Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q1 2019 Earnings Conference Call May 7, 2019 9:00 AM ET
Simon Burton - Chief Executive Officer
David Einhorn - Chairman of the Board of Directors
Tim Courtis - Chief Financial Officer
Conference Call Participants
Brett Reece - Janney Montgomery Scott
David Silver - Buffalo Bay Capital, LLC
Mikel Abasolo - Solo Capital Management
Thank you for joining the Greenlight Re Conference Call for the First Quarter 2019 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 and are subject to risks and uncertainties and assumptions, including those enumerated in the company’s Form 10-K/A, dated March 15, 2019 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, except as required by law. Please note, this event is being recorded.
I would now like to turn the conference over to Greenlight Re’s CEO, Mr. Simon Burton. Please go ahead, sir.
Thank you, Alison, and good morning, everyone. Our performance in the first quarter of 2019 resulted in modest growth in book value, driven by good investment performance that David will discuss later, including a strong start to our second quarter. This return was largely offset by losses from reserve increases in the auto class. Generally, auto exposures are short tailed.
However, in the first quarter of 2019, we experienced unanticipated losses in this line due to adverse rulings that affected a significant number of claims in Florida, including many claims that were considered to be closed, rulings impacted loss events that occurred between 2015 and early 2018.
Based on our analysis, we are confident that no other underwriting periods will be impacted. You may recall that in 2017, we decided to reduce our overall exposure to the auto class well before the recent loss developments in Florida was known. We have since ceded over $150 million of auto premium, which has allowed us to match ongoing net exposure to our risk appetite for the class.
Claim developments in our auto class has overshadowed what was otherwise a successful quarter, as we continue to diversify and increase the margin potential of our underwriting. Ambitions have improved in most classes of business, as the market finally appears to be reduced in the capital deployed in many underperforming classes.
In London Market Specialty classes, the Lloyd’s performance review has caused capacity withdrawal from some lines of business that until recently had an oversupply of capital. This withdrawal has put upwards pressure on pricing and created room for us on syndicated placements in several areas, notably aviation, marine, energy and tourism.
Public health market conditions are increasingly favorable following two loss-making years for the industry. Recent Japanese windstorm renewals saw a rate increase of around 20%, and we anticipate similar improvements on the renewal of loss-impacted Florida treaties next month.
In the U.S., conditions in the private passenger auto class are generally good. Claim frequency has stabilized. And while we have seen the slow escalation of claim severity, carriers appear able to stay ahead of the trend with rate improvements. We reduced our overall exposure to auto last year, as I mentioned earlier, but we have a positive outlook in the class.
Workers’ compensation class is experiencing flat or slightly lower rates on exposure, but with claim frequency showing a downward trend, the risk adjusted returns are compelling and we are growing in that book. These portfolio highlights reflect an overall improving environments and a tailwind to our efforts in diversifying sources of revenue and improving underwriting returns.
I would like to turn the call over to David.
Thanks, Simon, and good morning, everyone. The Greenlight Re investment portfolio returned 6.2% in the first quarter, our longs contributed 12.1%, while our shorts detracted 5%. During the quarter, the S&P 500 Index returned 13.6%.
Our largest equity long positions were our biggest contributors in the quarter. General Motors stock returned 12%, as the company announced strong fourth quarter results and provided better than expected 2019 earnings guidance.
Bright House Financial announced better than expected fourth quarter results and reiterated its positive outlook for capital returns. In its subsequent annual report and filings, the company demonstrated ample capital and liquidity to support the three-year $1.5 billion share buyback plan announced in December. The stock appreciated 19% during the quarter and another 15% in April. We believe the shares remain significantly undervalued at around 4.6 times 2019 adjusted earnings and 38% of book value.
AerCap Holdings and AerCap Leasing company was our third biggest winner in the first quarter, as the stock climbed 17.5%. AerCap operates in a growing industry with a favorable outlook and management has a proven track record of having grown book value per share by 15% annually since we invested in 2014.
