Q4 2020 Greenlight Capital Re Ltd Earnings Call
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 and this call are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of $19 95.
And 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.
The year ended December 31, and 2020 and other documents filed by the company with the S. E. C. If one of them on risks or uncertainties materialize or if the companys 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 and.
After their prepared remarks.
We will be conducting a question and answer session for those that would like to ask a question. Please press Star then one to be added to the question queue.
I would now like to turn the conference over to Greenlight Re's, CEO and Mr. Simon Burton.
Please go ahead Sir.
Good morning, everyone and thanks for joining the call.
We are now over a year into it pandemic. This has caused tremendous suffering and the mens channel challenges globally as.
And this work is and the insurance industry, we continue to do on jobs remotely if necessary, unlike many and less fortunate situations.
Insurance has had an important financial role to play through the pandemic, but.
But the claim situation is complex and a clear picture of the ultimate cost of COVID-19 to the industry as 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 and the history of the insurance industry.
And 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 full pricing.
It seems to us that the industry is not properly paid for certain types of catastrophe tail scenarios, and we owe capital to minimize this exposure and our portfolio.
These numerous challenges combined to make 2020, a difficult year for the reinsurance industry.
And outperformance relative to this difficult industry backdrop was in my view very good.
The underwriting results, including reserve provisions for COVID-19 on catastrophes was just slightly worse and breakeven I'd say, 104% combined ratio.
We had a positive investment contribution from both the Solas class funds and evaluation uptick and several of our strategic investments.
With further contribution to shareholder value from share buybacks.
Given the immense challenges of 2020 high growth and book value per share of four 2% is a good outcome.
And 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 three years with less concentration of risk and individual counterparties and from systemic sources and a 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 1st renewals.
We will provide more details on our 2021 portfolio next quarter, but I am confident that we saw a significant step forward in January and 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 apps and early stage of development of and insure Tech.
Giving us a prominent role as a strategic partner provider of risk capacity and invest.
We launched this initiative in 2018 and after a couple of years of Slideway go out and find ways glances from a 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 and ensure tax at a later stage of development has surged in 2020, perhaps and Paul because of the pandemic has proven the concept to some key insure tech themes, such as online insurance purchasing disintermediation and emphasis on low friction customer experience.
This emerging investor interest suits are early stage investment strategy well.
Our public market investment capability managed by Greenlight capital was seen is out of fashion and by the reinsurance industry as we enter 2020 as.
As we left 2020 traditional investment strategies favored by the industry all 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 on correlated to our reinsurance business.
And operational changes, we established a service company and London joined the fourth quarter currently with a single employee working and our marketing capacity.
We are already seeing the benefits of this initiative with a significant increase and our visibility and access to one of our key markets now.
Now I'd like to turn the call over to David.
Thanks, Tom and and good morning, everyone.
And the silos classify and returned 8.4% and the fourth quarter.
<unk> contributed 14.1% shorts detracted, four 9% and macro was a small detractor during the quarter. The S&P 500 index returned 12, 1%.
Long positions and Aercap Brighthouse financial and Green brick partners were the biggest winners.
Aercap shares rallied, 81% and the fourth quarter as positive COVID-19 vaccine development bright and the outlook for air travel considerably.
While the recovery and passenger demand is likely to be gradual as vaccination rates ramp up globally Airlines are increasingly prioritizing leasing aircraft to optimize fleet flexibility and a trend that benefits aercap and is likely to persist even as the pandemic is over Aercap maintains a strong balance sheet and ended 2020.
With over $9 billion on liquidity and yet the stock currently trades at around 71% of book value.
Brighthouse financial returned 35% and the fourth quarter as the yield curve steepened and value stocks.
<unk> performed well since its spin out from Metlife and 2017 and the company has bought back over a quarter of its shares outstanding after briefly pausing buybacks and may of last year, probably has since resumed repurchasing shares and we expect it to buyback around 10% to 15% on the shares outstanding this year and the stock remains undervalued at around.
And 35% of adjusted book value and less than four times adjusted earnings.
Green brick partners share surged, 43% and the fourth quarter. The company reported record net new orders and 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 and January we sold a portion of sales class a shares and a secondary offering to rebalance the position size after the stock doubled and <unk>.
1020.
After the sales Greenberg remains a large position and the portfolio.
Our short book broadly detracted from performance and the fourth quarter as equity markets rallied year.
Year to date through February Silas glasses returned minus five 3%.
Please be aware that the starting in 2021, we changed the way and which we calculate the investment return by using the denominate or the asset of capital. The company is earmarking for investment and the Greenlight capital strategy.
