Greenlight Capital Re, Ltd. (GLRE) Q1 2021 Earnings Report, Transcript and Summary

Good morning and thank you for joining the Greenlight Re Conference Call for the First Quarter of 2021 Earnings. 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 are subject to risks, uncertainties and assumptions, including those enumerated in the company's Form 10-K from the year ended December 31, 2020, and other documents filed by the company with the SEC. 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 today's call. I'd like to start with an overview of the main drivers of financial performance for the first quarter, which saw growth in our book value per share of 0.5%. We had hoped for a straightforward start to 2021 after the industry turmoil of the last year, but we have already experienced some unusual events. David will later discuss the investment environment that we saw in January. From an underwriting perspective in February, Winter Storm Uri was the latest example of a natural catastrophe that surprised the insurance industry with its reach and intensity. Our exposure to Storm Uri resulted in a small underwriting loss for the quarter. We sold our majority stake in AccuRisk during the quarter, resulting in an after-tax gain of $10.5 million. AccuRisk is a successful and rapidly growing traditional MGA, but is no longer core to our strategic holdings. And we have ample opportunities to deploy this capital in other areas of the business. As we look forward to the rest of 2021 and beyond, we are working hard to grow and reposition our underwriting business to capitalize on significantly improved market conditions. Overall gross written premium in the first quarter increased by 55% to $170 million compared to the first quarter of 2020. Part of this increase came from rates where we charge more for the same exposure. But much of the increase was from the deployment of risk capacity that we withheld over the past two years as we waited for improved terms in the marketplace. The largest area of growth was reinsurance of various Lloyd's syndicates, an institution that has an exceptional track record of performance in periods of market dislocation. Similarly improved market conditions drove the year-on-year expansion of marine and other specialty classes. The increases in our motor liability and workers' compensation classes on the other hand result mainly from the growth in several quota share partners. We intend to reduce motor and workers' compensation exposure as the business renews over the coming year. As we grow the business overall, it's worth noting that the property catastrophe class was relatively disappointing at the January 1st renewals. Rates were up overall, but not enough in our view to adequately compensate for the accumulation and parameter risks of the class relative to other lines of business. Clearly an inflow of new capital late last year that quickly settled on the cat class as the path of least resistance was the culprit. As a result we reduced our risk to the pure catastrophe classes with overall exposure remaining about the same as incidental cat exposure increased in line with growth in the specialty area. Finally, the innovations team announced two investments since January. Nimbla is a trade credit underwriter and Player's Health offers insurance and risk management services to the amateur sports segment. Both companies have exceptional leadership and offer groundbreaking products and we look forward to supporting their growth. Now I'd like to turn the call over to David.

