Q2 2019 Earnings Call
Thank you for joining the Greenlight re conference call for second quarter 2019 earnings.
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After todays presentation, there will be an opportunity to ask questions.
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.
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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 uncertainties and assumptions, including those enumerated in the company's Form 10-K dated March 15th 2019, and other documents filed by the company with as you see.
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.
I would now like turn the conference over to Greenlight Re's CEO Mr. Simon Burton. Please go ahead Sir.
Thank you operator, and good morning, everyone.
In like we had a good quarter with positive results from both our underwriting and investments.
Gross written premium for the quarter increased by about 7% over the second quarter a 2018.
This growth represents the first year on year quarterly increase in gross written premium since we implemented changes to our underwriting appetite and late Twentys 17, which resulted in six quarters of your on your premium reduction.
The increase achieved during the second quarter of 2019 reflects the combination of attractive sources of new business and rate improvements in multiple areas of our existing portfolio.
And the property catastrophe Clos.
Two years of outsize industry losses have resulted in rates improvements that I expect will continue through the year and renewal season and pops into 2020 .
Although the pricing improvement is caused by significant deterioration in industry insured loss estimates for type two in JV from initial estimates of $5 billion to about $15 billion today.
The insurance industry as a whole this miss on loss estimation was painful.
Following another significant mess on hurricane on <unk> in 2017.
Well I'll speak on JV increased by about $3 million during the second quarter, how loss estimates when Obama has decreased over time with our overall recent record on catastrophe loss estimation proving to be excellent.
We're also seeing pricing improvement from the significant level of truck collateral in wireless phones.
Which has increased the demand for traditional rated products.
We estimate that retro rate increases have exceeded those of direct reinsurance by a margin of between five and 10%.
As a result, we have not renewed our retro cover this year in order to maximize the return on allocated capital.
You know London market specialty business, we are now seeing the effects of the Lloyds performance review of 2018.
The resulting capacity withdrawal combined with higher than expected loss experience, it's great. It off with rating pressure, particularly in the marine energy satellites on d'aviation classes.
We have been building positions in each of these classes and expect to benefit from margin expansion as we renew and rights additional business in these areas.
Greenlight re innovations entered into six new investments during the quarter, bringing the portfolio to 12 completed transactions.
We have a healthy pulp pipeline of opportunities that reflects the growing awareness of our brand and we expect that improving insurance market conditions will add further momentum to our partners as they develop and launch their products.
Our outlook for this unit remains positive.
As we announced on May 31st as a result of VAM best decision to revise the outlook of our financial strength rating of a minus from stable to negative we have partially de risked our investment portfolio and commenced a strategic review led by the board of directors.
Board has engaged credit Suisse to assist in the review which is ongoing.
Look forward to providing updates as appropriate.
I would like to turn the call over to David.
Thanks, Simon and good morning, everyone. The solid class fund returned 2.7% in the second quarter, our shorts contributed 2.5% in our long contributed 1% during the quarter. The S&P 500 index returned 4.3%.
Our test for sure it was our largest contributor during the quarter as the company announced for quarterly results.
The company lost over $400 million during the second quarter. Despite record vehicle deliveries, we remain short test, but the company structurally unprofitable and despite management's theatrical has demonstrated no ability to reverse its losses.
That's what continues to underspend in Capex. Despite his global growth plan and the brain drain has experienced senior executives continues should Tesla lose access to the capital markets. It will face serious financial trouble.
Long positions in your cap and agent were also positive contributors during the quarter offset by losses in Schuh energy companies.
On may 31st we disclosed that the investment portfolio had been de risked and the majority of the investment assets had been moved to cash and short term treasuries, while the board of directors completed the strategic review the risk reduction represented about two thirds of the combined long and short exposure, we expect to managing investment portfolio was approximately just composition until the board is completed the strategic review.
Solace glass returned 0.5% positive in July and has returned 9.6% year to date investment portfolio is approximately 22% net long and bright house financials, our largest position.
Bright house this business is performing well and at its variable annuity book continues to mature a free cash flow should expand significantly.
The company currently plans to buy back $1.5 billion of stock by the end of 2021, which represents around 35% of the current shares outstanding.
Today, the company's market capitalization is just under $4 billion at less than 30% of book value and less than four times earnings. We believe brighthouse remains extremely undervalued.
