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Greenlight Capital (NASDAQ:GLRE)
Q4 2019 Earnings Call
Mar 10, 2020, 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 fourth-quarter and full-year 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 for the year ended December 31, 2019 and other documents filed by the company with the SEC. If one or more risks of 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. 2019 was a year of transition for the company. We fell short in our goal to deliver meaningful growth in book value per share for reasons I'll describe in a moment. [Audio gap] spent the last few years building a business with certain characteristics, a platform that is operationally lean and that emphasizes agility over scale and geographic reach, an underwriting portfolio that is diverse by class and with much reduced counterparty concentration risk going forward, a strategy to participate mainly as a following market on reinsurance placements, and as a price setter, only in areas where we have sufficient depth of expertise, and an innovations unit that build strategic partnerships with successful tech-enabled start-ups in our industry that give us long-term access to profitable underwriting business as well as the stake in areas of potentially significant growth within the insurance industry.

This strategy is designed to leverage a low expense base and a [Audio gap] But let me address why our 2019 financial results are not reflective of our improved business profile. Looking at our 2019 financial year performance, excluding the impact of natural catastrophes, our three worst-performing counterparties produced a combined underwriting loss of $39 million. The bulk of this underwriting loss related to our nonstandard auto class and was recognized during the first half of 2019. Additionally, fourth quarter changes in the carry value of our notes receivable represents another $6 million of losses we've recognized on loans we had extended to certain cedents.

We have no ongoing underwriting relationship with any of these cedents as they no longer fit our underwriting strategy. While the impacts on net income in 2019 from these discontinued relationships is painful, it also reinforces my conviction in our current strategy as the balance of the underwriting portfolio has performed well despite $17 million of catastrophe losses that impacted us during the year. Additionally, on the operational expense front, it is worth noting that our corporate expenses were elevated due to certain strategic review-related expenses that we incurred during the year. A strong investment performance of 9.3% on our investment in the Solasglas funds more than offset the losses from the discontinued underwriting relationships and our overall results was a 1.7% reduction in fully diluted book value per share.

Before I turn the call over to David, I'd like to provide a brief update on our ongoing strategic review. Since commencing the review, we have identified a variety of potential options for the company and have also engaged in discussions with prospective partners and counterparties. However, we have not selected any particular course of action, nor have we formalized the timetable to complete our review. Until we determine that further disclosure is appropriate, we do not intend to discuss developments with respect to the process.

Now I'll hand the call over to David.

David Einhorn -- Founder and President

Thanks, Simon, and good morning, everyone. The Solasglas fund returned minus 1% in the fourth quarter. Longs contributed 0.6% and shorts detracted 1.8%. During the quarter, the S&P returned 8.5% for the year, Solasglas returned 9.3%.

Long positions in the Chemours company and Green Brick Partners were the biggest winners in the quarter. Chemours returned 23% as the company announced third-quarter results that demonstrated sequential progress in regaining market share in its titanium dioxide segment. We expect these positive results to continue as well as intermediate term improvements to refrigeration segment. We also expect the market to come to better understand the concerns of potential large future legal liabilities related to PFOS and PFOA are overstated.

Green Brick stock was up 7% as the company announced good results that included strong order growth and that as its entry-level brand, Trophy Signature Homes was off to a wonderful start. Homebuilding in the U.S. is doing well, and lower interest rates lead to lower mortgage rates that are good for the industry. Solasglas returned minus 0.4% in February as the S&P dropped 8.2%, bringing the 2020 year-to-date return for Solasglas to minus 3%.

Net exposure was approximately 20% long in the investment portfolio at the end of the fourth quarter and has been reduced to approximately 15% net long at the end of February. The majority of the investment assets are in cash and short-term treasuries. This asset allocation mix is providing to be beneficial as the last few weeks, the markets have been extraordinarily volatile. Now I'd like to turn the call over to Tim to discuss financial results.

Tim Courtis -- Chief Financial Officer

Thanks, David. Starting with the fourth quarter, we reported a net loss of $30.3 million or $0.84 per diluted share. Net premiums written during the fourth quarter were $98.4 million, which is a reduction of 6.2% to net premiums written in the fourth quarter of 2018. The decrease was primarily due to the nonrenewal of auto business during 2019.

For the quarter, we reported an underwriting loss of $15.8 million, which was negatively impacted by natural catastrophe losses of approximately $14.2 million. The quarter was also negatively impacted by a small prior-year adverse reserve development of $1.1 million. The composite ratio for the quarter was 111.9%, with fourth-quarter cat losses adding 13.1 points to the composite ratio. We reported a total net investment-related loss of $8.8 million during the fourth-quarter 2019, which was a result of a net loss of 1% or $5.7 million on our investment portfolio in Solasglas and a loss of $6 million due to a valuation allowance in connection with the loans we had extended to certain cedents.

Moving on to the full-year results. Greenlight Re reported a net loss of $4 million for 2019 or $0.11 per fully diluted shares. Gross premiums written were $524 million for the year, a decrease of approximately 7.7% over 2018. As reported in prior quarters, the 2019 premiums have decreased, primarily due to the nonrenewal of motor and medical stop-loss contracts, with these decreases being partially offset by new contracts relating to financial, crop, energy, and other specialty lines.

