Greenlight Capital Re Ltd (GLRE) 2022 Q1 法說會逐字稿

Thank you for joining the Greenlight Re conference call for the first quarter of 2022 earnings.

The company reminds you that forward-looking statements may be made on 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 the company's projections. 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 call over to Greenlight's Re CEO, Mr. Simon Burton. Please go ahead, sir.

Good morning, everyone, and thanks for joining the call. The first quarter of the year used to be considered a benign period for the reinsurance industry with only the occasional large loss. Those days seem distant now. 2 years ago, we were contemplating the impact from the onset of COVID. Last year, Winter Storm Uri set new weather records. And this year, Ukraine has endured a massive ground invasion, while Russia is facing extensive economic sanctions.

During the first quarter, we recognized $13.6 million of losses from the Russian-Ukrainian conflict, which contributed 10.8 percentage points to our 106.2% combined ratio. While the conflict's impact on our combined ratio is substantial, it reflects the growth in our short-tailed specialty business that is otherwise performing well. The Russian-Ukrainian conflict is highly complex, particularly as it relates to the impact of Russian sanctions.

I'd like to highlight a few points about our reserve estimates. The loss estimate relates to an IBNR provision on losses incurred up to March 31, 2022. We have not received any reported losses to date. Our estimate includes an assessment of losses incurred in both Ukraine and Russia. A portion of our exposure to the conflict, including marine, energy, political violence, terror and whole account risks is protected by a retrocessional policy that attaches at $10 million and provides $20 million of coverage to us. The first quarter loss estimate does not reach the attachment point of this cover.

At the start of my remarks, I referred to the apparent disappearance of periods without significant industry events. Not surprisingly, we are seeing the withdrawal of reinsurance capacity in response to poor profitability of the industry over the past few years. The other side of this picture is that market conditions continue to improve. Market studies have suggested that rates overall have improved in each of the last 17 quarters. And the Russian-Ukrainian conflicts and reduction in underwriting capital are likely to continue supporting that trend, at least with respect to the short-tail specialty classes. And despite the scarcity of event-free quarters we've seen recently, we believe that no trends continue forever.

Looking forward, as our nonrenewed lower-margin business runs off over the next few quarters, we are expecting to see the impact of better business mix and continued rate improvement reflected in our results.

In April, we launched the Greenlight Innovation Syndicate 3456 under the Lloyd's syndicate-in-a-box initiative. Our Innovations unit is central to the company strategy and the syndicate will help us support our existing partnerships as well as grow our insurtech portfolio. During the first quarter, we made additional investments and generated $4 million of unrealized gains, reflecting the continued strong market interest in our Innovations partners.

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

Thanks, Simon, and good morning, everyone. The Solasglas fund returned 1.7% in the first quarter. Shorts, including indexed positions, contributed 4.9%. Macro contributed 3.5%. And longs detracted 6%.

During the quarter, the S&P 500 index declined by 4.6%. Our long positions in CONSOL Energy, Rheinmetall and Teck Resources and our macro position in inflation swaps were our largest positive contributors. Green Brick Partners, our largest long position, was our largest detractor. CONSOL Energy and Teck Resources stock prices advanced 66% and 42%, respectively, following price surges for metallurgical and thermal coal. Rheinmetall stock price climbed by 131% in the first quarter as Russia's invasion of Ukraine dramatically changed the outlook for European defense spending. About 3/4 of Rheinmetall's business is military related.

Our position in long inflation swaps benefited as the market began to price in its doubts about the Fed's wherewithal to return inflation to its 2% target. Even as the Fed adjusted the market's expectation to a faster tightening cycle, inflation expectations continued to increase. This benefited our gold position as well.

Green Brick shares fell 35% during the first quarter with nothing company specific to account for the drop. In fact, the blowout earnings released last night indicate that current business performance is excellent. However, the homebuilding sector derated as the market formed a view that the sharp rise in interest in mortgage rates will be the cause for a repeat of the 2008 housing crisis. We believe the comparison and the fear that is accompanying that to be misguided. Due to a decade of underdevelopment, U.S. is experiencing a severe shortage of housing.

Further, homebuilders currently have low financial leverage, there's significantly less speculation and lending underwriting standards are tighter. While higher mortgage rates might have an impact on demand, at this point, homebuilders are more constrained by supply.

We continue to be focused on the global inflation problem. And now at least, we believe that the Fed understands the problem. While it sounds serious about fighting it, the Fed has done little to help the problem other than talk about it. It's kind of like the opposite of the main rule from the movie Fight Club.

