Q2 2022 Greenlight Capital Re Ltd Earnings Call

Good morning and thank you for joining the Greenlight Read Conference call for the second quarter of 2022 earnings. At this time, all participants are not listening only mode. At this time, all participants are not listening only mode.

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 Security's litigation reform act of 1995. Forward-looking statements are not statements of historical facts, but rather reflect the company's current expectations, estimates, and predictions about future results and events, and are subject to risks and uncertainties and assumptions, including those enumerated in the company's form 10K for the year ended December 31, 2021.

and other documents filed by the company but the SEC.

If one or more risks or uncertainties materialize or if the company's underlying assumptions prove to be incorrect, actual results make very materially from what the company projects. The

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 one on your telephone keypad to be added to the question cue.

Anyone to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the call over to Greenlight Rees, Chief Executive Officer, Mr. Simon Bern. Please go ahead, sir. Please go ahead, sir.

Good morning and thanks for joining the call today.

Our second quarter performance was strong as we grew book value per share by 3.3% with a positive contribution from each of Underwriting, Innovations Investment and the Silpe Fund.

The second quarter underwriting result produced a combined ratio of 91.6%.

Although this is a significant improvement compared to our performance over the past couple of years, it's not unexpected.

We completed the major repositioning of the underwriting book last January , and although we face some headwinds as our auto exposure has rolled off,

The result this Court is more politely reflect on the righting potential. The Court is more politely reflect on the righting potential.

Looking ahead, we see the potential for further upside in undriking performance.

Putting up the national results aside for a moment, there are a couple of significant themes the industry is tackling right now, and I'd like to talk for each of them.

The widespread inflation we have seen is a significant concern to the industry, as it can add great uncertainty to the cost of claims, particularly for classes of business with long-pay outtails.

As a result, it creates pricing challenges for new business and valuation challenges and claims reserves.

Inflation repressor is not uniform with large differences between supply chain driven price spikes for maybe temporary and wage inflation which may last longer.

We are addressing these concerns in several ways.

First, our underwriting strategy is to focus on relatively short-tailed business, which is inherently less exposed to high inflation.

We estimate the power duration of our existing reserves at around two years, which is particularly short in an industry context. In an industry context.

Second, we have reduced our exposure to classes that are experiencing severe supply chain driven inflation such as auto. Second, we have reduced our exposure to classes such as auto. So that's all there. So that's all there. So that's all there. So that's all there.

Third, we incorporate inflation assumptions in all our pricing.

Currently at around 7 to 8% per year. We reassess these assumptions frequently.

While we are working hard to manage the downsides of inflation, it also comes with a benefit of increased demand for coverage limits.

which will support the demand side of the pricing equation and help to extend the currently favorable market conditions.

The second industry theme I'd like to note is the question of pricing for catastrophic losses, as natural and human driven.

This category includes natural perils, cyber risk, the Ukraine-Russia war, and other similar exposures to the human rights and areas. This category includes natural perils, cyber risk, the human rights and the human rights and areas.

In general, we have seen a reduction in available capacity industry-wide to address these risks.

which appears to now be driving significant changes to both coverage and price.

This is the welcome development, since our opinion is that the reinsurance industry overall has been neglectful in pricing tail risk.

We currently have relatively low exposure in some of these areas, for example cyber and secondary cat perils.

but it's possible that they become areas of compelling opportunity over the next six months.

The last industry theme is the impact of rapid, upward shift of the yield curve on the market values of bond portfolios.

which for some of our peers has reduced book values by 10% or more.

Green light has relatively little exposure to these shifts in bond pricing and in fact our overall investment performance has been excellent through the turmoil.

Finally, I'd like to update you on the progress of our innovations business.

From an investment and partnership perspective, we now have 23 portfolio companies having made one additional investment during the quarter, and we have a strong pipeline of interesting opportunities.

Overall, the portion of our net written premium that we categorize as innovation related is around 13% year to date.

The underwriting volume in our innovation syndicate at Lloyds was immaterial in the second quarter, but we are pleased with the volumes that are committed to the third quarter and beyond.

Some of this business derives from partnerships where we are an investor, but we have also seen significant interest in our products from the broader marketplace.

This market validation is gratifying and the syndicate is off to an excellent start.

Now I'd like to turn it all over to David.

Thanks Simon and good morning everyone.

The Salos class fondry turned 4.9% in the second quarter. Shorts contributed 15.3% and macro contributed 0.7%. Our longs detracted 10%. During the quarter of the S&P 500 index declined 16.1%.

Equity markets continue their descent into an official bear market in the second quarter. Our macro position in high yield credit default swaps and an S&P 500 index short were our largest positive contributors. Single name short positions in bubble basket stocks were also large positive contributors.

