Greenlight Capital Re Ltd (GLRE) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome -- thank you for joining the Greenlight Re conference call for the second quarter 2018 earnings.

Joining us on the call this morning are David Einhorn, Chairman; Simon Burton, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Brendan Barry, Chief Underwriting Officer.

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 by the company's Form 10-K dated February 20, 2018, 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 proves to be incorrect, actual results may vary 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.

I would now like to turn the conference over to Greenlight's CEO, Mr. Simon Burton. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today.

I'm pleased with the results from our underwriting operations this quarter, where we have seen a series of improvements in the positioning of the business. Here are some of the highlights. In the auto line of business, we are seeing the effect of rate increases, so we have now concluded a significantly higher than loss trends. Our quota share partners in this class continue to demonstrate their ability to stay ahead of emerging trends and have done well in balancing rate increases against group and the portfolio. Following the rebalancing of our auto gross exposure last year, we are comfortable with our net retained risk and our overall economics, including the fees from the ceded reinsurance contracts.

Workers' compensation has performed well over the last 2 years, although it is starting to face some pricing pressure this year. There are a few moving parts. We observed an uptick in loss severity, offset by reduced frequency. Pricing is down slightly, but there have been positive structural adjustments to offset most of the decline. We renewed most of our Florida-specific cat programs in June in an environment that was weak but within our expectations. We consequently ceded most of our Florida-specific exposure to a partner supported by lower-cost collateralized capital.

Overall, we have significantly decreased our exposure to natural catastrophes this year. Maximum exposure to any single event is down 15%, and our 1-in-250-year model scenario is down around 30%, which in part reflects a disproportionate reduction in our Florida exposure.

I have a few observations on market conditions. We are seeing an interesting dynamic following the significant hurricanes, flooding and wildfires over the last year. As a reminder, we didn't share expectation of many in our industry that property cat rates would respond vigorously after the events, simply because we didn't expect the supply of capital to reduce. That prediction turned out to be accurate. The renewals last month of loss-impacted Florida programs seem to particularly disappoint the market by pricing out between flat and single-digit rate increases.

Further weakness in loss-impacted renewals is old news now. The more interesting development is that the market's rejection of material price increases in catastrophe lines has exposed other underperforming classes to scrutiny, particularly in the London market specialty areas. We are starting to notice a determination to reduce capacity in some marine subclasses, for example, where performance has been persistently poor. Some of the change appears to be driven by pressure from the corporation of Lloyd's, which has put underperforming classes and, in some cases, entire syndicates on notice that remedial action is required. We have seen evidence of response in several ways: syndicate consolidation and other expense-cutting measures, scaling back capacity in problem areas and pressure on commission structures in facilities and MGA business. It's too early to predict an improved underwriting environment, but these are welcome signs of more rational behavior.

This quarter was uneventful on the reserving side, and overall, the reserves have not moved materially since last quarter. The 2017 catastrophe loss estimates are approximately flat, and there was overall a small increase -- small reserve release on prior periods.

Now I'd like to turn the call over to David.

Thanks, Simon, and good morning, everyone. The Greenlight Re investment portfolio declined 3.8% in the second quarter and 0.2% in the month of July. Our longs contributed 3.4% in the quarter, and our shorts detracted 6.1%. This has been a frustrating environment for us and for value-investing styles.

AllianceBernstein recently reported that value-investment strategies are performing in the bottom 1 percentile since 1990. Reality is that the market is cyclical and, given the extreme anomaly, reversion to the mean should happen sooner rather than later, we just can't say when.

The biggest detractor to performance in the quarter was Brighthouse Financial, a spinout from MetLife that sells annuities and life insurance. We first purchased the stock in the third quarter of last year. At the time, the market did not expect the company to return capital until 2020 and the stock was trading at just 56% of book value. Since the spin, the company's executed according to our expectations and has made progress towards returning capital earlier than originally forecast. Despite this, the stock ended the quarter at 37% of book value and less than 5x earnings.

Comparable businesses traded significantly higher multiples. We believe Brighthouse shares are materially undervalued, and it remains one of our highest-conviction longs.

It was another difficult quarter in our short portfolio but some story stocks continued their ascent despite what we view as increasingly deteriorating fundamentals. Tesla shares rose 28% in the quarter and was our second-biggest loser. Manufacturing problems continued yet the stock jumped after the CEO promised the short burn of the century on Twitter. Despite short-term production surge theatrics, the company has missed all of its material manufacturing targets and financial projection. Losses of the company are mounting, and the emergence of viable competition for electric vehicles is eroding Tesla's long-standing first-mover advantage.

