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Greenlight Capital (NASDAQ:GLRE)
Q2 2019 Earnings Call
Aug 06, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Thank you for joining the Greenlight Re conference call for second-quarter 2019 earnings. [Operator instructions] 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-KA 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. 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. Greenlight Re had a good quarter with positive results from both our underwriting and investments. Gross written premium for the quarter were increased by about 7% over the second quarter of 2018. This growth represents the first year-on-year quarterly increase in gross written premium since we implemented changes to our underwriting appetites in late 2017, which resulted in six quarters of year-on-year premium reduction.

The increase achieved during the second quarter of 2019 reflects the combination of attractive sources of new business and rate improvements in multiple areas of our existing portfolio. In the property catastrophe class, the two years of outsized industry losses have resulted in rate improvements that I expect will continue through the year-end renewal season and perhaps into 2020. One of the pricing improvements is caused by a significant deterioration in industry insured loss estimates for Typhoon Jebi from initial estimates of $5 billion to about $15 billion today. Reinsurance industry as a whole, this miss on loss estimation was painful, following another significant miss on Hurricane Irma in 2017.

While our loss pick on Jebi increased by about $3 million during the second quarter, our loss estimates on Irma has decreased over time, with our overall recent record on catastrophe loss estimation proving to be excellent. We are also seeing pricing improvement from the significant level of trapped collateral in ILS funds, which has increased the demand for traditional rated products. We estimate that retro rates increases have exceeded those of direct reinsurance by a margin of between 5 and 10%. As a result, we have not renewed our retro cover this year in order to maximize the return on allocated capital.

In our London market specialty business, we are now seeing the effects of the Lloyd's performance review of 2018. The resulting capacity withdrawal, combined with higher-than-expected loss experience, has created upwards rating pressure, particularly in the marine, energy, satellites and aviation classes. We have been building positions in each of these classes and expect to benefit from margin expansion as we renew and write additional business in these areas. Greenlight Re Innovations entered into six new investments during the quarter, bringing the portfolio to 12 completed transactions.

We have a healthy pipeline of opportunities that reflects the growing awareness of our brand, and we expect that improving insurance market conditions will add further momentum to our partners as they develop and launch their products. Our outlook for this unit remains positive. As we announced on May 31, as a result of A.M. Best's decision to revise the outlook of our financial strength rating of A- from stable to negative, we have partially derisked our investment portfolio and commenced a strategic review led by the board of directors.

Board has engaged Credit Suisse to assist in the review, which is ongoing. We look forward to providing updates as appropriate. Now I'd like to turn the call over to David.

David Einhorn -- Chairman

Thanks, Simon, and good morning, everyone. The Solasglas fund returned 2.7% in the second quarter, our shorts contributed 2.5%, and our longs contributed 1%. During the quarter, the S&P 500 Index returned 4.3%. Our Tesla short was our largest contributor during the quarter as the company announced quarterly results.

The company lost over $400 million during the second quarter despite record vehicle deliveries. We remain to short Tesla as the company is structurally unprofitable and despite management's theatrics, has demonstrated no ability to reverse its losses. Tesla continues to underspend in capex despite its global growth plans and the brain drain of experienced senior executives continues. Should Tesla lose access to the capital markets, they will face serious financial trouble.

Long positions in AerCap and Adient were also positive contributors during the quarter, offset by losses in two energy companies. On May 31, we disclosed that the investment portfolio have been de-risked and a majority of the investment assets had been moved to cash and short-term treasuries while the board of directors completed the strategic review. The risk reduction represented about two-thirds of the combined long and short exposure. We expect to manage an investment portfolio with approximately this composition until the board has completed the strategic review.

Solasglas returned 0.5% positive in July and has returned 9.6% year to date. The investment portfolio is approximately 22% net loan, and Brighthouse Financial is our largest position. Brighthouse's business is performing well. And as its variable annuity book continues to mature, free cash flow should expand significantly.

The company currently plans to buy back $1.5 billion of stock by the end of 2021, which represents around 35% of the current shares outstanding. Today, the company's market capitalization is just under $4 billion. At less than 30% of book value and less than four times earnings, we believe Brighthouse remains extremely undervalued. Now, I'd like to turn the call over to Tim to discuss the financial results.

