Greenlight Capital Re, Ltd. (NASDAQ:GLRE) Q1 2020 Earnings Conference Call May 6, 2020 9:00 AM ET
Company Participants
Simon Burton - Chief Executive Officer
David Einhorn - Chairman
Tim Courtis - Chief Financial Officer
Conference Call Participants
Michael Katz - Glenrock Advisory Associates
Operator
Thank you for joining the Greenlight Re conference call for the First Quarter 2020 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 facts, but rather reflect the company's current expectations, estimates and predictions about future results and events and are subject to risks, uncertainties and assumptions, including those enumerated in the company's Form 10-K/A for the year ended December 31, 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. After the prepared remarks, we will be conducting a question-and-answer session. [Operator instructions]
I would now like to turn the conference over to Greenlight Re's CEO, Mr. Simon Burton. Please go ahead, sir.
Simon Burton
Good morning and thank you for joining our call today. The attention of the insurance industry and of the world is on COVID-19. In discussing the impacts of this pandemic on Greenlight Re, I will first review its effect on our first quarter performance and then discuss considerations for the second quarter and beyond. On the liability side, the economic implications of lockdown and distancing vary by location, but became meaningful to many of our clients in the latter half of March.
For Greenlight Re, the picture varies by underwriting class. In the auto class, our data suggests that claim counts started to drop in late March, although the apparent reduction may, in part, reflect the lag in claim reporting. In workers' compensation, we are tracking the small portion of our book that relates to ambulance and emergency medical personnel where we expect to see an increase in claims. Our exposure to other categories of essential workers is also relatively small.
For the portion of our book exposed to industrial accidents, we see indications of reduced claim activity. The medical stock loss class is an area of possible exposure, but so far, there is no sign of increased claim activity, and policy deductibles generally position us above the cost of treatment for most COVID-19 cases. We are also expecting to see pandemic losses from our clients at Lloyd's, writing classes that include event cancellation and trade credit although our exposure in these areas is, again, relatively small.
In sum, we have determined that overall COVID-19 had an immaterial impact on our first quarter, which produced a combined ratio of 98.9%. As the pandemic progresses, we anticipate further stresses and complications, including a reduction in premium revenue as some of our cedents may provide premium refunds to their policyholders.
Similarly, we may see drops in exposure-rated premium and policy cancellations. The impacts on net income from premium reductions is less clear since these actions should generally be accompanied by a drop in claims. Possibly, the single biggest risk to the insurance industry is the potential for legislation to require insurers to pay business interruption claims despite the absence of the physical damage generally required by insurance contracts to trigger a claim payment.
We expect that the U.S. plaintiffs' bar is determined to extract to win, and the outcome of this debate is unlikely to be determined any time soon. I should also note that as we are a reinsurance company with no direct insurance business, the caps in our contracts limit the tail exposure even in an extreme scenario such as the retroactive expansion of coverage.
David will separately cover the investment performance where the market turmoil started significantly before the insurance event. In early April, the company announced the conclusion of its review of strategic transaction alternatives, concluding our belief that stockholder value will be better enhanced on a stand-alone basis than by pursuing a transaction with a third party.
We have also expanded the share repurchase program, which reflects the confidence we have in the quality of our reserves and balance sheets and the opportunity presented by the market to increase shareholder value through buybacks. Tim will share the details of the repurchases in a few minutes.
Now, I will pass the call over to David.
David Einhorn
Thanks, Simon, and good morning, everyone. The Solasglas fund returned negative 8.1% in the first quarter. Longs detracted 8.6% while shorts and macro were modestly positive. During the quarter, the S&P 500 Index returned negative 19.6%. Long positions in Brighthouse Financial, the Chemours Company and Greenberg Partners were the biggest detractors. Brighthouse Financial fell 38% in the quarter.
In February, the company reported strong fourth quarter operating results and an impressive year-end risk-based capital ratio of over 550%. Additionally, a timely change in the company's hedging strategy enabled management to announce a $1.25 billion dividend to the holding company, which would bring its cash position to around $2 billion.
