Greenlight Capital Re Ltd (GLRE) 2018 Q4 法說會逐字稿

Thank you for joining the Greenlight Re Conference Call for the Fourth Quarter and Full Year 2018 Earnings. Please note, this event is being recorded. 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 dated February 27, 2019, 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 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, except as required by law.

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

Thank you, operator, and good morning, everyone. Let's first acknowledge that our overall performance in 2018 was very poor. I'd like to review the steps we took during the year to preserve our operating position and address the volatility we experienced. First, if you may recall that we took an unusually bearish view on the prospects of the property cap market [growing] record cap losses in 2017 and that turned out to be a sound prediction. During the first half of 2018, we explored ways to efficiently seed out more of our cat exposure, resulting in effectively dropping the attachment points of our retro cover for Florida storm events. The expanded coverage turned out to be particularly effective in mitigating our loss from Hurricane Michael last quarter. The second action in August was the issuance of our convertible notes resulting in approximately $84 million in net proceeds after a stock repurchase, to support the [service] division of our operating companies in Cayman and Ireland. Third was a series of steps we took to moderate downside risk and reduce investment leverage, including placing an amount approximating our net reserves in cash equivalents to further reduce volatility. After last month's strong investment returns showed, we have retained our ability to participate in upside developments. We also believe that the move to the Solasglas fund structure in the third quarter provides better clarity of our overall risk division.

Collectively, these steps leave us with a balance sheet that's although smaller in size, represents continued excellent security for our policy holders. A.M. Best reaffirmed our A- rating in the third quarter last year and since the time of that review, our BCAR score has improved as a result of our continued risk management actions. Of course, this data is only one piece of any rating agency review. Repositioning of our underwriting business showed good progress during the year as we achieved a better balance between our [larger] quota share relationships and a smaller following positions in selected classes of business. This trend continued at the recent January renewals as we built a significant number of new client relationships. We are executing the plan deliberately and with regard to overall market conditions, we continue to be protective of low cost base, which has allowed us to remain competitive throughout the period of capital reduction. Our progress in open market reinsurance is complemented by our parallel focus on establishing strategic partnerships. The Innovations unit closed a total of 5 investments last year in tech-enabled startups. Two of which have already launched insurance products and generated a small volume of business for us in the fourth quarter. We also significantly increased our investment in AccuRisk, and MGA focused on accidents and health products. We expect (technical difficulty) our growing stable of strategic partnerships to form an increasingly important part of our overall plan going forward. The underwriting combined ratio in 2018 of approximately 103% translates to just under 100% excluding the impact of natural catastrophes. While an improvement on the prior year, there is still some way to go before I consider our underwriting business to be a significant value contributor. A lot of that work has been completed, but not yet done to our financials and more is to come. It's clear to me that we are on the right path.

Finally, we made one senior appointment during the quarter, Neil Greenspan joined us as Chief Accounting Officer. I had the pleasure of working with Neil earlier in my career, and I'm excited to have him on board.

Now I would like to turn the call over to David.

Thanks, Simon, and good morning, everyone. The Greenlight reinvestment portfolio declined 10.2% in the fourth quarter. Our longs lost 19%, while our shorts contributed 8.3%. During the quarter, the S&P 500 Index returned negative 13.5%. Brighthouse Financial was our biggest detractor in the fourth quarter. The stock declined 31% despite positive third quarter results and encouraging comments from management during an investor outlook call in early December. Management shared that the business is performing much better than had been expected a year ago and offered greater visibility into the company's earnings profile for the next 3 years. It also raised its long-term ROE target and announced plans to purchase $1.5 billion of stock by 2021. We're about 40% of Brighthouse's year-end market cap. This month, Brighthouse announced strong fourth quarter results including over $12 a share in GAAP earnings per share during a volatile quarter for capital markets. While the GAAP results don't match the economic results, it was usual for the market to see the company's market hedges were largely effective during the downturn. The company also reported sufficient capital buffers and ample liquidity to support the capital return program announced in December.

Additionally, earnings should continue to improve as the company ends its reliance on MetLife for transition services, modifies its hedging program and adopts NAIC accounting reforms. It appears that the market has started to take note, the stock is up over 34% year-to-date in 2019, which has helped us this year. It still trades at only 35% of book value. Ensco, an offshore contract oil drilling company was our second biggest detractor in the fourth quarter. The stock fell nearly 58% as the price of crude oil tumbled. By contrast, AerCap, an aircraft leasing and aviation finance company whose stock price should be negatively correlated to oil prices declined 31% and was our third biggest detractor, despite no obvious negative developments at the company. AerCap's business is stable with 99% of its lead on lease to a diversified group of airlines. With a 7.4 year remaining average lease term, we believe AerCap's future earnings stream offers excellent visibility. Management are savvy capital allocators, having compounded book value per share at 15% annually, since our initial investment in 2014. And then at 18% since the company's 2006 IPO. At year-end, AerCap traded at 63% of stated book value and under 6x 2019 consensus earnings. The stock has appreciated 16% in 2019. With a handful of winners in our short book in the fourth quarter, including Continental Resources and oil fracking company, which we covered during the year-end oil route and puts on Netflix, our goal position contributed over 1% through our return in the quarter.