The stock trades at rough a 20% discount to book value, which presents management an opportunity to accelerate its sale of aircraft and redeploy the proceeds into even more aggressive share repurchase program. Since 2015, AerCap has reduced its share count by 36%.
Our shorts collectively and our bubble basket of shorts in particular detracted from the quarter results, a notable exception is Tesla, whose stock declined 15.9% in the first quarter as the company’s operating performance deteriorated. Demand for the company’s higher-end Model S and Model X has dramatically softened and U.S. sales of Model 3 fell by almost two-thirds quarter-over-quarter in March.
Tesla has responded with headcount reductions and price cuts, which so far have failed to generate significant incremental demand. In recent weeks, the CEO has all but abandoned the narrative of the last few years that profit from selling cars would prove the company’s value. The stock continued its slide in April and is now down 28% for the year.
The investment portfolio returned 4.8% in April, long positions contributed 5.8%, while short positions detracted 0.001%. At April month-end, the portfolio was approximately 83% long and 57% short.
Now, I’d like to turn the call over to Tim to discuss financial results.
Thanks, David. For the first quarter of 2019, we recorded net income of $5.9 million, compared to a net loss of $142.8 million for the comparable period in 2018. Fully diluted net income per share was $0.16 for the first quarter of 2019, compared to a net loss per share of $3.85 for the same period in 2018.
Gross premium written in the first quarter of 2019 were $162.6 million, which is a reduction of approximately 7% from the prior year quarter. Decrease in premiums written was primarily related to a medical stop-loss contract that we decided not to renew during the first quarter of 2018.
Additionally, the decrease was due to the commutation of a mortgage reinsurance contract during 2018. Partially offsetting those decreases, premiums increased due to the new workers’ compensation and multi-line contracts written during the quarter.
Composite ratio for the first quarter of 2019 was 115.2%, compared to a composite ratio of 96% during the comparable period in 2018. As Simon indicated, the large increase in the composite ratios for the quarter was primarily due to prior year adverse development on private passenger automobile business.
General and administrative expenses incurred during the first quarter of 2019 increased slightly to $6.8 million, compared to $6 million incurred in the prior year period. Underwriting expenses were $3.8 million for the first quarter of 2019, as compared to $3.5 million incurred in 2018, an increase primarily relating to personnel costs.
The underwriting expense ratio for the first three months of 2019 was 2.2%, resulting in a combined ratio of 117.4% for the quarter. Our corporate expenses of $3 million for the first quarter were also up slightly from the prior year quarter, primarily due to increased personnel expenses, as well as expenses related to our innovation initiatives.
We reported net investment income of $30.8 million on our investment in Solasglas during the first quarter of 2019, representing a return of 6.2% on the investment portfolio in the fund. Additionally, we reported net investment income of $1.6 million on our other investments.
The fully diluted adjusted book value per share as of March 31, 2019 was $13.16, an increase of 0.5% for the quarter and a decrease of 28.3% from $18.35 per share reported in March 31, 2018.
At our recently held Board of Directors meeting, the Board approved a renewal of the company’s current share repurchase plan, which expires on June 30 of this year. The plan provides for repurchase authorization of 2.5 million shares and expires on June 30, 2020. There were no share repurchases during the first quarter of 2019.
We may re-held the Annual Meeting – Annual General Meeting on May 2, 2019, and I’m pleased to report that all seven proposals contained in the proxy were approved by shareholders, including the reelection of all Directors for additional one year terms.
Now, I’ll turn the call back to the operator and open it up for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Brett Reece of Janney Montgomery Scott. Please go ahead.
Good morning, gentlemen. Thanks for the opportunity to ask a question or two. How long do you think it will be, how many quarters before we can get the combined ratio back down below 100?
Good morning, Brett. So the reserve action we took this quarter, we believe is something – it’s our best estimates of the issue we faced in the auto class and based on the emerge issued over the last three months. That’s not to say that the results can move in one direction or the other, but we’re well along the way of resolving that issue.
