Q4 2021 Greenlight Capital Re Ltd Earnings Call
Good day and thank you for joining the Greenlight re conference call for the fourth quarter of 2021 earnings.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Please note this event is being recorded.
The company reminds you that forward looking statements that may be made in this call are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 forward looking statements are not statements of historical fact, but rather reflect the company's current expectations estimates and predictions.
<unk> 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 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 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 those that would like to ask a question. Please press star then want to be added to the question queue.
I would now like to turn the conference over to Green Light Rees CEO Mr. Simon Burton. Please go ahead Sir.
Good morning, everyone and thanks for joining the call.
Before we get started I'd like to take a moment to recognize the adversity faced by the Ukrainian people over the past two weeks and express my hope for a quick end to the hostilities.
I will discuss this conflict further in a few minutes.
Let's start with a review of our financial performance and our positioning for the year ahead.
In the fourth quarter of 2021, we grew book value per share by five 6% with positive contributions from each of underwriting strategic investments and solas class, partly offset by G&A and interest expenses.
For the full year 2021, it was another challenging year for the insurance industry has an unusually long waste of natural catastrophes resulted in the second highest level of cat losses in history.
This kind of activity added around six points to our combined ratio of 109% will be.
There were also headwinds in the wholesale portfolio as core repair and replacement costs suffered rocket and Cynthia inflationary pressure. Although this was offset by reserve releases from the runoff photo books that performed better than expected.
A call that we have been steadily reducing our exposure to the auto glass over the last few years.
With the final large step down completed on January one 2022.
These headwinds aside I'm pleased with the performance of the go forward underwriting business.
The performance of strategic investments was a highlight to the.
With five consecutive quarters of gains innovations investments generated unrealized gains of $19 $6 million when the carrying value of $22 $9 million as of January one 2021.
We also realized a $10 5 million dollar gain net of tax in the first quarter of 2021 from the divestments of our position in a more traditional M D. A.
Next I'd like to recap our strategy and highlight some of the changes we have made over the past four years.
First a summary of our open market underwriting strategy.
When I joined the company in 2017, our portfolio is dominated by a small number of large accounts. Our underwriting is now considerably more diverse by line of business with lower individual counterparty risk and with higher margin potential of course, this diversification brings exposure to a wider array.
If global insurance events, but I believe that assuming risk that's properly priced diversified on risk managed is key to achieving optimal underwriting results.
This rebalancing of the portfolio it took some time.
But I am pleased to report that with the renewal actions. We took on January one 2022. This process is now complete.
Here are a couple of highlights to give you a sense of the changes in 2017 also represented 55% of our premium today is 2% in.
In 2017, the top five accounts amounted to 72% of total premium we estimate this will be roughly 20% in 2022.
Looking at the current diversified portfolio of risks there are a few key characteristics.
We have grown our Lloyd's partnership significantly, which aligns with my view that Lloyd's has a strong track record of outperformance and favorable market conditions, we have grown our excess of loss business, resulting in a more conventional balance between access of loss in quota share.
We're all concerned about the risk of inflation on claims costs.
As a result, we are writing a relatively low volume of long tailed exposure.
Greenlight re does not have any direct relationships with Washington, insurers brokers or any other Russian companies or individuals. We expect that our clients are strictly adhering to sanctions on Russia.
The impact of sanctions on our premium volume is likely to be minor.
The war will likely present us with loss exposure from a specialty book, we have received no specific information on damage to ensure that sets a new claim notices so we have not yet developed and estimates of losses incurred.
Moving away from the wall come back to Green lines operational strategy I would like to discuss the partnership's created by our innovations unit.
We launched Greenlight re innovations in March 2018, and over the last four years, we have built one of the most active and respected teams India at least stage ensure tech space.
Over this period, we have made 20 investments in short tanks, mainly M D as offering a differentiated products or distribution strategy.
While the prospects as capital appreciation is trying to our primary focus is on the potential for underwriting opportunities.
The time is up on a scale their businesses with our visibility into their operations as an early stage investor often combined with lower than market placement expense. These risks should overtime be more profitable than comparable open market business.
In 2021, 6% of our premium was linked to our innovation portfolio and this proportion will increase in 2022.
Industry wide has been significant interest in actual attack over the last 18 months and the number of our competitors have started to adopt a strategy similar to ours.
We have seen some eye watering valuations and <unk>.
Hi proof of our share price collapses for some of the publicly quoted actual tax who have struggled to contain costs driven by their rapid growth.
Each of our portfolio of companies is focused on profitability rather than revenue growth alone and a key part of our investment process is identifying partners, who understand the importance of underwriting profits.