Now I'd like to turn the call over to Tim to discuss the financial results.
Thanks, David the second quarter of 2019, Greenlight re reported net income of $15.3 million compared to a net loss of $37.4 million for the comparable period in 2018.
Fully diluted net income per share was 42 cents for the second quarter of 2019 compared to a net loss of one dollar and one cents in the prior year period.
For the six months ended June Thirtyth 2019, we reported net income of $21.2 million compared to a net loss of $180.1 million for the first six month of 2018.
Fully diluted net income per share was 58 cents compared to a net loss of $4.87 per share for the same period in 2018.
Gross premiums written were $314.9 million for the first six month of 2019, a small decrease of 0.7% from the prior year period.
Premium reductions due to the non renewal of a medical stop loss contract and the commutation of a mortgage contract in 2018 were mostly offset by premium increases from new workers compensation and multi line contracts written during 2019.
Net earned premiums for the first six months of 2019 decreased by 10.5% to $245.8 million from the prior year period, which coincides with an increase in unearned premiums, resulting from the new business written during 2019.
The composite ratio for the second quarter was 96.1% and there was small favorable loss development of $5.2 million during the quarter as the underwriting portfolio performed in line with our expectations.
The first six months of 2019, the composite ratio was 105.8% higher composite ratio, resulting from reserving actions taken on auto losses during the first quarter of the year.
Combined ratio for the second quarter of 2019 was 98.8%, bringing the combined ratio for the year to date to 108.3%.
Total general and administrative expenses incurred during the first half of 2019 was $14.8 million, which is an increase of $1.8 million over the prior year period.
This increase is primarily related to higher personnel I T and innovation related expenses.
The underlying writing expense ratio for the first six months of 2019 was 2.5% compared to 2.8% in the comparable period in 2018.
This decrease was primarily due to higher other income reported on deposit accounts deals, which is included in the calculation of the underwriting expense ratio.
We reported total net investment income of $18.8 million during the second quarter of 2019, which includes net investment income of $14.4 million are in on our investment in Solus glass.
Reflecting a net gain of 2.7% on the solus glass funds for the quarter.
For the first six months of 2019, we reported total net investment income of $51.1 million.
Of which $45.2 million related to investment income in the Solus glass fund, reflecting a gain of 9.1%.
Fully diluted adjusted book value per share as of June Thirtyth, 2019 was $13.58, a 3.7% increase from $13 and 10% per share reported at December 31, 2018, and a decrease of 21.9% from $17.38 per share reported at June Thirtyth 2018.
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 proceed 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 too.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from David Rocker and individual. Please go ahead.
Thanks very much.
Well I am best decision to downgrade the company's debt was based on poor insurance performance over a long period of time.
Well things seem to have stabilized it insurance is still.
Not providing a very attractive return most of the gain is due to the portfolio.
The stock is 40% below book value.
And the question I have basically is why go on.
What is the specific charge given to credit Suisse.
What options are being considered.
What assets or capabilities do you have specifically to offer it to an attractive partner or buy out US you know.
Party.
Hi, David This is David I would say.
Thank you for the question.
The the strategic review led by Credit Suisse is designed to.
Find the best strategic direction for the company. The company has we believe a number of attractive assets, including its underwriting team and existing book of business in in came in and in Ireland.
We think that the investment program itself has value we think that the public listing has value. We think that the team that is in place has value.
And we're looking with credit Suisse in a way to.
Improve the company's business position and structure and deal with whatever pressure as coming from the rating agencies.
The discount to the.
Between the stock and the book value of the company is manifestly obvious to everybody that is involved and it is something that we hope will be addressed through this process in reasonably short order.
Can you comment on that as you've indicated that one of your.
Strong thing for.
One of your other long positions was a substantial amount of buyback of its undervalued security whether you have considered a similar buyback up your own as a means of closing the gap between book and what you believe to be improved prospects.
Yes, I'm very sensitive to the discount and I'm very aware of the math.
Relating to buybacks the problem we have at the moment is given where we are in the strategic review, we're not going to be able to have clearance from council to be able to trade the stock in our own account while were in possession of likely material non public information.
As am best given you any indication of what kind of improvement would be required for them to reverse the downgrade.
David This is Simon.
To be clear the am best action was a modification of our a minus rating from stable to negative outlook.
