Q3 2021 Greenlight Capital Re Ltd Earnings Call
Combined ratio over the past few quarters, which reflects improvements in both the quality of our underwriting business and in the overall rating environment.
I'd like to summarize some of the major movements and written premium by class during the quarter.
We are now seeing the reduction in motor liability premium that I discussed in the past two investor calls.
We believe the reasoning behind our decision to reduce exposure has been validated as we are seeing an uptick in accident frequency along with increases in claim severity driven by elevated repair costs. As you ask drivers have reverted to normal driving habits over the past few months.
Our auto exposure will likely take another step down in 2022, as we have decided not to renew further proportionate. This look at January one.
And the financial costs written premium increased during the quarter driven mainly by a rebound in demand for reps and warranty insurance from M&A activity decreased in earlier stages of the pandemic.
Accident and health is a fairly it's fairly small class per ounce, but a couple of things going on there first our traditional A&H business has reduced as we replace it with support for our innovations partners, we're doing a great job on offering new products and disrupting and otherwise inefficient clients.
We have restructured some of our exposure from quota share to excess of loss with equal or greater dollar margin potential, but much lower written premium.
Looking forward to 2022, it is not clear how the market will respond to yet another loss, making in the property catastrophe class.
Rate increases last January were disappointing as new capital arrived to replenish supplying.
This leaves a skeptical that sufficient capacity will be removed to support the needed catastrophe price improvements this year end.
On the other hand, we expect the account losses. This year will help support and extend the generally favorable market conditions in most other classes.
The continued low investment interest rates environments provides further support for pricing conditions overall.
Our innovations unit continues to perform well with an investment gain of $9 $6 million during the quarter, which is an increase of 31% from the prior quarter carried value.
While the investment success is the welcome result of great execution by the innovations team.
A central objective continues to be to enhance our underwriting products and quality of return by establishing a range of proprietary strategic partnerships.
Data innovations business represents approximately 6% of our total written premium.
We see the potential for significant growth from innovations derived underwriting opportunities going forward.
Finally, we completed our annual review with ambassador last quarter, which resulted in re affirmation of our a minus rating and an uplift in outlook to stable. We're pleased that they invest because with our own view of balance sheet strength underwriting prospects on the compelling strategic potential of our innovations business.
Now I'd like to turn the call over to David.
Thanks, Tom and good morning, everyone.
<unk> class <unk> returned negative two 7% in the third quarter longs detracted three 5% shorts contributed positive one 1% and macro was flat during the quarter. The S&P 500 index returned 0.6%.
Long positions in Green brick partners Tomorrow for our largest detractors positive contributors included our long position in Atlas Air worldwide, and our short exposure to several so called story stocks.
Our largest position green brick partners held an analyst day in August at the meeting the company highlighted that its revenues have compounded at 28% annually. Since 2014 IPO in 2020. The company earned $2 24 per share, which is a 93% increase from 2019 the analyst community.
Has taken its estimates for the year and next higher and they now expect the company to earn $4 <unk> per share in 2022. This would represent a remarkable 250% cumulative growth and its bottom line and three years.
These days on commerce market reward accompanying experiencing this amount of growth with a double digit valuation multiple lines revenues arent above market multiple on its earnings Greenberg ended the quarter down 10% to $20 52 and was valued at just five six times 2021 expected earnings.
Our long position in Atlas Air was the largest positive contributor as the stock advanced 20% during the third quarter. The company had a nice beat on our reported second quarter earnings and a strong third quarter earnings guidance and the number of new multiyear customer contracts Atlas continues to benefit from what now appears to be a structural support.
<unk> of air cargo capacity.
Airfreight market is benefiting from ecommerce growth in global supply chain disruptions. Meanwhile, airfreight supply has shrunk as international passenger belly capacity remains significantly below pre pandemic levels and there are long lead times to deliver new freighters Atlas trades at a p/e multiple of around five times.