Tim Courtis -- Chief Financial Officer and Principal Accounting Officer

Thanks, David. For the second quarter of 2019, Greenlight Re reported net income of $15.3 million, compared to a net loss of $37.4 million for the comparable period in 2018. Fully diluted net income per share was $0.42 for the second quarter of 2019, compared to a net loss of $1.01 in the prior-year period. For the six months ended June 30, 2019, we reported net income of $21.2 million, compared to a net loss of $180.1 million for the first six months of 2018.

Fully diluted net income per share was $0.58, compared to a net loss of $4.87 per share for the same period in 2018. Gross premiums written were $314.9 million for the first six months of 2019, a small decrease of 0.7% from the prior-year period. Premium reductions due to the non-renewal of the medical stop-loss contracts and the commutation of a mortgage contract in 2018 were mostly offset by premium increases from new workers' compensation and multiline contracts written during 2019. The net earned premiums for the first six months of 2019 decreased by 10.5% to $245.8 million from the prior-year period, which coincides with an increase in unearned premiums resulting from the new business written during 2019.

The composite ratio for the second quarter was 96.1%, and there was small favorable loss development of $5.2 million during the quarter as the underwriting portfolio performed in line with our expectations. For the first six months of 2019, the composite ratio was 105.8%, a higher composite ratio resulting from reserving actions taken on auto losses during the first quarter of the year. Combined ratio for the second quarter of 2019 was 98.8%, bringing the combined ratio for the year to date to 108.3%. Total general and administrative expenses incurred during the first half of 2019 was $14.8 million, which is an increase of $1.8 million over the prior year was primarily related to higher personnel, IT and innovation-related expenses.

The underwriting expense ratio for the first six months of 2019 was 2.5%, compared to 2.8% in the comparable period in 2018. This decrease was primarily due to higher other income reported on deposit-accounted deals, which is included in the calculation of the underwriting expense ratio. We reported total net investment income of $18.8 million during the second quarter of 2019, which includes net investment income of $14.4 million on our investment in Solasglas, reflecting a net gain of 2.7% on the Solasglas fund for the quarter. For the first six months of 2019, we reported total net investment income of $51.1 million, of which $45.2 million related to investment income in the Solasglas fund, reflecting a gain of 9.1%.

Fully diluted adjusted book value per share as of June 30, 2019, was $13.58, a 3.7% increase from $13.10 per share reported at December 31, 2018, and a decrease of 21.9% from $17.38 per share reported at June 30, 2018. Now, I'll turn the call back to the operator and then open it up to questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from David Rocker, an individual. Please go ahead.

Unknown speaker

Thanks very much. A.M. Best's decision to downgrade the company's debt was based on core insurance performance over a long period of time. While things seem to have stabilized, insurance is still not providing a very attractive return.

Most of the gain is due to the portfolio. The stock is 40% below book value. And the question I have basically is why go on? What is the specific charge given to Credit Suisse when options are being considered? What assets or capabilities do you have specifically to offer to an attractive partner or buy out a party?

David Einhorn -- Chairman

This is David. Thank you for the question. The strategic review led by Credit Suisse is designed to find the best strategic direction for the company. The company has, we believe, a number of attractive assets, including its underwriting team and existing book of business in Cayman and in Ireland.

We think that the investment program itself has value. We think that the public listing has value. We think that the team that is in place has value. And we are looking with Credit Suisse in a way to improve the company's business position and structure and deal with whatever pressure is coming from the rating agencies.

The discount to the -- between the stock and the book value of the company is manifestly obvious to everybody that is involved. And it is something that we hope will be addressed through this process in reasonably short order.

Unknown speaker

Can you comment on -- as you've indicated that one of your strong things for -- one of your other long positions was a substantial amount of buyback of its undervalued security, whether you have considered a similar buyback of your own as a means of closing the gap between book and what you believe to be improved prospects.

David Einhorn -- Chairman

Yeah. I'm very sensitive to the discount and I'm very aware of the math relating to buybacks. The problem we have at the moment is given where we are in the strategic review, we're not going to be able to have clearance from counsel to be able to trade the stock in our own account while we're in possession of likely material non-public information.

Unknown speaker

Has A.M. Best given you any indication of what kind of improvement would be required for them to reverse their downgrade?

Simon Burton -- Chief Executive Officer

David, this is Simon. To be clear, the A.M. Best action was a modification of our A- rating from a stable to negative outlook, not a downgrade. But of course, it is -- it does amount to pressure from A.M.

Best that we're mindful of. Their decision, as they made clear in their press release, is a result of, over time, high levels of volatility from both sides of the balance sheet. And in their view, an improvement in our underwriting business profile is needed in the near term. They have not put a time line on any next step they may not take.