Not not a downgrade.
But of course it is it does amount to two pressure from from A.M. best footwear.
Mindful off.
Their decision as they made clear in the press release is a result of.
Over time.
Hi levels of volatility from both sides of the balance sheet.
And in their view.
And improvements in our underwriting business profile is needed in the in the near term.
They have not put a.
Timeline on.
On any next steps they may not take.
The company is.
Is working on our strategic review with.
With all that all our commitments and.
Our relationship with them best continues to be healthy and positive.
Okay. One last question I'm not sure I fully understood in your restructuring have you.
Eliminated two thirds of your investment portfolio with some of those costs.
Because it just seems like that part actually increased year over year within the quarter. It was just the individual equities, which were limited.
Yeah, certainly Dave its Tim Curtis here.
Actually if you look in note two in the in the queue. It actually has the the composition of the Solus Glass fund.
And in that you'll see that.
It was repositioned to have a large element of cash in us treasuries relative to the equities that remain in the funds you can actually see the numbers and.
The reduction in the equities.
From those tables.
Thank you very much.
Our next question comes from Brett Reece with Janney Montgomery Scott. Please go ahead.
Good morning, gentlemen.
Going forward.
Do you think this sign on is going to continue to manage the investments Weve just a more conservative mandate or is there another manager that that's going to be brought in.
Brett This is Simon.
But obviously, we've made short term changes fast we.
Go through our strategic review process directed by the board.
To significantly reduce the volatility that we've we've seen and in the recent period from the investment strategy.
We have a.
An ongoing and committed relationship to David and Greenlight capital.
And the at this point the company does not foresee any any changes.
Good.
Okay. That's one reason I own the stock.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Mattel Abbas solo with so little capital management. Please go ahead.
Yes, Hello, Thanks for taking my question John or questions.
And the first <unk>.
We go to <unk> to David and Yeah, and whose relates to the assignment to credit Suisse first Boston I I, if I understood well what she has to be is mandated to do east.
To figure out ways to improve your.
Rating Wifi A.M. best.
But they are not.
Contemplating.
Broader strategic alternatives, one of which would be to simply liquidate the company.
Seems we're blind to the strategic review of the Gore.
Yeah I have.
Just one these very specific question studies.
And he's the liquidation of the company on the table or is it something that you totally disregard that and that would be my first question.
Yeah. This is David.
Yes. His mandate is broader than what you had suggested.
We do not believe that liquidation of the company is the first option to consider.
We are going through a path of trying to find.
Better solutions than a liquidation.
But if the process plays out in a way that is worse than we presently expect we would certainly have to compare whatever we decide to other alternatives that might be available.
Okay, and David if I may follow up just to frame at least a big internal debate I mean to me it seems.
<unk>.
Something like.
With that.
That.
That that a company that you chair.
He's given an investment bank.
You know the mandate for a strategic review I, you know I definitely would not investors and Ingredion right right.
Because we think that.
Credit Suisse has better strategic review capabilities than yourself, but anyway. So let me just say I mean from my point of view.
Keith.
I would have a 1.4 billion in assets only 140 million that is 10% of the assets are invested at risk.
Or the company is.
[laughter] very constrained he needs.
The technical side of the insurance business.
I mean, the most you can aim for east to stabilize the situation I mean to to.
<unk> to minus the company's suit that this 13.6, a net asset value per share doesn't erode from here, but but.
But.
I mean is there.
In my mind, it's hard to.
Yeah ambition and any chance alternative differing Dan Dan either.
Go through a capital raise a big one.
Or to liquidate and and I know that that the day that this strategic review is is ongoing.
But if you could help me frame the debate there would be incredibly helpful. Thank you.
Sure.
Look it's useful to have a financial adviser among other reasons is is if you want to run a process, where you are soliciting third parties. It is good for them to make the rounds of calls to do those kinds of contacts to run a process. You know that is that is.
You know smooth they have good experience in this area as well as having a large number of contacts and relationships with a broad.
Number of potential strategic partners that we may want to consider engaging with so there is value.
In that relationship in terms of managing the process separate and apart for whatever you think about their abilities to assess different alternatives for which I believe that they also have useful capabilities I would say the idea of a you know a large capital raise is not something that is at the top of our list.
