Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q2 2024 Earnings Call Transcript

Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q2 2024 Earnings Call Transcript August 10, 2024

Operator: Thank you for joining the Greenlight Capital Re Limited Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. It’s now my pleasure to turn the call over to David Sigman, Greenlight Re’s General Counsel. You may begin.

David Sigmon: Thank you, and good morning. I’d 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.greenlightre.com. Joining us on the call today will be our Chief Executive Officer, Greg Richardson, Chairman of the Board, David Einhorn, and Chief Financial Officer, Faramarz Romer. 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 federal securities law. These forward-looking statements 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 SEC from time-to-time. Additionally, management may refer to certain non-GAAP financial measures. The reconciliation to these measures can be found in the company’s filings with the SEC, including the company’s recently filed Form 10-Q for the quarter ended June 30, 2024. The company undertakes no obligation to publicly update or revise any forward-looking statements. With that, it is now my pleasure to turn the call over to Greg.

Greg Richardson: Thanks, David. Good morning, everyone, and thank you for joining us today. Greenlight Re reported gross written premiums of $169 million, up 9.1% compared to the second quarter of 2023. We delivered net income of $8 million, which equates to 1.5% growth in fully diluted book value per share during the quarter, or 6% on an annualized basis. We reported a combined ratio of 99.8% for the quarter. Our underwriting result was impacted by a higher-than-normal level of current period catastrophe losses, primarily related to the U.S. convective storm season, which added 8.4% to our second quarter combined ratio. U.S. convective storm losses in the second quarter are estimated at over $30 billion, roughly twice the 10-year average.

Our exposure to these events almost exclusively relates to a homeowner’s insurance program, which we non-renewed effective January 1, 2024. While we have some residual exposure to U.S. severe convective storms, the peak U.S. convective storm season of March to June is behind us, and our ongoing exposure is declining rapidly as the 2023 treaty runs off. Excluding U.S. convective storm losses, our portfolio performed well in the quarter and in line with expectations. We remain positive about the positioning of our portfolio and market conditions in general. At July 1, the renewal season was in line with expectations, reinsurers remained disciplined, and pricing continues to be attractive. We continue to see attractive opportunities for growth, particularly in the property and specialty classes, but are more cautious in casualty, particularly if there are large original limits involved.

I recently returned to the Cayman Islands after spending a couple of weeks in Ireland and the U.K., where I had the opportunity to spend some extended time with our staff, our brokers, and our clients. Greenlight Re’s positioning with our brokers and clients is strong, and we look forward to future growth with them. Greenlight Re is in good shape, we have a strong team, and I am excited about our prospects. Now I’d like to turn the call over to David Einhorn.

David Einhorn: Thanks, Greg, and good morning, everyone. The Solace Glass Fund returned 1.2% in the second quarter. Our short portfolio added 1.6%, and macro added 0.9%. The long portfolio detracted 1%. During the quarter, the S&P 500 index advanced 4.3%. The largest positive contributors were long investments in Salve, HP, and Kyndryl Holdings. The largest detractors were long positions in Bright House Financial and Greenbrick Partners, and a single name short. Salve advanced 30% during the quarter. Despite concerns around falling soda ash prices, the company exceeded earnings expectations in the first quarter and maintained its full year outlook. HP shares gained 16% as PC hardware sales turned marginally positive after seven quarters of decline, and the company guided to a return of growth for this segment.

The market might have also begun to show excitement around the prospect of an even larger AI-related PC growth cycle. Kyndryl Holdings shares advanced 21% after another positive earnings update, which saw results exceed expectations on all key metrics. Importantly, the company finally guided toward constant currency revenue growth, beginning in its fourth fiscal quarter this year. Gains in the macro portfolio were primarily driven by gold, which appreciated 4% over the quarter. Bright House Financial shares fell 16% after announcing for the second quarter in a row a surprising one-off earnings disappointment. This time it disclosed that it incurred a reinsurance arbitration expense of several hundred million dollars. Greenbrick Partners shares fell 5% over the period.