In January we announced that we will be launching Lloyd's syndicate, 3456, which will focus exclusively on <unk> type business sourced from our innovations unit the.
The syndicate will enable us to further support our partners by providing them with access to the Lloyds brand rating and global licenses.
In combination with our investment position in the solar glass. We are excited about the potential for each area of the business to create shareholder value in 2022.
Confident that the company is better positioned now than at any time since I became CEO .
Now I'd like to turn the call over to David.
Thanks, Simon and good morning, everyone.
The Solas class final returned nine 9% in the fourth quarter Longs contributed 11, 8% shorts contributed <unk>, 2% and macro detracted, 0.7%.
During the quarter the S&P 500 index returned 11%.
Our long positions in Brighthouse financial Kenmore, and Green brick partners for our largest positive contributors.
In equity index hedge and individual short position and our long position in Danaher scientific where our biggest detractors write.
Brighthouse financial gain 15% during the quarter. The company reported another strong result, and continued its aggressive and accretive share repurchases, which totaled 12% in 2021.
Since the spin off from Metlife in 2017, the company has reduced its share count.
35% and we expect it to repurchase another double digit percentage of the shares in 2022.
Stock currently trades at a 3.0 times p/e multiple or its expected 2022 earnings and 33% of book value.
The more stock advanced 15% during the quarter as titanium dioxide supply remains tight and pricing continues to escalate. We believe both the tio two segment as well as the Fluoro polymer businesses are largely sold out for the coming quarters.
Green brick partners stock price advanced 48% from the fourth quarter, but there wasn't anything obvious to us that was responsible for this last week green brick reported its fourth quarter and full year results. The company earned $3.72 per share in 2021, which was up 65% year over year.
And 200% cumulatively over the past two years analysts.
Analysts expect the company to continue its growth this year as current projections are for EPS of $4 20 in 2022. The stock currently trades at an undemanding five two times at these expected results.
Tamara scientific shares fell 48% from the fourth quarter. We believe the primary driver was the mismanagement of its capital structure.
In December the company suddenly decided it needed to raise money in a convertible bond was hastily issued on terms that were unattractive to the company.
We used this opportunity to swap most of our investment from common stock. So the convertible note. That's why we moved up a level in the capital structure, we'll collect the coupons and given favorable terms will participate in most of the upside should it develop we continue to believe that there will be enormous demand for the company's biodegradable plastic.
At the current environment after a number of challenging years for value investing combined with what we consider to be another bubble and certain speculative stocks. We believe that tide has now turned we believe that inflation is now a structural problem and we're positioned to benefit from it and our long short and macro positions the solid glass.
Portfolio returned three 4% in February and has returned two 7% year to date.
We believe the tide turns a year ago, and it's showing up in our performance over the last 12 months ended February 28 silos classes returned 16, 5%.
Net exposure was approximately 39% in the investment portfolio at the end of 2020 , one and roughly 29% at the end of February let.
Let me say a few things about Russia's invasion of Ukraine. There are now over 2 million displaced Ukrainians and untold debt and as the crisis extends numbers will continue to expand.
From an investment perspective, just as the pandemic accelerated a number of trends that were already in place. So too is the current turn of events.
We already had an inflation problem, which the war is certain to accelerate.
Similarly, the bubble in speculative stocks seems to have topped a year ago and the recent stock market turbulence appears to be accelerating the unwind of the excesses.
With relatively tight positioning and a proud inflation posture, while we did not anticipate this war, we are reasonably well positioned at the outset of the conflict.
Now I'd like to turn the call over to Neal to discuss the financial results.
Thank you David and good morning at the end of the fourth quarter, our fully diluted book value per share was $13.99 an increase of five 6% from September 30 and four.
Four 2% from December 31, 2020, our net income for the quarter was $24 $3 million for 71 per share for the year ended December 31, 2021, our net income was $17 6 million or 51 per share.
We reported underwriting income of $4 $8 million during the fourth quarter and a combined ratio of 96, 4%.
The quarter's underwriting results included a favorable prior year development with a net financial impact of $11 $5 million in losses from deposit accounted contracts of $8 $7 million.
While deposit accounted contracts are disclosed separately from those to which we apply reinsurance accounting the actuarial processes used to estimate the ultimate losses are the same.
And by the impact of these adjustments reduced our fourth quarter combined ratio by two one percentage points.
This impact was divided between components the reinsurance accounted development improved our loss ratio, while the deposit accounting impact increased our underwriting expense ratio, we did not recognize any material adjustments to our COVID-19 estimates during the quarter.
For the year, our combined ratio was 109%.