Despite this, the stock fell 66% from its peak during the pandemic-induced market route, at one point, valuing the entire company at less than its excess cash. We were able to offset some of the Brighthouse loss by hedging the position with shorts of other global life insurers. Chemours fell 50% in the first quarter.
In early February, management pointed to a positive turn in the titanium dioxide cycle and early signs that the company is regaining lost market share. After a strong positive reaction, the stock price fell dramatically over fears that demand for its products will collapse in the global economic slowdown.
Unlike some of its competitors, we believe that Chemours has sufficient liquidity to survive a protracted downturn and emerge with significant profits on the other side. We continue to think that Chemours' legal liability concerns over forever chemicals are overblown as it was not a participant in the PFAS used in fire-fighting foam.
Green Brick Partners fell 30% in the first quarter. Green Brick's low leverage relative to its peers should allow it to weather the near-term slowdown in home sales, and we believe the company will ultimately benefit from a longer-term shift in preferences from multifamily residences to single-family homes.
Solasglas returned negative 1.1% in April bringing the 2020 year-to-date result for Solasglas to negative 9.1%, compared to negative 9.3% for the S&P 500. Net exposure was approximately 10% long in the investment portfolio at the end of the first quarter and 11% at the end of April. The COVID-19 pandemic, while a health crisis, has brought upon an economic crisis due to the lockdown measures that were implemented globally.
The economy is faced with simultaneous supply and-demand shocks that have led us to a deep global recession. The authorities have now taken a whatever-it-takes approach to lessen the economic impact. The magnitude of both fiscal and monetary stainless is something which we've never experienced before.
We've been very cautious in managing the portfolio through this period but believe there are medium and long-term opportunities for value-investment style as the market sorts through the net winners and losers of these unprecedented times.
Now, I would like to turn the call over to Tim to discuss the financial results.
Tim Courtis
Thanks, David. For the first quarter of 2020, Greenlight Re reported a net loss of $40.3 million, compared to net income of $5.9 million for the comparable period in 2019. The net loss per share was $1.11 for the first quarter of 2020, compared to fully diluted net income per share of $0.16 for the same period in 2019.
Net premiums written in the first quarter of 2020 were $109.1 million, which is a reduction of approximately 23% from the prior-year quarter, primarily due to the non-renewal of certain auto business offset by new business written in several different specialty lines. There was a significant decrease in ceded premiums in the quarter due to the nonrenewal of retrocessional coverage on auto business.
Net premiums earned were $111 million for the first quarter, a decrease of approximately 11%, compared to the prior-year quarter. The company reported underwriting income of $1.3 million during the first quarter of 2020 and a composite ratio of 96.8%, compared to a composite ratio of 115.2% during the comparable period in 2019. General and administrative expenses of $6.8 million incurred during the first quarter of 2020 were relatively flat compared to the prior-year period.
Underwriting expenses were $2.9 million for the first quarter of 2020, as compared to $3.8 million incurred in 2019, the decrease primarily relating to personnel cost. The underwriting expense ratio for the first three months of 2020 was 2.1%, resulting in a combined ratio of 98.9% for the quarter. Our corporate expenses of $3.8 million for the first quarter were higher from the prior-year quarter, primarily due to increased professional and legal fees related to the strategic review. We expect our quarterly corporate expenses to be lower in the near term.
We reported a net investment loss of $42.1 million on our investment in Solasglas during the first quarter of 2020, representing a loss of 8.1% on the investment portfolio in the fund. Additionally, we reported net investment income of $6.8 million on our other investments. A fully diluted book value per share as of March 31, 2020, was $11.63, a decrease of 9.7% for the quarter.
As Simon indicated, the board expanded the company's current share repurchase plan from 2.5 million to 5 million Class A ordinary shares with an extended expiry to June 30, 2021. There were no shares repurchased during the first quarter of 2020 as we were restricted due to the strategic review. However, during April, the company repurchased approximately 293,000 shares at an average price of $6.44 per share.