In May, the company announced both record-breaking first quarter earnings and homebuilder gross margins. The third largest detractor was a single-name short position, which, despite an unexciting earnings update, saw a stock rally on the heels of a company event where it unveiled new AI-related initiatives. Our net exposure remained neutral during the quarter. Led by a surge in Greenbrick Partners, the Solace Glass portfolio returned 4.6% in July and has returned 11.3% year-to-date through July 31. Net exposure in the investment portfolio is approximately 31% at the end of July. This month is the 20th anniversary of Greenlight Re. I just returned from a board meeting in Dublin, where I had the chance to meet our European staff and celebrate this milestone.

When we first started Greenlight Re, we had a vision, but no idea what it would actually eventually become. Despite some tough periods, I’m incredibly proud of the team and what we built from the ground up. The company is the strongest it has ever been, and I look forward to the next 20 years. During our Board meeting, the board made the decision to increase the allocation to the Solace Glass fund from 60% to 70% of adjusted book value. This change was made effective August 1. Now I’d like to turn the call to Farmaraz, who will discuss the financial results in more detail.

Faramarz Romer: Thank you, David, and good morning, everyone. During the second quarter of 2024, we generated net income of $8 million, or $0.23 per diluted share, compared to $49.9 million, or $1.32 per diluted share, in Q2 2023. The underwriting book generated a small profit of $0.3 million after underwriting-related G&A expenses. Current period catastrophe losses accounted for $13.3 million, the majority of which related to the U.S. severe convective storms, as Greg mentioned, while approximately $5.9 million related to the German floods, the Taiwan earthquake, and an offshore platform fire. During the second quarter, our net written premiums increased by $8.9 million, or 6.2%, to $154.1 million, compared to the same quarter in 2023.

The growth related to the specialty book, while the property and casualty books, partially offset the increases. The net premiums earned were $158.4 million, an increase of $18.5 million, or 13.2%, compared to Q2 last year. Turning to our specialty book, our net premiums written increased by $25.9 million, or 76.4%, during the second quarter, mainly within the marine and energy classes. The composite ratio for the specialty business decreased to 72.2% in the second quarter, compared to 76.7% during Q2 last year. The decrease primarily related to favorable loss development within our mortgage and marine and energy classes, partially offset by the offshore platform fire during the quarter. Moving to our casualty book, net premiums written decreased by $7.4 million, or 8.7%, during the second quarter, primarily related to the Lloyds Syndicate business.

The composite ratio for the casualty business was 104.9% in the second quarter, compared to 91.4% in Q2 last year. The increase was partially related to higher loss ratio, driven by reserve strengthening on certain legacy casualty contracts, and partially due to higher acquisition costs on the Lloyds Syndicate business. Within our property book, net premiums written decreased by $9.6 million, or 36.2%, during the second quarter, driven primarily by the non-renewed homeowners contract that Greg mentioned earlier. The composite ratio for the property business was 127.5% for the second quarter, compared to 122.2% during Q2 last year. The composite ratios during both periods were impacted by the U.S. convective storm losses on the previously mentioned homeowners contract.

Total G&A expenses increased by $0.5 million during the second quarter to $10.5 million, compared to $10 million in the second quarter of 2023. The increase is primarily related to growth in headcount, as we added new staff across various departments and locations. We reported total net investment income of $12.6 million during the second quarter, compared to $42.2 million in Q2 last year. Our investment in the Solace Glass fund reported a gain of $4.3 million, or 1.2%, while our innovations investment reported a small gain this quarter. We earned $8.1 million of interest income on our restricted cash and cash equivalents and on our funds deposited at Lloyds. We have generated $40.7 million of cash from operations during the first half of this year.

During the second quarter, we prepaid $10 million of our term loans, bringing down our debt ratio to the lowest level since 2018. We have grown our book value per share for seven consecutive quarters. Over the last 12 months, our fully diluted book value per share has grown 11.9% as a result of strong underwriting and investment results. As of June 30, 2024, our fully diluted book value per share was $17.65. Before we move to the Q&A session, I want to mention that yesterday we announced that we will be hosting our 2024 Investor Day on November 19 in New York City. You can register for the event by contacting Karin Daly, our investor relations representative. We look forward to seeing you there. And now I will turn the call back to the operator to open it up for questions.

Operator?

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today is coming from Eric Hagen from BTIG. Your line is now live.

