’d focus more on the margin expansion potential rather than the top line.

Got it. Thanks. And just one more for me, just a numbers question, maybe it's for Neil. But on the COVID losses, just curious what the split there is between IBNR and actual case reserves.

It's almost all IBNR Kyle. Also one point to note is, in the prepared remarks, when I referred to the $7.1 million that was net financial impact. So we have some structured contracts in there sort of gross reserve, which is almost all in IB&R, it’s actually higher than that, probably in the $16 million range. But that's offset financially by some profit commission benefit we took.

Perfect. Thanks very much.

Thank you.

Our next question comes from Joshua Horowitz from Palm Global. Please go ahead.

P-A-L-M, Palm Global, thank you. Good morning, everybody. How do I evaluate your casualty book of business to identify trends? For example, you know the diversity in the book, but are there any sectors that are more heavily weighted than others?

Good morning Joshua. So we're not a big writer of casualty longer or even medium tail casualty, the sources of casualty exposure in our book are areas like in a minimum limit auto. So we still have a reasonably large non-standard auto business and what comes with that is minimum limits of underlying exposure, that's dominantly casualty, that's quite short tail, that's related to car accidents with a very short tail on them. We have a fairly sizable workers' compensation book, which is more medium tail and there are various other areas of casualty in the book, those are the two largest areas, nothing extends to very far out in the tail always with the criteria of issuing underwriting profits, this isn't a float generation approach that we're taking on casualty. Is that helpful.

Yes, absolutely. Thank you.

Thank you.

The next question comes from Bob Farnam with Boenning & Scattergood. Please go ahead.

Yes, good morning. A couple of questions on the combined ratio. So given your comments to Kyle about just kind of the models being inaccurate or whatnot, have you changed or are you expecting to change your cat load for the year?

Good morning, Bob. So that’s a good question, we do use the models as they stand to evaluate expected count losses, where we're careful and where we're suspicious of the models is far out in the tail, that's where we simply choose not to participate. The relationships that we have, that provide us with the cat exposure that we have in our portfolio, our – cat. So these don't extend deeply into the tail where we frankly think the industry is not properly compensated for that tail risk. Our cat load is going to be driven by the models. The models themselves are constantly evolving, as you can imagine. But we're happy with the assessment of our cat exposure through the models as they exist today, it's – that we're more circumspect about assuming more tail exposure.

Right, okay. So with your combined ratio, do you have a combined ratio target? I know over the last several years you've had trouble kind of reaching that a 100% combined ratio target for one reason or another. I know taking out – stripping out the development in the COVID and the cats you're kind of in the high 90%, but I would consider cat to be a normal part of your story. So I'm trying to figure out what a kind of a normalized combined ratio would be, if I just don't include or don't expect anything for development or COVID from here.

Yes, Bob. I understand the challenge, we don't guide on combined ratio or any other financial metric. What I would say is that looking at the past, I think it's important to get the proper context here. Our portfolio is very different to three or four years ago. Whereas it was once characterized by a relatively smaller number of large relationships, often quota share and subject to quite lumpy idiosyncratic situations that more often than not hurt us on the downside rather than the upside in recent years. The go-forward portfolio has very, very few of those characteristics. We've worked hard to eliminate counterparty risk, frankly, where we're – we’re simply not paid for that risk and replacing it with randomness risks for which we all paid, we all properly compensated. I'm sorry that that doesn't necessarily help you with building a model and determining a run rate of combined ratio. But I want to emphasize that there's a great degree of ambition here to generate significant underwriting profits going forward. And the past is not necessarily representative of that.

No, that's good to point out. So your portfolio has changed over time, so it's a different animal that we should be looking at. So in terms of the acquisition cost ratio, it had been trending down over the last few years. Do you still see room for that to improve?

Yes, so the acquisition cost is again something that's going to move depending on the – it can be a bit lumpy. Let me put it that way, Bob. We don't focus on it uniquely. We care about the margin potential of the business we write. Sometimes the characteristics of the business that we see may be a very low loss ratio, 20% potentially, but a 50% or north of 50% acquisition ratio all-in, or the business might be a 60% loss ratio and a much more efficient 25% acquisition ratio. So it varies dramatically by the class of business. We focus on margin potential, not acquisition ratio in isolation.

