Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q3 2024 Earnings Call Transcript

Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q3 2024 Earnings Call Transcript November 5, 2024

Operator: Thank you for joining the Greenlight Capital Re, Ltd. Third Quarter 2024 Earnings Conference Call. [Operator Instructions] It’s now my pleasure to turn the call over to David Sigmon, Greenlight Re’s General Counsel. You may begin.

David Sigmon: Thank you, Kevin 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 investors 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 laws. 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 reconciliations 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 September 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, which is also U.S. Election Day. We have an Investor Day presentation in New York City just 2 weeks from today, and I hope that you all can attend. It will provide additional background and color on Greenlight Re’s progress and go-forward strategy. Greenlight Re reported gross written premiums of $168.3 million for the quarter. We delivered net income of $35.2 million, up $21.7 million versus the third quarter of 2023. This equates to 6.1% growth in fully diluted book value per share during the quarter. Fully book – fully diluted book value per share has grown 11.8% in 2024 or 16.0% on an annualized basis. Third quarter 2024 benefited from strong investment income driven by the Solasglas fund, which reported income of $19.8 million, a 5.2% return on our investment portfolio.

Recall that on our earnings call last quarter we announced that our allocation to Solasglas investment portfolio was increased from 60% to 70% of adjusted book value, effective August 1. We reported a combined ratio of 95.9% for the quarter, our eighth consecutive quarter of underwriting profit. Our year-to-date combined ratio is 97.9% despite being another relatively active year for insured natural catastrophes, which are estimated at over $100 billion through the first 9 months of 2024. Hurricane Helene made landfall in Florida’s Big Bend on September 26 as a category 4 storm and went on to impact Georgia and the Carolinas. Most importantly, our hearts go out to those who lost loved ones; and suffered devastating property losses, some of which are uninsured.

Q&A Session

Greenlight Re’s expected loss from Helene is estimated at $7.5 million. This assumes an industry loss of approximately $10 billion. During the quarter, our overall cat losses were $14.1 million, including $2 million from Central European floods; and the remainder, from additional losses on severe convective storms from the first half of the year. Cat losses contributed 9.3% to our combined ratio in the quarter. The active Atlantic hurricane season continued into the fourth quarter, with Hurricane Milton making landfall in Florida on October 9 as a cat 3 storm. Hurricane Milton was one of the most intense Atlantic hurricanes on record but, fortunately, weakened prior to landfall. There is a high degree of uncertainty over the extent of the industry loss resulting from Hurricane Milton, with estimates ranging from a low of $5 billion to a high of $50 billion.

Fortunately, Greenlight Re’s property exposure is underweighted in Florida. Our preliminary loss estimate of $5 million to $15 million assumes 3 to 4 basis points of the overall industry loss. With the third quarter behind us, our underwriting focus has turned to the critical 1/1 renewal season. We believe market conditions remained very attractive, with discipline remaining generally strong and no material increase in reinsurance capacity. In recent weeks, we attended industry conferences in Monte Carlo and Baden-Baden, where we have met many of our clients and brokers. We are confident that Greenlight Re is well positioned to take advantage of market opportunities at 1/1. As to our leadership, our Board recently approved the appointments of Tom Curnock as Group Chief Underwriting Officer; and Pat O’Brien as Group Chief Operating Officer.

Both Tom and Pat have been instrumental leaders in our company for many years; and have already hit the ground running in their new, expanded roles. Finally, we were pleased that AM Best recognized the progress Greenlight Re has made in recent years. In October, AM Best affirmed our A- rating and upgraded our outlook to positive from stable. Now I’d like to turn the call over to David Einhorn.

David Einhorn: Thanks, Greg and good morning, everyone. The Solasglas fund returned 5.2% in the third quarter. Our long portfolio contributed 9.9%. The macro portfolio contributed 1.2%, and the short portfolio detracted 5.1%. During the quarter, the S&P 500 index advanced 5.9%. The largest positive contributors were long positions in Green Brick Partners, gold and Solvay. The largest detractors were a short basket to hedge homebuilding exposure, equity index hedges and a separate housing-related single-name short position. Green Brick Partners advanced 46% during the quarter. The company reported quarterly earnings of $2.32 per share, which beat analyst expectations of $1.77 per share. Green Brick continues to execute well on its differentiated strategy that focuses on both land acquisition and the subsequent development of single-family home communities, which enables it to deliver industry-leading gross margins.

Solvay advanced 7% during the quarter. Demand in Solvay’s key end markets continues to show signs of stabilization. In the quarterly update, the company announced earnings above expectations, supported by cost cutting and better-than-expected free cash flow. Management also raised EBITDA guidance to the upper end of the previous range and increased free cash flow guidance for fiscal year 2024. Gains in the macro portfolio came primarily from gold, as the price appreciated another 13% over the quarter. The largest detractor was a recently implemented short-basket homebuilder stocks constructed to hedge the broad exposure related to our Green Brick investment. Other detractors included equity index hedges and a single-name short in another housing-related company.