Eric Hagen: A couple of questions here. I mean, first, just how are you thinking about the opportunity to grow the insurance portfolio, earn higher premiums in light of, just this new narrative surrounding a more sensitive macro backdrop? Do you feel like there’s any lines of business that you expect you can maybe lean into and target if competitors are reducing their risk?

Greg Richardson: Sure. This is Greg. Thanks for the great question, Eric. I’ll kind of break it into two things. You talked about the macro backdrop. Obviously, let’s start with that. Obviously, we’re in a period of, I would say, heightened macroeconomic uncertainty, a frothy market, which is showing some pullback uncertainty about interest rates, global political challenges, and elections coming up. So, obviously, that’s something that affects all financial services, including insurance and reinsurance companies. I would point out that I think the nature of our portfolio, both on the investment side and on the liability side, makes us more resilient than many other reinsurance companies by nature of the strategies that we employ.

So, on the investment side, we hedge a lot of macroeconomic risk. And on the liability side, we’re not that exposed to longer-tail financial lines, inflation risk. While we write some mortgage reinsurance, it’s a rather modest portion of our portfolio. So, no one can escape that exposure, of course, but we feel well-positioned. And I would perhaps point out to you our experience in 2022, when there was an inflation-driven interest rate shock. And I think Greenlight probably outperformed almost every insurance or reinsurance company in the world on that measure. So, macroeconomic risk, obviously, is a factor. And then within the reinsurance world, in the insurance world, we worry about the cycle that’s going on. We remain in a strong position overall.

We think it’s probably peaked in most lines. But in property and specialty, as I pointed out, we find the rates still to be quite attractive and opportunities for growth. Casualty is a more complicated story, and so we’re a little bit more cautious on that. But we think our casualty positions are less susceptible to the inflation and nuclear verdict severity problems that many, many companies are struggling with. You highlighted the insurance play, and that’s one of our aspects of our business that we’re most proud of. Obviously, we’re noted for having superb investment acumen, and that’s the hallmark of Greenlight Re in many respects. But coming up close second to that, we share a similar pride in our innovations book. What we have built there under the leadership of Brian O’Reilly is nothing short of extraordinary.

And the challenge is, it is innovations. It’s forward-looking. It takes courage, and it takes conviction, and there’s some learnings along the way that we’ve had. But we’re really excited about the well-diversified portfolio that we have. It’s a portfolio that is very niche-oriented. In some cases, linked to new distribution mechanisms of the new economy and growth driven by the new economy. We avoid sort of wholesale commodity reinsurance capacity lines, which are subject to either large event risk or systematic pricing risk. So again, like macroeconomic risk, nobody can avoid the cycles in reinsurance or insurance. We think the innovations book is probably more resilient with respect to those forces. If we do nothing to grow or build our innovations business beyond the positions we have, there will be potential for significant growth just within the existing portfolio.

At the same time, there is a terrific pipeline of new opportunities. Our issue with innovations is not the attractiveness of the business. It’s the growth relative to our balance sheet. So key to that is finding capital partners to partner with us in that area. And we’ve launched initiatives to do just that. I’m highly confident, given the level of interest we’ve heard to date, that we’re going to be able to execute on that plan as well. You started out by talking about insurance. That is a big opportunity. But we want to keep our net position in proportion with our balance sheet and with the other strategies that we have that includes Solace Glass that includes open market reinsurance that includes innovations. And also will include over time capital management in a small measure as well.

All of which is geared towards optimizing and driving ROE, which I would argue is my highest mission and highest goal is to improve shareholder returns over time.

Eric Hagen: That was a really helpful response. I appreciate you guys. We picked up a little bit on the reinsurance portfolio and the investment portfolio. How comfortable do you guys feel with the current capital allocation? Any perspectives on what led to the higher allocation to the investment portfolio? Just in light of how well reserved you guys are, how well you feel you are, how reserved you are right now. What do you think of the scenarios, where you feel like you can bring perhaps even more capital to investment portfolio. Thank you, guys.

