Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q3 2022 Results Conference Call November 3, 2022 9:00 AM ET
Company Participants
Simon Burton – Chief Executive Officer
David Einhorn – Chairman
Neil Greenspan – Chief Financial Officer
Operator
Thank you for joining the Greenlight Re Conference Call for the Third Quarter of 2022 Earnings.
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 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 are subject to risks, uncertainties and assumptions including those enumerated in the Company’s Form 10-K for the year ended December 31, 2021, Form 10-Q for the three months ended March 31, 2022, and other documents filed by the Company with 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, as except required by law.
After the prepared remarks, we will be conducting a question-and-answer session. [Operator Instructions]
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 thank you for joining us today to discuss our third quarter results. Our key performance metric is change in book value per share, which decreased during the third quarter by 3.9%. Any reduction is a disappointment. Although our performance was relatively good in the context of the severe challenges that the overall reinsurance industry faced this quarter.
Hurricane Ian struck late in September and is yet to be fully assessed by the industry, although it is likely one of the costliest insurance events in history. Other natural catastrophes occurring during the third quarter included two typhoons impacting Japan and South Korea. These wind storms added 19 points to our third quarter combined ratio. In the past few years, we have been steadily reducing our exposure to headline natural catastrophes as our negative sentiments on exposure and tail risk outpace the level of rate increases.
On the other side of the industry balance sheet, the rapid increase in bond yields has for the second successive quarter, hit those with fixed income investment strategies very hard. Most equity strategies haven’t fared much better.
Our investment result was excellent in the third quarter. Relative to the reinsurance industry as a whole, our investment strategy is working well, and has allowed us a level of capital preservation on available to more traditional reinsurance balance sheets with significant fixed income exposure.
Looking forward, it’s difficult to overstate the tailwinds we are seeing in our core reinsurance business. Underwriting conditions at the start of 2022 were very good. In our opinion, they were the best in over a decade. The industry has since seen an unusual confluence of events through the year, the Ukraine-Russia war, a series of natural catastrophes including Hurricane Ian, claim inflation and investment losses from multiple sources.
So from a sentiment perspective, it’s clear that reinsurers are determined to achieve better pricing and terms across a range of short-tail specialty classes led by property catastrophe to achieve some level of payback following several years of underperformance. That’s a helpful dynamic, although the real driver of better pricing will be the imbalance in supply and demand. We are already receiving urgent requests for reinsurance support from our customers, and it’s clear that reinsurance capital is presently a valuable and stressed commodity.
In previous market cycles, we have seen inflows of fresh reinsurance capital at times like these, but investors seem skeptical and fatigue by a pattern of weak performance and trapped capital particularly in the catastrophe [ROS] funds. This leaves us in a strong competitive position in our short-tail specialty and catastrophe classes of business as we look to the year ahead.
Last month, we announced three promotions and the revised underwriting structure that went with them. Finbar Griffin, who was appointed Chief Underwriting Officer of Greenlight Reinsurance Ireland; Regal Cairns was appointed Chief Underwriting Officer of our Cayman subsidiary, Greenlight Reinsurance Ltd.; and Kagabo Ngiruwonsanga is now Head of Innovations Underwriting. I joined Andy Gladwin, who is Head of U.K. Marketing and Active Underwriter for Greenlight’s Innovation Syndicate to form an underwriting leadership team of four people.
All of these leaders have a deep understanding of their respective markets and have developed a well-fit placed customer relationships. Each has gained my trust in respect over the last several years.
Turning now to our Innovations business. This is the first quarter of the last eight that we haven’t posted significant investment gains to our carry values. This isn’t a surprise as many of our largest partners had completed capital raises over the past year, which is generally less than in a strong financial position.
Looking ahead, the combination of an improved insurance operating environment for everybody, including tech-enabled startups and the reemergence of the buyer’s market and early-stage investments has made our overall innovation thesis even stronger. For the year-to-date, about 12% of our total net written premium is derived from our Innovations business and the pipeline of attractive opportunities continues to grow.
You may have seen the announcement that we are hosting an Investor Day in New York City on Thursday, November 17, starting at noon. We’re looking forward to seeing many of you there in person for the first time in a few years. If you would like to attend, please contact Karin Daly of The Equity Group at IR@greenlightre.ky, and she will be happy to send you the details.
Now I’d like to turn the call over to David.