If the Fed was serious about stopping the inflation problem, we believe it would be as aggressive and creative in tightening as it is when it was easing. While inflation is set to drop from its current 8.5% year-over-year rate, we do not expect the Fed to be sufficiently aggressive in fighting it. It is like the inflation will remain persistently above the 2% target.

The Solasglas portfolio returned 6.9% in April and has returned 8.7% year-to-date. Net exposure was approximately 26% net long at the end of the first quarter and roughly 30% at the end of April.

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 first quarter, our fully diluted book value per share was $13.65, a decrease of 2.4% from December 31, 2021. Our net loss for the quarter was $5.7 million or $0.17 per share. We reported an underwriting loss of $7.7 million during the first quarter and a combined ratio of 106.2%. The Russian-Ukrainian conflict contributed $13.6 million or 10.8% to the combined ratio. The quarter's underwriting results included adverse prior year development with a net financial impact of $2.6 million. Adjustments to our COVID-19 estimates represented roughly half of this development.

Gross premiums written were $145.9 million for the quarter, a decrease of 14% from the first quarter of 2021 due primarily to our decision to reduce our participation in motor and workers' compensation contracts. This decrease was partially offset by growth in specialty, general liability and multiline business, including premium generated by the company's Innovations partners.

Premiums ceded were $6.0 million in the first quarter of 2022 and were insignificant for the 3 months ended March 31, 2021. During 2022, we entered into new retrocession agreements, primarily to reduce our exposure to large marine and energy loss events and certain property losses.

We reported total net investment income of $7.7 million during the first quarter. We earned $4.1 million from our investment in the Solasglas fund and recognized an additional $3.7 million of other investment income primarily from our Innovations investments.

Total general and administrative expenses incurred during the quarter were $7.2 million, down slightly from $7.5 million in the first quarter of 2021.

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

(Operator Instructions) Our first question will come from [David Beal] with [Enobia Investments.]

I wanted to start with the insurance tech. I see it's grown from, I think, 7% of the premiums up to 10%. I was wondering if you could give us an indication where it will be in the next 24 -- 12 or 24 months. It seems like great progress.

David, it's Simon. So the insurtech, the Innovations unit is substantial to the organization, to our operations as I've mentioned today and in the last several quarters. It is growing. We're growing it steadily and carefully on the insurance side.

I can't indicate where it will be. We never forecast our financial metrics in any case. But I will tell you that it is my objective that Innovations is increasingly important in the context of our overall operations, if that helps.

Yes. Okay. A little bit. The 10% is a focus in 1 or 2 of the larger ones? Or is it kind of spread out? I imagine it's in the more mature ones. Can you comment on that?

We have approximately 20 partnerships at this point. And there is a wide variety of stages of maturity. So the first investment for partnership we entered into was -- and this is on the investment side, was earlier in 2018, and we've been steadily making, building up the book since then.

So these things will come online at different stages in maturity. Some of our partners are not really early stage anymore. They're sort of entering their medium stage of maturity. They've built teams and operations. They may have an MGA, and they've launched their products.

So it will be staggered. But it's quite a substantial portfolio. Most of our partnerships do present us or are likely to present us with the opportunity to participate in insurance business and future. So that will come online over time.

As to our current volume, yes, there is a bit...

(technical difficulty)

Pardon me, ladies and gentlemen, it appears that we have reconnected our speaker line. Speaker, please go ahead and proceed.

David, I'm sorry about that. It's Simon here. I believe we were just addressing the question of insurtech business as it comes online over time and the constituents of our current book. So we have about 20 partnerships on the Innovations side, investment partnerships. And a fairly high proportion of these will ultimately present us with the opportunity to participate in the insurance business as it grows. But they're all at varying stages of maturity. We made our first investment in -- earlier in 2018, I believe. And we made our most recent investments a few weeks ago.

So where we stand today is there is a bit of lumpiness in our current book, but that's going to spread out significantly over the next several quarters, I expect, as more and more of our partners bring their -- launch their products, bring their MGAs online and we participate in the insurance opportunity, if that helps.

Okay. It does help. Yes. My other question was to the bond debt. Can you comment or at least tell us as much as you can about the plan to refinance it or pay it down and how that looks over the next 12 months?

Sure, David. This is David, and nice to hear from you. We're quite aware of the bond maturing in August. And we've begun thinking about what to do about it, and we will approach it in an orderly and timely fashion.