Repeat losses contributed six one percentage points to this total with the bulk of abuse cat losses being generated by hurricane either the European floods, and Hailstorms and winter storm Yuri.
Our adjusted combined ratio for the fourth quarter was 97, 7% an increase of five one percentage points over the fourth quarter of 2020.
During Q4 2021, we increased our loss picks on a significant portion of the auto business that we earned during the first three quarters of the year, which led to a disproportionate impact on the quarter's adjusted combined ratio.
This increase related to the increased inflation costs in the auto class.
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Our adjusted combined ratio for the year ended December 31, 2021 was 94, 1%.
We do not intend to continue to provide an adjusted combined ratio measure in future quarters.
Our intention in introducing the measure last year was to help investors understand the trends in variability in our underwriting results. However, we have since concluded that the use of this measure does not significantly enhance investors' understanding of our underwriting performance.
Going forward, we intend to focus our disclosure on the significant drivers of our combined ratio and underwriting results.
Gross written excuse me gross premiums written were $125 1 million for the quarter up 6% from the fourth quarter of 2020.
This increase relates primarily to growth in our financial lines business and the reinsurance coverage, we provide to third party Lloyd's syndicates.
Increase was partially offset by decreases in other lines.
For the year ended December 31, 2021, gross premiums written were $565 4 million.
Up 18% from 2020 and increased also driven by the growth in Lloyd's business.
Premiums ceded were insignificant for both the quarter and the year ended December 31 2021.
Total general and administrative expenses incurred during the quarter were $8 million, which was roughly unchanged from the fourth quarter of 2020 for the year total Gino G&A was $29 $4 million.
11% from 2020. This increase was driven by the growth of our innovations unit higher professional fees and increased technology expenses.
We reported total net investment income of $25 $3 million during the fourth quarter, we earned $22 $3 million from our investment in the solar squads fund and recognized an additional $2 million of other investment income primarily from our innovations investments for the year ended December 31 2021.
One our investment in solar Glass fund earned $18 1 million.
Representing a seven point.
Seven 5% return on the associated investment portfolio.
Our other investment income totaled $32 $1 million driven by gains on our strategic investments now I will turn the call back to the operator and open it up to questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre 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.
And the first question will come from David Bell with Bell brands. Please go ahead.
Thank you I appreciate the time today.
My first question is to the mix of business.
Can you comment on the leasing versus the following how the split is.
Correct.
Sure David Good morning.
So we didn't disclose the splits of lead versus Paulo.
It's quite fluid is determined at the point of underwriting.
Do you think it's material to our financial disclosures, which is why it's never a metric that we practice different disclosed, but let me let me give you an idea of the distinction between the two.
Uh huh.
Leading leading business is something that a disciplined reinsure would do when you've got great visibility into our class C O <unk>.
Really resourced.
Yeah.
A high degree of expertise and history and credibility in that class of business and likelihood by clients.
As a follow up.
<unk> got all of the resources, you need to make a cogent underwriting decision.
But you may not be quite as well equipped in in terms of visibility into the entire market and operational profile. So.
We make the distinction between where we lead and follow depending on how we view ourselves in some classes. We are we do have a tremendous amount of.
And expertise and visibility in the class, we may lead business than in other classes, that's less the case.
There should be no implied distinctions, though between the quality of the underwriting.
<unk>.
Okay that does help.
Just a little bit more on that and given the innovation question does it affect that mix is there more needed.
Leading.
Sorry your question was.
With me on the innovations, yes so.
The innovations business that connects to our underwriting that is different so.
What I described a moment ago was more open market reinsurance approach. Okay on the innovation side, we're generally an early stage investor with our partners.
We often negotiate.
Access and rights to reinsurance business as the an MGA might.
Build that business and then hit the market. So there is optionality that is also a bit less frictional expense because we have a direct relationship with our with our partner and.
They have less need for an intermediary.
<unk>.
In those cases, yes, we may well be leading buses following having said that we will apply the same distinction we're not necessarily an expert in travel insurance for example, or title insurance both of which are examples of our portfolio of companies and it may be a Bachelor.
Solution for everybody to have a more prominent lead on the program with a significant participation from greenlight behind them again, you shouldn't imply there should be no implied.
Difference between the quality of underwriting, but there'll be a mix, though as well.
Okay Super.
Core more general, but second question is more general.
How do you.
How do you.
Alright, and your strategy, how do you compete.
With the fight with roughly 500 million in capital, while somebody like competitors 5 billion capital.
Help me.
I understand that.
Yeah, that's a good question, but it's a good question so.
It's it's certainly the case that we don't have as much market power as a company that's 10 times our size.