Greg Richardson: Yes, I’ll take a crack at that. But I’m sure David or Faramarz might want to chime in on that. When you look at our investment portfolio over 20 years, it’s delivered superior risk-adjusted returns. True alpha in the financial sense. But when you look at it in the context of a reinsurance company and the risk capital that we allocate to that, it’s even better. So our Solace Glass investment returns on risk capital, as we allocate and think about that scarce resource that we have is the risk-bearing capacity. The returns over the past several years on the Solace Glass have been superior probably the best returning aspect of our business. So it is accretive to us to increase that allocation. If you start increasing it wildly large, then it starts consuming disproportionate amounts of capital, and those returns on risk capital begin to diminish.

But it is absolutely accretive to make this increase from 60% to 70%, and we have the excess capacity to do that. So that is, from an economic standpoint, a very smart move to make. The open market reinsurance also continues to be generating very attractive, on a pricing basis, risk-adjusted returns. Now that’s obviously, the actual returns are going to vary with events. We had a pop in the first quarter from the bridge in Baltimore. We had some unfortunate, severe convective storm losses from that legacy contract that’s in runoff. But the ongoing portfolio, we believe, continues to generate very attractive returns on capital. And so we see opportunity to grow there. In the future, all good things come to pass. And at some point, prices will not be as attractive, and then we’ll have to pare back and adjust our portfolio accordingly.

But what I like about Greenlight is the optionality that we have. Innovations is going to be a growing foundation of steady proper business that we have enormous influence and control over. We think attractive margins. Open market reinsurance is obviously more cyclical and opportunistic, but we have the option to dial that up and dial it down. And then the investment, we have a terrific amount of optionality in there. We can go long, we can go short, we can be net. We can provide, we think attractive returns in all kinds of market conditions. I want to leave it at that. And then Faramarz and David, if you wanted to either add or correct anything I’ve just said.

David Einhorn: There’s nothing to correct, but I might just add a little bit, just in terms of a little bit of a longer-term perspective for the allocation to the Solace Glass. As probably everybody on the call knows, the company a few years ago went through a period of very significant stress. And we had a large capital loss around 2018, and this triggered a great deal of concern from everybody involved, including the board, including the management, including the rating agencies. The stock obviously performed extremely poorly and deservedly so. This led to a change in the allocation to the managed account, which was in a different form at that time, but subsequently has been renamed and reconstructed as Solace Glass. And we had a significant cut to the allocation that we had.

Since then, I think the period of stress has dissipated. The stress that came from the various actions also impacted the liquidity of the business, because on the reinsurance side, counterparties were demanding more collateral, and the company did not have excess liquidity. We had always had adequate liquidity, but we really didn’t have excess liquidity. And so liquidity was a factor in figuring out how much we could reasonably allocate to the investment side. Now, over time, as the underwriting results have improved, as the investment results have improved, as the balance sheet has improved, and [Pharma] [ph] has done a great job on this, we’ve begun substantially recovering some of the excess collateral that was being posted to counterparties, such that the liquidity position of the company is dramatically better than it was even just a couple of years ago.

Similarly, I don’t want to speak for the rating agencies, but from my perspective, the tone of those conversations has improved materially, and the company is in a better position in all directions. Now we have brought on Greg as the new CEO, and he’s been in the process over the last few months beginning to think about his framework for how he thinks that the company, under his leadership, should be allocating capital. And I think he hinted at that a bit. The board has been responsive to all of these changes. I’m pleased that we were able to announce this morning that as of August 1, we allocated an additional 10% of the adjusted equity to the Solace Glass portfolio. And I believe that as things continue to improve, as liquidity improves, the capital position improves, and the performance continues to be sustained at attractive levels, I believe that the board and the management and the rating agencies ultimately over time will become sympathetic towards additional increases to the Solace Glass allocation.

But it’s not going to happen in a big step function. It’s going to be maybe more baby steps like we went from 50 to 60, and now we’ve gone from 60 to 70. And if we continue progressing, there should be room for further increases in the future.

Operator: Thank you. We’ve reached the end of our question-and-answer session. Should you have any further follow-up questions, please direct them to Karin Daly of the Equity Group, Inc. at ir@greenlightre.ky. And she’ll be happy to assist you. This now concludes Greenlight Re’s second quarter 2024 earnings conference call. Thank you. You may now disconnect.