Q4 2022 Greenlight Capital Re Ltd Earnings Call
Speaker 1: The.
Speaker 1: The P. they people of person.
Speaker 2: Thank you for joining the Greenlight Capital Re Limited fourth quarter and year-end December 31, 2022 earnings conference call.
Speaker 2: At this time, all participants are on a listen-only mode.
Speaker 2: A question and answer session will follow the formal remarks. It is now my pleasure to turn the call over to Karen Daley, Greenlight Reeves Investor Relations Representative and Vice President at the Equity Group. You may begin.
Speaker 3: Thank you, Donna, and good morning. I would like to remind you that this conference call is being recorded and will be available for replay following the conclusion of the event. An audio replay will also be available under the investor section of the company's website at www.greenlightree.com.
Speaker 3: Joining us on the call today will be Chief Executive Officer Simon Burton, Chairman of the Board David Eidhorn, and Chief Financial Officer Neil Greenspan. Additionally, Farah Mars-Romer, current Chief Accounting Officer and Treasurer, and incoming Chief Financial Officer will be available for the question-and-answer session of the call.
Speaker 3: On behalf of the company, I'd like to remind you that forward-looking statements may be made during this call and are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact.
Speaker 3: but rather reflect the company's current expectations, estimates, and predictions about future results and are subject to risks and uncertainties.
Speaker 3: If one or more risks or uncertainties materialize, or if the company's underlying assumptions prove to be inaccurate, actual results could vary materially. Additionally, management may refer to certain non-GAAP financial measures during their remarks. The reconciliations to these measures, as well as the risk factors, can be found at a company's filings.
Speaker 3: future events, or otherwise, except as required by law.
Speaker 3: With that, it is now my pleasure to turn the call over to Mr. Simon Burton. Simon. Thank you, Karen, and welcome to your first Greenlight Re-conference call. Good morning, everyone. Thank you for joining us.
Speaker 4: I believe that we will look back on this period and consider it a watershed for Greenlight Re and the reinsurance industry as a whole. The industry and Greenlight has for several years posted substandard underwriting results, in large part because rate improvements each year didn't keep up with the combination of stubbornly frequent hurricane and weather events, inflation, COVID.
Speaker 4: and the tragic and unexpected war in Ukraine. This pattern of underpricing was broken at the January renewals this year. The reinsurance industry experienced a significant capital void, resulting in a market that struggled to clear the demand for risk in classes that were impacted by losses in 2022, such as property catastrophe, aviation, war and terror, and marine.
Speaker 4: In these classes we commonly saw placements close at 25% rate increases or better, whereas in property catastrophe the rates were generally up by 50%. In our view the subjectively good but unlucky 2022 market for short tail specialty and catastrophe business is now an objectively good market in 2023.
Speaker 4: This is the first time in my career that I've said this.
Speaker 4: The short tail specialty and property catastrophe classes represent around 40% of our 2023 business plan. Elsewhere in our portfolio, rate improvements are moderate in the single digits on average, although that's still meaningful for classes that have in general been consistently profitable.
Speaker 4: Overall, I'm very pleased with the quality of the business we wrote on January 1st and I believe the outlook for our underwriting business over the next year or two is excellent.
Speaker 4: Now I'd like to comment on some of the highlights of the fourth quarter and full year 2022 financial results.
Speaker 4: Our key performance metric is increase in fully diluted book value per share. In 2022, when most of our peers saw a decline in this metric, I am pleased to report that our fully diluted book value per share increased during the fourth quarter by 7.7% and by 4.3% for the year.
Speaker 4: The Solus Glass Fund was the largest driver of the campaign with an exceptional return during the quarter of 13.4% and 25.3% for the year.
Speaker 4: While the underwriting combined ratio of 102.3% for the year was broadly in line with our peer group, it was significantly behind our expectations going into 2022. There were two main reasons for this.
