Greenlight Capital Re Ltd. Q1 2023 Earnings Call

[music].

Hello, and thank you for joining the Greenlight capital REIT first quarter 2023 earnings conference call.

At this time, all participants are in listen only mode.

And answer session will follow the formal presentation you May press star one at any time to be placed in the question queue. It's now my pleasure to turn the call over to Karen Daily Greenlight Res Investor Relations Representative and Vice President at the equity Group you May. Please go ahead, Karen Thank you Kevin and good morning.

Would like to remind you that this conference call is being recorded and will be available for replay. Following the conclusion of the event and audio replay will also be available under the investors section of the company's website at Www Dot Green light Red Dot com.

Joining us on the call today will be Chief Executive officer of signed anchor and chairman of the Board, David Einhorn, Chief Financial Officer, Sarah Morris around that.

On behalf of the company I'd like to remind you that forward looking statements may be made during the 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, but rather reflect the company's current expectations estimates and predictions about future results and are subject to risks and uncertainties.

As a result actual results may differ materially from those expressed or implied.

For more information on the risks and other factors that may impact future performance investors should review the periodic reports that are filed by the company with the FCC from time to time it.

Additionally, management may refer to certain non-GAAP financial measures during their remarks, the reconciliations to these measures can be found in the company's filings with the SEC, including the company's Form 10-Q for three months ended March 31st 2023.

The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise, except as required by law with that it's now my pleasure to turn the call over to Mr. Simon for Ed.

Thank you Karen.

Everyone. Thank you for joining us.

I'd first like to welcome Firewalls Roemer, who is joining his first earnings call as CFO since his promotion effective April <unk>.

The CFO transition went well, which is not surprising as far malls has been an integral member of the team for the past 16, yes. He is now fully up to speed.

Well the first quarter of 2023, we reported growth in book value per share of one 1% and net income was $5 $9 million. Despite each of our three pillars of underwriting innovations and she'll be performing below our expectations for the quarter.

Starting with the underwriting results. The combined ratio of 99, 8% was impacted by five seven points of winter storm and convective storm losses.

Along with five six points of non cat reserves deterioration in Iraq.

The storm losses relate to a single innovation U S government as program Richard in 2022 that experienced higher than anticipated volatility from a winter storm in late December and from convective storms in March.

We have identified these concentration issues, leading up to the renewal of the homeowners program at January 1st when we restructured a favorable terms.

So this volatility is contained to a single policy thats now running or otherwise a bulk of innovations underwriting risks is running well and we expect that this is an isolated situation.

The reserve pressure, we experienced in the first quarter is in part coming from the auto class where claims severity continues to escalate.

Well, it's all insurers as a whole has struggled with rates adequacy in the face of extraordinary repair cost inflation.

You will recall that we had almost completely exited this class by the middle of 2022. So we expect this pressure to be short lived with respect to ours.

The theme of claim inflation is also present elsewhere.

And is responsible for another portion of the deterioration.

Or is the duration is relatively short at under three years.

This inflationary pressure is generally confined to minority block of reserves and runoff.

We grew net written premium by 25% in the first quarter to $175 million, which is the highest first quarter volume we have achieved under our new underwriting strategy.

So almost the increases from the portion of the books. It was repriced at January 1st that significantly better terms, including property Marine specialty and multi line, which includes our Lloyd's F L positions.

We were also able to expand and diversify the overall book into a market that is supply constrained in many of the classes that we write.

Renewals at April 1st with similarly compelling.

Crew on Japanese catastrophe book, because we saw rates improvements that exceeded 20% is just one example give.

Given that we continue to see increases in reinsurance demand as students attempt to reduce their own volatility coupled with persistent supply constraints I believe that the outlook for our underwriting model is excellent for the rest of 2023 and into 2024.

Moving onto our innovations business actual tech valuations continue to be relatively depressed.

This provides us an opportunity to access attractive underwriting business via a partnership approach are compelling valuations.

We completed two new investments during the quarter and had a small write down on one of our positions.

Our Lloyds Syndicate 3456 is proving to be an attractive option for partners seeking risk capacity. Despite some bumps in navigating the Lloyd's onboarding processes, we have a strong pipeline of opportunities for the syndicate.

Finally, we are pleased to welcome David Sigman, who joined last month as General Counsel.

David comes to us with significant reinsurance experience and we are excited to have him on the team.

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

Thanks, Simon and good morning, everyone.

The solid class portfolio lost 1.1% in the first quarter, our longs contributed eight 9% to the gross return shorts and macro cost us, 9.0%, 0.3%, respectively. During the quarter. The S&P 500 index advanced seven 5%.

The first quarter was a challenging investment environment as many investments and performed well in 2022 reversed in 2023, we repositioned the portfolio from Barrington neutral, while we await further economic developments.

Long positions and Greenberg partners Kendra holdings in gold were the largest positive contributors to the quarterly result, Brighthouse financial a single name short position in our basket of housing sector shorts hedging some of our green brick exposure, where the material detractors.

