Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q2 2022 Earnings Conference Call August 3, 2022 9:00 AM ET
Company Participants
Simon Burton – Chief Executive Officer
David Einhorn – Chairman
Neil Greenspan – Chief Financial Officer
Operator
Good morning and thank you for joining the Greenlight Re Conference Call for the Second Quarter of 2022 Earnings. At this time, all participants are in a listen-only mode. The company reminds you that forward-looking statements that maybe made in this call are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect the company’s current expectations, estimates and predictions about future results and events and are subject to risks and uncertainties and assumptions, including those enumerated in the company’s Form 10-K for the year ended December 31, 2021 and other documents filed by the company by the SEC. If one or more risks or uncertainties materialize or if the company’s 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. After the prepared remarks, we will be conducting a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Greenlight Re’s Chief Executive Officer, Mr. Simon Burton. Please go ahead, sir.
Simon Burton
Good morning and thanks for joining the call today. Our second quarter performance was strong as we grew book value per share by 3.3%, with a positive contribution from each of underwriting, innovations, investments and the silky fund. The second quarter underwriting result produced a combined ratio of 91.6%. Although this is a significant improvement compared to our performance over the past couple of years, it’s not unexpected. We completed the major repositioning of the underwriting book last January. And although we faced some headwinds as our auto exposure has rolled off, the result this quarter more closely reflects our underwriting potential.
Looking ahead, we see the potential for further upside in underwriting performance. Putting our financial results aside for a moment, there are a couple of significant themes the industry is tackling right now and I’d like to touch on each of them. The widespread inflation we have seen is a significant concern to the industry as it can add great uncertainty to the cost of claims, particularly for classes of business with long payout tails. As a result, it creates pricing challenges for new business and valuation challenges and claims reserves.
Inflationary pressure is not uniform with large differences between supply chain-driven price spikes that maybe temporary and wage inflation, which may last longer. We are addressing these concerns in several ways. First, our underwriting strategy is to focus on relatively short tail business, which is inherently less exposed to high inflation. We estimate the payout duration of our existing reserves at around 2 years, which is particularly short in an industry context. Second, we have reduced our exposure to classes that are experiencing severe supply chain-driven inflation such as auto. Third, we incorporate inflation assumptions in all our pricing, currently at around 7% to 8% per year. We reassess these assumptions frequently. While we are working hard to manage the downsides of inflation, it also comes with the benefit of increased demand for coverage limits, which will support the demand side of the pricing equation and help to extend the currently favorable market conditions.
The second industry theme I’d like to note is the question of pricing for catastrophic losses both natural and human-driven. This category includes natural perils, cyber risk, the Ukraine-Russia war and other similar exposures and scenarios. In general, we have seen a reduction in available capacity industry-wide to address these risks which appears to now be driving significant changes to both coverage and price. This is a welcome development since our opinion is that the reinsurance industry overall has been neglectful in pricing tail risk.
We currently have relatively low exposure in some of these areas, for example, cyber and secondary cat perils, but it’s possible that they become areas of compelling opportunity over the next 6 months. The last industry theme is the impact of rapid upward shift of the yield curve on the market values of bond portfolios, which for some of our peers has reduced book values by 10% or more. Greenlight has relatively little exposure to these shifts in bond pricing and in fact, our overall investment performance has been excellent through the turmoil.
Finally, I’d like to update you on the progress of our innovations business. From an investment and partnership perspective, we now have 23 portfolio companies having made one additional investment during the quarter and we have a strong pipeline of interesting opportunities. Overall, the portion of our net written premium that we categorize as innovation related is around 13% year-to-date. The underwriting volume in our innovation syndicate at Lloyd’s was immaterial in the second quarter, but we are pleased with the volumes that are committed for the third quarter and beyond. Some of this business derives from partnerships where we are an investor, but we have also seen significant interest in our products from the broader marketplace. This market validation is gratifying and the syndicate is off to an excellent start.
Now, I’d like to turn the call over to David.
