Greenlight Capital Re Ltd (GLRE) 2021 Q4 法說會逐字稿

Good day, and thank you for joining the Greenlight Re Conference Call for the Fourth Quarter of 2021 Earnings. (Operator Instructions) 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 for the year ended December 31, 2021, 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.

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 the call. Before we get started, I'd like to take a moment to recognize the adversity faced by the Ukrainian people over the past 2 weeks and express my hope for a quick end to the hostilities. I will discuss this conflict further in a few minutes.

Let's start with a review of our financial performance and our positioning for the year ahead. In the fourth quarter of 2021, we grew book value per share by 5.6%, with positive contributions from each of underwriting, strategic investments and Solasglas, partly offset by G&A and interest expenses. For the full year 2021, it was another challenging year for the insurance industry as an unusually long list of natural catastrophes resulted in the second highest level of cat losses in history. Discount activity added around 6 points to our combined ratio of 100.9% for the year.

There were also headwinds in the auto portfolio as core repair and replacement costs suffered rapid and severe inflationary pressure, although this was offset by reserve releases from the runoff auto book that performed better than expected. Recall that we have been steadily reducing our exposure to the auto class over the last few years, with the final large step-down completed on January 1, 2022. These headwinds aside, I'm pleased with the performance of the go-forward underwriting business.

The performance of strategic investments was a highlight of the year with 5 consecutive quarters of gains. Innovations investments generated unrealized gains of $19.6 million on a carry value of $22.9 million as of January 1, 2021. We also realized a $10.5 million gain net of tax in the first quarter of 2021 from the divestment of our position in a more traditional MGA.

Next, I'd like to recap our strategy and highlight some of the changes we have made over the past 4 years. First, a summary of our open market underwriting strategy. When I joined the company in 2017, our portfolio is dominated by a small number of large accounts. Our underwriting is now considerably more diverse by line of business with lower individual counterparty risk and with higher margin potential. Of course, this diversification brings exposure to a wider array of global insurance events, but I believe that assuming risk that's properly priced, diversified and risk managed is key to achieving optimal underwriting results.

This rebalancing of the portfolio took some time, but I'm pleased to report that with the renewal actions we took on January 1, 2022, this process is now complete. Here are a couple of highlights to give you a sense of the changes. In 2017, auto represented 55% of our premium, today it's 2%. In 2017, the top 5 accounts amounted to 72% of total premium, we estimate this will be roughly 20% in 2022.

Looking at the current diversified portfolio of risks, there are a few key characteristics. We have grown our Lloyd's partnership significantly, which aligns with our view that Lloyd's has a strong track record of outperformance and favorable market conditions. We have grown our excess of loss business, resulting in a more conventional balance between excess of loss and quota share. We are concerned about the risk of inflation on claims costs. And as a result, we are writing a relatively low volume of long-tailed exposure.

Greenlight Re does not have any direct relationships with Russian insurers, brokers or any other Russian companies or individuals. We expect that our clients are strictly adhering to sanctions on Russia. The impact of sanctions on our premium volume is likely to be minor. The war will likely present us with loss exposure from our specialty book. We have received no specific information on damage to insured assets and no claim notices. So we have not yet developed an estimate of losses incurred.

Moving away from the war and come back to Greenlight's operational strategy, I would like to discuss the partnerships created by our innovations unit. We launched Greenlight Re Innovations in March 2018. And over the last 4 years, we have built one of the most active and respected teams in the early-stage insurtech space. Over this period, we have made 20 investments in insurtechs, mainly MGAs offering a differentiated product or distribution strategy.

While the prospect of capital appreciation is attractive, our primary focus is on the potential for underwriting opportunities that emerge over time as our partners scale their businesses. With our visibility into their operations as an early-stage investor, often combined with lower than market placement expense, these risks should, over time, be more profitable than comparable open market business. In 2021, 6% of our premium was linked to our innovation portfolio, and this proportion will increase in 2022.

Industry-wide, there has been significant interest in insurtech over the last 18 months and a number of our competitors have started to adopt a strategy similar to ours. We have seen some eye-watering valuations and high-profile share price collapses for some of the publicly quoted insurtechs who have struggled to contain costs, driven by their rapid growth. Each of our portfolio companies is focused on profitability rather than revenue growth alone. And a key part of our investment process is identifying partners who understand the importance of underwriting profits.

