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Greenlight Capital RE Ltd  (NASDAQ:GLRE)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Thank you for joining the Greenlight Re Conference Call for the Fourth quarter and Full Year 2018 Earnings. Please note, this event is being recorded.

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, uncertainties and assumptions, including those enumerated in the Company's Form 10-K, dated February 27, 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.

I would now like to turn the conference over to Greenlight Re's CEO, Mr. Simon Burton. Please go ahead, sir.

Simon Burton -- Chief Executive Officer

Thank you, operator, and good morning everyone.

Let's first acknowledge that our overall performance in 2018 was very poor. I'd like to review the steps we took during the year to preserve our operating position and address the volatility we experienced.

First, you may recall that we took an unusually bearish view on the prospects of the property cat market. Following record cat losses in 2017, that turned out to be a sound prediction. During the first half of 2018, we explored ways to efficiently seed out more of our cat exposure, resulting in effectively dropping the attachment point of our retro cover for Florida storm events. This expanded coverage turned out to be particularly effective in mitigating our loss from Hurricane Michael last quarter.

Second action in August was the issuance of our convertible notes resulting in approximately $84 million in net proceeds after stock repurchase to support the service division of our operating companies in Cayman and Ireland.

Third was a series of steps we took to moderate downside risk and reduce investment leverage, including placing an amount approximating our net reserves in cash equivalents to further reduce volatility.

After the last month's strong investment results showed, we have retained our ability to participate in upside developments. We also believe that the move to the Solasglas fund structure in the third quarter, provides better clarity of our overall risk position.

We like to believe these steps will leave us with a balance sheet that's, although smaller in size, represents continued excellent security for our policyholders and Best reaffirmed our A- rating in the third quarter last year, and since the time of that review, our FICO score has improved as a result of our continued risk management actions. Of course, this data is only one piece of any rating agency review.

Repositioning of our underwriting business showed good progress during the year as we achieved a better balance between our larger quota share relationships and smaller following positions in selected classes of business. This trend continued at the recent January renewals as we built a significant number of new client relationships. We are executing the plan deliberately and with regard to overall market conditions, we continue to be protective of our low cost base, which has allowed us to remain competitive throughout the period of capital reduction.

Our progress in open market reinsurance is complemented by a parallel focus on establishing strategic partnerships. Innovation Unit closed a total of five investments last year in tech-enabled start-ups, few of which have already launched insurance products that generated a small volume of business for us in the fourth quarter. We also significantly increased our investment in AccuRisk, an MGA focused on accident and health products. We expect our growing, stable and strategic partnerships to form an increasingly important part of our overall plan going forward.

The underwriting combined ratio in 2018 of approximately 103% translates to just under 100% excluding the impact of natural catastrophes. While an improvement on the prior year, there is still some way to go before I consider our underwriting business to be a significant value contributor. All of that work has been completed, but not yet earned through our financials and more is to come. It's clear to me that we are on the right path.

Finally, we made one senior appointment during the quarter. Neil Greenspan joined us as Chief Accounting Officer. I had the pleasure of working with Neil earlier in my career, and I am excited to have him on board.

Now, I'd like to turn the call to David.

David Einhorn -- Chairman of the Board of Directors

Thanks, Simon, and good morning everyone.

The Greenlight Re investment portfolio declined 10.2% in the fourth quarter. Our longs was (ph) 19% while our shorts contributed 8.3%. During the quarter, the S&P 500 Index returned negative 13.5%. Brighthouse Financial was our biggest detractor in the fourth quarter. The stock declined 31%, despite positive third quarter results and encouraging comments from management during an investor outlook call in early December.

Management shared that the business is performing much better than had been expected a year ago and offered greater visibility into the Company's earnings profile for the next three years. It also raised its long-term ROE target and announced plans to repurchase $1.5 billion of stock by 2021 or about 40% of Brighthouse's year-end market cap.

This month, Brighthouse announced strong fourth quarter results, including over $12 a share in GAAP earnings per share during a volatile quarter for capital markets. While the GAAP results don't match the economic results, it was useful for the market to see the company's market hedges were largely effective during the downturn. The company also reported sufficient capital buffers and ample liquidity to support the capital return program announced in December.

Additionally, earnings should continue to improve as the company ends its reliance on MetLife for transition services, modifies its hedging program and adopts NAIC accounting reforms. It appears that the market has started to take note, the stock is up over 34% year-to-date in 2019, which has helped us this year. It still trades at only 35% of book value.

Ensco, an offshore contract oil drilling company was our second biggest detractor in the fourth quarter. The stock fell nearly 58% as the price of crude oil tumbled. By contrast, AerCap, an aircraft leasing and aviation finance company whose stock price should be negatively correlated to oil prices, declined 31% and was our third biggest detractor, despite no obvious negative developments at the company.

AerCap's business is stable with 99% of its fleet on lease to a diversified group of airlines. With a 7.4 year remaining average lease term, we believe AerCap's future earnings stream offers excellent visibility. Management are savvy capital allocators, have a compounded book value per share at 15% annually since our initial investments in 2014, and at an 18% since the company's 2006 IPO. At year end, AerCap traded at 63% of stated book value and under six times 2019 consensus earnings. The stock has appreciated 16% in 2019.

We had a handful of winners in our short book in the fourth quarter including Continental Resources, an oil fracking company which recovered during the year-end oil route and puts on Netflix. Our goal (ph) position contributed over 1% to our return in the quarter. Investment portfolio gained 8.6% in January as our Top 3 long equity positions each posted double-digit gains.

General Motors surprised the market by announcing that it expected to beat its full year 2018 earnings and free cash flow guidance and guided to positive earnings growth in 2019. GM now expects to earn $6.50 to $7.00 per share in 2019, which would imply a PE multiple of under five times the year-end price for a company that has demonstrated impressive fundamental performance and stands to further benefit from a massive cost cutting program that will take $4.5 billion out of annual operating expenses.

At January month end, the portfolio was approximately 88% (ph) long and 52% short. Through the course of 2018, we reduced our gross exposure in response to a challenging environment for our value investment style, and we entered 2019 with a portfolio consisting of fewer names than it did a year ago, but one that is more concentrated in our highest conviction investments where long companies they're (ph) are performing are priced at very low valuations. Our shorts have flawed business models, questionable accounting and leadership or obvious path to serious problems. While, it's still early days, we are encouraged by the start of this year.

Despite our challenges on the investment side, Greenlight Re has continued to do a solid job executing on the underwriting side, and I was pleased with the progress we made during the January renewal season. Simon, Brendan and the team have continued to execute well on transforming our portfolio and setting Greenlight Re up for future success.

Now, I'd like to turn the call over to Tim to discuss the financial results.

Tim Courtis -- Chief Financial Officer

Thanks, David. I'll briefly go through the financial results starting with the fourth quarter where Greenlight Re reported a net loss attributable to shareholders of $80.8 million, compared to a net loss attributable to shareholders of $37.7 million for the prior year quarter. Net loss per share was $2.25 for the fourth quarter of 2018 compared to a net loss per share of $1.02 in the prior year period.

Gross premiums written during the fourth quarter were $135.1 million, which is a reduction of 2.7% over premiums written in the fourth quarter of 2017. The decrease was primarily due to reduction in exposure in a multi-line casualty contract.

For the quarter, we reported an underwriting loss of $18 million which was negatively impacted by catastrophe losses of approximately $14.3 million net of reinstatement premiums. The quarter was also negatively impacted by prior year adverse reserve development, which resulted in a net negative financial impact of $4.5 million.

Composite ratio for the quarter was 112.6% with fourth quarter cat losses adding 11.9 points to the composite ratio.

We reported a total net investment-related loss of $56.4 million during the fourth quarter of 2018, which was primarily the result of a net loss of 10.2% on our investment portfolio in Solasglas.

Moving now to the full-year results, Greenlight Re reported a net loss to shareholders of $350.1 million for 2018 compared to a net loss to shareholders of $45 million in 2017. Net loss per share for 2018 was $9.74.