And as amounts currently 50% of surplus.
The biggest detractors in 2020, one had been green brick where the market seems to be digesting, our block sale and our short book net.
Net exposure was approximately 46% long and 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 multi year stretch of historic underperformance value stock styling and experienced a reversal on 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.
Palio should do well from here I'm.
And I'm pleased with our underwriting results for the quarter and year. Despite a tough year for natural disasters, coupled with the pandemic time and and the team's efforts over the last few years to reposition the underwriting portfolio have borne fruit, we hope to do even better and 'twenty 'twenty, one given the hardening market environment now.
Now I'd like to turn the call over to Neal 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 and during the quarter at $13 42 per share net income for the quarter was $42 million or $1 20 per share driven primarily.
By gains on our investment and Solas class that David described earlier the.
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.
Elevated current year losses, and a few contracts during the quarter, which drove drove the combined ratio slightly above 100% net.
Net written premiums were 107% excuse me $117 7 million for the quarter up 20% from the fourth quarter of 2019, the bulk of this and great increase related to new business written during 2020.
These contracts, which spanned our property and 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.
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 and Solas class.
We also recognized $9 $9 million of other investment income, which was driven primarily by our innovations and other strategic partnerships.
Turning now turning to our results for the full year as Simon mentioned, our fully diluted book value per share grew four 2% during 2020.
Net income for the year was $3 $9 million 11 per share.
While we had a small underwriting loss that I'll discuss in a moment, our investments performed well and our investments and the solids class fund generated $4 $4 million year on year and our other investment income produced $21 $1 million. The primary drivers of the other investment income were mark ups and devaluations.
Our innovations investments and $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 104% catastrophe events. During the year ended December 31, and 2020 included including Hurricanes, Lora and salad the Midwest Derecho storms.
And North American wildfires contributed $9 million to the underwriting loss COVID-19 contributed an additional seven $1 million.
<unk> these events as well as adverse prior period development and $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 and I'll conclude with an update on our share repurchases during the fourth quarter, we repurchased approximately 700000 shares and an average cost of $7 60 per share equating to a discount of 43% drop our December 31 fully diluted book value per share net.
Now I'll turn the call back to the operator and open it up for questions.
We will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
I'd like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Kyle Labella, with Dowling and partners.
Please go ahead Sir.
Thanks, Good morning, everybody.
Good morning.
Simon and I Wonder if.
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 what the numbers might be but curious in terms of sort of how you're thinking about where there could be some exposure and the book and just get.
And you get your thoughts there and maybe also just if you have any thoughts of of how it might impact the AR the rate environment.
And going forward from here.
Sure Kyle good morning.
The winter storms all.
And I think complex and obviously unusual and.
To a degree unprecedented.
In terms of how we're thinking about how this may develop and impact to us.
There aren't really great precedence Hurricane Harvey was Texas events, a number of years ago.
But we don't think thats necessarily going to lineup to the to the storms.
And our portfolio is relatively straightforward, we don't write a lot of.
Personal and commercial property directly and Texas only through some of our cat relationships. So.
Well, we're not expecting day.
And outsized events for the company.
But this is going to take some time to work through I would like to make a comment on on the models though.
And I have to admit that having observed the last.
Three or four years more actually.
And of events.
And that are occurring that seem to endlessly break the models or indicate the tail and modeling is not sufficient.
The winter storm and 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 on anticipated.
This constant theme of Muddles insufficiently contemplating tail exposure is a very big theme for us and it's something we're laser focused on and our portfolio and.
With the.
And the way we assume.
That business the way we write cat business is is it's constantly.
With a focus on on diminishing that tail that tail exposure when the models get things wrong.
Got it that's helpful. Thanks, and then just a maybe a more macro question, but if we look out at the at the underwriting environment, Simon you've been pretty pretty favorable on on market conditions and the lines that you are looking to to grow.
And your investment environment seems like it's setting up better for the for the value investing philosophy of the Solas class fund and and obviously share repurchase as a consideration given the given the multiple just sort of curious how how are 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 and a lot of different areas. As you say the underwriting environment as is clearly very good and improving.
We are participating in that quite strongly.
The investment environment as you've heard from David is.
Is very interesting for us on the value side, our innovations unit is seeing.
A great deal of opportunity we have a strong pipeline performance is quite good there and with.
That's a forward looking.
Play on the industry, which I think is only going to sort of grow in importance. The company. So those whereas innovations may historically has seemed like a.