Okay. I can appreciate. That's kind of trying to back into the combined ratio question, but it sounds like you just want me to focus on overall combined ratio holistically because that's what you're looking at. In terms of your AM Best Rating, what have your conversations with AM Best been and what do you need to have the negative outlook revoked?

Well, that's a good question. Our relationship with AM Best has always been good and healthy and open and it continues to be so, we made certain commitments to AM Best over the last few years in terms of the transformation of our underwriting business. And we've kept those commitments and they seem to be – they seem to recognize that. So I'm happy with our relationship with AM Best. It's a positive relationship. They understand what we're doing, they understand our ambition, they recognize the progress we've made. It's much harder for me to say to determine the criteria for the removal of the negative outlook. Clearly, it's something that we'd like to see and we're working towards but that's not something I can necessarily detail for you.

Okay. Thanks for the color, Simon. Thanks.

Thank you.

[Operator Instructions] The next question comes from Art Winston with Pilot Advisors. Please go ahead.

Thank you. Good morning. I was wondering with the tightening market, maybe a better relationship with Best, if there's any possibility of taking some of the $700 million of restricted cash and putting it into more traditional investments, because with the amount of investment income you have and your underwriting results, you really cannot get a competitive return on investment – return on equity compared to American industry. Maybe it's good with other insurance companies, but it can't be terrific with $700 million of this restricted cash. So hopefully, can you switch that or change it and reduce it?

Good morning, Art. So the restricted cash item on our balance sheets is something that is present for every reinsurer. There's an element of that. That's just a necessary part of being a rated reinsurance company with no obligations to counterparties. Having said that, it is something that we're focused on and cash efficiency is an area where we have made some improvements at the margins over the past few months, it is very much an area of focus. Now that investment leverage, clearly we have the Solasglas opportunity. We have our more traditional investments that compliment that. You're right, that more investment leverage is, in general, a good thing. We are, of course, founded by the overall volatility that we're able to issue them on the balance sheet. But your core question of focusing on restricted cash is something we do every day. And it's where – there are minor efficiencies to be had, but on the whole, that's a balance sheet entry that it's unerasable and is common among every rated reinsurance company.

So the tightening underwriting conditions, which you described, the more favorable conditions and your better results really have no bearing at all on that whatsoever. It is what it is and it can't be changed is what you're suggesting?

Well, obviously the improved market will – we expect lead to better margin potential, better profit potential on underwriting. And that is we – that's a strong benefit to our shareholders. The restricted cash element itself is a consequence of being a reinsurance company.

One further question, the convertible debt matures right away, doesn't it or am I wrong, the 95 million convertible?

Convertibles mature in August of 2023.

2023. Okay. Okay. Thank you. Thank you.

Sure.

The next question comes from William Arms, a Private Investor. Please go ahead, sir.

Good morning, guys. Thanks for the call. This one's for David just related to the stock sitting sort of three plus years at a pretty decent discount to book value. Anything else getting addressed related to that?

The stock reflects what the market thinks the stock is worth. We think the stock is at the wrong price, but we're not in a position to argue or to change that. Last year, we marshaled some resources and some consensus to engage in a share repurchase and we purchased a bunch of stock at a good discount. And I think that that added notably to the book value per share. So far this year, we've not – getting a stock buyback done is a bit of a process. You need to get everybody on board for wanting to do that. And there's a bunch of constituencies. And early this year, the company has not reached the point where we have enough constituencies organized and supportive of buying back stock. And that's my failing really as the chair of the company to not make sure that that's properly on the agenda. And I assure you that that will be fixed at the next board meeting. So that further buybacks can be more properly considered.

Okay, thanks.

Sure.

At this time, we show no further questions in the queue. And this concludes our question-and-answer session. As a reminder, should you need any follow – or should have any follow-up questions, please direct them to Mr. Adam Prior of the Equity Group, Inc. at area code (212) 836-9606, again that is area code (212) 836-9606. And he 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. And at this time, this concludes the conference. Thank you for attending today's presentation. And you may now disconnect.