Thanks Simon, and good morning everyone. The Solasglas fund returned 1.5% in the first quarter. Longs contributed 11.7%, shorts detracted 6.8% and macro detracted 2.8%. During the quarter, the S&P 500 index returned 6.2%. Long positions in Brighthouse Financial, AerCap Holdings, Danimer Scientific were the biggest winners. Brighthouse Financial returned 22% in the first quarter as the company benefited from rising interest rates. AerCap shares returned 29% in the first quarter as the aviation industry continued on its path to recovery. In March, AerCap announced its acquisition of GE Capital Aviation services continuing management's track record of buying attractive assets at compelling prices. The combined fleet of over 2000 planes is expected to comprise primarily new technology and narrow-body aircraft and have an average remaining lease term of around seven years, which should continue to support a high degree of earnings visibility for the combined entity. The transaction is expected to close in the fourth quarter. Danimer Scientific, which manufactures biodegradable plastic branded as Nodax soared 61% in its first quarter as a public company. Danimer's intellectual property is extremely valuable and positions the company as a leader in PHA production. The world has an enormous problem with single-use plastics and we believe PHA will contribute to the solution for many plastic packaging applications. Already several blue-chip brands have already signed on as Danimer's customers and demand for Nodax will outstrip supply for the foreseeable future. The stock has tumbled after the Wall Street Journal raised questions about Nodax's biodegradability claims. We believe the criticism is unfounded. Danimer's product has been tested extensively and certified as biodegradable in all environments according to high international standards. Most recently, Danimer has been a target of a pair of aggressive short sell reports from a single entity. We have followed this author's work for a long time. He is extremely smart and capable; however, the reports on Danimer are so full of blatant misuse of data that we have to believe that the purpose is to intentionally spread false and misleading information for the purpose of affecting the short-term stock price. We, of course, support the vigorous debate and discussion about stocks but there are limits and these reports in our view cross the line and represent the worst elements of the short-selling profession. Although we are satisfied to have generated a positive investment return in the first quarter, January got off to a rough start with a 7.3% loss that we recovered in February and March. Two factors contribute to this dynamic. First, Green Brick Partners our largest position doubled in 2020. This led to an excessive weighting within our portfolio. In January we sold about 20% of our shares in an underwritten off, causing the stock to depress temporarily. The other performance drag was our short portfolio. In late January, a handful of our positions got caught up in the market squeeze of highly shorted stocks. Given this dynamic we have for the time being reduced the number and sizing of single-name shorts in our portfolio. Year-to-date through April, Solasglas has returned 3.5%. Net exposure was approximately 24% in the investment portfolio at the end of the first quarter and roughly 35% at the end of April. We're pleased with our overall results in the first quarter. Despite the small underwriting loss relating to Storm Uri, the rest of the reshaped underwriting portfolio is performing as expected. The gains of Solasglas and our strategic investments allowed us to generate a small increase in book value for the quarter and we hope this pattern continues. I'd also like to offer a few comments on the results of our annual meeting that we held on Tuesday. The voting rights were clearly disappointing. The official tally gave us an unsuccessful outcome on say-on-pay. Additionally, after application of voting cutback, adjustments required under our organizational documents, Joe Platt, the Board's Lead Director and Chair of the Nomination and Governance Committee was reelected to the company's operating company, but was not reelected to the holding company Board. We believe that the voting results were adversely affected by low voter turnout, high broker non-votes and adverse recommendations by certain proxy advisory firms. That said, we are committed to our shareholders in adhering to and bettering our corporate governance oversight. We're committed to making necessary changes to prevent a repeat performance in future years. Regarding say-on-pay some history is in order. Over the years our compensation committee has structured management pay in a way that we believe is tightly aligned with underwriting performance. However, the reinsurance market generally and our underwriting results were more specifically have experienced unanticipated volatility, a result of which has been our management team has earned less than originally forecasted and significantly less than management at peer companies. The Board has great respect for and confidence in the company's management team and our employees. We want to ensure that they remain motivated, energized and aligned. In connection with our efforts to balance management interests and those of our shareholders, in September 2020 we retained compensation consultant Mercer to assist the compensation committee in reviewing and revising our compensation incentive plan design. In light of time constraints and logistical issues, Mercer did not play a material role in the company's compensation setting practices in 2020. However, Mercer is working diligently with the compensation committee on compensation setting practices and decisions for the 2021 calendar year. I do think it is worth noting that last year, there were some extraordinary circumstances. In addition to unforeseen consequences of COVID-19, the company had been involved in a comprehensive and time-intensive strategic review, which was an all-consuming task for our lean management team and which compounded and added to their already significant workload. As a result, the Board carefully considered and unanimously agreed to make certain off-cycle merit-based compensation adjustments and awards. That said, we understand and appreciate that these compensation decisions are in contrary to certain proxy adviser benchmarks, which we will endeavor to be mindful of in the future. Regarding the vote over Joe Platt, we believe that the outcome of his reelection principally emanates from the current absence of diversity on our Board. As I mentioned, 2020 was a year of challenges for the company, which is headquartered in the Cayman Islands. Adding to our challenges is the fact that visitors are not allowed to travel to the Cayman. We have identified several diverse board candidates to join our Board, but it has been nearly impossible for any new Director candidate to meet in person with many of the members of our Board and our management team. We intend to add at least one diverse Director no later than July. Finally, let me say a few words about Joe Platt. Joe is an incredibly skilled businessman with tremendous aspects and superior judgment. In his role as the Board's Lead Director, he has performed with a plum and navigated conflict and build consensus. He's a model Director and has fulfilled a vital role and we thank him. While he will not serve as a Director of the parent company, I am pleased that he will continue on as a Director of Greenlight Reinsurance Ltd. And now, I'd like to turn the call over to Neil to discuss the financial results.

Thank you David, and good morning everyone. Our fully diluted book value per share grew 0.5% during Q1, ending the quarter at $13.49 per share. Net income for the quarter was $6.5 million, or $0.19 per share driven primarily by the investment gains that Simon and David discussed earlier. The company reported an underwriting loss of $2.0 million for the quarter and the combined ratio of 101.5%. The quarter's results included $4.6 million of losses from Winter Storm Uri and an additional $2.9 million from deposit-accounted contracts. Net premium writtens were $170 million for the quarter, up 56% from the first quarter of 2020. Most of this increase is reflected in our casualty line of business and was driven largely by multi-line quota share contracts covering several Lloyd's syndicates. Total general and administrative expenses incurred during the quarter were $7.5 million, representing an increase of 11% over Q1 2020. This increase was due primarily to additional incentive compensation costs. We reported total net investment income of $18.7 million for the quarter, which includes $4 million of income on our investment in Solasglas. Our other investment income includes $14.2 million of realized gains from the AccuRisk sale. Partially offsetting this gain was an income tax expense of $3.7 million associated with the sale. We did not repurchase any shares during Q1. As our existing authorized share and convertible note repurchase plan expires on June 30, 2021 our Board has approved a new repurchase plan that becomes effective on July 1, 2021. The new plan which authorizes the company to purchase up to $25 million of our ordinary shares expires on June 30, 2022. Now I'll turn the call back to the operator and open it up to questions.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Kyle LaBarre from Dowling & Partners. Please go ahead.