That's something that we dabble in and a very minor way.
Internally here, we consider.
The value of investing strategy, the open markets underwriting opportunities and the innovations forward looking innovations investments and strategic relationships and the business that comes off that all in a very exciting areas.
Got it and.
Maybe just to dive into that and just a bit more just in terms of growth going forward how much how much flexibility do you have for additional growth given the.
The leverage right now and given the makeup of the portfolio.
I do see opportunities for margin expansion.
And so.
And that's a bit different to premium capacity, let's say.
I wouldn't necessarily signals that our premiums could expand by by 30% going forward, but I do see plenty of opportunity for margin expansion with the pulp within the portfolio, perhaps as we increasingly.
To rebalance from some of our larger quota share relationships towards margin rich excess of lost opportunities, which in a hardening market saw really the place to be that process started years ago and we are.
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 thanks, and just one more from me just a numbers question, maybe maybe it's for Neil on.
On the Covid losses, just curious what the what the split there is between <unk> and and actual case reserves.
It's almost all I've been on Kyle.
And also one point to note is in the prepared my prepared remarks, when I referred to the seven one.
And that was net financial impact. So we have some structured contracts and they're sort of gross reserve, which is almost all and <unk> is actually higher than that.
Probably probably and there are $16 million range, but.
And that's offset financially by some <unk>.
Profit Commission benefit we took.
Perfect. Thanks very much.
Thank you.
Our next question comes from Joshua Horowitz with P. A L and global please go ahead.
P. A L M palm global thank you.
Good morning, everybody, how do I evaluate your casualty book of business to identify trends for example.
Note the diversity and the book, but are there any sectors that are more heavily weighted than others.
Good morning, Joshua So we will not see a big writer of casualty longer or even medium tail casualty the sources of casualty exposure and a bulk of areas like in a.
Minimum minimum limits on.
So we still have a reasonably large non standard auto business and.
And what comes with that is minimum limits.
The underlying exposure.
This dominantly casualty.
That's quite short tail and alike.
And that's related to car accidents.
With with a very short tail on them.
We have a fairly sizeable workers' compensation book, which is more medium tail.
And there are various all the.
Areas of casualty and the book those are the two largest areas.
Nothing extends to very far out from the tail always with the criteria of pursuing underwriting profits. This isn't a flow generation.
The approach that we're taking on casualty.
Is that helpful.
Yes, absolutely.
Thank you.
Thank you.
The next question comes from Bob Farnam, with Boenning and Scattergood. Please go ahead.
Sure and good morning.
Couple of questions on the combined ratio so.
Given your comments to call about kind of the models being inaccurate or what have you changed or are you expecting to change your and your cat load for the year.
Good morning, Bob So that's a good question.
And we do use the <unk>.
<unk> as they as they stand to evaluate it.
Expected cat losses.
And where we are careful and we're aware of.
Suspicious of the models as far out from the tail. That's why we simply choose not to participate the relationships that we have.
Provide us with the cost exposure that we have and our portfolio are capped. So these don't extend deeply into the tail where were we.
Frankly, I think the industry is not is not properly compensated for that tail risk.
A cat load.
Is he is going to be driven by the models and models themselves the constantly evolving as you can imagine.
But we're happy with the the assessment of our cost exposure through the models as they.
As they exist today, it's that we have more circumspect about.
Fuming more mortality exposure.
Right Okay.
So with your combined ratio do you have a combined ratio target.
Last several years, you've had trouble and kind of reaching net 100 100.
Net combined ratio target for one reason or another.
I know taking out stripping out the development and the Covid and the cats youre kind of and the high Ninety's, but I would consider cats to be a normal part of your story, so I'm trying to figure out what.
And of a normalized combined ratio would be if I. Just don't include don't expect anything for development or where COVID-19 from here.
Yes, Bob I understand the challenge, we don't guide on on combined ratio or any other financial metric.
What I would say is this.
Looking at the past.
I think it's important to get the proper context here.
Folio is is very different to three or four years ago.
Whereas it was one is characterized by a relatively small and number of large relationships all from quota share.
And subject to quite lumpy idiosyncratic situations.
More often than not hurt us on the downside rather than the upside in recent years.
The go forward portfolio.
And is very very few of those characteristics, we've worked hard to to.
Eliminates.
Counter policy risk frankly, where we were simply not paid for that risk and replacing it with randomness risks for which we which we all paid and we all properly compensated.
I am sorry that that doesn't necessarily help you with building a model and and determining a run rate of combined ratio but.