Our long position in Brighthouse Financial and ODP Corporation in Gold were the biggest detractors.

In mid-June, the bear market broadened and inflation beneficiaries fell sharply. Bright House and Gold suffered mostly as a result of this. ODP shares declined.

After the company's board announced in late June that it was scrapping plans to move forward with the divastiture or public spin-off of its consumer business.

Generally speaking, some value stocks have become so cheap relative to the earnings of the underlying businesses.

that the companies themselves are buying back a large portion of their own market capitalizations.

Five of our largest positions are perfect examples of this.

Bright House ended the quarter at about 25% of its book value and less than three times consensus earnings. We expect the company to repurchase 10 to 20% of its shares this year.

While console energy ended the quarter of trading at 2.6 times its book value, we believe the company will generate close to its entire market cap in after-tax free cash flow by the end of 2023. The company will be able to generate close to its entire market cap in the future. The company will be able to generate close to its entire market cap

Capital returns have not yet begun, but we expect they will shortly. Can we expect them to be significant?

Reembrick Partners ended the quarter at 1.1 times book value and less than four times consensus earnings. The company bought back five percent of its shares as of last quarterly announcement and authorized another buyback of an additional 10% of the shares. Reembrick Partners ended the shares. Reembrick Partners ended the shares. Reembrick Partners ended the shares. Reembrick Partners ended the shares. Reembrick Partners ended the shares.

Tech resources ended the quarter to about 85% of book value, and less than four times consensus earnings. The company recently began buying back its shares. When the CEO was asked on the April 27th quarterly call what the plans were for playing his really strong hand of cards here, he responded with, I'd like to buy the whole company back myself.

With commodity prices falling rather dramatically, the market has quickly come to expect disinflation and an economic slowdown. We recognize that near-term inflation will show improvement, but we believe the stickier components of inflation will persist. We have lowered our net exposure because we expect a bumpy ride for equity markets as the Fed continues to tighten.

We're focusing our long investments in the types of companies that are poised to continue returning meaningful portions of their earnings and cash well to their shareholders.

Net exposure was approximately 20% long and the investment portfolio at the end of the second quarter.

The Salas Cosporfolio returned 1.1% in July and is returned 7.9% year to date.

We also had solid results in our underwriting activities. As Simon described, the transformation of the underwriting portfolio is now complete and I believe we are in a good position to capitalize on the headwinds facing the reinsurance industry as we have been less impacted than others but will benefit from higher rates in better terms.

Now I'd like to turn the collar over to Neil to discuss the financial results.

Thank you David and good morning. Our net income for the quarter was $14.8 million for 37 cents per share. For the six months and the June 30th, 2022, our net income was $9.1 million or $23 cents per share. Our net income was $9.1 million or $23 cents per share.

Gross premiums written in the second quarter were $134.8 million, a decrease of 5% from the second quarter of 2021, due primarily to our decision to reduce our participation in motor and workers' compensation contracts.

This decrease was partially upset by growth in specialty, general liability, and personal property business, including premium generated by the company's innovation partners.

Premium seeded were $7.2 million in the second quarter of 2022.

We enter into new retrocession agreements during 2022, primarily to reduce our exposure to large marine and energy loss events in certain property losses.

Premiums seeded in the second quarter of 2021 were insignificant.

We reported underletting income of $9.3 million during the second quarter and the combined ratio of 91.6%

The quarter's underwriting results included adverse prior year development with a net financial impact of the $2.5 million, relating primarily to our motor port volume.

We reported total net investment income of $17.2 million during the second quarter.

We earned $11.9 million from our investment in the Solos class fund and recognized an additional $5.3 million of other investment income, primarily from our innovations investments.

Total General and administrative expenses incurred during the quarter were $8.1 million up slightly from $7.7 million in the second quarter of 2021.

We incurred other non-underwriting expenses of $6 million in the second quarter of 2022. The foreign exchange losses and investment losses incurred by Lloyd Syndicates in which the company participates. The foreign exchange losses and investment losses are incurred by the foreign exchange losses. The foreign exchange losses and investment losses participants.

Other non-underwriting expenses incurred in the second quarter of 2021 or in significant.

At the end of the second quarter our fully diluted book value per share was $14.10, an increase of 3.3% from March 31. Now I will turn the call back to the operator and open it up to questions.

Thank you. We will now be conducting a question and answer session.

If you would like to ask a question, please press star one on your telephone keypad.

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For participants using speaker equipment and maybe necessary to pick up your handset before pressing the start keys, please, while we pull for your questions.

Thank you. Should you have any follow-up questions?

Please direct them to Karen Daley of the Equity Group at ir at Greenlightre.ky and she will be happy to assist you.

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

This does conclude today's conference call and you may disconnect your lines at this time.

Have a great day.

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