Now I'll turn the call back to the operator and open it up to questions.
Question-and-Answer Session
Operator
[Operator instructions] Our first question will come from Chris [indiscernible], a Private Investor.
Unidentified Analyst
Hi. Question on G&A, and you mentioned that that will come down. Can you elaborate a little bit on where you think G&A will come out going forward?
Tim Courtis
Hi. Thanks, Chris. It's Tim Courtis here. Yeah, as we mentioned, the expenses were approximately $1 million higher in terms of what we're seeing on the corporate expense side. And I think that's a decent proxy for how we're looking going forward in the near-term.
Unidentified Analyst
Okay. And then on the composite ratio and the improvement that you saw there versus some prior periods, what do you expect – I mean, not necessarily in 2Q, but given the book of business that you have going forward, what do you think is a reasonable expectation on whether it's on the composite or combined ratio, whichever is the easier way to describe that?
Simon Burton
Morning, Chris. This is Simon here. So, we don't forecast combined ratio or any of our financial metrics, but to just put our performance this quarter in context, so particularly if you're comparing to Q1 a year ago, Q1 a year ago was dominated by the auto situation that we've described in some detail in previous quarters, and it's quite idiosyncratic and confined to a small area of our book.
The underlying performance of the rest of the book is not that different to a year ago. So the residual performance is improving. We're growing the business that we want to grow. We're shrinking the business that we want to shrink, notably, auto. So we're pleased and not surprised by the outcome, but it was rather obfuscated by this single idiosyncratic loss from our auto book a year ago. I hope that helps.
Unidentified Analyst
Okay. And I guess, the bigger picture that I'm trying to understand because this is certainly, as you mentioned a better performance on the composite ratio than you've seen for some time, and even with that and even if we adjust for the higher-than-normal corporate expense, it seems likely that between G&A at this level of composite ratio that there will be a drag on earnings from the insurance side of the business. I appreciate that you don't forecast especially not in any kind of given quarter, but is that something that you think is here to stay? Or is there such a transformation in the book of business on the insurance side that you could envision no longer having a drag from composite ratio plus G&A, interest expense, etcetera?
Simon Burton
Well, I would disagree with the observation you've made that there's a drag on the overall company from the insurance performance from the reinsurance book. Again, the source of the loss deterioration a year ago was from policies under it and frankly, before I joined the company and then several years in the past. The residual performance of the book has been steadily improving over that period. So, I firmly believe that the reinsurance business, as it stands today, is additive to the company.
Now of course, we want to improve on the economic addition of the reinsurance business overall. And as I said, the trajectory of growing the business that we want is steady. And I think you see that in some of the mix of business shifts in our premium detail, particularly in the other and specialty lines, but secondly, the pandemic really has thrown a spanner in the works of the entire industry. You've heard in my opening remarks that I consider the company to be well-positioned for the difficulties the industry is experiencing and will continue to experience over the next six months.
Now that's primarily by virtue of this being a pure reinsurance company without the exceptionally high leverage that you'll typically see insurers, which is how an insurance portfolio is characterized against the balance sheet. So, we're well-positioned for the stresses and changes that we're anticipating. I consider our portfolio additive improving on the right trajectory, and I do expect improved conditions for us going forward as the world rights itself following this really awful pandemic situation.
Unidentified Analyst
Okay. Well, it's good to hear that you think that can be additive going forward. Hopefully, you can appreciate whether I look on a three-year, five-year, 10-year basis the insurance business has been a material drag. I know that you weren't there for a lot of that time, but that would be a really significant change and certainly hope to see that going forward. Thank you.
Simon Burton
Chris, just one last comment. This isn't – thank you. This isn't me distancing myself from our results, of course. What I'm trying to point out simply is that our strategy did undergo a marked change here around 2017 when I joined the company. And it has taken some time for that strategy to play out, to manifest in our financial results. That's simply a byproduct of the claims reporting lag that you will always see in any reinsurance company. But thank you for your question.