David Einhorn
Thanks, Simon, and good morning, everyone. The Solasglas fund returned 3.6% in the third quarter. Our loans contributed 6%, the short portfolio detracted 0.1%, and macro detracted 1.4%. During the quarter, the S&P 500 index declined 4.9%. Long positions in Atlas Air and Green Brick Partners and a short position to manage Green Brick’s housing sector exposure were our largest positive contributions. Gold and two undisclosed short positions were the biggest detractors.
Atlas Air Worldwide was our biggest winner during the quarter as shares advanced 55% after the Company received a takeover bid from a group of private equity investors. At $102.50 per share we believe the consortium is getting a great deal, but we are intent to exit our two-plus year investment for a large gain after the deal was announced.
Green Brick Partners shares advanced 9% during the quarter as the Company announced its second quarter earnings of $2.08 per share, which beat the consensus estimates by nearly 70%. During the quarter, the Company was also added to the S&P 600 Small Cap Index. We believe the quarterly share price gain was held in check due to the widely publicized slowdown in housing domains as mortgage rates spiked at the fastest rate in decades. Nonetheless, Green Brick outperformed its peers and as a result, a short position we had in August in the basket of homebuilders to hedge housing sector risk was also positive for us during the quarter.
The price of gold declined 8.1% during the quarter as investors preferred the shininess of the now higher yielding cash alternatives and treasury bonds to the precious metal. We remain concerned that the current global inflation problem could metastasize into a full pledge sovereign debt crisis somewhere and believe that continuing our goal despite the possibility of further short-term weakness is prudent.
Aside from Twitter, which we’ve exited into the completed deal, we didn’t add any new material long positions during the quarter. And quite frankly, we haven’t been doing much buying all year. With the capital we recently received from the Twitter deal closing, we’re building our stockpile to dry powder for potential opportunities in the coming quarters. We are in a bear market, and we expect it to continue for some time.
The solid class portfolio returned 6.9% in October and has returned 18.2% year-to-date. Net exposure in the investment portfolio was approximately 13% at the end of the third quarter, down from 20% at the end of the second quarter. While the losses from Hurricane Ian are frustrating in light of an otherwise comps form season, we did well on a relative basis and are positioned to capitalize as the reinsurance market improves further.
We have a great team, and I want to take this opportunity to congratulate Regan Cairns and Barry Griffin, who was recently promoted to the roles of Chief Underwriting Officer in Cayman and Ireland, respectively.
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 loss for the quarter was $18.5 million or $0.56 per share. For the nine months ended September 30, 2022, our net loss was $9.4 million or $0.28 per share. We reported an underwriting loss of $18.9 million during the third quarter and a combined ratio of 115.4%. The underwriting loss included $19.5 million of losses from Hurricane Ian and $3.2 million from Typhoons Nanmadol and Hinnamnor.
The underwriting loss also included $6.1 million of expense relating to deposit-accounted contracts. The catastrophe losses and deposit accounting expense contributed 23.6 percentage points to the combined ratio. By comparison, the equivalent period in 2021 reported an underwriting loss of $12.6 million, which included $25.9 million of catastrophe losses from Hurricane Ida, the European floods and hailstorms, and South African riots.
Gross premiums written in the third quarter were $155.1 million, an increase of 21% from the third quarter of 2021. This increase was due to growth in specialty, general liability, multiline and personal property business including premium generated by the Company’s Innovations partners. Our decision to reduce our participation in motor contracts partially offset this increase.
Premiums ceded were $8.8 million in the third quarter of 2022 and immaterial in the third quarter of 2021. We reported total net investment income of $11.6 million during the third quarter. We earned $8.5 million from our investment in the Solasglas fund, and recognized an additional $3 million of other investment income primarily from interest earned on our restricted cash.
Total general and administrative expenses incurred during the quarter were $7.4 million, up from $6.1 million in the third quarter of 2021. The increase was due primarily to higher expenses relating to share-based compensation and Syndicate 3456.
We incurred other non-underwriting expenses of $6.8 million in the third quarter of 2022 due primarily to foreign exchange losses. Our non-underwriting expenses incurred in the third quarter of 2021 were insignificant. At the end of the third quarter, our fully diluted book value per share was $13.55, a decrease of 3.9% from June 30.
Now I’ll turn the call back to the operator and open it up to questions.
Question-and-Answer Session
Operator
We also remind you that a replay of this call and other important information about Greenlight Re is available on our website at www.greenlightre.com. Thank you.
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