Greenlight Capital Re Ltd (GLRE) 2021 Q2 法說會逐字稿

Thank you for joining the Greenlight Re Conference Call for the Second 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 and are subject to risks, uncertainties and assumptions, including those enumerated in the company's Form 10-K for the yearend 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 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. (Operator Instructions). This call is being recorded.

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 second quarter. We saw a small growth in book value per share of 0.8%. We had strong contributions from current year underwriting, share buybacks and upwards valuation of our Innovations investments. These contributions were partly offset by actions taken to strengthen legacy and COVID reserves and by a small loss in the Solasglas fund.

The second quarter adjusted combined ratio, which excludes the impact of prior period reserve development for catastrophes was 93%. The differential to the financial quarter results of 96.5% combined ratio is partly due to reserving actions against certain casualty contracts written between 2014 and 2018 to a single counterparty. I'd attribute this development mainly to indications of higher-than-expected social inflation, although I'm confident that outside of these contracts, our exposure to the growing social inflation problem is fairly small.

Adjustments to our COVID reserves had a further adverse net financial impact of $3.1 million. The return from Innovations investments was $4 million in the second quarter, which represents a 15% increase over the carry values of these investments at March 31. Investor sentiment towards insurtechs continues to be positive, and I think there's every reason to believe that this will continue, at least with respect to businesses that prioritize profitable growth.

Many of our partners have taken the practical approach of leveraging parts of traditional distribution networks in combination with unique and disruptive products and have been quite successful in executing their initial plans. As all of our investment markups have been based on external valuation events, typically a new capital raise, the gains we have recognized to-date are appropriately conservative.

Underwriting conditions have in general continued to be favorable in the second quarter. The composite ratio in our property line of business is 71.4% and in other specialty is 81%, which is a significant improvement on the second quarter last year of 93.3% and 100.1% respectively. The casualty line of business worsened slightly to 102.8%, mainly as a result of the reserve actions I described earlier. Our casualty business is otherwise profitable and performing as expected.

As we look forward to the rest of the year, we have developed a cautious stance in 2 particular classes of business. In the auto class, we had allowed our exposure to drift upwards through the pandemic as the claim frequency has been relatively favorable. As lockdowns ended and work commutes picked up, we are expecting claim frequency to increase and at the same time, we have seen a surge of interest in the class from other reinsurers, resulting in some margin erosion.

As a result, we have taken steps that will reduce our auto exposure over the next 6 to 12 months. The workers' compensation class may similarly see a resurgence of claim frequency with a return to work. Despite the underlying premium rates trending flat to slightly down, we still see areas of opportunity, but our overall exposure to the class is likely to reduce in future quarters. These collective underwriting actions will create additional risk capacity to support the higher-margin underwriting opportunities we are seeing from our Innovations partners and in other areas of open market specialty business.

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

Thanks, Simon, and Good morning, everyone. The Solasglas fund returned negative 0.9% in the second quarter. Longs contributed 4.2%, shorts detracted 2.3% and macro detracted 2.4%. During the quarter, the S&P 500 Index returned 8.5%. Our long position in Danimer Scientific and a couple of short positions were our largest detractors. Positive contributors included long positions in Chemours and CONSOL Energy. After soaring 61% in the first quarter, Danimer stocks fell 34% in the second quarter. Despite the volatility in the share price, nothing has changed with respect to our long-term investment thesis.

We believe the company's IP is significantly more valuable than the entire current market cap of the company and provides a sizable margin of safety to our investment. The world is going to want and need a lot of biodegradable packaging and Danimer's technology is not easy to replicate. Aside from Danimer, our negative result came in the final 2 weeks of the quarter following the FOMC meeting on June 15 and 16.

At the meeting, the fed acknowledged that inflation is running hotter than expected. This caused some market participants to worry that they may raise rates and begin tapering its asset purchases sooner than the market had anticipated. On the back of this, bonds and growth stocks outperformed value stocks dramatically and the stock prices of many of our largest longs declined.

The market appears to believe the fed assertion that inflationary pressures are not only transitory, but will be diffused quickly. We disagree. While we believe some inflation will prove short-lived as bottlenecks related to economic reopening are resolved, we think we have reached a structural change in inflation and expected period of sustained higher prices. Our largest positions are businesses that should benefit from rising prices in a number of industries. An example of this is Chemours, whose stock returned 26% in the second quarter. Chemours produces titanium dioxide, which is used to make products such as paint and plastics. Spot pricing for titanium dioxide is up substantially this year, given supply shortages in the wake of the post-COVID construction boom.

As one of the few industry players with spare capacity, Chemours stand to benefit from higher prices and volumes. It currently trades for around 9x this year's earnings estimates. Another example is CONSOL Energy, whose stock has passed 90% in the second quarter as seaborne thermal coal prices rallied to the highest level since 2011, with U.S. thermal coal prices following suit. CONSOL is the lowest cost, most efficient miner in Appalachia. Although coal demand is on the decline in the U.S., nearly half of CONSOL's production is exported to emerging markets to support growing cement, brick and steel production, along with power generation. As a result, we believe CONSOL's secular outlook is stronger than the market is giving it credit for.

In addition to Chemours and CONSOL, our long portfolio includes companies like Green Brick Partners, which reported over 50% earnings growth last night and Teck Resources, a miner of met coal, zinc and copper. Teck is currently undergoing a major copper mine expansion project in Chile that will double the company's copper production just as the global supply of copper is projected to fall. Meanwhile, demand for copper is increasing as consumer preferences shift toward green energy solutions, including electric vehicles. Teck trades at 7x this year's consensus earnings estimates.

