Q2 2021 Greenlight Capital Re Ltd Earnings Call

[music].

Thank you for joining the Greenlight re conference call for the second quarter of 2021earnings.

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 the numerator in the company's form 10-K for the year end December 31, 'twenty 'twenty and other documents filed.

The company with the S E C.

If 1 or more 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.

After the prepared remarks, we will be conducting a question and answer session for.

For those that would like to ask a question. Please press Star then 1 to be added into the Q.

This call is being recorded I would now like to turn the conference over to Greenlight re CEO Mr. Simon Burton. Please go ahead Sir.

Good morning, everyone and thanks for joining today's call.

I'd like to start with an overview of the main drivers of commercial performance for the second quarter, we sold a small growth in book value per share from North 0.8.

We had strong contributions from current year underwriting share buybacks and they'll put valuation of our innovation investments.

These contributions were partly offset by actions taken to strength from legacy and Covid reserves by a small loss in the solar squash phone.

The second quarter, adjusted combined ratio, which excludes the impact of prior period Reserve development for catastrophes was 93%.

The differential to the financial quarter result, 96, 5% combined ratio is partly due to reserving actions against certain casualty contracts written between 2014 and 2018 to a single counterparty.

I would attribute this development, mainly 2 indications of higher than expected social inflation, although I am confident that outside of these contracts our exposure to the growing social inflation problem is fairly small.

Adjustments to our Covid reserves had a further adverse net financial impact for $3.1 million.

Yeah.

The return from innovations investments was $4 million from the second quarter, which represents a 15% increase over the carrying values of these investments at March 30 <unk>.

Investor sentiment towards actual tax continues to be positive and I think there's every reason to believe that this will continue at least with respect to businesses that prioritize profitable growth.

Many of our partners have taken the practical approach of leveraging parts of traditional distribution networks and culmination with unique and disruptive products and that's been quite successful in executing their initial plans.

As all of our investment Markups had been based on external valuation events typically a new capital raise the gains we have recognized to date are appropriately conservative.

Underwriting conditions have in general continued to be favorable in the second quarter.

The composite ratio in our property line of business is 71, 4% and then all the specialty is 81%, which is a significant improvement until the second quarter last year of 93, 3% on a 101% respectively.

The casualty line of business Westwood slightly to 102, 8%, mainly as a result of the reserve actions I described earlier.

Our casualty business is otherwise profitable and performing as expected.

As we look forward to the rest of the year.

We have developed a cautious stance in 2 particular classes of business.

In the auto class, we had allowed our exposure to drift upwards through the pandemic as the claim frequency has been relatively favorable.

As Lockdowns ended and work commutes pick Tau, we are expecting claim frequency to increase and at the same time, we have seen a surge of interest in the class from other reinsurers, resulting in some margin erosion.

As a result, we have taken steps that will reduce our rule to exposure over the next 6 to 12 months.

The workers compensation cost may similarly, see a resurgence of claim frequency with the return to work.

Despite the underlying premium rates trending flat to slightly down.

We still see areas of opportunity with our overall exposure to the class is likely to reduce in future quarters.

These collective underwriting actions will create additional risk capacity to support the higher margin underwriting opportunities. We are seeing from our innovation partners.

And in other areas of open market specialty business.

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

Thanks, Tom and good morning, everyone.

<unk> class fund returned negative <unk>, 9% in the second quarter Longs contributed 4.2% shorts detracted, 2.3% and macro detracted 2.4%.

During the quarter. The S&P 500 index returned 8.5%.

Our long position in Danaher scientific and a couple of short positions, where our largest detractors positive contributors included long positions and can Morris and Consol energy.

After starting 61% in the first quarter Danaher stock fell 34% in the second quarter. Despite the volatility in the share price nothing has changed with respect to our long term investment thesis. We believe the company's IP is significantly more valuable than the entire current market cap of the company and provides a sizable margin of safety to our investments.

The world is kind of want and need a lot of biodegradable packaging and Danaher technology is not easy to replicate.

Aside from Panama are negative result came in the final 2 weeks for the quarter. Following the F. O M C meeting on June 15th and 16th.