To put that issue aside, the core portfolio is performing quite well actually. We’ve made a great deal of progress in diversifying the book of business. We’ve entered a number of new classes, particularly on London Market Specialty. We are steadily diversifying in our loss-making classes and balancing the portfolio between quota share and some excessive loss divisions.
There’s a great deal of more integrity and diversity to the portfolio with every passing quarter. And I see the earnings potential of the business consistently improving from here on out. Brett, I can’t promise that you don’t hit bumps in the road similar to the one we’ve experienced this quarter. But I’m very pleased with the way the business is shaping up.
All right. Barring an unforeseen bump in the road, we should consistently see that combined ratio ratchet back down towards a 100 and below over the succeeding quarters in your best guesstimate right now?
So let’s define what bumps in the road means. The recent reserve charge we took is clearly a bump in the road. Any large natural catastrophe would be a bump in the road that would disturb our results clearly as it with the entire industry. Aside from issues like that and others similar vein, I do see that there’s positive earnings potential in the portfolio, yes.
Okay, great. Now once upon a time, I went to law school, can you explain to me how you thought you had closed cases? And then all of a sudden, there were adverse rulings that resulted in this adverse development into 2015 to 2018 time period?
It’s a good question, Brett. And I certainly understand your interest in more detail. This is a situation where we have got to balance a transparency with the obligation we have to our counterparties. So for that reason, I’d prefer not to delve into the idiosyncrasies of the particular development that we’ve seen here to respect those client relationships.
Whatever these idiosyncrasies were, how comfortable should I be that this is it and it won’t – these idiosyncrasies will not resurrect in the future?
Well, as I mentioned in the opening remarks, the events that are impacting us here occurred no later than early 2018. So from that, you should infer that our counterparties have a pretty good handle on the universe of exposure here. It’s not increasing as time goes on. They are moving through the process of resolving to be the claim issues. They are reasonably far along that process.
The ultimate cost of the claims is still somewhat uncertain until the process is completed, that’s necessarily going to be true. But I don’t consider that this is a bottomless pit of exposure that we will see the relentless pain from.
Okay. And one last one, if I may. Your thinking and metrics on your share buyback, will you only be in the market? If it’s – if the stock price is below the book value, is there – Buffett will by Berkshire if it’s trading at a 120% of book? What are you – what’s the board’s thinking on that?
Well, our view on share buybacks is at all times, we – our primary concern is that, we have complete flexibility to make the right decisions based on the conditions we see at any given time. Clearly, a decision to buy back our shares will be balanced between multiple considerations, including share price and the opportunity we have to deploy capital in other areas.
So that will be the considerations that go into any decision. Those are fluid, but changeable constantly with – we’re not going to predefine conditions that will cause a buyback scenario.
All right. One final one and I apologize. When I go on Bloomberg this morning, I mean, no one is following, I think, the analysts that my firm that was following it retired. I don’t think anybody is following your company now. Are you going to attempt to try to get coverage of your company from – of the firms in the Street?
We have good relationships with multiple analysts and in – are in correspondence with them on an ongoing basis. I think today, we’re up against the idiCORE [ph], which perhaps has dampened dependence somewhat. But we are hopeful that there will be increased coverage in the future.
Right. Well, as a contrarian until I’ve built my position, less attention is better. Thank you for answering my questions and good luck.
Thank you, Brett.
[Operator Instructions] Our next question will come from David Silver of Buffalo Bay Capital. Please go ahead.
Good morning. Thank you for the helpful update. One insurance question and one investment question. On the insurance side, what is your general approach to taking on catastrophe exposure? And what is your general approach towards your insurance portfolio? Do you try to make it more conservative, given that you have a more aggressive investment model? And on the investment side, my question is, what is your outlook for Tesla?
I’ll take the insurance question, David, thank you for that. So on the cat side, cat is an interesting business. It has been inflated over the years in terms of its attractiveness relative to other classes.
I would remind you is that cat is sufficiently compelling from a margin standpoint to have a certain allocation from our portfolio. But it’s not so compelling yet some weeks a day that allocation should be outsized and a big driver of both risk and return.