Gross premiums written were $567.5 million for the year, a decrease of approximately 18.1% over 2017. As reported in prior quarters, the 2018 premiums have decreased primarily due to a decreased participation in a multi-line casualty contract, non-renewal of a homeowners' contract and the commutation of a mortgage reinsurance contract in the third quarter.

For 2018, our composite ratio was 100.2% with net catastrophe losses contributing 3.7 percentage points. There was no material prior year development on loss reserves during the year, although reserving changes did result in a net negative financial impact of $7.4 million primarily due to adjustments to profit and ceding commission.

Our general and administrative expenses for the year totaled $25.2 million, which is a reduction of $1.2 million from the prior year.

Underwriting expenses of $13.1 million were lower than the $15.1 million reported in 2017, primarily as a result of reduced bonuses and recruitment costs. The underwriting expense ratio for the year was 2.6% resulting in a combined ratio for the year of 102.8%.

Our corporate expenses during 2018 of $12.1 million compares to $11.2 million for the prior year and is higher, primarily due to severance costs and expenses related to our Innovations initiative.

We reported a total net investment related loss of $323.1 million, which primarily was a result of a net loss of 30.3% for the year on the combined results of our investment in Solasglas and formally in the investment joint venture.

Fully diluted adjusted book value per share as of December 31, 2018 was $13.10, a 41% decrease from $22.22 per share reported at December 31, 2017.

Now, I'll turn the call back to the operator to open it up to Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator's instructions) The first question comes from Meyer Shields with KBW. Please go ahead.

Meyer Shields -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks. I was hoping to get an update on what you saw January 1 (ph) renewals in terms of overall pricing and ceding commission trends?

Simon Burton -- Chief Executive Officer

Sure Meyer. January 1st for us was a good result. I will answer that in two parts. One is, we're continuing the process of entering a couple of new class of business to Greenlight's, primarily London market specialty classes and that's going well with moderating our pace for good reason, but all the consolidation we're seeing at Lloyd's and the various disruption there is creating opportunity for us. I think separately and more directly to your question, Meyer, is what did rates look like? Well, clearly driven by two years of particularly challenging outcomes on the cat side, we are seeing some improvements where a placement is -- has any element of account exposure.

I would caution that though because some of these improvements are -- improvements are very overdue. So when we look at the Wild Side apparel for example, I think those rates could double and we're not necessarily any happier about that business than we were two years ago because our perception has recalibrated so far.

When it comes to the impending renewals in, let's say Japan, in April, I don't think necessarily (inaudible) has caused us to reframe our view of the apparels and I think there is potentially a very interesting conducive environment there for us. So it's a mixed bag. Overall, a general upward trend for us.

Meyer Shields -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Thanks. And you touched on this, but I wanted to dig in a little deeper just in terms of London market business and whether the rate increases that we're seeing so far and what I think is definitely better discipline. Are we at a point of adequacy?

Simon Burton -- Chief Executive Officer

Well, this is again a good question. We believe, we are for the business we're writing, and that's -- I could be -- I can be very definitive on that point. So in classes, like cyber where we made a relatively modest entry point at January 1st or aviation that we've written for the first time here following a number of years of inadequacy in my view, I think we are at that point, marine and energy is another point of interest.

I would say though that it depends on the carrier's ability to access that business efficiently. We do run particularly low expense ratio, cost base and we don't suffer from operational overreach and that helps us get to the economics of the given deal, whereas some of our peers, perhaps particularly in the London market, Lloyd's may struggle. So the question of adequacy is again not uniform across the industry, but we're very comfortable where we are.

Meyer Shields -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Fantastic. Thanks you very much.

Operator

(Operator Instructions) Should you have any follow-up questions, please direct them to Adam Prior at 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.

Duration: 19 minutes

Call participants:

Simon Burton -- Chief Executive Officer

David Einhorn -- Chairman of the Board of Directors

Tim Courtis -- Chief Financial Officer

Meyer Shields -- Keefe, Bruyette & Woods, Inc. -- Analyst

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