After meeting the fed acknowledged that inflation is running hotter than expected.

Some market participants to worry that they may raise rates and begin tapering its asset purchases sooner than the market had anticipated on the.

The back of this constant growth stocks outperformed value stocks dramatically and the stock prices of many of our largest longs declined.

The market appears to believe the fed assertion net inflationary pressures not only transitory, but will be diffused quickly we disagree.

We believe some inflation will prove short lived as bottlenecks related to economic reopening are resolved. We think we have reached a structural change in inflation and expected period of sustained higher prices.

Our largest positions our businesses that should benefit from rising prices in a number of industries.

An example of this is Kim <unk>, who stock returned 26% in the second quarter <unk> produces titanium dioxide, which is used to make products such as paint and plastics spot.

Spot pricing for titanium dioxide, it's up substantially this year given supply shortages in the wake up the post COVID-19 construction boom.

1 of the few industry players for spare capacity can mark stands to benefit from higher prices and volumes. It currently trades for around 9 times This year's earnings.

Estimates.

Another example is console energy, whose stock has passed 90% in the second quarter as seaborne thermal coal prices rallied for the highest level since 2011 with U S. Thermal coal price is following suit.

Console as the lowest cost most efficient minor in Appalachia, although coal demand is on the decline in the U S. Nearly half consoles productions export it to emerging markets to support growing cement for can scale production along with power generation. As a result, we believe consoles secular outlook are stronger than the market is giving it credit for.

In addition to commercial console our long portfolio includes companies like Green brick partners, which reported over 50 per cent earnings growth last night, and Teck resources, a minor net call zinc and copper Tech is currently undergoing a major copper mine expansion project in Chile that will double the company's copper.

<unk> just as the global supply of copper is projected to fall.

Meanwhile, demand for copper is increasing as consumer preferences shift towards green energy solutions, including electric vehicles.

Teck trades at 7 times. This year's consensus earnings estimates, we also on Atlas Air worldwide. The largest operator of Boeing 747 freighters Atlas continues to benefit from what now appears to be a structural shortage of air cargo capacity as demand has grown while supply has shrunk it trade for the p/e multiple of around 5 times.

Year to date through July solace glasses returned.

8% net.

Net exposure was approximately 38% long in the investment portfolio at the end of the second quarter and roughly 46% at the end of July.

Greenlight re continues to make progress in our underwriting activities and has generated a 99% combined ratio for the year to date. We're hopeful this trend continues and improves further going forward.

When we take into account investment gains and a recent stock buyback our book value per share.

Should benefit from all 3 factors.

As I said during last quarters call. We are committed to refreshing our board I'm pleased to welcome 3 new independent members to our board of Directors, John Ferrari first lien poly and Victoria cast each of them brings a wealth of corporate and governance experience to the company and we look forward to working with them as well.

Continue to enhanced Greenlight re at every level.

We're also about to complete an engagement with compensation consultant Mercer. Our goal is to revamp our compensation plan, bringing them in line with market practices and further align our employees with our shareholders now I would like to turn the call over to Neal to discuss the financial results.

No.

Thank you David and good morning, our fully diluted book value per share grew <unk>, 8% during the second quarter ending the quarter at $13.60 per share net income for the quarter was zero point $6 million or <unk> <unk> per share.

We reported underwriting income of $4.6 million during the quarter and a combined ratio of 96, 5% the.

Quarters underwriting results included $3.6 million of net financial impact from adverse prior year development, which contributed 2.7 points to our combined ratio.

Included in the prior year development was $3.1 million of Covid related losses.

1 point I'd like to emphasize is that the prior year development I. Just described is on a net financial impact basis.

In reviewing our Covid reserves during the quarter, we made adjustments to several accounts and our overall loss estimate change for a little.

However, in some of the favorable revisions involved contract with offsetting profit commissions. The COVID-19 adjustments had an overall negative impact on our underwriting results.

Gross written premiums were $141.6 million for the quarter up 21% from the second quarter of 2020, the bulk of this increase related to Lloyds multi line quota share contract for.