So that’s how we land on the cat exposure that we’re issuing today. Should that calculation or the environment change in the future, of course, our appetite may change. I’m not forecasting that. Cat is one more fluid from a capacity standpoint. I think what we’re seeing now is take up in rates through some withdrawal of the collateralized fund capital. I’m expecting that to replenish perhaps quite rapidly.
So I’m not anticipating a relentless March appear to rates from a decade ago. But we’re comfortable with our overall exposure, and we think a decent allocation to cat is the right decision for us.
Your – the second part on the overall balance of risk in the portfolio, yes, very good question. We do – we are very mindful of the overall risk in the enterprise and our risk management efforts are directed entirely that way. So to be clear, risk management is all encompassing our – both insurance – the insurance liabilities and our investment risk.
One or the other could move up and down at various points in time. We see that as the power of our model actually the ability to toggle one or other side of the balance sheet in concert with each other, but it’s a good question. Thank you. David, would you like to take the…
Sure. This is David, and I’d be happy to discuss Tesla a little bit. I think that we have a negative view towards Tesla. We think that stock is overvalued and that the risk reward on the long side is exceedingly poor.
The company’s business has deteriorated remarkably, I think, our thesis for the last year or so was that their results would peak out around in the third quarter of last year when there were some initial demand for the highest spec versions of the Model 3. And now that, that demand has been satisfied by the most enthusiastic customers at Tesla. The demand for this is now in decline.
I think, the company was surprised that they had a big loss in the first quarter, as they projected a profit as late as January. And I think that they face a real demand cliff, both at the high-end in their Model S and Model X, which I think are being cannibalized some from the Model 3, but also from third-party auto competitors. And I think that the Model 3, which was supposed to bring the company to profits and cash flow positive as far as the eye could see, it’s not likely to achieve sufficient volumes or margins in order for that to be true.
So the result, I think, is that the management is in a bit of a scramble right now, making some very aggressive promises about their technological prowess and the transformation of transportation under their self-driving and other technologies, which are probably many years away from being implemented successfully if ever. And I think that they now face a stream of almost unending losses.
And so with the market cap the way that it is, I think, as the market absorbs that and some of the disappointments prove out in the coming quarters, we expect to do well in our short position from here.
Thank you both very much. Very helpful. Best of luck to the company.
Our next question will come from Mikel Abasolo of Solo Capital Management. Please go ahead.
Yes. Hello. Thank you very much for taking my question. This is for Simon. Simon, my question to you is, if I recall correctly, when you joined the company, there was kind of a due diligence process on your behalf, on your team we have and from some third parties on their adequacy of the research at the time. My question is, what do you think went wrong with that assessment that explains the negative surprise in this coming quarter? And how that surprise can or cannot be extrapolated into the future? Thank you.
It’s a good question, thank you. The process we embarked on in the first six months of my joining, that’s the last-half of 2017, as you say, it was quite thorough. And it resulted in a strengthening at Q4 2017. You’re right that strictly speaking, there continues to be a less estimation of liability related to the auto class, as we’re seeing today with the result strengthening.
But I would not characterize that as a mix by either our internal work or the third parties we engage to assist in a portfolio review, simply because the source of claim was so unusual and idiosyncratic to not in the accounted parties, but the State of Florida and is shifting sands with their court judgments. It simply wasn’t possible to uncover the softness in the reserves that we’re now seeing manifest in this last quarter. So strictly speaking in estimation I agree, but not one that any reasonable reserve could have courts and despite thorough review.
Okay, thank you. And again, my previous – for exceeding the call. Good luck going forward. We’re investors and big believers.
Thank you, Mikel.
Should you have any follow-up questions, please direct them to Adam Prior of The Equity Group Inc. at 212-836-9606, and he will be happy to assist you. We also remind you that a replay of this call and other pertinent information about Greenlight Re is available on our website at www.greenlightre.com. The conference has now concluded, and we thank you for attending today’s presentation. You may now disconnect your lines.