Greenberg shares advanced 45% in the first quarter, mostly as analysts expectations for this year's earnings stopped coming down.

It appears that the market is gaining confidence in the housing sector again after 2020 twos fear at higher interest rates would cause an imminent collapse.

Greenberg remains well position, it's margins are the highest in the industry and it maintains an enviable land position that some of the country's best markets. Just last week. The company reported extremely strong new orders revenues gross margins and earnings it simply blew away consensus expectations. They performed during last year's housing slowdown.

Kindred isn't it services business that was spun out of IBM and late 2021 prior to the spin IBM position. This unit as a loss leader in order to sell more hardware. This investment is a turnaround story as Kendra can now offer solutions from multiple vendors and is better positioned to raise pricing on the no margin contra.

<unk> that are expiring in the next couple of years.

With an enterprise value of $4 5 billion to $17 billion of revenue Kinder old trades for less and 0.3 times sales. Meanwhile, as peers trade for at least twice that multiple we expect the shares to re rate overtime as Kendra closes the margin gap with its peers.

Gold advanced 8% in the quarter the gain occurred after several bank failures as the market expectations for further rate high.

Eight hikes reversed into expectations of rate cuts starting as soon as this summer.

One concern is that the problems with the banks May force, the federal reserve to prioritize preserving financial stability over defeating inflation, causing the next leg up for inflation or.

The higher gold price appears to be taking some of that risk into account.

Brighthouse financial shares dropped by 14% in the quarter in response to the bank failures, partially caused by a few banks buying long duration bonds that Ellen value when interest rates rose and the market sold off many companies in the insurance sector that also on long duration bonds.

Even though brighthouse as a beneficiary of higher rates by virtue of having very long duration liabilities, which are quite different from the short term deposits that can leave abruptly for a bank. The mark this the market decided to simply ignore this difference we don't believe any of the concerns is specific to brighthouse.

It is our view that rate cuts are unlikely to happen this year and while the market is expecting them in the back half of the year as such we added to our interest rate positions by better federal funds futures expressing this thesis directly means that we are only subject to the central bank's decisions for the balance of the year, rather than being subject to the market's expectations.

Tuesday, I presented our analysis on the Tesco technologies at the Southern conference. The Tesco is the spin off of the powertrain unit from Continental AG.

As an auto parts supplier that is poised for enormous growth and its E V segment, where it supplies the key components of the drivetrain systems and other other than batteries.

Despite this leading edge technology position and important product wins with many leading EV makers the shares trade cheaper than most other auto suppliers.

The solid SaaS portfolio gained three 4% in April and has returned two 3% year to date through April net exposure in the investment portfolio was approximately 43% at the end of the first quarter, we don't usually comment I'd been months performance, but given the strong performance of green brick in May This month is off to a strong start.

Given the significant rate increases we achieved on the underwriting portfolio. We are cautiously optimistic that our combined ratio will continue to improve as 2023 progresses and that we will improve profitability on both sides of the balance sheet for the REIT.

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Now I'd like to turn the call over to farmers to discuss the financial results. It is farmers first call as CFO . Many of you got to hear from him at our Investor Day last year.

Thank you David and good morning, everyone.

While I have been between likely for several years. It is an honor to now serve as the company's Chief Financial Officer.

I look forward to continue working closely with Simon and the rest of the highly talented team as we take advantage of the current market conditions.

We add value for our shareholders.

Now turning to our results for the first quarter of 2023.

Net income for the quarter was $5 $9 million or <unk> 17 cents per diluted share.

We reported underwriting income of zero point $4 million during the first quarter and a combined ratio of 99, 8% compared to an underwriting loss of $7 $7 million and a combined ratio of 106, 2% during the equivalent 'twenty to 'twenty two period.

While the overall underwriting performance improved this quarter. The result was negatively impacted by $10 $3 million or seven two combined ratio points.

Catastrophe and weather related events.

$4 $1 million after tax losses related to winter storm, Elliot, which hit the northeast of the United States in late December 'twenty two.

The severe convective storms in the month of March resulted in $401 million of losses.

The remaining $2 1 million of catastrophe losses came from New York, clicking, Turkey, and cyclone Gabrielle and New Zealand.

Adjusting for catastrophe events losses, our current year loss ratio decreased seven four percentage points to 55, 1% compared to the same period in 2022.

Excluding winter storm Elliot, we experienced $7 $9 million or $5 six combined ratio points of unfavorable.

Prior year loss development during the first quarter.

We reported total net investment income of $5 $2 million during the first quarter of 2023.

We lost $3 $1 million on our investment in the solar plus fund and earned $8 $4 million other than investment income primarily from interest income earned on our restricted cash.

<unk> benefited from the higher interest rates compared to the same period in 2022.