<unk> ceded were insignificant in the second quarters of 2021 and 2020.

Total general and administrative expenses incurred during the quarter were $7.7 million, representing an increase of $1.6 million or 26% from the second quarter of 2020.

This increase was driven by the growth of our innovations unit higher D&O insurance premiums and increased expenses associated with improvements in our information systems and technology.

We reported total net investment income of $2 million during the quarter, which includes $4 million of unrealized gains on our innovations investments, we incurred a $2 million loss from our investment in the solvents Solas class 1 during the second quarter.

I will conclude with an update on our share repurchases during the second quarter, we repurchased approximately 700000 shares at an average price of $9.30 per share equating to a discount of 32% of our June 32021 fully diluted book value per share now.

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

We will now begin the question and answer session.

To ask a question you May Press Star then 1 on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble our roster.

And the first question comes from Kyle Labarr with Dowling and partners. Please go ahead.

Great. Thanks, good morning, everybody.

The first question maybe for for Simon just.

The comments on social inflation and in your opening remarks, and obviously inflation more broadly has been a topic all through earnings including on the on the economic side, just curious in terms of what what Youre seeing in the portfolio and maybe how the rise in that kind of like inflation is changing your your outlook from an underwriting opportunity in re reserving perspective.

Yes, good morning Carl.

Social inflation is.

Or at least so called social inflation I'm not sure. There's a very clear this definition of the term.

It's only growing issue for the industry.

We're seeing signs of.

Unanticipated claim inflation on.

Business.

<unk> reasonably mature at this point and our portfolio and I think across the industry.

That's the that's the reason for the uptick in our reserves and a relatively isolated pockets across the rest of our reserve block.

Our portfolio is characterized generally by short too low medium tail liabilities and on the medium tail side, it's more on the workers' comp.

And the things Web awards generally are capped and social inflation is less likely to be to be ramp and so in the context of our portfolio I'm quite confident that should social inflation.

Take off and the way that the industry fears.

We have this pocket, where we've taken some provision.

Elsewhere in the portfolio, we feel quite comfortable.

Generally.

I'd say that.

In terms of our in terms of our overall appetite.

It is guiding our appetite, we think that the proposition on short to medium tail lines more on the shoretel side for us given our scale.

Even our operational reach is tremendously good Andy.

The jeopardy that may come on the longer tail business without the sort of global re so that some of our peers have.

It's something that we decided not to do.

Got it that's helpful and 1 more for me just again sort of a broader discussion, but obviously, we're talking small numbers with the COVID-19 revisions, but maybe.

Maybe a little bit more interested in.

We're now a.

A year year, and a half past sort of the start we started to see losses come through reserves develop.

Your view on.

The overall impacts of Covid changed materially and how are you seeing anything that's been surprising either positive or negative in terms of how it has played out so far.

Sure. So we are not that surprised of course there was a.

Relatively small provision this quarter, but it was it didn't emanate from any particular surprise in the portfolio I'll, let neel elaborate in a moment for a few wishes.

I'd say from an interest to industry perspective, where we are less we are less impacted by this but I think the industry should remain concerned about the impact on <unk>.

Excess of loss property cat treaties I think that that is it seems to be a quite substantial unresolved issue for the industry.

Our exposure is quite manageable there I think it may be more of an issue for us for other reinsurers.

Yes, hi.

Hi column Youll here. Thanks for the question non it not a lot to add.

As I indicated actually our total ultimate losses on Covid came down a little bit in the quarter. It was just that it was the acquisition cost the profit Commission issue, which confuse things a little but as Simon indicated we're not we're not seeing a lot of movement on our end on our book.

Perfect. That's it for me thanks very much.

Thanks Carl.

Yeah.

As a reminder, if you have a question. Please press star then 1 to join the queue.

This concludes our question and answer session.

Should you have for any follow up questions. Please direct them to Adam prior of the equity group incorporated at 212836966, and he will be happy to assist you.

We also remind you that a replay of this call and other pertinent information about Greenlight re is available at our website at www Dot Greenlight re dot com.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

Yeah.