Lately it feels like many of our longs and exceeding both consensus and our own often more optimistic expectations for their operating performance, but the share price reactions to these positive developments have been minimal. We believe this dynamic ultimately to persist at the stocks don't re rate higher it will eventually be resolved through share repurchases.
There are several companies in our portfolio that appear poised to return our current market cap to shareholders over the next few years.
As we continue to hold the quaint view that shares represent a fractional ownership of a business as the denominator of shares goes down the fraction of the business to each share represents goes up.
Year to date through October solid classes return, 0.7% net exposure was approximately 35% long in the investment portfolio at the end of the third quarter and roughly 46% at the end of October while our underwriting suffered in the third quarter from several cat events that Simon discussed the underlying reinsurance <unk>.
Fans are favorable we continue to make progress with the overall repositioning of our portfolio. In addition to the reaffirmation of our a M best a minus rating with a stable outlook.
We just returned from importantly, with our new board members and I want to welcome Earth's Victoria and John to the team. It was terrific to have fresh viewpoints from industry practitioners that should help enhance our business and strategy overtime now I'd like to turn the call over to Neal to discuss the financial.
Our results.
Thank you David and good morning at the end of the third quarter, our fully diluted book value per share was $13 25.
Representing a two 6% reduction atg booty.
Our net loss for the quarter was $13 9 million or <unk> 42 per share.
We reported an underwriting loss of $12 $6 million during the quarter and the combined ratio of 109, 3%. The quarter's underwriting results included $26 million of catastrophe losses, which contributed 19, one percentage points to our combined ratio.
Of this loss these due to hurricane either.
We did not recognize any material adjustments to prior year loss estimates, including those related to COVID-19.
Gross premiums written were $128 7 million for the quarter down 5% from the third quarter of 2020, the bulk of this decrease related to motor contracts.
We elected to reduce or withdraw our participation.
Premiums ceded were insignificant in the third quarters of 2021 and 2020.
Total general and administrative expenses incurred during the quarter were $6 1 million.
Representing an 18% increase over the third quarter of 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 $4 million during the quarter, which includes $9 $6 million of unrealized gains.
On our innovations investments.
<unk> incurred a $6 1 million loss from our investment in the solar glass one during the third quarter.
I'll conclude with an update on our share repurchases during the third quarter, we repurchased 354000 shares at an average price of $9 18 per share equating to a discount of 31% of our September 32021 fully diluted book value per share.
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 one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And our first question will come from David Bill of B L. Brands. Please go ahead.
Hello, David Bell.
Thank you for taking my question.
Simon I had a question on the <unk>.
$9 6 million innovation gain.
Did did you off sell one of the companies to realize the gain or did you market up can you elaborate on.
On this part of the business.
Sure Hi, David.
Neil.
Alright.
Yes.
Great.
Thanks for the question.
No we have not realized none of those gains represent realized gains the way we the way we address valuations who is we absolutely don't carry these investments technically at fair value, we carry them it costs less impairment and what the markups represent is.
If there is basically it would be identical security in a subsequent raise capital raise we will mark up our carrying value on the basis of that new valuation. So that's what you see there.
It was a capital raise revaluation until we marked up our holding accordingly, that's the bulk of it.
Alright, and can you share I mean I've been following them from the news from the press releases can you share which ones are doing better or.
Any clarity on that or detail.
Hey, David It's Simon here.
We don't do that.
We don't have.
Information on any of our any of our partners customers and these are.
Private companies still so on bulletins dealer that's logical okay. Well you said the innovations are 6% of the premiums now that business is growing can you share what you expect this to grow to I.
I guess more on the vision and innovation seems to be a big part of the future and so I'd like to better understand how you're growing the third.
Written premiums in that area.
Sure as I said in my prepared remarks innovations I'd say.
It has long been an important strategic.
Elements of the company.
We've been growing it steadily we launched the units in early 2018, frankly, I started thinking about this day, one and the job mid 2017.