For 2019, our composite ratio was 104.5% with net catastrophe losses contributing 3.6 percentage points. Prior-year development on loss reserves, primarily from private, personal auto business negatively impacted our first quarter 2019 results. Although subsequent quarters reported net positive reserve development, the impact of reserve development for the year contributed 6.2 percentage points to the composite ratio. Our general and administrative expenses for the year totaled $29.8 million, which is an increase of $4.6 million from the prior year.

These underwriting expenses of $14.3 million were slightly higher than $13.1 million in 2018, primarily as a result of higher personnel and IT costs. The underwriting expense ratio for the year was 2.4%, resulting in a combined ratio for the year of 106.9%. Our corporate expenses during 2019 of $15.6 million, compares to $12.1 million for the prior year and is higher primarily due to higher level of professional fees and legal fees as well as personnel costs. We reported total net investment-related income of $52.3 million, which primarily was a result of a net gain of 9.3% for the year on our investment in Solasglas.

The fully diluted adjusted book value per share as of December 31, 2019 was $12.88, a 1.7% decrease from $13.10 per share reported at December 31, 2018. Now I'll turn the call back to the operator to open it up to Q&A.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Cory Reed from Otter Creek Advisors. Please go ahead.

Cory Reed -- Otter Creek Advisors -- Analyst

Yes. I'm going to try and do my best, David Einhorn, here. You turned down 12.50 bid for the company earlier this year. You could probably not get anywhere near to that now, but perhaps 11.50.

Why don't you go back and try and resolicit that bid? Underwriting has been miserable over a long period of time. We all understand the investment experience. But having to sit here and ride this thing down the tubes is very frustrating. Thank you.

David Einhorn -- Founder and President

Well, this is David Einhorn. And honestly, I don't think that was a very good David Einhorn. That being said, the company is doing the best it can within the strategic review process. I can't comment on any specifics.

The figure you quoted came out of a press report. I can't comment on the accuracy of that report, but I don't endorse it's accuracy either. The process is ongoing, and the company is going to do the best that it can to get the best outcome possible for the shareholders. That what I have to say about this.

Operator

The next question comes from David Rocker from Rocker Partners. Please go ahead.

David Rocker -- Rocker Partners -- Analyst

Hi. This is somewhat similar to the previous question. But this strategic review has been going on that was announced at the time of the second quarter report. And it was indicated that as of May 31st after the downgrade from Best, that you had commenced this review.

This is a very long time to have a review and to not say anything about it is puzzling. The companies who start takeover battles and end them in a week. I don't expect that, but I certainly don't expect there to be utter silence at this point there without any description of what you're considering or why you're doing it. And further, as a second question, why was the company, obviously, in shrink mode while your operating expenses are rising? Could you please comment on those two things, please?

David Einhorn -- Founder and President

Well, I'll take the first one, and Simon will take the second one. I think it is fair to say that the strategic review has taken longer than we would have expected it to. And I think you can take from that our -- whatever our first course of action choice was did not pan out, and so now we're thinking about other courses of action. And when we eventually come up with something that we think is the best available choice, we will make it and we will announce it and go forward on that basis.

Simon, you want to answer about the expense.

Simon Burton -- Chief Executive Officer

And your question, David?

David Rocker -- Rocker Partners -- Analyst

Yes. The question is --

Simon Burton -- Chief Executive Officer

Absolutely. Your question, David, on us being shrinking. We -- if you

David Rocker -- Rocker Partners -- Analyst

The G&A expenses were up $4 million.

If you look at our expenses in two pieces. The underwriting expenses are slightly up, not materially so. Frankly, I would not characterize the company at all in shrink mode. Where the top line may be reducing the gross written premium, we're actually writing considerably more margin-rich business, which requires a great deal more efforts on operations.

So we're doing quite a lot with what we have on the underwriting side. The increase in the operating expenses that you're seeing is almost entirely from expenses connected to the strategic review, which obviously are, we would consider, onetime for the purposes of this strategic review.

It was $4 million. Was that the cost that you paid for the strategic review? And I guess, one other thing, if I may add to it. What are the tests that A.M. Best has that would enable you to restore your rating to stable from negative and where are you in seeking to achieve those?

Simon Burton -- Chief Executive Officer

We have an ongoing and healthy communication line with A.M. Best. We keep them fully apprised of our progress, both operationally and around the strategic review, and they're interested in our conclusions. There's nothing else to add.

David Rocker -- Rocker Partners -- Analyst

And was your cost of Credit Suisse, $4 million?

David Einhorn -- Founder and President

No, David. I can confirm that as of 12/31/2019, what is in the financials. It was approximately $3 million accrued for total expenses related to the strategic review.

Operator

The next question comes from Jonathan Shafter from Clear Harbor. Please go ahead.