Speaker 4: First, we experienced catastrophic losses, mainly from the Ukraine war and Hurricane De'an, that were in total well beyond an average year, contributing 8.4 percentage points to our combined ratio. Secondly, revisions to our estimates of reinsurance and deposit accounted losses incurred in prior years.
Speaker 4: increased our combined ratio by 3.9 points.
Speaker 4: The reserving pressure came from a couple of sources.
Speaker 4: including the runoff of our US auto book, the runoff of a large legacy workers compensation relationship and other inflationary pressure on reserves.
Speaker 4: Underwriting revenue that derived from innovations partnerships was 18% of our 2022 Net Britain Premium.
Speaker 4: We are now in our sixth year of steadily building our innovations business.
Speaker 4: We have demonstrated our ability to pick winners as valuations increased over the last few years and are now showing resiliency despite last year's waning of investor appetite in the in-shore tech sector. However, our long-term objective has always been to build differentiated underwriting business supported by innovations partnerships. Earlier in the year, we launched our innovation syndicate 3456 at La-
Speaker 4: with Faramore's rumors stepping up as our next CFO . This is the result of the succession plan that we sketched out about three years ago.
Speaker 4: Paramaz has been with us for 16 years and he's ready for this new role. Orderly succession of my exceptional colleagues is always gratifying to me, although we also have to say farewell to Neil, who agreed to join the team at an uncertain time for Greenlight, and who has been instrumental in setting us on a very exciting new path.
Speaker 4: has been with us for 16 years and he's ready for this new role. Orderly succession of my exceptional colleagues is always gratifying to me, although we also have to say farewell to Neil who agreed to join the team at an uncertain time for Greenlight and who has been instrumental in setting us on a very exciting new path. I wish him all the best for the future.
Speaker 4: Now I'd like to turn the call over to David.
Speaker 4: Now I'd like to turn the call over to David. Thanks Simon and good morning everyone.
Speaker 5: The Solace Glass Fund returned 13.4% in the fourth quarter. Our longs contributed 12.5%, the short portfolio contributed 2%, and macro added 0.9%.
Speaker 5: During the quarter, the S&P 500 advanced 7.5%. Long positions in Twitter and Green Brick and an undisclosed short position were the largest positive contributors to the quarterly results. A basket of housing sector short positions hedging some of our Green Brick exposure.
Speaker 5: and our high yield index credit default swaps were the material detractors.
Speaker 5: Twitter was our largest winner during the quarter as Elon Musk took the company private at the agreed upon price of $54.20.
Speaker 5: Green brick shares advanced 13% as housing stocks broadly recouped some of their steep decline from earlier in the year. As these stocks rallied, our housing sector hedge basket was the largest detractor.
Speaker 5: We established a new medium-sized long position in Tenant Health Care during the fourth quarter. The company is an operator of hospitals and ambulatory surgery centers. In recent years, the company has grown and transitioned its business mix toward its higher margin ambulatory centers.
Speaker 5: This shift has enabled the company to generate significant and what we believe to be sustainable cash flows.
Speaker 5: The company announced a sizable buyback of its shares, which we expect will shrink the share count by about 20% by the end of 2024. The Silas Glass Fund had an excellent 2022, returning 25.3% compared to a decline of 18.1% for the S&P 500.
Speaker 5: Our short positions contributed 26.1% to this result and macro added 3.8%. Our long positions were just about flat, generating significant alpha.
Speaker 5: Our outlook for 2023 is that the economy appears to be quite strong, with both full employment and sticky inflation.
Speaker 5: Despite the Fed raising rates and shifting from quantitative easing to quantitative tightening during 2022, we believe that monetary policy remains stimulative.
Speaker 5: Short-term rates remain below the rate of inflation and we believe that the ability to now earn about 4% on cash in the bank to be a significant income boost to the household sector which has $17 trillion in short-term interest rate sensitive assets compared to only $5 trillion in variable liabilities.
Speaker 5: Fiscal policy is also stimulative with very high deficits at a time of peak or near peak employment.