Steadily growing our portfolio.
As I mentioned the characteristic of these partnership saw both.
<unk> investment typically and often rights into subsequent placements of reinsurance business. So thats generally a rights to access our business, but not necessarily an obligation to provide the capacity.
Early stage startups.
Our on a runway.
We are backing companies, who are very methodical in the way they execute spinoff purely looking for growth.
So this takes time.
And we're really starting just starting to see on the reinsurance side the fruits of.
For the full year.
I'm reluctant to give.
Give you any guidance on what future premium volumes could be.
<unk> at around 6% of written premiums to date this year and I do expect that to increase.
Perhaps materially certainly the opportunity is increasing materially and we have a large and increasingly sizable portfolio from which to choose a reinsurance opportunities wrong. So watch this space.
But I am going to hold off on giving you specific guidance there.
Okay fair enough.
Great the progress, we're making so far so congratulations on that.
Yeah.
This is another question I guess on the broader portfolio.
David I only mentioned that progress on repositioning of the portfolio can you elaborate more on that I understand.
Moving away from cat, but this past quarter Theres, a 1919 percentage points on cat is going forward are you now moving away from cat or will there always be a <unk>.
Certain amount of cat.
Okay understand that.
Sure so on deals.
Yeah, So our view on that is.
Is let's call it middle of the road.
The exposure that we take on.
We will painful.
Notwithstanding that there has been some volatility over the past few years on a loss this quarter.
We don't consider sufficiently.
Sufficiently.
Well priced to be outsized in terms of.
Portfolio.
That may change in the future but.
Im.
I'm skeptical as I said in my prepared comments that kind of.
Tends to be one of those classes were losses appear to drive sentiments.
<unk>.
The industry made demand price increases ultimately.
This is a function of <unk>.
Supply and <unk>.
The supply that to be.
Available to address the market January one is unknown at this point. So we're skeptical are not currently expecting that we will take an outsized.
And the comp business, it's quite unlikely.
We think our current exposure is <unk>.
Reasonable given the.
Prospects.
Something around where we are today.
And David just said Theres not any confusion when I when I talked about repositioning the portfolio I actually meant away from auto as opposed to away from from cap.
Away from auto Okay.
Just one more of ICR time might be going long call, but.
The peers that they have.
Do they have maybe <unk> partner did they also have a difficult quarter on the cat.
Sure.
Yes.
No. So this is an industry event, so I'm not going to discuss any individual peers, but.
The third quarter was a very substantial.
Quarter, four for natural catastrophe losses and the.
The industry as a whole.
Any any company with a significant weighting to reinsurance.
Was almost certainly heavily impacted.
Okay.
And if I have time just for one more I guess this is more for the on a portfolio side for David Einhorn.
Can you I've read in the K.
And the pattern.
Gold position.
And at.
And trying to understand how that relates to the $220 million total investment.
Part of it or is there a separate piece because I think it's 80%.
Roughly 40% short.
Maybe you can provide some clarity because I'm just a little confused on how that total number adds up.
Yes. It is.
I think <unk> too.
When we think about percent hi, when we think about the whatever the capital and the cow. The gold is counted against whatever the limits are for that.
The investment policy when we give the long short ratio that does not include gold.
Okay. So okay.
$222 million does that include roughly $22 million of gold.
And it sounds like from here.
I don't have in front of me, but that sounds about right.
Okay, so 10%.
Okay, I'm trying to come up with a cash book value that exists in that business, but I understand the GAAP book value, but I'm trying to kind of get the simple pieces of the.
The liquid book of the simplest piece and then I can back up the bond debt and then add back the cash on the balance sheet.
Anyway, I'm trying to look at it very simple terms of trying to understand the cash book value that makes sense. So that's if that helps.
And I'm not really sure I've got the balance sheet here I'm, not really sure what youre, what youre getting at exactly.
Unless youre, just talking about like the deferred acquisition costs or something.
Yeah.