We believe the latter is structurally unprofitable business and faces looming debt maturities that could be challenging to refinance at a reasonable interest rate. Nonetheless, it was a strong period for everything housing related as investors celebrated the move in lower yields and the 50 basis point rate cut from the Fed. At an investment conference in October, we outlined the thesis behind our long position in Peloton Interactive. Peloton was a popular stock during the COVID era, as demand for at-home fitness products and services skyrocketed. During this time, the company heavily invested for growth without any regard for profitability or expense management. After multiple missteps and subsequent management changes, the stock fell 98% from its peak price in late 2020.

Throughout this time, Peloton has maintained a loyal and engaged customer base through its subscription-based business model. Recently, the company has committed itself to dramatically cutting costs. Should the company be successful in rightsizing its cost structure, we expect significant EBITDA generation. And when applying a modest peer multiple to those profits, we believe the stock has significant upside. We decreased our net exposure over the period, as we seek to be more conservatively positioned from an equity beta perspective. With the market marching steadily higher into record territory, it has become arguably the most expensive stock market we have ever seen. The Solasglas portfolio returned negative 0.2% in October and has returned 11.7% year-to-date through October 31st.

Net exposure in the investment portfolio was approximately 31% at the end of October. I look forward to seeing many of you at our Investor Day in New York on the afternoon of November 19th. Now, I would like to turn the call over to Faramarz to discuss the financial results in more detail.

Faramarz Romer: Thanks David and good morning everyone. During the third quarter of 2024, we generated net income of $35.2 million or $1.01 per diluted share compared to $0.39 per diluted share during the third quarter last year. The underwriting book generated $6.1 million of profit after underwriting related G&A expenses, or a combined ratio of 95.9%. Current year cat losses added 9.3 percentage points to our third quarter combined ratio, while favorable prior year loss development improved the combined ratio by 3.1 percentage points. Our gross premiums written for the third quarter decreased by $14.7 million or 8% to $168.3 million compared to the third quarter last year. The decrease was primarily related to two contracts that we non-renewed in 2024.

Excluding those two contracts, the gross premiums increased by 3.3%. The decrease in gross premiums related to the property book was mainly driven by a homeowner’s contract that we non-renewed during 2024. This homeowner’s contract has suffered from U.S. severe convective storms. However, our current in-force property book is expected to be profitable even with the hurricane losses that Greg mentioned. During the third quarter, our casualty gross premiums written decreased by 15.5%, due to non-renewing a funds at Lloyd’s contracts during 2024 and a shift in our workers’ compensation book from proportional to excessive loss. The remainder of our casualty book has performed in line with our expectations for the third quarter and year-to-date.

Our casualty book is generally weighted towards small to medium-sized enterprises with low limits that are less susceptible to extreme jury verdicts and risk of third-party litigation funding. The gross premiums written by our specialty book grew by $21.4 million or 52% compared to third quarter last year. The majority of this growth was related to a proportional new specialty contract which has an outward proportional retrocession. On a net premium basis, our specialty book grew by $7.8 million or 19.6%, driven by new marine and energy business, partially offset by lower underlying premium on the financial lines business. Notwithstanding the idiosyncratic Baltimore bridge incident in the first quarter of this year, our specialty book has generated attractive returns for the third quarter and year-to-date.

Our ceded premiums have increased both for the third quarter and year-to-date compared to the same period last year. The reason for this is two-fold. First, it relates to the new inward specialty contract that has an outward retrocession that I mentioned earlier. Second, during 2024, we purchased additional excess of loss retrocession coverage to maintain our overall exposure to marine, energy, aviation and other specialty lines. We see this as a key part of a risk management of our growing specialty book. As a percentage of earned premiums, our underwriting expense ratio was 4.2% for the third quarter this year compared to 3% in the third quarter last year. The expense ratio was higher, partly as a function of lower earned premiums and partly due to higher expenses related to personnel costs, including stock-based compensation and higher professional fees.

We have generated $82 million of cash from operations during the first three quarters of this year. During this quarter, we repurchased shares for $7.5 million on the open market at prices ranging from $12.49 to $14.22, resulting in an average price of $13.68. We currently have $17.5 million remaining under the share repurchase plan approved by the Board earlier this year. We have grown our book value per share for eight consecutive quarters. Over the last 12 months, our fully diluted book value per share has grown 16% as a result of strong underwriting and investment results. As of September 30, 2024, our fully diluted book value per share was $18.72. I look forward to seeing you at the Investor Day on November 19th in New York City. If you have not yet registered, please contact Karin Daly, our investor relations representative.

I will now hand the call back to the operator to open it up for questions.

Operator: