Greenlight Capital (GLRE) Q3 2019 Earnings Call Transcript

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Greenlight Capital (GLRE)
Q3 2019 Earnings Call
Nov 07, 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 the third quarter of 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, uncertainties and assumptions, including those enumerated in the company's Form 10-K/A for the year ended December 31, 2018, Forms 10-Q for the periods ended June 30, 2019, and September 30, 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 -- Chief Executive Officer

Thank you, operator, and good morning, everyone. I'm pleased with our performance this quarter, which resulted in book value growth of 1.2%. We had a positive contribution from underwriting despite higher-than-normal loss activity in several key classes as well as a positive investment return. In the third quarter, on the loss side, we saw a high level of natural catastrophe activity with Typhoon Faxai and Hurricane Dorian, which were followed in October by the much larger Typhoon Hagibis.

As Hagibis' geographic impact largely overlapped with that of Faxai, we expect that the demand surge will be magnified, and the loss adjustment process will be more complicated for both typhoons. Our estimated losses from Faxai and Dorian equated to an additional 2.4 points on our third-quarter loss ratio. To date, the information reported to us by our customers is not sufficient for a meaningful estimate of our loss from Typhoon Hagibis. 2019 is the third successive year of significant natural catastrophe losses.

We have seen the reemergence of North Atlantic landfalling hurricanes after a quiet decade and a surprising number of typhoons in Japan. We expect the price for cat risk to increase overall, particularly in Japan, and we plan to continue to participate as a net writer not buyer of cat retro. We also saw loss activity in our satellite business, with two large losses occurring in the third quarter. We expect a strong market response to these launch failures with early signs that rates may double in the short term.

We like the class for this very reason that rates respond quickly and directly to loss activity. I have discussed our efforts in rebalancing the underwriting portfolio several times before, and that process continues. During the third quarter, we reduced our exposure to certain counterparty and Florida-specific risks in our nonstandard auto book. However, we continue to have a positive outlook in this class.

Rates have continued to improve in 2019 from a healthy base in 2018, and we have expanded our positions in other states and programs. Before I turn the call over to David, I'd like to provide a brief update on our strategic review. As you will recall, in August, we announced that we had engaged Credit Suisse to assist the company and the board in evaluating strategic alternatives. Since that time, we have identified a variety of potential options for the company but have not selected any particular course of action, nor have we formalized a timetable to complete our review.

We have, of course, implemented steps designed to preserve capital, including derisking our investment portfolio, and our efforts to maximize value for our shareholders continue. However, until we determine that further disclosure is appropriate, we do not intend to discuss developments with respect to the process. Now I'll hand over to David.

David Einhorn -- Chairman

Thanks, Simon, and good morning, everyone. The Solasglas fund returned 1.2% in the third quarter. Longs contributed 2.2% and shorts detracted 0.8%. During the quarter, the S&P 500 Index returned 1.7%.

Long positions in Green Brick Partners and Brighthouse Financial were the biggest winners in the quarter. Green Brick stock climbed over 28% as the company announced strong second-quarter results and management indicated that it expects earnings growth to affect positively in the third quarter of this year. The company also continues to increase its community count and launched its entry-level Trophy Signature Home brand in October. Green Brick reports earnings today.

Brighthouse Financial shares returned 10.3% in the third quarter. Brighthouse reported a $400 million increase in statutory capital in the second quarter, surprising the market, which had expected a loss of nearly $1 billion due to declining interest rates. A $1.4 billion positive swing for a company with a market cap of just over $4 billion should have resulted in a significant move higher for the stock, but the market more or less shrugged it off. The company has continued its $1.5 billion buyback program, repurchasing nearly 3% of the outstanding shares in the second quarter and another 3% in the third quarter and another 1% in October.

Earlier this week, Brighthouse reported strong third-quarter results with over $5 per share in normalized statutory earnings in the third quarter alone. The company also completed its annual actuarial review and closed the third quarter with $125 of book value per share. Our short position in Tesla detracted our performance as unit sales in the third quarter improved more than we expected, and the stock climbed to 8%. Although the stock is down year to date, we're surprised to see, it has proven to be as resilient as it has been in the face of relentless negative news and what appears to be an end of the company's growth trajectory.

Revenues were down quarter over quarter and decreased 7% from a year ago. And revenues that's most important, United States market declined over 39% year over year. In October, the company announced a surprise third-quarter profit and the stock soared. These results appear to be driven by changing and aggressive accounting.

The biggest surprise was a currency gain and other income that was directly offset by a currency loss in other comprehensive income. Practically speaking, the results were unimpressive as the company saw revenue declines as average selling prices on all models fell as Tesla attempted to keep volumes up. Tesla has been very creative in its accounting, but we believe, continues to be structurally unprofitable. We remain short.

Balance class returned negative 1.7% in October. As of October 31, the investment portfolio is approximately 21% net long and the majority of its investment assets are in cash and short-term treasuries, with a good underwriting result during the quarter, despite some catastrophe losses and generated a small underwriting profit, I'm pleased with the progress we're making, as Simon and the team continue to shift our underwriting portfolio into a more diversified book of positive risk-adjusted opportunities. Now I would like to turn the call over to Tim to discuss the financial results.

Tim Curtis -- Chief Financial Officer

Thanks, David. For the third quarter of 2019, Greenlight Re reported net income attributable to the company of $5.1 million compared to a net loss of $89.1 million for the comparable period in 2018. The fully diluted net income per share was $0.14 for the third quarter of 2019 compared to a net loss of $2.48 per share in the prior-year period. For the nine months ended September 30, 2019, we reported net income attributable to the company of $26.4 million compared to a net loss of $269.2 million for the first nine months of 2018.

The fully diluted net income per share was $0.72 for the nine months ended September 30, 2019, compared to a net loss of $7.49 per share for the same period in 2018. Gross premiums written were $425.5 million for the first nine months of 2019, a small decrease of 1.6% from the prior-year period. Premium reductions due to the nonrenewal of medical stop-loss and motor contracts were partially offset by premium increases from new workers' compensation, motor and multi-line contracts written during 2019. The composite ratio for the third quarter was 96%, which, as Simon mentioned, included 2.4 loss ratio points related to current period natural catastrophes.

During the quarter, there was negligible prior period loss reserve development. Underwriting expenses were flat relative to the prior-year quarter, resulting in an underwriting expense ratio of 2%. Our resulting combined ratio was 98% for the quarter, which is both a sequential and year-over-year improvement. For the first nine months of the year, the composite ratio was 102.4%, which was a result of reserving actions taking on auto losses during the first quarter of this year.

Total underwriting expenses incurred during the first nine months of 2019, net of other income related to underwriting, were $8.7 million, resulting in a combined ratio for the year to date of 104.7%. Our corporate expenses of $11.4 million for the first nine months of 2019 compared to $9.4 million reported during the same period in 2018, with the increase being primarily due to higher legal and other professional fees and information technology expenses. We reported total net investment income of $9.9 million during the third quarter of 2019, which includes net investment income of $6.6 million on our investment in Solasglas, reflecting a net return of 1.2%. For the first nine months of 2019, we reported total net investment income of $61 million, of which $51.8 million related to investment income in the Solasglas fund, reflecting a gain of 10.4%.

The fully diluted adjusted book value per share as of September 30, 2019, was $13.67, a 4.4% increase from $13.10 per share reported at December 31, 2018. Now I'll turn the call back to the operator and then open it up to questions.

Questions & Answers:

Operator

[Operator instructions] I'm not showing any questions at this time, this will conclude our question-and-answer session. And also conclude Greenlight Re's third-quarter 2019 earnings conference 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. I apologize. We did have some questions that came into the queue.

At this time, we will go ahead and proceed with our first question. And that would be from Ethan Sharvit of Argos Capital Management. Please go ahead.

Ethan Sharvit -- Argos Capital Management -- Analyst

Hi, thank you. Can you hear me? Hello?

Simon Burton -- Chief Executive Officer

We can, Ethan.

Ethan Sharvit -- Argos Capital Management -- Analyst

OK. Thank you for taking the question and congratulations on results in Q3. I just wanted to ask about news that was reported in the quarter related to a possible bid to acquire the company. I know you mentioned that you're not going to discuss the strategic developments.

But in terms of a Bloomberg article, can you discuss a little bit the background? And what your -- what developments happened this quarter?

David Einhorn -- Chairman

Yes, hi, this is David. And we're not going to comment on market rumors.

Ethan Sharvit -- Argos Capital Management -- Analyst

OK. Thank you.

Operator

[Operator instructions] And the next question comes from Mikel Abasolo of Solo Capital Management.

Mikel Abasolo -- Solo Capital Management -- Analyst

Hello. Thank you for taking my question. This is a short one. How much of the Solasglas fund is invested at risk at the end of the quarter?

Tim Curtis -- Chief Financial Officer

Mikel, it's Tim here. On the face of our balance sheet is the amount of the net asset value that is in the fund. And as we have described previously, Solasglas creates an investment portfolio, out of what we contribute and is able to go long and short in that position. And we've publicly stated that as we are derisking our portfolio they would be the majority of that, but that is relative to the investment portfolio, not the net asset value would be invested -- would be derisked and in fixed income securities.

So the majority is in fixed income securities, and the rest is eligible for the long-short portfolio.

Mikel Abasolo -- Solo Capital Management -- Analyst

So in percentage terms or in proportion, can you be more specific Tim, please?

Tim Curtis -- Chief Financial Officer

Yeah. Well, the other way to look at that is if you look at the Q on Page 13, that shows the actual balance sheet of Solasglas at September 30th, and it breaks down what is in at -- investments at fair value and what is in cash and cash equivalents. So the derisked portion of the net asset value would be in the cash and cash equivalents. So you can see at the investments at fair value, that would be in...

Mikel Abasolo -- Solo Capital Management -- Analyst

OK. OK. Thank you. Now, I apologize, but I looked at it in the 10-Q on the PDF, and that page was blank for some reason.

I should have looked at it at the GARP. But thank you for the response. And now, my question is, if the amount is so low, isn't it more -- wouldn't it be more appropriate to discuss the strategic revision up to a point where you feel comfortable disclosing something rather than discussing the positions in companies like Tesla or something like that? Because I think it's more material to the investment, don't you think?

David Einhorn -- Chairman

Yeah. This is David again. And no, I understand the interest in what's going on with the strategic review process. This is the investment portfolio rough size that we expect to maintain until we've completed the strategic review process.

I think it makes sense to discuss where we do have risk in the portfolio. So that was where we start talking about some of the mutual investments that have been made, that the company has opportunity to put money in. Relating to explaining more about the strategic review processes, it simply doesn't make sense at this time for us to comment further.

Mikel Abasolo -- Solo Capital Management -- Analyst

OK. OK. Thanks anyway. Thanks.

Operator

[Operator instructions] And at this time, I am not showing any additional questions. So we will conclude the question-and-answer session and conclude Greenlight Re's third-quarter 2019 earnings conference call. And once again, 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. [Operator signoff]

Duration: 20 minutes

Call participants:

Simon Burton -- Chief Executive Officer

David Einhorn -- Chairman

Tim Curtis -- Chief Financial Officer

Ethan Sharvit -- Argos Capital Management -- Analyst

Mikel Abasolo -- Solo Capital Management -- Analyst

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