In January, we announced that we will be launching Lloyd's Syndicate 3456, which will focus exclusively on insurtech business sourced from our innovations unit. The Syndicate will enable us to further support our partners by providing them with access to the Lloyd's brand rating and global licenses. In combination with our investment position in Solasglas, we are excited about the potential for each area of the business to create shareholder value in 2022. I'm confident that the company is better positioned now than at any time since I became CEO.

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

Thanks, Simon, and good morning, everyone. The Solasglas fund returned 9.9% in the fourth quarter, longs contributed 11.8%, shorts contributed 0.2% and macro detracted 0.7%. During the quarter, the S&P 500 Index returned 11%. Our long positions in Brighthouse Financial, [General Motors] and Green Brick Partners were our largest positive contributors. An equity index hedge and individual short position and our long position in Danimer Scientific were our biggest detractors.

Brighthouse Financial gained 15% during the quarter. The company reported another strong result and continued its aggressive and accretive share repurchases, which totaled 12% in 2021. Since the spin-off from MetLife in 2017, the company has reduced its share count by about 35%, and we expect it to repurchase another double-digit percentage of the shares in 2022. The stock currently trades at a 3.0x PE multiple of its expected 2022 earnings and 33% of book value. More stock advanced 15% during the quarter as titanium dioxide supply remains tight and pricing continues to escalate. We believe both the TiO2 segment as well as the fluoropolymer businesses are largely sold out for the coming quarters.

Green Brick Partners stock price advanced 48% in the fourth quarter, but there wasn't anything obvious to us that was responsible for this. Last week, Green Brick reported its fourth quarter and full year results. The company earned $3.72 per share in 2021, which was up 65% year-over-year and 200% cumulatively over the past 2 years. Analysts expect the company to continue its growth this year as current projections are for EPS of $4.20 in 2022. The stock currently trades at an undemanding 5.2x of these expected results.

Danimer Scientific shares fell 48% in the fourth quarter. We believe the primary driver was the mismanagement of its capital structure. In December, the company suddenly decided it needed to raise money and a convertible bond was hastily issued on terms that were unattractive to the company. We use this opportunity to swap most of our investment from common stock to the convertible note. This way, we moved up a level in the capital structure, will collect a coupon and, given favorable terms, we'll participate in most of the upside should it develop. We continue to believe that there will be enormous demand for the company's biodegradable plastic.

Looking at the current environment, after a number of challenging years for value investing, combined with what we consider to be another bubble in certain speculative stocks, we believe that tide has now turned. We believe that inflation is now a structural problem, and we are positioned to benefit from it in our long, short and macro positions. The Solasglas portfolio returned 3.4% in February and has returned 2.7% year-to-date. We believe the tide turned a year ago and is showing up in our performance. Over the last 12 months ended February 28, Solasglas has returned 16.5%. Net exposure was approximately 39% in the investment portfolio at the end of 2021 and roughly 29% at the end of February.

Let me say a few things about Russia's invasion of Ukraine. There are now over 2 million displayed Ukranians and untold debt. And as the crisis extends, the numbers will continue to expand. From an investment perspective, just as the pandemic accelerated a number of trends that were already in place, so too is the current turn of events. We already had an inflation problem, which the war is certain to accelerate. Similarly, the bubble on speculative stocks seems to have topped a year ago and the recent stock market turbulence appears to be accelerating the unwind of the excesses. With relatively tight positioning in a pro-inflation posture, while we did not anticipate this war, we are reasonably well positioned at the outset of the conflict.

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

Thank you, David, and good morning. At the end of the fourth quarter, our fully diluted book value per share was $13.99, an increase of 5.6% from September 30, and 4.2% from December 31, 2020. Our net income for the quarter was $24.3 million or $0.71 per share. For the year ended December 31, 2021, our net income was $17.6 million or $0.51 per share. We reported underwriting income of $4.8 million during the fourth quarter and a combined ratio of 96.4%.

The quarter's underwriting results included a favorable prior year development with a net financial impact of $11.5 million and losses from deposit accounted contracts of $8.7 million. While deposit accounted contracts are disclosed separately from those to which we apply reinsurance accounting, the actuarial processes used to estimate the ultimate losses are the same. The combined impact of these adjustments reduced our fourth quarter combined ratio by 2.1 percentage points, although this impact was divided between components.

The reinsurance accounted development improved our loss ratio, while the deposit accounting impact increased our underwriting expense ratio. We did not recognize any material adjustments to our COVID-19 estimates during the quarter. For the year, our combined ratio was 100.9%. Catastrophe losses contributed 6.1 percentage points to this total with the bulk of these cat losses being generated by Hurricane Ida, the European floods and hailstorms and winter storm Uri.

Our adjusted combined ratio for the fourth quarter was 97.7%, an increase of 5.1 percentage points over the fourth quarter of 2020. During Q4 2021, we increased our [loss picks] on a significant portion of the auto business that we earned during the first 3 quarters of the year, which led to a disproportionate impact on the quarter's adjusted combined ratio. This increase related to the increased inflation costs in the auto class that Simon discussed earlier.

Our adjusted combined ratio for the year ended December 31, 2021, was 94.1%. We do not intend to continue to provide an adjusted combined ratio measure in future quarters. Our intention in introducing the measure last year was to help investors understand the trends and variability in our underwriting results. However, we have since concluded that the use of this measure does not significantly enhance investors' understanding of our underwriting performance. Going forward, we intend to focus our disclosure on the significant drivers of our combined ratio and underwriting results.

Gross premiums written were $125.1 million for the quarter, up 6% from the fourth quarter of 2020. This increase relates primarily to growth in our financial lines business and the reinsurance coverage we provide to third-party Lloyd's Syndicate. The increase was partially offset by decreases in other lines. For the year ended December 31, 2021, gross premiums written were $565.4 million, up 18% from 2020, an increase also driven by the growth in Lloyd's business. Premiums written were insignificant for both the quarter and the year ended December 31, 2021.

Total general and administrative expenses incurred during the quarter were $8.0 million, which was roughly unchanged from the fourth quarter of 2020. For the year, total G&A was $29.4 million, up 11% in 2020. This increase was driven by the growth of our innovations unit, higher professional fees and increased technology expenses.

We reported total net investment income of $25.3 million during the fourth quarter. We earned $22.3 million from our investment in the Solasglas fund and recognized an additional $2 million of other investment income, primarily from our innovations investments. For the year ended December 31, 2021, our investment in Solasglas fund earned $18.1 million, representing a 7.5% return on the associated investment portfolio. Our other investment income totaled $32.1 million, driven by gains on our strategic investments.

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

(Operator Instructions) And the first question will come from [David Bell with Bell Brands].

Appreciate the time today. My first question is to the mix of business. Can you comment on the leading versus the following business, how the split is in the reinsurance?

Sure, David. So we don't disclose the split of lead versus follow, it's quite fluid. It's determined at the point of underwriting. I don't think it's material to our financial disclosures, which is why it's never a metric that we've tracked as undisclosed. But let me give you an idea of the distinction between the 2. Leading business is something that a participant -- a reinsurer would do when you've got great visibility into a class, you're fully resourced and a high degree of expertise and history and credibility in that class of business and likely with our client.

As a follower, you've got all of the resources you need to make a cogent underwriting decision, but you may not be quite as well equipped in terms of sort of visibility into the entire market and operational profile. So we make a distinction between where we lead and follow depending on how we view ourselves. In some classes, we do have a tremendous amount of expertise and visibility in the class. We may lead business there. In other classes, that's less the case. There should be no implied distinction though between the quality of the underwriting, if that helps.

Just a little bit more on that. Given the innovation push, does it affect that mix? Is there more leading (inaudible).

Your question on the innovations, yes. So the Innovations business, as that connects to our underwriting, that is different. So what I described a moment ago is more our open market reinsurance approach. On the innovation side, we're generally an early-stage investor with our partners. We often negotiate access and rights to reinsurance business as an MGA might build their business and then hit the market. So there's optionality there. There's also a bit less frictional expense because we have a direct relationship with our partner and have less need for an intermediary.

In those cases, yes, we may well be leading versus following. Having said that, we'll apply the same distinction. We're not necessarily an expert in travel insurance, for example, or title insurance, both of which are examples of our portfolio companies. And it may be a better solution for everybody to have a more prominent lead on the program with a significant participation from Greenlight behind them. Again, you shouldn't imply -- there should be no implied difference between the quality of that underwriting, but there'll be a mix there as well.