The company is working on our strategic review with all our commitments, and our relationship with A.M. Best continues to be healthy and positive.

Unknown speaker

OK. One last question. I'm not sure I fully understood. In your restructuring, have you eliminated two-thirds of your investment portfolio with Solasglas? Because it just seemed like that part actually increased year over year within the quarter, it was just the individual equities which were eliminated.

Tim Courtis -- Chief Financial Officer and Principal Accounting Officer

Yeah. Certainly, David. It's Tim Courtis here. Actually, if you look in Note 2 in the Q, it actually has the composition of the Solasglas fund.

And in that, you'll see that it was repositioned to have a large element of cash and U.S. treasuries relative to the equities that remain in the fund. So you can actually see the numbers and the reduction in the equities from those tables.

Unknown speaker

Thank you very much.

Operator

Our next question comes from Brett Reiss with Janney, Montgomery, Scott. Please go ahead.

Brett Reiss -- Janney, Montgomery, Scott -- Analyst

Morning, gentlemen. Going forward, do you think Mr. Einhorn is going to continue to manage the investments with just a more conservative mandate? Or is there another manager that's going to be brought in?

Simon Burton -- Chief Executive Officer

Brett, this is Simon. Obviously, we've made short-term changes as we go through our strategic review process directed by the board to significantly reduce the volatility that we've seen in the recent period from the investment strategy. We have an ongoing and committed relationship to David and Greenlight Capital. And at this point, the company does not foresee any changes.

Brett Reiss -- Janney, Montgomery, Scott -- Analyst

Good, because that's one reason I own the stock. Thank you.

Operator

[Operator instructions] Our next question comes from Mikel Abasolo with Solo Capital Management. Please go ahead.

Mikel Abasolo -- Solo Capital Management -- Analyst

Yeah, hello. Thanks for taking my question. The first would go to David. And this relates to the assignment to Brett Reiss' first question.

I -- if I've understood well, what CSMB is mandated to do is to figure out ways to improve your rating with A.M. Best. But they are not contemplating broader strategic alternatives, one of which would be to simply liquidate the company. Since we're blind to the strategic review of the board, I have just one -- this very specific question.

That is, is the liquidation of the company on the table? Or is it something that you totally disregard? That will be my first question.

David Einhorn -- Chairman

Yeah. This is David. CS mandate is broader than what you have suggested. We do not believe the liquidation of the company is the first option to consider.

We are going through a path of trying to find better solutions than liquidation. But if the process plays out in a way that is worse than we presently expect, we would certainly have to compare whatever we decide to other alternatives that might be available.

Mikel Abasolo -- Solo Capital Management -- Analyst

OK. And David, if I may follow up, just to frame at least a bit the internal debate. I mean, to me, it seems something is like where that the company that you chair is given an investment bank the mandate for a strategic review. Definitely, we're not investors in Greenlight Re because we think that Credit Suisse has better strategic review capabilities than yourselves.

But anyway, just let me just say, I mean, from my point of view, if out of $1.4 billion in assets, only $140 million, that is 10% of the assets, are invested at risk. And the company is very constrained in its -- in the technical side of the insurance business. And the most you can aim for is to stabilize the situation, I mean, to manage the company so that the $13.6 net asset value per share doesn't erode from here. But I mean, is there -- in my mind, it's hard to ambition any alternative different than either go through a capital raise, a big one, or to liquidate.

And I know that the strategic review is ongoing. But if you could help me frame the debate, that would be incredibly helpful.

David Einhorn -- Chairman

Sure. Look, it's useful to have a financial advisor, among other reasons, is if you want to run a process where you are soliciting third parties, it's good for them to make the round of calls to do those kinds of contacts to run a process that is smooth. They have good experience in this area, as well as having a large number of contacts and relationships with a broad number of potential strategic partners that we may want to consider engaging with. So there is value in that relationship in terms of managing the process, separate and apart for whatever you think about the abilities to assess different alternatives, for which I believe that they also have useful capabilities.

I would say the idea of a large capital raise is not something that is at the top of our list, neither is the idea of a liquidation at this point. I think we're not in the position to rule out any particular thing completely, but I actually think that both of those alternatives are somewhere between very unlikely and remote at this stage. And then finally, regarding the low level of asset investment, I would agree with you and I think the board would agree with you that this is not a sustainable position for the company to achieve attractive results. So the outcome of this process is going to have to lead to something different than what we are presently displaying, but this is the reasonable position for us to take that we think is in the best interest of the company and the shareholders for a, what -- with the scheme of things, a brief period of time while the company comes up with its best strategy.