We also own Atlas Air Worldwide, the largest operator of Boeing 747 freighters. Atlas continues to benefit from what now appears to be a structural shortage of air cargo capacity as demand has grown while supply has shrunk. It trades at a PE multiple of around 5x. Year-to-date through July, Solasglas has returned 1.8%. Net exposure was approximately 38% long in the investment portfolio at the end of the second quarter and roughly 46% at the end of July.

Greenlight Re continues to make progress in our underwriting activities and has generated 99% combined ratio for the year-to-date. We're hopeful this trend continues and improves further going forward. When we take into account investment gains in our recent stock buyback, our book value per share should benefit from all 3 factors.

As I said during last quarter's call, we are committed to refreshing our Board. I'm pleased to welcome 3 new independent members to our Board of Directors, John Ferrari, Ursuline Foley and Victoria Guest. Each of them brings a wealth of corporate and governance experience to the company, and we look forward to working with them as we continue to enhance Greenlight Re at every level.

We're also about to complete an engagement with compensation consultant Mercer. Our goal is to revamp our compensation plan, bringing them in line with market practices and further align our employees with our shareholders.

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

Thank you, David, and Good morning. Our fully diluted book value per share grew 0.8% during the second quarter, ending the quarter at $13.60 per share. Net income for the quarter was $0.6 million or $0.02 per share. We reported underwriting income of $4.6 million during the quarter and a combined ratio of 96.5%.

The quarter's underwriting results included $3.6 million of net financial impact from adverse prior year development, which contributed 2.7 points to our combined ratio. Included in the prior year development was $3.1 million of COVID-related losses.

One point I'd like to emphasize is that the prior year development I just described, is on a net financial impact basis. In reviewing our COVID reserves during the quarter, we made adjustments to several accounts, and our overall loss estimate changed very little. However, as some of the favorable revisions involved contracts with offsetting profit commissions, the COVID-19 adjustment had an overall negative impact on our underwriting results.

Gross written premiums were $141.6 million for the quarter, up 21% from the second quarter of 2020. The bulk of this increase related to Lloyd's multiline quota share contract. Premiums ceded were insignificant in the second quarters of 2021 and 2020.

Total general and administrative expenses incurred during the quarter were $7.7 million, representing an increase of $1.6 million or 26% from the second quarter of 2020. This increase was driven by the growth of our Innovations unit, higher D&O insurance premiums and increased expenses associated with improvements in our information systems and technology. We reported total net investment income of $2 million during the quarter, which includes $4 million of unrealized gains on our Innovations investments. We incurred a $2 million loss from our investment in the Solasglas fund during the second quarter.

I'll conclude with an update on our share repurchases. During the second quarter, we repurchased approximately 700,000 shares at an average price of $9.30 per share, equating to a discount of 32% of our June 30, 2021, fully diluted book value per share.

Now I'll turn the call back to the operator and open it up to questions.

(Operator Instructions) And the first question comes from Kyle Labarre with Dowling & Partners.

First question maybe for Simon. Just I appreciate the comments on social inflation in your opening remarks and obviously inflation more broadly has been a topic all through earnings, including on the economic side. Just curious in terms of what you're seeing in the portfolio and maybe how the rise in economic inflation is changing your outlook from an underwriting opportunity and reserving perspective?

Yes. Social inflation is -- or at least so-called social inflation, I'm not sure there's a very clear definition of the term, it's certainly a growing issue for the industry. We're seeing signs of unanticipated claim inflation on business that is reasonably mature at this point in our portfolio and I think across the industry. So that's the reason for the uptick in our reserves in a relatively isolated pocket.

Across the rest of our reserve block, our portfolio is characterized generally by short to low medium tail liabilities. And on the medium tail side, it's more on the workers' comp end of things where awards generally are capped and social inflation is less likely to be rampant. So in the context of our portfolio, I'm quite confident that should social inflation take off in the way that the industry fears that we have this pocket where we've taken some provision, but elsewhere in the portfolio, we feel quite comfortable.

More generally, I'd say that in terms of our overall appetite, it is guiding our appetite. We think that the proposition on short to medium tail lines, more on the short-tail side for us, given our scale, given our operational reach is tremendously good and the jeopardy that may come on the longer tail business, without the sort of global reach that some of our peers have, is something that we decided not to do.

Got it. No, that's helpful, and one more for me, just, again, sort of a broader discussion. But obviously we're talking small numbers with the COVID revisions, but I may be a little bit more interested in we're a year, 1.5 year past sort of the start. We started to see losses come through reserves develop. Has your view on the overall impacts of COVID changed materially? And are you seeing anything that's been surprising, either positive or negative in terms of how it's played out so far?

Sure. So we are not that surprised. Of course, there was a relatively small provision this quarter, but it was -- it didn't emanate from any particular surprise in the portfolio, I'll let Neil elaborate in a moment if he wishes. I'd say from an industry perspective, where we're less -- we are less impacted by this. But I think the industry should remain concerned about the impact on excess loss property cap treaties. I think that is -- it seems to be quite a substantial unresolved issue for the industry. Our exposure is quite manageable there. I think it may be more of an issue for other reinsurers.

Yes. Hi Kyle, Neil here. Thanks for the question. Not a lot to add. As I indicated, actually, our total ultimate loss on COVID came down a little bit in the quarter. It was just that it was the acquisition cost issue -- the profit commission issue, which confused things a little. But as Simon indicated, we're not seeing a lot of movement on our end on our book.

(Operator Instructions) This concludes our Question-and-Answer Session. 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 at our website at www.greenlightre.com. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.