And for more general -- my second question is more general. How do you -- or on your strategy, how do you compete with roughly $500 million in capital while some of the other competitors are $5 billion in capital? Could you help me understand that?

Yes, that's a good question. That's a good question So it's certainly the case that we don't have as much market power as a company that's 10x our size, who can wade into a placement or a class of business demand to see everything and cherry-pick the placements typically. Having said that, what we do have that our larger peers don't is agility. I'm directly day-to-day involved in all of the underwriting decisions. We have a very flat structure here. We can pivot in a moment on strategy and tactics in underwriting in a way that larger peers with dispersed underwriting and layers of management find it rather more difficult to do. So in my view, we make up for lack of market power by significantly enhanced agility. And by the way, our broker relationships are tremendously good. We are valued by our partners, brokers very often value response time and agility and sort of clear thinking over a monstrous balance sheet. So we do feel as though we more than make up for that difference.

Okay. And then my final question is to the management comp plan. Is it tied to stock price performance? And if not, why not? And then, as an add-on to that, why not any additional stock purchase during the quarter?

So our [volume] metrics, as we've disclosed, in large part tie into growth in shareholder value and the addition to shareholder value from our operational results. That's number one. So to the extent that impacts stock price, which is a very direct link in my view, yes, there is a tie-in. Second, a large component of management's comp is stock itself. So stock performance is explicitly something that we're interested in. So yes, I think there's a very clear connection between our plans and our shareholders' interest. I consider the alignment very strong.

On the buybacks, we, at all times, consider the best use of our capital. As things stand today, we see both opportunity to deploy capital in our various areas of operation being the market underwriting, Solasglas and innovations. We also have to keep in mind the implied scale of the business and the implications of reducing that scale with our partners and with rating agencies. So that's always a consideration as well. Recently that's led us to buyback rather less, that could change in the future.

And the next question will come from Desmond Kinch with OAM.

I have a couple of questions for David. The first one is related to the last question that was asked, which is -- so David, how do you expect to significantly reduce or eliminate the roughly 50% discount to NAV at which Greenlight Re shares currently trade? And the second one is, in Greenlight Re's earlier years following the IPO, the expectation was the investment returns at Greenlight Re should be a bit more than 1x the investment returns of Greenlight Capital. But in more recent years due to insurance rating constraints, this ratio is almost certainly less than 1x now. Could you give some color and numbers perhaps in a sort of dynamic sense of how that ratio has changed and may change over time?

Look, I think in order to narrow the discount to book value, we have to demonstrate to the market on a sustained basis that we can earn a reasonable return on our equity. And I do think we're making progress along the ways in terms of putting up the results that suggest that. I don't believe it has yet been absorbed or accepted by the market to be true, and we're going to keep at it. I would expect we're going to work harder in 2022 relating to investor communications as well to do a better job of explaining how we've -- like Simon mentioned on the call, we've transformed a bit of the underwriting, the diversification, the strategy and so forth.

Relating to your second question, you're correct in terms of how the company was structured into the IPO. After the difficult year that we had in 2018, the company decided to reduce the amount of risk that it was taking on the investment side of the portfolio. We are presently investing approximately 50% of the equity and managed over here similarly to the hedge fund. But it's also a little bit less than effectively because there's constraints on the amount of investment we're able to make. So we run the hedge funds with a bigger gross than we do the Solasglas partnership. And so, the result is, if I were to put my thumb to the wind is, the effect is it's about -- effectively about the equivalent of about 40% of the equity. This is something that we consider to be an open issue that we will continue to review with the company and with the rating agencies as time goes by. My personal preference is to hope that that can be increased.

(Operator Instructions) The next question will be from [Daniel DeYoung] with -- he's actually a private investor.

Yes. Actually, you just answered my question. I would really, really like to see the float that's managed by you increasing. I think a lot of investors are investing primarily for the investment strategy. But it was really good to see last quarter firing on all cylinders. It's good to see the hard work that's been done to get the operating business to be a good one and then the innovation business on top of that. But, yes, I would really like to see the flow managed by you increase.

And thank you, sir. Ladies and gentlemen, this concludes our question-and-answer session, and thus concludes today's call. Should you have any follow-up questions, please direct them to Karen Daly of the Equity Group Inc. at 212-836-9623, and she 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.