Total general and administrative expenses incurred during the quarter were $9 $9 million up from $7 $2 million in the first quarter of 2022.

The increase was due primarily to nonrecurring expenses relating to legal fees and severance costs during the first quarter of 2023.

We recognized $4 $9 million, a foreign exchange gain in the first quarter of 2023, due primarily to the strong pound sterling.

At the end of the first quarter, our fully diluted book value per share was $14 75, an increase of one 1% from December 31st 2022, and an increase of eight 1% from March 31st 2022.

During the first quarter, we repurchased $17 $5 million of our senior unsecured convertible notes.

The remaining $62 million of notes mature on August four 2023.

We are actively working on plans to refinance them when that's non convertible debt.

Now I'll turn the call back to the operator, who will open it up for questions.

Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up here.

Handset before pressing star one.

One moment, please while we poll for questions. Our first question is coming from Anthony <unk> from Dowling <unk> partners. Your line is now live.

Hi, Good morning, Simon just a couple of questions for you on the underwriting side of the business. There was really strong property growth in Q1, just wanted to know is this a good run rate for growth as we think about the rest of the year and that could be specific the property business or even broader for the whole portfolio.

Hey, Anthony.

Our property business is imports some of the homeowners business that I that I mentioned earlier in the call and.

And in part of some of our cat retro positions that we established at one one so it's a bit lumpy.

And fairness, that's a considerable amount so that business is quota share so should.

Right through the through the year, but I'm reluctant to guide you to any particular run rates on the on our property business.

Because it can come and go.

No that makes sense and I. Appreciate the fact, you were mentioning with the route preserve durations were relatively short term, but do you think these pressures are going to persist in future quarters, specifically on the auto and I think there were pockets with workers.

As well.

Well I think it's a good question and I think it's one that the entire industry is asking it so.

So from an industry perspective will ease pressures persist I.

I think so yes.

Although in fairness I think we've we've already received the bulk of bad news on on the inflationary pressure.

Should all be getting ahead of us.

Repricing, our reserves based on the new inflationary outlook.

Temporary or long lives to whatever your view might be.

With respect to our reserves, though and I think that's where your question because the duration is so shorts and particularly on the auto side, we got out of that business almost entirely.

Almost a year ago, when it was tapering considerably before that.

I I would be surprised if if that continues to kick for much longer.

Quite apart from that answer look at every point in time, we established our best estimates of reserves and this is our best estimates of reserves at no point am I getting too.

Uh-huh expects.

The deterioration I think I think we put it as a whole.

Okay. That's that's helpful and if I may I just have one more question.

You know you pointed to underlying loss ratio improved seven points in the quarter. Despite the reported combined ratio of being you know also improving six points, but on the underlying position is this mostly due to the book kind of shifting to property business or is there anything else to highlight here that would.

Benefit the underlying results.

Yeah, I Wouldnt say that its necessarily a shift towards property. The property volume as is all but a fair amount of that says rates not exposure. If you look at our P&L profile.

It's not.

It's about the same for our peak perils as little up in Japan, where we take trouble. So this growth in the portfolio and property, but its not that considerable lots of interest rates.

This growth pretty much everywhere through the through the through the book with the exception of perhaps work is called which is which we are taking a more cautious deal.

The picture is really an.

And underlying imp.

Improvement in rates in almost every class, we rights and the continuing diversification of build out to the entire portfolio I wouldnt necessarily focus on property or any individual classes being as being the driver of that.

Alright. Thank you so much that's all I had to ask.

Youre welcome.

Thank you as a reminder, Thats star one to be placed in the question queue. One moment. Please while we poll for further questions.

Our next question is coming from David shift from ship insurance at Beaver. Your line is now live.

Hi, There you had mentioned that you were.

Going to looking into replacing the convertibles with a fixed debt are fixed rate debt I was just wondering roughly what a mouth, where you're thinking. The other question is is there really any reason that you need to have any debt whatsoever.

Hi, David it's far more here.

Yeah, It's a good question.

We started five years ago with convertible debt of 100 million.

And we have now since that repurchase.

Bunch of it and the remaining balance is about $62 million.

So.

Current view is to look at refinancing the outstanding debt balance.

Discussions are progressing well and we think we can close in the second quarter.

So size wise, we'll be looking to replace one of our existing outstanding debt amounts.

And I guess the second part of my question was is there a reason that you need to have any debt.

Okay. Thank you.

We're in a in a market, where we see opportunities on the underwriting side and we want to have so much liquidity on cash available to deploy in those markets. So we.

We are assessing.

We're always looking at opportunities for our capital structure and at this time, we believe that this is the best option for us.

Okay.

Thank you there are no additional questions. At this time should you have any follow up questions. Please direct them to Karen daily of the equity Group, Inc. At IR at Greenlight re Dot Ky.

I'll be happy to assist you. This now concludes Greenlight Re's first quarter 2023 earnings conference call. Thank you you may now disconnect.

Yeah.