Speaker 5: The result is that the economy appears to be accelerating and inflation appears more embedded than most market participants want to acknowledge.
Speaker 5: We expect interest rates to head higher from here and stay there for longer than many market participants expect.
Speaker 5: As a result, we have positioned the portfolio to succeed best in a bear market with sticky inflation and rising interest rates.
Speaker 5: The Solace Glass Portfolio declined 0.8% in January and advanced 1.1% in February and has returned 0.3% in 2023 through February . White exposure to the investment portfolio is approximately 38% at the end of the fourth quarter.
Speaker 5: I'd like to thank also Neil Greenspan for his service to the company over the last five years. Neil helped improve our financial reporting, budgeting, and enhance our financial controls while mentoring FarmerR's to take over the CFO role. We're sad to see Neil go, but are pleased with the smooth transition and it's always exciting to be able to promote with him.
Speaker 5: As Simon said, Farmhurst has been with us a very long time. He was hired as a member of our finance team in 2007. I think it's fantastic he's worked his way up and made it to Chief Financial Officer.
Speaker 5: Congratulations farmers, and I'm sure everyone on this call will enjoy meeting him.
Speaker 5: And now I'd like to turn the call over to Neil to discuss the financial results.
Speaker 6: Thank you, David, and good morning, everyone. Our net income for the quarter was $34.8 million for 91 cents per diluted share.
Speaker 6: For the year ended December 31, 2022, our net income was $25.3 million, or 73 cents, per diluted share.
Speaker 6: We reported underwriting income of $6.5 million during the fourth quarter and a combined ratio of 94.2%. There were no individually significant losses that occurred during the quarter.
Speaker 6: Although the company benefited from $1.4 million of favorable loss development during Q4, on a net financial impact basis, the company experienced roughly $3.2 million of adverse priority or development.
Speaker 6: The primary reason for this disconnect is that a significant driver of the favorable loss development related to our mortgage portfolio which incorporates profit commissions back to the seeding insurers.
Speaker 6: Therefore, the favorable loss development on these contracts was offset by increased acquisition costs. The advisor
Speaker 6: By comparison, the fourth quarter of 2021 reported net underwriting income of $4.8 million.
Speaker 6: Gross premiums written in the fourth quarter of 2022 were $127.4 million, an increase of 2% from the fourth quarter of 2021.
Speaker 6: This increase was due to growth in personal property, general liability, and other specialty business, including premiums underwritten by our innovation partners.
Speaker 6: This increase was partially offset by our decision to reduce our exposure to personal motor and workers' compensation risks.
Speaker 6: Premium sheeted were $11.5 million in the fourth quarter of 2022 and immaterial in the fourth quarter of 2021. We reported total net investment income of $32.5 million during the fourth quarter. We earned $30.4 million from our investment in the Solace Glass Fund and recognized an additional $2.2 million of other investment income.
Speaker 6: income primarily from interest income earned on our restricted cash.
Speaker 6: Total general and administrative expenses incurred during the quarter were $8.9 million, up from $8.0 million in the fourth quarter of 2021. The increase was due primarily to higher expenses relating to share-based and other compensation.
Speaker 6: and operational costs of the newly created syndicate 3456. We recognized other non-underwriting income of $1.6 million in the fourth quarter of 2022 due primarily to foreign exchange gains. These FX gains represented a partial reversal of foreign exchange losses recognized in prior.
Speaker 6: September 30. Now I'll turn the call back to the operator who will open it up for questions.
Speaker 2: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Speaker 2: Once again, that's star 1 to register a question at this time. We'll pause a moment for questions to be submitted.
Speaker 2: star one to register a question at this time. We'll pause a moment for questions to be submitted.
Speaker 2: Thank you. There are no questions at this time. Should you have any follow-up questions, please direct them to Karen Daley of the Equity Group, Inc. at ir at greenlightree.ky, and she will be happy to assist you. This now concludes Greenlight Ree's fourth quarter and full year 2022 earnings conference call. Thank you. You may disconnect.