Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q4 2022 Earnings Call Transcript March 9, 2023
Operator: Thank you for joining the Greenlight Capital Re Limited Fourth Quarter and Year-End December 31, 2022, Earnings Conference Call. It is now my pleasure to turn the call over to Karin Daly, Greenlight Re’s Investor Relations representative and Vice President at The Equity Group. You may begin.
Karin Daly: 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 Investors section of the company’s website at www.greenlightre.com. Joining us on the call today will be Chief Executive Officer, Simon Burton; Chairman of the Board, David Einhorn; and Chief Financial Officer, Neil Greenspan. Additionally, Faramarz Romer, current Chief Accounting Officer and Treasurer and incoming Chief Financial Officer, will be available for the question-and-answer session of the call. 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, but rather reflect the company’s current expectations, estimates and predictions about future results and are subject to risks and uncertainties. A 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 in the company’s filings with the Securities and Exchange Commission, including Form 10-K for year ended December 31, 2022. 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 is now my pleasure to turn the call over to Mr. Simon Burton. Simon?
Simon Burton: Thank you, Karin, and welcome to your first Greenlight Re conference call, and good morning, everyone. Thank you for joining us. 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 and the tragic and unexpected war in Ukraine. This pattern of underpricing was broken at 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 on terror and marine.
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. This is the first time in my career that I’ve said this. 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. Overall, I’m very pleased with the quality of the business that we wrote at January 1, and I believe the outlook for our underwriting business over the next year or 2 is excellent.
Now I’d like to comment on some of the highlights of the fourth quarter and full year 2022 financial results. 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. The Solasglas fund was the largest driver of the gain with an exceptional return during the quarter of 13.4% and 25.3% for the year. 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 2 main reasons for this. First, we experienced catastrophic losses mainly from the Ukraine war and Hurricane Ian, 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 increased our combined ratio by 3.9 points. The reserving pressure came from a couple of sources, including the runoff of our U.S. auto book, the runoff of a large legacy workers’ compensation relationship and other inflationary pressure on reserves. Underwriting revenue that derived from innovation partnerships was 18% of our 2022 net written premium. We are now in our sixth year of steadily building our Innovations business. 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 insurtech 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 Lloyd’s. And while the premium volume in 2022 was not material due to the midyear starts, this launch was an important milestone in developing our innovation strategy. We are excited by the strategic potential of our Innovations business. Finally, we announced on Tuesday that Neil is leaving us at the end of March with Faramarz Romer stepping up as our next CFO. This is the result of the succession plan that we sketched out about 3 years ago. Faramarz 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. Now I’d like to turn the call over to David.
David Einhorn: Thanks, Simon, and good morning, everyone. The Solasglas fund returned 13.4% in the fourth quarter. Our longs contributed 12.5%. The short portfolio contributed 2% and macro added 0.9%. During the quarter, the S&P 500 advanced 7.5%. Long positions in Twitter and Green Brick in 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 Partners exposure and our high-yield index credit default swaps were the material detractors. Twitter was our largest winner during the quarter as Elon Musk took the company private at the agreed-upon price of $54.20 Green Brick shares advanced 13% as housing stocks broadly recoup some of their steep decline from earlier in the year.
As these stocks rallied, our housing sector hedge basket was the largest detractor. We established a new medium-sized long position in Tenet Healthcare 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. This shift has enabled the company to generate significant, and what we believe to be sustainable cash flows. 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 Solasglas fund had an excellent 2022, returning 25.3% compared to a decline of 18.1% for the S&P 500. Our short positions contributed 26.1% to this result and macro added 3.8%.
Our long positions were just about flat, generating significant alpha. Our outlook for 2023 is that the economy appears to be quite strong, with both full employment and sticky inflation. Despite the Fed raising rates and shifting from quantitative easing to quantitative tightening during 2022, we believe that monetary policy remains stimulative. 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. Fiscal policy is also stimulative, with very high deficits at a time of peak or near peak employment.
The result is that the economy appears to be accelerating and inflation appears more embedded than most market participants want to acknowledge. We expect interest rates to head higher from here and stay there for longer than many market participants expect. As a result, we have positioned the portfolio to succeed best in a bear market with sticky inflation and rising interest rates. The Solasglas portfolio declined 0.8% in January and advanced 1.1% in February and is therefore returned 0.3% in 2023 through February. Net exposure to the investment portfolio was approximately 38% at the end of the fourth quarter. I’d like to thank, also, Neil Greenspan for his service to the company over the last 5 years. Neil helped improve our financial reporting, budgeting and enhance our financial controls while mentoring Faramarz to take over the CFO role.
We’re sad to see you’ll go, but are pleased with the smooth transition, and it’s always exciting to be able to promote from within. As Simon said, Faramarz has been with us a very long time. He was hired as a member of our finance team in 2007. And I think it’s fantastic. He’s worked his way up and made it to Chief Financial Officer. Congratulations, Faramarz, and I’m sure everyone on this call will enjoy meeting him. And now I’d like to turn the call over to Neil to discuss the financial results.
Neil Greenspan: Thank you, David, and good morning, everyone. Our net income for the quarter was $34.8 million or $0.91 per diluted share. For the year ended December 31, 2022, our net income was $25.3 million or $0.73 per diluted share. 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. 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 prior year development. 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 seating insurers.
Therefore, the favorable loss development on these contracts was offset by increased acquisition costs. By comparison, the fourth quarter of 2021 reported net underwriting income of $4.8 million. Gross premiums written in the fourth quarter of 2022 were $127.4 million, an increase of 2% from the fourth quarter of 2021. This increase was due to growth in personal property, general liability and other specialty business, including premiums underwritten by our innovations partners. This increase was partially offset by our decision to reduce our exposure to personal motor and workers’ compensation risks. Premium ceded were $11.5 million in the fourth quarter of 2022 and the material 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 Solasglas fund and recognized an additional $2.2 million of other investment income, primarily from interest income earned on our restricted cash. 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 and operational costs of the newly created Syndicate 3456. We recognized other nonunderwriting 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 quarters. Nonunderwriting expenses incurred in the fourth quarter of 2021 were insignificant.
At the end of the fourth quarter, our fully diluted book value per share was $14.59, an increase of 7.7% from September 30. Now I’ll turn the call back to the operator, who will open it up for questions.
Operator: This now concludes Greenlight Re’s Fourth Quarter and Full Year 2022 Earnings Conference Call. Thank you. You may disconnect.