GM reported a decent first quarter and successfully restructured its money-losing Korean operation. More importantly, the company announced a $2.25 billion investment by SoftBank's Vision Fund into Cruise automation, GM's autonomous driving unit, valuing that business at $11.5 billion. Implicitly, this transaction should have unlocked $11 per share of value in GM stock, not counting any value ascribed to SoftBank validating GM's technology or providing strategic help. GM was up 8% and was our biggest contributor in the quarter. But in July, the company lowered guidance because of higher commodity prices relating to the new tariffs and currency headwinds. If we just strip out the implied value for GM's retained ownership of Cruise, GM's core auto business trades at less than 5x earnings. GM remains our highest [convictional ideal].

Given the investment losses, we've taken several actions to mitigate our problems. In a difficult environment, we've been aggressively managing our gross exposure, we've increased our uses of put options in the short book. We have risk-managed our position sizes, and our trading has helped reduce the losses.

Our year-to-date investment result is poor, but we're encouraged by the underlying fundamentals of the companies in our portfolio, which have generally improved in our long book and have deteriorated in our short book. It is difficult to explain the disconnect between the stock prices and the funds. Our expectation is that we'll close, over time, to our benefit.

Our underwriting operations continue to show progress both in repositioning the portfolio and the level of profitability. Simon and the team are doing a great job in an environment that the industry continues to describe as difficult. Our goal remains to be prudent and to lay a strong foundation of expertise in innovation and the cycle eventually turns.

Now I'd like to turn the call over to Tim to discuss the financial results.

Thanks, David. For the second quarter of 2018, Greenlight Re reported a net loss of $37.4 million compared to a net loss of $35.5 million for the comparable period in 2017. The net loss per share was $1.01 for the second quarter 2018 compared to a net loss of $0.96 in the prior year period. For the 6 months ended June 30, 2018, we reported a net loss of $180.1 million compared to a net loss of $27.1 million for the first 6 months of 2017. Net loss per share was $4.87 for the 6 months ended June 30, 2018, compared to a net loss of $0.73 per share for the same period in 2017.

Gross premiums written were $317.2 million for the first 6 months of 2018, a decrease of 14.7% from the same period in 2017, primarily due to nonrenewal of a Florida homeowner's quota share contract in the fourth quarter of 2017 as well as lower participation in multiline casualty contract.

Our net earned premiums for the first 6 months of 2018 decreased by 12% to $274.7 million from the prior year period, primarily due to the lower premiums written as well as the retrocession of certain Non-Standard Automobile business that commenced during the third and fourth quarters of 2017.

The composite ratio for the second quarter was 92.7% and was 94.5% for the first 6 months of 2018. There was a small favorable loss development of approximately $800,000 reported in our second quarter. We are pleased with the results of our current underwriting portfolio, which continues to perform well and in line with our expectations.

Total general and administrative expenses incurred during the first half of 2018 was $12.9 million, which is in line with our prior year's expenses. Underwriting expenses of $7.6 million for the first 6 months of 2018 were in line with our expectations and compared to $8.1 million incurred in 2017. This gives rise to an underwriting expense ratio for the first 6 months of 2018 of 2.8% and a combined ratio of 97.3%.

Our corporate expenses of $5.3 million for the first 6 months of 2018 compared to $4.9 million reported during the same period in 2017 was a small increase attributed to slightly higher legal and professional fees incurred in the current period.

We reported a net investment loss of $40.7 million during the second quarter of 2018, reflecting a net loss of 3.8% on our investment portfolio. For the first 6 months of 2018, we reported a net investment loss of $185.9 million, reflecting a net investment loss of 15.2%.

During the second quarter of the year, the company repurchased 180,000 Class A ordinary shares of the company's stock at an average price of $15.27 per share. Fully diluted adjusted book value per share as of June 30, 2018, was $17.38, a 23.2% decrease from $22.64 per share reported at June 30, 2017.

And finally, as a reminder, we would welcome everyone to join us on November 15 for our sixth biannual Investor Day, which will be held at the French Institute in New York City. Further information and notices will be provided closer to the event.

Now I'd like to turn the call back to the operator and open it up for questions.

(Operator Instructions) Our first question is from Bob Glasspiegel of Janney Montgomery Scott.

Simon, seems like you've had 2 quarters now of relatively stable results in reserve development. Does this give you comfort that this is now your company and the results should be in line with this prospectively?

Bob, yes. When I started a year ago, there was a lot to like about the portfolio. We did make a reserve adjustment at the end of the year there, as you recall, which really reflected a recognition of some old, nonrenewed contracts that we took a fresh view of. The current business is running well, both the business that -- in the portfolio I inherited and the portfolio diversification efforts that have been underway the last 12 months. Obviously, the reserves are what they are and you see the results of that exercise. So yes, Bob, I feel my feet are fully under the table now.

Workers' comp, does the decline in pricing suggest you want to cut back that line? Or are rates where they need to be for you to earn a good return in that segment?