Mikel Abasolo -- Solo Capital Management -- Analyst

Excellent. And if I may, I have one for Simon that is more tactical that -- if I may, Simon. And I looked at the insurance business review, and I was -- I'm not an insurance expert so forgive me if I missed it in here. But I was surprised by the emphasis the company made on workers' compensation.

And I say this because we own some shares in some other insurers. And in particular, we own shares in Fairfax Holding in Canada. And as you know, this is an insurance operation that consistently underwrites for negative cost float. And in their latest results release, they said that their companies are continuing to see healthy hardening price increases across most lines of business in North America, with the exception of workers' compensation.

And my question to you would be, I mean, what do you see that others don't see?

Simon Burton -- Chief Executive Officer

So workers' compensation is a key but not our largest class of business. We write that business for a profit. That is our intention, not to acquire the float at some negative cost. Of course, I can't comment on any peer in the insurance industry.

But our perspective on workers' compensation as a class is that you're correct in that it is one of those classes that does not seem to be receiving improved terms and conditions and rates as many others have in the past six months or so. But the fundamental reason for that, in our view, is that workers' comp was broadly adequate, whereas many other classes were less or less adequate or inadequate, in many cases. Our particular portfolio has performed well. We write business when we see attractive opportunities.

And I stand behind the underwriting decisions we've made.

Mikel Abasolo -- Solo Capital Management -- Analyst

Thanks a lot.

Operator

Our next question is a follow-up from David Rocker. Please go ahead.

Unknown speaker

Thank you very much. Virtually, the entire gain this quarter came from investment income, and that is also after taking very substantial reserves in prior years on the insurance side. Can you give us some idea, and I know Credit Suisse is looking at this as well, of what you think a reasonable expectation in dollars for earnings from the insurance side of the business ex the investment side of the business as you are currently constituted?

Simon Burton -- Chief Executive Officer

David, we don't provide forward guidance on our earnings from either side of the balance sheet and for particular reasons. What I will say is that we anticipate over the medium to long term that the insurance and reinsurance operations of the company should be additive to book value and should compensate our investors for the risks that we're taking -- the insurance risk that we're taking. It's important. I believe that the portfolio, as it's positioned today, does, and in fact, adequately compensates our investors for that risk.

As you quite correctly point out, some of the headwinds on our results do relate to prior periods, in some cases, liabilities that were assumed by the company several years ago, if not more than that. But what's most important to me is our current portfolio positioning and the risk reward that we present to our investors, which I think is compelling.

Unknown speaker

Can you give some idea of how you can demonstrate greater confidence in the future? Your stock is basically at a low despite these improvements and despite the improvements in the investment performance. The investment performance was half that in the quarter of what Greenlight's own performance was. And the insurance, as I've indicated, has provided very little in incremental earnings during this period. Obviously, you've lost a great deal of the trust of your investment group.

What can you do to reverse that?

Simon Burton -- Chief Executive Officer

Well, your question on how we can demonstrate our competence now and going forward is ultimately for you to judge and I respect that. One metric that you may choose to examine, for example, maybe our underwriting year performance as opposed to our financial year performance. Financial year, of course, including prior-year period loss developments. The underwriting performance is a pure review of our current portfolio and our current activities.

That is -- it's a rather different picture than the financial metrics, as I think you'll agree when you take a look at that.

Unknown speaker

Are present officials of the company prohibited from their own activities, buying and selling their own security during this time of evaluation? Or could they make individual decisions?

David Einhorn -- Chairman

Generally speaking, I think people involved with the company are restricted from trading the shares at this time.

Unknown speaker

Do you have any idea of how long it will take for Credit Suisse to complete its review and proposals to you?

David Einhorn -- Chairman

Without putting a line in the sand, we expect to be -- to have progress this year.

Unknown speaker

OK, thank you.

Operator

[Operator instructions] Should you have any follow-up questions, please direct them to Adam Prior of 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. [Operator signoff]

Duration: 32 minutes

Call participants:

Simon Burton -- Chief Executive Officer

David Einhorn -- Chairman

Tim Courtis -- Chief Financial Officer and Principal Accounting Officer

Unknown speaker

Brett Reiss -- Janney, Montgomery, Scott -- Analyst

Mikel Abasolo -- Solo Capital Management -- Analyst

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