Now I'm trying to understand I guess the difference between the.
And cash in the unrestricted and how much.
And how that adds into the book value.
Maybe I'll build a form of this question better next quarter.
But look I think a lot of the recent Neil can elaborate but I think a lot of the restricted cash is pledged as collateral as part of the reinsurance business. So thats in cash, but it's in some kind of a trust account and.
And so we don't have we don't have direct claim on it and tell policies are resolved.
I'd say that's okay. That's correct.
That helps.
And the total amount you can invest to tap the equity.
The shareholder equity.
That's the current situation yes.
Okay, Great and then lastly, if I still have one more on the share repurchase I.
So is there a restricted period during the quarter.
When you kind of continue.
Why is it won't grow quite a bit lower or are you allowed to share.
And so we can understand.
I guess, even though there is an authorization is there is there the available cash to buy shares.
Currently.
Without affecting the equity or the a M best.
Yes look there is a continued balance between.
The business needs.
Need to post collateral.
The rating.
Agency fees and.
Our ability to compete in the market and so we balance the capital in the business with the different opportunities including.
Share repurchase, which we've been pretty active with.
We've bought back about 15% of the company since the beginning of 'twenty 2020.
Yes, that's impressive.
Okay, well I really appreciate it thanks for that.
The time charter and spot.
Our next question comes from Kyle Levine of Dowling and partners. Please go ahead.
Thanks, Good morning, guys few questions for me.
Just one more on the innovations.
Unit Simon Im certainly.
Great.
You don't want to give too much color on all the moving pieces in there just curious how you look at the the profitability profile on the reinsurance Youre writing within the.
The innovations partnerships versus sort of the overall book.
The non innovations piece, if there is any any gap there.
Yes, good morning Carl.
So this is a key element of what we're doing here as I said in my <unk>.
<unk>.
<unk>.
Investment results of the innovations portfolio is welcome as it's been a great experience this year, but the central objective is reinsurance.
Strength in our business.
And improve the quality of business, so that fluid is increasing.
The idea here is that where we have the optionality to write it.
With partners, who we understand very well so by by nature of our relationship our early stage.
Sponsorship with these companies.
And our visibility into their operations and herbicides are the governance and so on we have a very good understanding of the of that business number one so that is.
Frankly from a reinsurance underwrites that perspective tremendously valuable this isn't a.
Relatively unknown.
<unk>.
Clients, where we receive a reinsurance submission we know them for better than that number two is typically there's there's less frictional expense in writing this reinsurance than open market.
There may be a brokerage gold, but but often the.
The fees are lower than the.
With the full run rate.
And third of course is that some.
It's a one way option.
Assigning the option and its not an obligation. So those things combined has led me to conclude and suddenly it's.
Belief in the current portfolio and it will be going forward.
<unk> concluded that the the margin potential of this business is generally or suddenly on average better than the margin potential of our open market business, which itself is quite healthy at the moment.
That's why we're so excited about innovations it does two very important things for the company.
It's creating strategic.
Relationships is creating optionality on.
On well priced reinsurance business.
Yeah.
Got it thanks, and then Simon last quarter I thought you gave some helpful comments on sort of how youre viewing the social inflation environment.
Now that's clearly still an issue for the overall.
Insurance industry, but theres been sort of a shifting focus to the economic inflation side and cost of goods sold and supply chain issues. Just just wondering based on the sort of shorter to medium tail off of your books, how youre thinking about economic inflation and are you seeing any any effects on that in the portfolio.
Yes, we are.
And also and that's probably the the parts of the book that IDE.
0.2 is potentially being impacted as you know as I said earlier today on for the last couple of Investor calls, we've been dialing down our ultra exposure steadily we took a big step down on July 1st there'll be another step down January one asset class, where we are seeing.
Not only the sort of return to normality in the increase in miles driven but some of the supply chain effects.
Increase our cost of sourcing replacement parts after accidents.
Yes, we have seen is we've taken action quite proactively I think it's on reflection has.