Unidentified Analyst
Thanks.
Operator
Our next question comes from Michael Katz with Glenrock Advisory Associates.
Michael Katz
Hi. I have a question for David, I suppose. I haven't looked at the stock in a while. And when looking through the website, I saw that the portfolio has been "de-risked" and will be substantially encashed by now. I remember it at a time when it was reasonably closely mirroring David's hedge funds positioning. Can you please comment on how the portfolio is different from the past? What the exposure is now and perhaps highlight some of the features of the current positioning? Thank you.
David Einhorn
Yeah. Absolutely. We did move the portfolio to approximately 70% cash roughly a year ago. The portfolio today is positioned about 30% long, a little bit less than that and about 20% short for a net exposure of about 10%. All of the positions in the Greenlight Re portfolio are also in the Greenlight Capital portfolio, although they are not in the same proportions.
There's been various changes relating to the de-risking, which caused some positions to remain relatively larger and other positions to be much smaller or even disappear entirely. So, there's fewer overall positions in the Solasglas partnership at this time.
Michael Katz
I see. Can you comment on why the degree of investedness is so low now? And also, where would I find information or can you comment about the positioning? Like more specifically, I mean, the type of sectors or maybe even individual names in the portfolio?
David Einhorn
Sure. The reason the portfolio is de-risked was roughly a year ago in response to the difficult performance that the company was having, which led us to decide to conduct a strategic review and to operate at a lower level of risk while that review was being conducted. The specific means in the portfolio on the long side, the largest exposures are Brighthouse Financial, Green Brick. We recently added back a bunch of AerCap and Chemours, I think would be the four largest positions in the long side of the book today.
Michael Katz
Is there an intention to return to a more full investedness?
David Einhorn
There's an intention to have those kinds of discussions, but no decision to do that has been made by the board at this time.
Michael Katz
Thank you very much.
David Einhorn
Sure.
Operator
Our next question comes from Sean Lee, a private individual.
Unidentified Analyst
Hi. Yes, my question is for Simon. Trevor Research University has recently published reports saying that this year's hurricane season that's going to have above-normal activity maybe even possibly be one of the most active on record. I was just wondering are the models you're running showing the same types of forecast, and if so, what's something that you can do to be a little bit more proactive this year in protecting from any potentially devastating losses there? Thanks.
Simon Burton
Yeah. Good morning, Sean. Thanks for the question. The models that we run, and in fact, generally across the industry, are not forecasting models, just to be clear. We do benefit from forecasts from institutions, universities and so on, research and institutions. And of course, industry does pay some attention to those forecasts, but they're usually discounted to the fullest degree for two reasons: one is, it's difficult to shift the portfolio meaningfully in response to a short-range forecast that often arises about this time of year, May, just before the hurricane season starts. So, a lot of our bets have been placed before now.
And second is, the forecasts, I'm sorry to say, even at this point, are often quite inaccurate. So, the models that we run are based on views of historical frequencies, often with layers of conservatism to reflect things like climate change and there's industry perception that frequency and severity have both been on an upswing certainly in certain parts of the world. So the models do reflect some conservatism and a skeptical view of general conditions in natural catastrophes, but not fully. We don't fully contemplate the forecasting.
Having said all of that, we do place our bets in the Cat business. We see the class as additive to our portfolio. We don't see the conditions in Cat to be sufficiently exciting for this to be an outsized line for us. So, we don't consider ourselves a Cat specialist. We're not heavy in that class. We're relatively underweight compared to many of our peers. Should those conditions change and it becomes a considerably more interesting class for us, then we would revisit, but that's our current view.
Unidentified Analyst
Okay, great. Thanks.
Operator
This will conclude our question-and-answer session, as well as today's call. 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. Thank you for attending today’s presentation, you may now disconnect.
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