Investment portfolio gained 8.6% in January as our top 3 long-equity positions, each posted double-digit gains. General Motors surprised the market by announcing that it expected to beat its full year 2018 earnings and free cash flow guidance and guided to positive earnings growth in 2019. GM now expects to earn $6.50 to $7 per share in 2019, which would imply a PE multiple under 5x. The year-end price for a company that has demonstrated impressive fundamental performance and stands to further benefit from a massive cost-cutting program that will take $4.5 billion out of annual operating expenses. At January month end, the portfolio was approximately 88% long and 52% short. Through the course of 2018, we reduced our gross exposure in response to a challenging environment for our value investment style. And we enter 2019 with a portfolio consisting of fewer names than it did a year ago, but one that is more concentrated in our highest conviction investments. Where our long companies are performing well and are priced at very low valuations, our shorts have flawed business models, questionable accounting and leadership, who are obvious paths to serious problems. While it is still early days, we're encouraged by the start of this year. Despite our challenges on the investment side, Greenlight Re has continued to do a solid job executing on the underwriting side. And I was pleased with the progress we made during the January renewal season. Simon, Brendan, and the team have continued to execute well on transforming our portfolio and setting Greenlight Re up for future success. Now I'd like to turn the call over to Tim to discuss the financial results.

Thanks, David. (technical difficulty) briefly go through the financial results starting with the fourth quarter. For Greenlight, we recorded a net loss attributable to shareholders of $80.8 million compared to a net loss attributable to shareholders of $37.7 million for the prior year quarter. Net loss per share was $2.25 for the fourth quarter 2018 compared to a net loss per share of $1.02 in the prior year period. Gross premiums written during the fourth quarter were $135.1 million due to reduction of 2.7% over premiums written in the fourth quarter of 2017. The decrease was primarily due to reduction in exposure in a multi-line casualty contract. For the quarter, we reported an underwriting loss of $18 million, which was negatively impacted by catastrophe losses of approximately $14.3 million net of reinstatement premiums. Quarter was also negatively impacted by prior year adverse reserve development, which resulted in a net negative financial impact of $4.5 million.

Composite ratio for the quarter was 112.6% with fourth quarter cat losses adding 11.9 points to the composite ratio. We reported a total net investment related loss of $56.4 million during the fourth quarter 2018, which was primarily the result of a net loss of 10.2% on our investment portfolio in Solasglas.

Moving now to the full year results. Greenlight Re reported a net loss to shareholders of $350.1 million for 2018 compared to a net loss to shareholders of $45 million in 2017. Net loss per share for 2018 was $9.74. Gross premiums written were $567.5 million for the year, a decrease of approximately 18.1% over 2017. As reported in prior quarters, the 2018 premiums have decreased primarily due to a decreased participation in a multi-line casualty contract, nonrenewal of a homeowners contract and the commutation of a mortgage reinsurance contract in the third quarter. 2018, our composite ratio was 100.2% with net catastrophe losses contributing 3.7 percentage points. There was no material prior year development on loss reserves during the year, although reserving changes did result in a net negative financial impact of $7.4 million, primarily due to adjustments to profit and seeding commissions. Our general and administrative expenses for the year totaled $25.2 million, which is a reduction of a $1.2 million from the prior year. Underwriting expenses of $13.1 million were lower than the $15.1 million reported in 2017, primarily as a result of reduced bonuses and recruitment cost. The underwriting expense ratio for the year was 2.6%, resulting in a combined ratio for the year of 102.8%.

The corporate expenses during 2018 of $12.1 million compares to $11.2 million for the prior year and is higher primarily due to severance costs and expenses related to our innovation initiative. We recorded a total net investment related loss of $323.1 million, which primarily was a result of a net loss of 30.3% for the year on the combined result of our investment in Solasglas and formally in the investment joint venture. Fully diluted adjusted book value per share as of December 31, 2018, was $13.10, a 41% decrease from $22.22 per share reported at December 31, 2017.

Now I'll turn the call back to the operator to open it up to Q&A.

(Operator Instructions) The first question comes from Meyer Shields with KBW.

I was hoping that I could get an update on what you saw January 1 renewals in terms of overall pricing and seeding commission trends?

Sure, Meyer. January 1 for us was a good result. We -- I'd answer that in 2 parts. One is, we're continuing the process of entering a couple of new class of business to Greenlight's primarily London market specialty classes. And that's going well. We're moderating our pace for good reason. But all the consolidation we're seeing at Lloyd's and the various disruption there is creating opportunity for us. I think separately, and more directly to your question, Meyer, is what did rates look like. Well, clearly, driven by 2 years of, particularly challenging outcomes on the cat side, we're seeing some improvements, where a placement is -- has any elements of cat exposure. I would caution that though because some of these improvements are very overdue. So when you look at the wildfire peril, for example, I think those rates could double, and we're not necessarily any happier about that business than we were 2 years ago because our perception has recalibrated so far. When it comes to the impending renewals in, let's say, Japan, in April, I don't think necessarily Typhoon Jebi has caused us to reframe our view of the perils. And I think there's potentially a very interesting conducive environment there for us. So it's a mixed bag. Overall, a general upward trend for us.

Okay. You touched on this, but I wanted to dig in a little deeper just in terms of London market business and whether the rate increases that we're seeing so far and what I think is definitely better discipline. Are we at a point of adequacy?

Well, so that -- again, a good question. We believe we are, for the business we're writing. And that's -- I can be very definitive on that point. So in classes, like cyber where we've made a relatively modest entry point January 1 or aviation that we've written for the first time here following a number of years of inadequacy in my view, I think, we're at that point. Marine and energy is another point of interest. I would say though that it depends on the carriers' ability to access that business efficiently. We do run particularly low expense ratio cost base and we don't suffer from operational overreach. And that helps us get to the economics of a given deal, whereas some of our peers perhaps, particularly, in the London market, Lloyd's may struggle. So the question of adequacy is again not uniform across the industry, but we're very comfortable where we are.

(Operator Instructions) 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.