It's been a good decision to to pay that book down across the rest of the portfolio.
This is a there's.
The threat of this theme.
I'd say the auto piece was perhaps most impacted.
Got it got it and then maybe one for for Neil.
Any chance, we can get the split on the on the cats between what were idled losses, what were flood losses.
What was the South African riots.
Right.
May not be possible for retro and theyre not but just curious.
Sure no.
Not any retro there.
As I said in the call Carl the biggest one time just thrown it might be exact ROE down here biggest the biggest loss was either than that.
However, total amount that was about 18.
European floods and the European Hail together came in a little bit higher than four.
And then the South African riots, when including the total catastrophe loss was not.
During the half and we also included an even though it was the prior quarter, but it was current year. There was a few hundred thousand of development on Yuri So.
That was the program.
Got it thank you and one more for me and.
There is probably no no no answer yet but.
A lot of a lot of talk on global minimum tax and what may happen there.
Curious, how how greenlight re is thinking about.
About that and how you might manage.
What's still an unknown situation.
Yes, so as you say it is an unknown.
I'd just point out a couple of things.
Clearly, we're thinking about an unusual consider in the context of green lights in the industry. One is that we.
We don't have substantial to the overseas affiliates that are that are writing generating sort of local business thats not ceded to the Cayman Islands, we do have.
In office in Dublin.
But so but otherwise we don't have that large operational structure that is often characterized by by some of our peers in the industry.
That makes the.
<unk>.
The question of how any global minimum tax might manifest there'll be applied rather simpler for us than it might be.
And the second thing is.
I know that all of this is up in the air but theres been a revenue threshold sort of north of seven or 800 million cited again, that's not set in stone.
We are south of that although we could be approaching that at some point.
I would also add that as every potential for sort of an industry industry calls out for reinsurance in the Cayman Islands, which is of course, something we're exploring so at this point Kyle.
Characterize this as you know, we're very where we're following it closely.
Some work being done behind the scenes, but this isn't.
Very high on our radar concerns right now.
Perfect. Thanks, very much that's it for me.
Thank you.
The next question comes from Macau Alba solo of solo capital Management. Please go ahead.
Okay.
Thank you for taking my question.
This goes back to this.
Very.
Top down but from.
From my point of view.
Market seems not to trust that your insurance operation is viable long term.
Hum.
I think that it's unlikely that adjusting your combined ratio by a couple of assets will change that.
So my question would be what needs to happen for you to wind down their insurance operation and just manage the proceeds strike.
Hedge fund them with a permanent capital.
Alright.
Your investees.
And you're happy to see Brighthouse, our Atlas air shrink and rightly so.
And my view, despite the fact that they are operating.
Profitable.
Profitability as opposed to Greenlight re.
So.
And that's a puzzle to me.
I acknowledge that you are buying back stock, but why not apply the recipe to currently we more aggressively and just follow the insurance operation.
And the last question would be is this is this issue discussed at all by the board.
Thank you.
Michael This is Simon David made.
102 point to jump in please do David.
I want to be clear that we are of course, a reinsurance company that is.
Core operational objective.
<unk> platform is critical to us it is inherent in the and the value proposition to our shareholders. It's meaningful we expect it will continue to be meaningful.
In order to manage and David touched on this earlier.
Sort of markets and regulatory and rating agencies expectations of the company we have to.
A moderate the overall risk that is allocated to the various drivers.
Return.
Let me just make a comment on your points about the reinsurance returns.
Truly I think.
Suddenly over the past.
Two years, so through 2020 and into 2021.
I accept that.
Reinsurance profitability has been weak.
We've compared quite favorably to the industry as a whole.
2020 return.
Our combined ratio in 2020 was approximately.
First quartile for the reinsurance industry, depending on the pay as you select.
Our results this quarter with very significant.
Our caf experience with Ida and others again.
Relatively favorable compared to many of our peers.
And by our risk management.