Neither is the idea of a level liquidation at this point I think we're not in a position to rule out any particular thing completely but I actually think that both of those alternatives are somewhere between very unlikely in and remote at at this stage and then finally regarding the low level of asset investment I would agree with you and I think the board would agree with you that this is not a sustainable position for the company to achieve attractive results. So the outcome of this process is going to have to lead to something different than what we are presently displaying but this is the reasonable position for us to take that we think is in the best interest of the company and the shareholders for a what went in the scheme of things a brief period of time, while the company comes up with it it's a it's best strategy.
Excellent. Thank you very much and if I may I have one for Simon that is more tactical, but but if I may.
Simon I'm, not I I I look that up.
Yeah insurance business review.
I I was I I'm I'm not uninsured an expert so so forgive me if I'm mistaken here, but but I was surprised by that emphases the company made on workers' compensation.
And I say this because we we we own some shares in some other insurers.
And in particular, we always sure sure seem for Fox.
Holding in Canada, and that's you know this is this is a a reinsurance operation that consistently.
And the rights for negative cost float.
And in there.
Latest results release, they said that that their companies are continuing to see healthy hardening price increases across most lines of business in North America with the exception of workers compensation.
My question to you would be [laughter] furnace season, I mean, what do you see that those don't see thank you.
Oh, Oh workers compensation is a key but not our largest class of business.
We write that business or for a profit that is our intention not to acquire the flows so from a negative cost.
Of course, I I can't comment on any p. and the insurance industry, but our perspective on workers compensation as a class is that youre correct in that.
It is one of those classes that does not seem to be.
Receiving or improve.
The terms and conditions and rates are as many others have in the past 66 months also but the fundamental reason for that is in our view is that workers comp was broadly.
Adequate.
Whereas many other classes, where well less or less adequate or inadequate in many cases.
Our particular portfolio has performed well we write business when we see attractive opportunities are and I stand behind the the underwriting decisions we've made.
Excellent Thanks, a lot.
Our next question is a follow up from David Rocker. Please go ahead.
Thank you very much virtually the entire gain a this quarter.
Came from investment income.
And that is also after taking very substantial reserves in prior years.
On the insurance side can you give us some idea I know credit suisse's looking at this as well.
Of what you think a reasonable expectation in dollars for earnings from the insurance side of the business ex the investment side of the business as you're currently constituted.
David We don't provide forward guidance on our earnings from either side of the balance sheets of full.
Particular reasons.
What I will say is that.
We anticipate over the medium to long term that the insurance and reinsurance operations of the company should be additive to book value.
Should compensate our investors for the risk that we're taking a the insurance risk that we're taking.
It's it's important supply I believe that the portfolio has his position today does in fact adequately compensate our investors for that risk.
As you quite correctly points out some of the.
Headwinds on our results do relate to prior periods.
In some cases liabilities that were shooting by the company several years ago, if not if not more than that.
But what's most important to me is a current portfolio positioning and the risk reward that we presented for investors, which I think is a is compelling.
Well can you give us some idea of how you can.
Demonstrate greater confidence in the future your stock is basically at a low despite these improvements and despite the improvements in the investment performance of investment performance was half that in the quarter of what Green lights on performance was.
In insurance as I've indicated has provided very little incremental earnings. During this period, obviously, you've lost a great deal of the trust and for your investment group, what can you do to reverse that.
Well your question on how we can demonstrate or competence now and going forward. It is is of course ultimately for you to George and I respect that.
Won a metric that you may choose to examine a for example, or maybe our underwriting performance as opposed to a fund I for your performance for enough. We are of course, including a prior period loss development. The underwriting of performance is a is a pure a view of our current portfolio and ER.
And our current activities.
That is a it's a rather different picture than the financial metrics a us because I think you'll agree when you when you take a look at that.
Our president.
Fit for the company prohibited from their own activities buying and selling their own security. During this time of evaluation.
Or could they make individual decisions.
Generally speaking I think.
People involved with the company on a restricted from trading the shares at this time.
You have any idea of how long it will take for credit Suisse to complete its.
Reviewing proposals to you.
You know without putting a line in the sand, we expect to be a to have progress this year.
Okay.
Thank you.
Again, if you have a question. Please press Star then one.
Should you have any follow up questions. Please direct them to Adam prior of the equity group Inc. at two one too.
8369, 606, and he 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 Dot Greenlight re dotcom.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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