But I want to emphasize that there's a great degree of ambition here too.
And to generate.
On a significant underwriting profits going forward and the past is not necessarily representative of that and.
That's good to point out so your portfolio has changed over time, so it's a different.
And that should be looking at.
So in terms of the acquisition cost ratio and have been trending down over the last three years.
Can you still see room for that to improve.
Yes. So the acquisition cost is again something that is going to move depending on the.
It can be a bit lumpy, let me put it that way Bob.
We we.
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, 2020%, potentially but a 50% or north of 50% acquisition ratio all in.
All the business might be a 60% loss ratio and a much more efficient and 25% acquisition ratio. So we.
It varies dramatically by the class of business, we focus on margin potential not acquisition ratio and isolation.
Okay I can appreciate so that was kind of.
And trying to back into the combined ratio question, but it sounds like you're just wanted me to focus on overall combined ratio holistically.
And Thats, what Youre looking at.
In terms of a M best rating.
And what.
What are your conversations with and best Ben and what's what do you need to have the negative outlook remarks.
Well that's a good question that our relationship with and best has always been good and healthy and open and it continues to be so.
We made certain commitments to invest over the last few years in terms of the.
And the transformation of our underwriting business.
And we've kept those commitments and they seem to be.
They seem to recognize that and so on.
And I'm happy with our relationship with and best It's a positive relationship they understand what we're doing and 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 that.
That's not something I can I can necessarily detail for you.
Okay. Thanks for the color Simon and thanks.
Thank you.
As a reminder, if you do have a question. Please press Star then one on your Touchtone phone.
The next question comes from Art Winston with pilot Advisors. Please go ahead.
Thank you good morning, and was wondering with the tightening market and maybe a better relationship with best if theres any possibility of taking some of the 700 million and restricted cash.
And putting them into more traditional investments because with the amount of investment income you have and your underwriting results you really cannot get a competitive return on investment return on equity 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 and reduce it.
Good morning so.
The restricted cash item on our balance sheet is something that is present for every reinsurer.
It is.
Does and elements of that that's just a necessary.
Part of being a rated reinsurance company with with and obligations to Counterparties, having said that it is something that we're focused on and cash efficiency is.
It is an area, where we are we have made some improvements so that the margins over the past few months. It is very much scenario of focus now that investment leverage.
Clearly we have the <unk>.
All of this glass opportunity we have.
On a more traditional investments that complement that.
On.
And.
You are right that more investment leverage is is in general a good thing.
We are of course bounded by the overall volatility that we're able to assume on the balance sheets, but.
Your your core question of.
And of focusing on restricted cash is something we do every day.
And.
It's it's where there are minor efficiencies to be had but.
On the whole that is.
That's our balance sheets and tree that.
On a ratable.
And as is common among.
And every rated reinsurance company.
On the tightening underwriting conditions and wish you described the more favorable conditions and your better results really have no bearing at all on on that whatsoever is what it is and it can't be changes 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.
<unk>.
Does that said strongly a strong benefit to our shareholders.
The restricted cash element itself as a as a consequence of being the reinsurance company.
One further question the convertible.
That matures right away it doesn't it or am I wrong.
95 million convertible note.
And convertibles and mature in August of 2023 23, okay. Okay. Thank you. Thank you.
Sure.
The next question comes from William Arms, a private Investor. Please go ahead Sir.
Good morning, guys. Thanks for the call.
This one is for David just related to the stock.
And any sort of three plus years at a pretty decent discount to book value and anything else getting addressed related to that.
Dark reflects what the market thinks the stock is where we think the stock is at the wrong price, but we're not in a position to argue or and a change that last year.
We.
Marshall and some resources and some consensus to engage on a share repurchase and we purchased a bunch of stock and a good discount and I think that that added notably to the book value per share.
And so far this year.
Net.
Getting getting a stock buyback on is a bit of a process you need to get.
Everybody on board for wanting to do that and Theres 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 and that's my feeling really as the as the chair of the company and that make sure that that's properly on the agenda and I assure you that that will be fixed at the at the next board meeting so that further buybacks can be more properly considered.
Okay. Thanks.
Sure.
At this time, we show no further questions and the Q and this concludes our question and answer session.
And as a reminder, should you need any follow up should you have any follow up questions. Please direct them to Mr. Adam Prior of the equity Group, Inc. At area Code 2128369, 606, again that is area code 21283696.
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 IR web site at Www Dot Greenlight re dotcom.
And at this time. This concludes the conference. Thank you for attending today's presentation and you may now disconnect.
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