Greenlight Capital Re Ltd (GLRE) 2020 Q4 法說會逐字稿

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. Looking -- 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 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)

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 channel -- 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 claims 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 man-made catastrophes in the history of the insurance industry. This was driven not by large hurricanes and earthquakes but by a high-frequency of windstorms 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 are careful 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 reserve provisions for COVID-19 and catastrophes, was just slightly worse than breakeven at a 100.4% combined ratio. We had a positive investment contribution from both the Solasglas fund and the valuation uptick in several of our strategic investments, with further contribution to shareholder value from share buybacks. Given the immense challenges of 2020, our 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 3 years with less concentration of risk in individual counterparties and from systemic sources and to 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 evident at 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 Insurtechs at a later stage of development has surged in 2020, perhaps, in part, because the pandemic has proven the concept of 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 out of fashion by the reinsurance industry as we enter 2020. As we left 2020, traditional investment strategies favored by the industry are left with a bleak prospects of low yields on capital rich balance sheets that historically have relied on healthy investment returns to satisfy their 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 if the pandemic is over. AerCap maintains a strong balance sheet and ended 2020 with over $9 billion in liquidity, yet the stock currently trades at around 71% of book value.

Brighthouse Financial returned 35% in the fourth quarter as the yield curve steepened and value stocks broadly performed well. Since its spinout from MetLife in 2017, the company has bought back over 1/4 of its shares outstanding. After briefly pausing buybacks in May of last year, Brighthouse has since resumed repurchasing shares, and we expect it to buy back around 10% to 15% of the shares outstanding this year. The stock remains undervalued at around 35% of adjusted book value and less than 4x adjusted earnings.

Green Brick Partner shares surged 43% in the fourth quarter. The company reported record net new orders at all of its homebuilder brands during the quarter and ended the year with the 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, 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 sales 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 multiyear stretch of historic underperformance. Value stocks finally experienced a reversal in the fourth quarter of last year, and this 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 national 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. We saw 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 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 investment in the Solasglas fund generated $4.4 million during the year, and our other investment income produced $21.1 million. The primary drivers of the other investment income were markups in the valuations 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, equating 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.

Simon, I wondered 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. 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 and impact us, there aren't really great precedents. Hurricane Harvey was up, 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 cap 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 3 or 4 years, more actually, of events that are recurring that seem to endlessly break the models or indicate that 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 have 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 we're -- the way we assume our cat business, the way we write cat business is constantly with a focus on diminishing that tail exposure when the models get things wrong.

Got it. That's helpful. And then just a sort of maybe it's a more macro question. But if we look out at the underwriting environment and, 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 that 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 of the company.

So those -- whereas innovations may historically have seemed like a -- something that we dabble in, in a very minor way, internally, here, we consider the value investing strategy, the open market underwriting opportunities and the innovations -- forward-looking innovations, investments and strategic relationships and the business that comes off that. All 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 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, are really the place to be. That process started years ago, and we're quite a long way through that, but there's still some more work to be done. So I'd focus more on the margin expansion potential rather than the top line.

Got it. 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, that was net financial impact. So we have some structured contracts in there, so the gross reserve, which is almost all in IBNR, is actually higher than that, probably in the $16 million range. But that's offset financially by some profit commission benefit we took.

Our next question comes from Joshua Horowitz with Palm Global.

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

So we're not a big writer of casualty longer or even medium tail casualty. The sources of casualty exposure in our book of areas like minimum limits of auto, so we still have a reasonably large nonstandard auto business. And what comes with that is minimum limits underlying exposure that's dominantly casualty. That's quite short tail. That's related to core 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 2 largest areas. Nothing extends to very far out on the tail always with the criteria of pursuing underwriting profit. This isn't a float generation approach that we're taking on casualty. Is that helpful?

Yes. Absolutely.

The next question comes from Bob Farnam with Boenning and Scattergood.

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

Bob. So it's a good question. We do use the models as they stand to evaluate expected cat 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 are all capped 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 are 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 100% combined ratio target for one reason or another. I know taking out -- stripping out the development and the COVID and the cats, you're kind of in the high 90s. But I would consider cats to be a normal part of your story. So I'm trying to figure out what 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 3 or 4 years ago. Whereas it was once characterized by a relatively smaller number of large relationships or from 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 simply not paid for that risk and replacing it with randomness risk for which we are paid, we are 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 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. Other business might be a 60% loss ratio and a much more efficient 25% acquisition ratio. So we -- it varies dramatically by the class of business. We focus on margin potential, not acquisition ratio in isolation.

No, okay. I could appreciate. So 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 A.M. Best rating, what have your conversations with A.M. Best been? And what do you need to have the negative outlook removed?

Well, that's a good question. Our relationship with A.M. Best has always been good and healthy and open, and it continues to be so. We made certain commitments to A.M. 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 A.M. 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 -- that's not something I can necessarily detail for you.

(Operator Instructions) The next question comes from Art Winston with Pilot Advisors.

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 in your underwriting results, you really cannot get a competitive return on investment, return on equity when 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 or reduce it?

So the restricted cash item on our balance sheet is something that is present for every reinsurer. It is a -- there's an element of that, that's just a necessary part of being a rated reinsurance company with certain 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 with 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 complement that. You're right that more investment leverage is, in general, a good thing. We are, of course, bounded by the overall volatility that we're able to assume 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 is unerasable. And it's 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, the -- obviously, the improved market will -- we expect lead to better margin potential, better profit potential on underwriting. And that is a -- we -- that's strongly -- a strong benefit to our shareholders. The restricted cash element itself is a consequence of being a reinsurance company.

One further question. The convertible, that matures right away, doesn't it, or am I wrong? The $95 million convertible?

No. Convertibles mature in August of 2023.

Of '23. Okay.

The next question comes from William Arms, a private investor.

This one's for David, just related to the stock sitting sort of 3-plus years, 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.

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-up -- or should you 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.