Jonathan Shafter -- Clear Harbor -- Analyst

Hey, gentlemen. The 13% net loan in the Solasglas investment portfolio that you disclosed for the end of February, does that apply to just the $162 million of invested assets in the portfolio or is that on the $348 million of total assets in the portfolio or, I guess, it's about the $240 million net? I know you've added half cash in the portfolio. Is that included in that 13% or is it 13% of 50% of cash?

Simon Burton -- Chief Executive Officer

It's 13% of whatever the grossest highest figure you would come up with it is. I don't know if I would confirm the exact way that you're describing it.

Jonathan Shafter -- Clear Harbor -- Analyst

OK. Thank you.

David Einhorn -- Founder and President

And just further to that, if you wanted to refer to Note 3 in the financial statements, it does break down the investments in the Solasglas fund. So you can actually see the various components that make up the funds.

Operator

[Operator instructions] The next question is from Daniel Schneeburger, private investor. Please go ahead.

Unknown speaker

Hi, guys. Thanks for taking my question. My first question is around conflicts of interest, David. And you're -- both the GP of Green Light, obviously, and you're chairman of the board and are in charge of achieving the best outcome for shareholders.

I was just wondering, how do you manage that conflict?

David Einhorn -- Founder and President

Well, we have an independent committee of directors to address these kinds of conflicts, and they are regularly engaged in it when matters come up.

Unknown speaker

OK. And have you -- during this process, have you become more agnostic toward what Greenlight's role will be going forward in terms of managing the capital?

David Einhorn -- Founder and President

I don't know what you mean by that.

Unknown speaker

So let's say, you would have two similar options, and one of them would involve a continuation of investment mandate, and let's say, the other option will be slightly more favorable for shareholders. How would you personally vote?

David Einhorn -- Founder and President

We will do what's best for all the stakeholders of the company.

Unknown speaker

OK. Understood. My second question is your thoughts on the liquidation because Blue Capital, obviously, announced a liquidation last July. And they are able to return pretty much book value for their shareholders and they returned about 80% of their capital within 12 months. My question for you guys is if you were to choose a liquidation as the best path forward for shareholders, how long do you envision would that take? Would you be able to return capital sort of in a similar pace or would that be a longer process?

David Einhorn -- Founder and President

I don't think we would be in a position to comment on that at this point.

Unknown speaker

OK. Understood. Thank you very much.

Operator

The next question comes from John Levin from Levin Capital. Please go ahead.

John Levin -- Levin Capital Strategies LP -- Analyst

Hi. A great admirer of David. You mentioned PFOA and PFOS, is there -- is there any open-ended thing in the underwriting that is significant and material enough to affect the book value in an important way? Or ask the question a different way, the way I should have asked, but I'm not sure how I should have asked it.

David Einhorn -- Founder and President

Are you talking about Chemours?

John Levin -- Levin Capital Strategies LP -- Analyst

Yes, because we've lost a zillion dollars in DuPont on this thing already.

David Einhorn -- Founder and President

Yes. We've done a lot of work here. We believe that their exposure isn't largely limited to the three plants and have done most or all of their -- most of their remediation. That there is one plant that had a fair number of human plaintiffs, most of which were resolved in 2017 in a large settlement that DuPont and Chemours split.

There's ongoing litigation relating to approximately 60 plaintiffs that emerged after 2017. There was a trial a week or two ago that led to one hung jury on one plaintiff and a $50 million verdict on the other plaintiff. So the company needs to figure out how to resolve those. Those are the only injury deals that we know about at this stage.

And we think that the remediation from the other two plants that is further away mostly from urban or populated centers is relatively unlikely to lead to things other than just actual cleanup costs of the physical facilities and surrounding areas, which I think is long since in process. There is a second set of litigation relating to a firefighting foam, which is a product that 3M made that DuPont made contributions in terms of ingredients. Our understanding is that the DuPont ingredients were not the chemicals that have led to the distress, but this is going to be something that's going to be the subject of litigation, probably for many years. Our understanding is that 3M is the one who has the vast, vast majority of these [Inaudible]

John Levin -- Levin Capital Strategies LP -- Analyst

That's our understanding also, David. That's why I asked the question to try to be helpful. OK.

David Einhorn -- Founder and President

And just to be clarified for everybody on the call. This is a discussion relating to our asset investment in the Solasglas funding Chemours. This is not a liability that is anywhere in the Greenlight Re underwriting portfolio.

John Levin -- Levin Capital Strategies LP -- Analyst

That's important. Great. OK.

David Einhorn -- Founder and President

Sure.

John Levin -- Levin Capital Strategies LP -- Analyst

That's why I asked the question to clarify it, to be helpful. Thank you.

David Einhorn -- Founder and President

Thank you, John.

Operator

[Operator signoff]

Duration: 23 minutes

Call participants:

Simon Burton -- Chief Executive Officer

David Einhorn -- Founder and President

Tim Courtis -- Chief Financial Officer

Cory Reed -- Otter Creek Advisors -- Analyst

David Rocker -- Rocker Partners -- Analyst

Jonathan Shafter -- Clear Harbor -- Analyst

Unknown speaker

John Levin -- Levin Capital Strategies LP -- Analyst

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