It's unfortunate that it.
With the backdrop of vastly improving underlying business.
Thus when we disclose our adjusted combined ratio, that's not really a financial measure.
A yardstick to give you an idea of the improvements in the business without the.
The complications and volatility from the large events.
It's unfortunate that you've <unk>.
Holder haven't yet seen the fruits of this of this work, but I assure you it's that.
I would just.
So I would just add that.
While the board did do with sizable strategic review of all kinds of alternatives, including winding down the business.
In early.
What was during 'twenty.
2020.
We conducted that review.
And the conclusion of the review, which is the best outcome for shareholders.
To pursue what we have been pursuing I don't think there should be any expectation that we will wind down the business and invest the money alongside along the way that we do in the hedge fund, where we to wind down the business I believe we would return capital to the <unk>.
Shareholders and let them decide how they want to invest it let me say that though having been considered alternatives. We don't think that it is a better alternative.
And what we're doing.
Finally to compare to other companies like the Green light portfolio, which you're buying back stock and we advocate them buying back stock.
Unfortunately for them Unfortunately for us they're in a better position to do so because of the strengths of their balance sheet and excess capital they have in their businesses relative to their.
Business opportunities, which doesn't mean, we don't buyback any stock we have been buying back stock.
I don't want to set expectations higher or lower it will depend.
On how we're able to generate capital so that we can have capital to to return.
Lately, we've had a hard time.
Achieving that nonetheless at.
At least personally I'm optimistic that that should improve.
Okay. Thank you and now Simon just just to be clear.
I am not making a judgment on your professional capability I'm just I'm just.
Skeptical of that debt.
Ration of your size or your positioning can be profitable.
And the businesses are in the segments in Europe, you are trying to attack that happened far from an expert in reinsurance, but we.
We do have in our portfolio is from insurance and reinsurance companies.
And they seem to be.
To be.
Getting better results, perhaps because of their breath, because whatever you know.
I'm not I'm not in the position to.
Do you have that.
The results.
You pointed out that 'twenty 'twenty was.
Trying to 'twenty, one was a good year.
I cannot dispute that.
It seems to me that that debt.
Net debt.
There is no evidence to show that your combined ratios below 100% systematically or sustainably or anything that's short in the market.
Okay.
It does not recognize.
You know that the ability to manage the business.
Profitability going forward so.
Knowledge.
Did you guys are buying back stock.
But.
Uh huh.
I was just curious.
As to whether the Bart has this discussion on the table on an ongoing basis because.
I remember well there the strategic review at that time.
<unk>.
On.
The hiring of credit Suisse.
Right.
The time has passed and.
Hum.
Business on the stock.
It doesn't.
Same to you.
To get any better or.
It could be.
Perfection of the market, but.
But I think that it's it's.
It's appropriate.
Appropriate and it's.
Relevant to to have that discussion I mean, the strategic discussion back in the table again.
That's all I wanted to say thank you.
I understand thank you for your question I, certainly don't take it personally and I welcome the scrutiny.
I would say that.
Your supposition that we are relatively small in the reinsurance industry and it can be challenging to make a pure reinsurance business of this scale.
That work is.
Is that a good observation.
But I need to go back to to point out that that's why we have a different strategy.
We do have buckets of capital allocation to our investment strategy, we have the growing innovations initiative, which we think is.
Really.
A home run for a company of our size.
Relatively lower market power in open market reinsurance business. So we are excited about where we are positioned notwithstanding via open market business can be challenging at our scale, but we asked.
<unk> is designed to mitigate.
To mitigate that.
Okay. Okay. Thank you Simon Thank you. Thank you.
This concludes our question and answer session.
Should you have any follow up questions. Please direct them to Adam prior of the equity Group, Inc. At 2128369606, and he will be happy to assist you.
Also remind you that a replay of this call and other pertinent information about Greenlight re is available on our website at www Dot Greenlight Ari Dot com.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].
Yeah.