David Einhorn
Thanks, Simon and good morning everyone. The Solasglas fund returned 4.9% in the second quarter. Shorts contributed 15.3% and macro contributed 0.7%. Our long detracted 10%. During the quarter, the S&P 500 Index declined 16.1%. Equity markets continued their decent into an official bear market in the second quarter. Our macro position in high-yield credit default swaps and an S&P 500 Index short were our largest positive contributors. Single-name short positions in bubble basket stocks were also large positive contributors.
Our long position in Brighthouse Financial and ODP Corporation and gold were the biggest detractors. In mid-June, the bare market broadened and inflation beneficiaries fell sharply. Brighthouse and gold suffered mostly as a result of this. ODP shares declined after the company’s Board announced in late June that it was scrapping plans to move forward with the divestiture or public spin-off of its consumer business.
Generally speaking, some value stocks have become so cheap relative to the earnings of the underlying businesses that the company themselves are buying back a large portion of their own market capitalizations. Five of our largest positions are perfect examples of this. Brighthouse ended the quarter at about 25% of its book value and less than 3x consensus earnings. We expect the company to repurchase 10% to 20% of its shares this year.
While CONSOL Energy ended the quarter trading at 2.6x its book value, we believe the company will generate close to its entire market cap in after-tax free cash flow by the end of 2023. Capital returns have not yet begun, but we expect they will shortly, and we expect them to be significant. Green Brick Partners ended the quarter at 1.1x book value and less than 4x consensus earnings. The company bought back 5% of its shares as of last quarterly announcement and authorized another buyback of an additional 10% of the shares.
Teck Resources ended the quarter at about 85% of book value and less than 4x consensus earnings. The company recently began buying back its shares. When the CEO was asked on the April 27 quarterly call, what the plans were for playing his really strong hand of cards here, he responded with, I’d like to buy the whole company back myself. With commodity prices falling rather dramatically, the market has quickly come to expect disinflation and an economic slowdown. We recognize that near-term inflation will show improvement. But we believe the stickier components of inflation will persist. We have lowered our net exposure because we expect a bumpy ride for equity markets as the Fed continues to tighten.
We are focusing our long investments in the types of companies that are poised to continue returning meaningful portions of their earnings and cash flow to their shareholders. Net exposure was approximately 20% long in the investment portfolio at the end of the second quarter. The Solasglas portfolio returned 1.1% in July and has returned 7.9% year-to-date. We also had solid results in our underwriting activities.
As Simon described, the transformation of the underwriting portfolio is now complete, and I believe we’re in a good position to capitalize on the headwinds facing the reinsurance industry. as we’ve been less impacted than others, but will benefit from higher rates and better terms.
Now I’d like to turn the call over to Neil to discuss the financial results.
Neil Greenspan
Thank you, David, and good morning. Our net income for the quarter was $14.8 million or $0.37 per share. For the 6 months ended June 30, 2022, our net income was $9.1 million or $0.23 per share. Gross premiums written in the second quarter were $134.8 million, a decrease of 5% from the second quarter of 2021 due primarily to our decision to reduce our participation in motor and workers’ compensation contracts. This decrease was partially offset by growth in specialty, general liability and personal property business, including premium generated by the company’s innovations partners.
Premium ceded were $7.2 million in the second quarter of 2022. We entered into new retrocession agreements during 2022, primarily to reduce our exposure to large marine and energy loss events and certain property losses. Premium ceded in the second quarter of 2021 were insignificant. We reported underwriting income of $9.3 million during the second quarter and a combined ratio of 91.6%. The quarter’s underwriting results included adverse prior year development with a net financial impact of $3.5 million, relating primarily to our motor portfolio.
We reported total net investment income of $17.2 million during the second quarter. We earned $11.9 million from our investment in the Solasglas fund and recognized an additional $5.3 million of other investment income, primarily from our innovation investments. Total general and administrative expenses incurred during the quarter were $8.1 million, up slightly from $7.7 million in the second quarter of 2021.
We incurred other non-underwriting expenses of $6 million in the second quarter of 2022 due to foreign exchange losses and investment losses incurred by Lloyd’s syndicates in which the company participates. Other non-underwriting expenses incurred in the second quarter of 2021 were insignificant. At the end of the second quarter, our fully diluted book value per share was $14.10, an increase of 3.3% from March 31.
Now I’ll turn the call back to the operator and open it up to questions.
Question-and-Answer Session
Operator
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