It's actually pretty good, Bob. We've had a good couple of years. The decline is very modest and, as I mentioned in my comments, that we've managed to address that largely by some structural changes. So we're still in a good spot. I think, if anything, we'd certainly like to keep our portfolio, perhaps grow where it makes sense, but we'll see where the opportunities are.

Was there any severance in Mike's departure? And is he -- are you planning to replace the position?

We are not, in the short term, planning another exec hire. But of course, that may change, Bob, and we'll evaluate our team as needed. But there's no immediacy to replacing the COO role. We did disclose severance. Tim, you have the number?

Actually, I don't have the number at hand. But there was a -- you'll see that the deed of settlement was posted as part of our EDGAR filing. It's payable over the next 18 months. And yes, so the severance was approximately $800,000.

And that was in the quarter or that's coming -- that is going to spread over 18 months?

That will be recognized in Q3.

Q3? Okay. And one last one for you, David. It seems like you have more conviction on GM and Brighthouse, and the stocks are lower. I mean, have you increased your position? Or were they fully sized previously?

GM, we have maintained or slightly reduced the position, selling it a little bit into some of the strength that was evident earlier in the quarter. Brighthouse, we moderately added to the position.

Our next question is from Manal Mehta of Sunesis.

Can you give us a better sense of your dependence on the A- rating from A.M. Best? What happens if you're downgraded? And what impact does that have on your PFIC exemption? And then my second question is on the performance of the DME account. At what point does the board have fiduciary obligation to review the investment management agreement?

Manal, yes our A- rating is important to us. And we are in constant communication with the rate agencies as we are throughout our normal course of business. We have a good relationship with them. We are heading into our review process over the next month or so with A.M. Best, which is our annual scheduled review and look forward to those conversations. Tim, you have a few comments on the PFIC situation?

Certainly, as you know, there is the new bright-line test for PFIC. We are involved right now in a restructuring contemplation. And certainly, we believe that we will be able to meet the PFIC hurdles, certainly this year, and those discussions and structural things, which a lot of our peers in the industry are doing as well. We're very confident that we will pass the PFIC new standard.

And David, would like to add anything?

No, that sounds fine.

Our next question is from Brian Meredith from UBS.

A couple of questions. Just curious, kind of adding onto the last question a little bit. Tim, maybe you can tell us, what is your capital cushion right now relative to kind of your A- rating in the event that there is some challenging performance going forward?

Brian, this is Simon. So -- sure. So the A.M. Best model, as you know, is, to a degree, formulaic. It's only a piece of the puzzle. As you're aware, the ratings process is considerably more involved than simply a model output, so I do want to make that clear. Having said that, from a model perspective, our BCAR score is quite healthy, and that's been noted by the rating agency. There remains a reasonable buffer there that we do not consider constrains us operationally in the short term. As I said, it's -- there are more factors that go into the rating process than that. But purely from a capital perspective, we feel quite comfortable.

So your current rating and what's going on is limiting your ability to take advantage of any opportunities that you're seeing of writing any business?

Our capital situation, as I said, from a model perspective, is in a good spot. It's something that the board will -- is thinking about and would consider, as we do at all times. But we don't particularly feel constrained from day-to-day underwriting opportunities at this point, no.

Great. And then, Simon, just curious in the 10-Q, you kind of highlighted you have capacity to kind of flushed out more of the collateralized reinsurance, just the impact you think that's going to have in the marketplace. And you highlight, outside of property cat, areas of kind of business it'll be moving into. Just curious, could you elaborate a little bit? And what areas do you see it moving into?

Yes. The collateralized world is an interesting one. Obviously, property cat is the, by far and large, the lion's share of it. That's a double-edged sword, though. Cat is now a well-traveled path. It's very easy to execute a collateralized cat deal. There's a ton of third-party capital available for that business, and we are a consumer of it. Frankly, to the extent that we can leverage some inwards business that we don't think quite meet our hurdles through to a collateralized provider, that's a minor fee-generating business for us. On the other side of the coin, we are rather more involved and interested in the innovative, more cutting-edge side of providing collateralized products to our clients. The end of last year, we executed on 2 quite substantial, as you know, collateralized nonstandard auto deals, which were, in their own world, somewhat groundbreaking, and efforts continued to explore where we might use collateralized capital for our clients and our benefit. But that's the first example. So I would say, our efforts are directed there. Cat is something -- collateralized cat is a business that is great if you've invested in a large cat team over the years and are somewhat scratching your head on how to best leverage them today. We're simply not in that position, so we'd prefer to leave it to others.

Thank you very much. Ladies and gentlemen, should you have any follow-up questions, please direct them to Adam Prior of The Equity Group on (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.

Thank you very much. Ladies and gentlemen, you may now disconnect your lines.