Okay. And then my other one was -- I'm trying to understand the net position of the -- and I guess this is for David or Neil or Simon. But if you look in your website on the April increase of the $16 million, 6.9%, and you divide that, the 6.9% by the $16 million, you get roughly $231 million net invested. But on the balance sheet, I see $151 million. I guess my question is the difference between the net assets and the -- versus the GLRE LP share, the net assets.

Yes. We're investing about 50% of the surplus. So just look at the shareholder equity and divide it by 2.

How was there a $16 million gain, though, on a 6.9% [mark?]

That was the -- if you took the surplus and divided it by 2 and you compare that to the profit, I think it was about 6.9%.

Okay. So the equity is roughly $460 million. Okay.

Sure.

I appreciate your guys' hard work. And David, amazing monthly outperformance. And on the insurance side, it's just [cash] that Ukraine (inaudible) tough for everybody.

Thank you, David.

(Operator Instructions) Our next question will come from [Daniel DeYoung,] a private investor.

My question is regarding the Solasglas fund and how much surplus is in that because I think on the last call, you said you were looking at increasing the percentage advantage. Has there been any progress on that? And is the lack of share buybacks related to the idea of managing a larger percentage of the surplus?

Yes. This is David. I raised the question again with the Board. And as yet, there hasn't been a change in that determination. I expect it will come up again at subsequent Board meetings. No, it's not related to the share repurchase.

Our next question will -- is a follow-up from [David Beal] with [Enobia Investments.]

I had another question on the insurance side. I was wondering if you all internally look at the return on allocated capital either in the past 3 years or 5 years that's not investment-related, just insurance.

Yes, David. We spend a great deal of time thinking about that through both the strategy work that we do and the business planning, and the capital allocation is a critical theme there. We think we've got a pretty good balance. As you can see, we've allocated a fair amount of our capital to our Innovations partners on the investments and increasingly, on the insurance side. And that's worked out tremendously well.

I suppose you could argue that a greater allocation would have been an even better result. But given the illiquid and private nature of these partnerships, we think we've got that allocation about right.

In the insurance portfolio, keep in mind that -- of course, you're seeing some volatility here from Ukraine. But keep in mind, the flavor of our book is it tends to be shorter tail in nature. So some cats, some idiosyncratic type events like Ukraine, but generally not highly exposed to long-term inflation. And we're seeing that theme pick up in the marketplace right now. So the duration of our reserves is about 2 years, and that's tremendously short across the industry.

So I just want to -- you to keep in mind that as we think about allocating capital, we're generally staying away from the long-term inflationary side of risk. And again, we think that serves us quite well on the capital side.

Okay. Is there any -- I realize you don't want to forecast. But with the insurance -- with the quarter ending in March, is there any kind of insight into things following into April and May about how the Ukraine thing is moving forward or other policies? I guess there's no forecast or anything, just sticking on the interim side (inaudible)

No, David, we don't publish interim forecasts. The event is ongoing. Obviously, you're aware of that. But we're monitoring it very carefully. I'd say that we've had no specific data on any emerging losses since March 31, let's call it the fog of war. But that information will steadily make its way to us through our partners, reinsurance partners. And of course, it will be reflected in our financial statements at the earliest opportunity to the extent that the ongoing event presents new exposure, but we're monitoring the situation very carefully.

Okay. And then switching back to the insurance tech. Just one more question, it will be my last question for today. But -- do you expect in 2022 or 2023 for one of the more mature, the larger ones, to exit an IPO?

We're not expecting -- we're not aware of any definitive plans of our partners. It's always an option. And founders at a certain stage in their maturity will consider liquidity as an option for them and their shareholders. So it's always a possibility, but we're not expecting that or relying on it, let's say.

If one were to occur, would you -- how would you all reallocate the $50 million? Would you reshare up the insurance? Would you move it into the portfolio -- the investment portfolio? That is really my last question.

Well, of course...

Would you buy back shares?

The IPO event is not the only way to see some liquidity of our partnership investments. There may be other opportunities through other capital raises as we go. And at every stage, we consider our position. Has it -- is it still the right size in our portfolio? Is it -- how positive are we on the prospects of the partnership? Generally, very positive. So we consider this at all stages.

And you're asking how we might redeploy that capital over time? Well, again, that will be based on the conditions that we see between Solasglas, buybacks, insurance opportunities or other new Innovations partnerships. And those events, those conditions vary rapidly and constantly. We make those decisions live.

This concludes our question-and-answer session, which also concludes our conference for today. Should you have any follow-up questions, please direct them to Karin Daly of The Equity Group 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. Thank you for attending today's presentation. You may now disconnect.