Thank you. Good morning everybody. Couple of questions for me. Maybe first Simon, appreciate the commentary on the market. Obviously, through earnings so far there seems to be a lot of focus on rate trends and rate increases beginning to moderate a bit, and some increased discussion about loss cost trends starting to pick back up. Just sort of curious from where you sit what you're seeing on both those trends?

Sure. Good morning, Kyle. So within our book, we do monitor rate trends. We don't disclose those trends, because we just don't have the sufficient volume of business for it to be credible. Having said that, we're observing similar trends to that we're seeing disclosed by our peers in the market. Specifically as I said in my prepared comments, cat is I think a bit disappointing. Rates were certainly off. But I don't think they were -- they increased to the extent that was required given the risk the peril and the opportunities across the market. So relatively speaking it was a disappointment. It's clear that the new capital found an easy path to writing cat business and I suspect that washed out some of the rate momentum. Going forward, I think that although we are not active in the middle of the year in direct to Florida placements June and July, I suspect there may be an affordability question on top of slowing of rate momentum in the Florida carriers. Simply can't pay the monumental rate increases that the reinsurers otherwise would like. So that's going to be an interesting dynamic that we're watching carefully. As I said we're not direct writers of that business. We do assume a small amount through a couple of our partners, but that will be an interesting situation to watch. Elsewhere in the portfolio, similar to other observations, workers' comp while it's performed well for us has certainly not responded with rates in the way that almost every other class has. And we will be pairing our positions on the workers' comp business as we go through the next year or so. Not that we dislike it. It's simply that there is a better opportunity elsewhere. Rate is continuing to move in the right direction in our specialty business. We've been -- we've seen a great deal of movement there and we're very optimistic going forward that there may be a slight slowing of momentum, but the increases seem to continue.

That’s great. Thanks.

And the second part -- the second part of your question is on loss cost trends. Sorry to interrupt Kyle. The -- on the trend side clearly comp has -- worker's comp has performed well, surprisingly well. And there may be a bit of a pandemic effect there. And, of course, that's feeding into the rate trajectory. We are concerned about social inflation as I think everybody is. The character of our book though means that we're not particularly exposed or certainly not as exposed as much of the industry might be to big shifts in social inflation, legal awards and so on. We just don't carry the same tail of exposure that many of our peers do. So again something we're watching carefully. We are concerned about it, but we're not unduly concerned about our book.

Got it. Thank you. That's helpful. And then maybe a bigger picture question, listening to your comments Simon on capital deployment within the reinsurance business and David's comments sounding a bit more favorable on the investment markets, obviously, you guys have continued to be able to find investments on the innovation side. Just, again, as you sit there in your seat Simon, how do you think about capital deployment from here given we're increasingly in a period where it seems like there's probably good uses of capital in a number of different places within your business?

Sure. We're seeing a plethora of opportunity and you listed the main candidates there. It's the Solasglas investment strategy. It's our innovation strategy. It's clearly our core reinsurance business. There's also a buyback potential that we should throw in the mix. So plenty of opportunity to use our capital. But that's a great place to be when we're examining every risk and every opportunity we see and we're measuring it against everything else. It's far, far better place to be than perhaps a couple of years ago when we were scrutinizing risk for adequacy. So very optimistic about how that will all come together.

Yeah. Okay. That's helpful. And then one last one for me and I'm not sure there's necessarily an answer at this point. But I think A.M. Best typically does their annual review of your rating sometime around mid-year June, July sometime like that. I know you guys talked to them all the time thoughts on how they're feeling about the model, the results obviously the underwriting has been improved since last year still a little bit above 100 in 2020, but I think you probably have some good reasons as to why. Just curious how those discussions are going and any insights you may have?

Sure. Look I'm not going to prejudge the outcome. Of course I won't do that. We continue to have a very good and productive relationship with A.M. Best. I do think that -- and this is my reading of the tea leaves, I think they understand and appreciate the improvement in underwriting except that between the COVID-19 losses, the pandemic exposure and various cats over the past not just one year, but a couple of years relative to performance to the industry has really been quite good on the underwriting side. I think they also appreciate that we are relatively less exposed to the extremely low yield on new money. We're a float business. We have an investment strategy that is a great use of our floats at a time when others are seeing investment returns fall off a cliff. Not only that but the -- you've got to roll the dice between investing new money in ultra shorts and getting almost nothing, or pushing out the duration of bit and suffering mark-to-market exposure on a leveraged balance sheet. But we don't have those issues to anything like the same degree. And we think that that positions us well and we believe that A.M. Best understand that also. So I'm optimistic as we go forward and we'll certainly have a continuation of a very good relationship with A.M. Best.

Perfect. Thanks very much for the answers. That’s it for me.

Thank you.

Thank you.

[Operator Instructions] Thank you. Should you have any follow-up questions please direct them to Adam Prior of the Equity Group Inc. at 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. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.