Wade into a placement through collapsing business demand to see everything.
Cherry pick the placements so typically.
He said that what we do have that our larger peers has done is agility.
I'm directly day to day involved in all of the underwriting decisions. We have a very flat structure here, we can pivot in a moment on strategy and tactics and underwriting in a way that larger peers with.
<unk> discussed our underwriting and layers of management funded while the more difficult to do so it might be we may call for a lack of market power.
By significantly enhanced agility and by the way on our broker relationships a tremendously good we are valued by our partners brokers very often.
Value, our response time, and the agility and sort of clear thinking.
Over over a monstrous balance sheets, so we do feel as though we.
Hum more than make up for that difference.
Okay. Thank you and then my final question to the management comp plan is it tied to stock price performance and if not why not and then add onto that.
Why not any additional.
Additional stock purchased during the quarter.
Thank you so much.
So or.
I called metrics.
So we've disclosed.
A large part tie into.
Growth in <unk> and shareholder value.
The addition to shareholder value from all of our operational results. That's number one so to the extent that impact stock price, which is a very direct link in my view, yes. There is a tie in a second.
The large components of management's comp is stock itself. So soft performances is explicitly.
Something that we're interested in so yeah. So I think it was very clear connection between our plans and in our shareholders interest I consider the alignment very strong on the buybacks.
We are at all times consider the best uses by capital spend.
Today, we see both the opportunity to deploy capital in a various.
Our areas of operation being open market underwriting soulless glass and innovations. We also have to keep in mind the implied.
Scale of the business and the implications of reducing that scale.
With our partners and with rating agencies. So that's always a consideration as well.
Recently that has led us to a buyback rather less.
That could change in the future.
Okay. Thank you very much.
Great.
Thank you and the next question will come from Desmond Kinch with O E. M. Please go ahead.
Hi, I have a couple of questions for David on the first one is.
As related to the last question that was asked by chance.
So David how do you expect to significantly reduce or eliminate the roughly 50% discount and easy at which Greenlight re shares currently trade.
On the second one is and Greenlight res earlier years.
Following the IPO the expectation once the investment returns of Greenlight re.
Should be a bit more than one times.
The investment returns of Greenlight capital.
In more recent years due to insurance rating constraints this ratio at all.
Certainly last from one one times now.
Could you give some.
Hollywood numbers, perhaps in a sort of a dynamic sense of how that.
That ratio has.
Change then.
May change.
All the time.
Okay.
Yes.
Look I think in order to narrow that discount to book value, we have to demonstrate to the market.
Sustained basis that we can earn a reasonable return on our equity.
And I do think we're making progress along the ways in terms of putting up the results suggest that I don't believe it has yet been absorbed or accepted by the market to be true and we're going to keep at it.
I would expect we're going to work harder.
In 2022 relating to Investor communications as well to do a better job of explaining how we.
Simon mentioned on the call we've transformed a bit of the underwriting.
That occasion the strategy.
And so forth.
Relating to your second.
Second question.
You are correct in terms of how the company was structured into the IPO.
After the difficult year that we had in 2018, the company decided to reduce the amount of risk that it was taking on the investment side of the portfolio. We are presently investing approximately 50% of the equity.
And managed over here it similarly to the hedge fund.
But it's also a little bit less time that effectively because there's constraints on.
And.
The amount.
Investment, we're able to make so we run the hedge funds are the bigger gross than we do the <unk> class partnership and so the result is if I were to put my thumb to the wind is the effect is it's about effectively the equivalent of about 40% of the equity.
<unk>. This is something that we consider to be an open issue that we will continue to review with the company.
And with our rating agencies as time goes by my personal preference is to hope that that can be increased.
Thank you Troy.
Ladies and gentlemen, once again, if you have a question. Please press Star then one.
The next question will be from Daniel D Young with.
As actual private Investor. Please proceed Daniel.
Yes, I think you just answered my question that I would really like to see the flow.
Well that's managed by your increasing I think a lot of investors.
Our investing primarily for investment strategy.
It was really good to see.
Last quarter firing on all cylinders and it's good to see the hard work that's been done.
Get the operating business.
Good one and then innovation business on top of that.
But yes, I would really like to see.
The flow managed by increase thank you.
Thank you.
And thank you, Sir ladies and gentlemen, this concludes our question and answer session and thus concludes today's call.
Should you have any follow up questions. Please direct them to current daily of the equity Group, Inc. At 2128369623, and she will be happy to assist you.
We also remind you that a replay of this call in other pertinent information about Greenlight re is available on our website at Ww Dot Greenway Greenlight re dot com.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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