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Greenlight Capital RE Ltd (GLRE -0.96%)
Q3Â 2020 Earnings Call
Nov 6, 2020, 9:00 p.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 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 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 by the company's Form 10-K/A for the year ended December 31st, 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 differ 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] Please note this event is being recorded.
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
Good morning and thank you for joining our call today. Before we discuss our quarterly results, I'd like to provide some market context and what has been another stressful quarter for the reinsurance industry.
In terms of loss activity in the quarter, it is unusual in two ways. First, there was a high frequency of small to medium-sized natural catastrophes, including hurricanes, extreme on-land storms and wildfires. Second, the ongoing pandemic is constantly adding to the body of potential industry loss exposure. The ultimate impact of losses incurred related to COVID-19 is still unknown as plaintiffs continue to test the insurers' positions on business interruption coverage in court with mixed success. Further uncertainties surrounds the ultimate duration at the pandemic, although the difficult winter in the northern hemisphere seems assured. Here we are seeing reinsurance industry capital being removed by cat losses and subject to loss and resulting uncertainty from COVID-19.
In typical hard market conditions, we would see significant new capital into the market. In past years, we have seen rapid inflows of collateralized ILS capacity, effectively keeping a lid on runaway market pricing. This year, signs are pointing to investor fatigue with the ILS products having experienced four years of losses and an inability to redeploy capital that's encumbered by COVID-19 loss uncertainty. New capital has been raised by start-ups and established reinsurers, but our assessment is that this new capital represents only a fraction of what's been lost or encumbered. The imbalance of reinsurance capital demand and supply is real and the effects of market conditions will be significant.
With that fairly complicated backdrop, I'm pleased with our performance this quarter as we reported a combined ratio of 100.4%. This underwriting result reflects discipline in both expense control and risk management as well as increasing stability in our loss reserves. Excluding the impact of catastrophes, the underlying combined ratio of 93.4% reflects an underwriting business that is already well positioned to create shareholder value as industry losses revert to normal levels.
As market conditions improved significantly into 2021, we expect our underwriting business to present an increasingly attractive risk return proposition for our shareholders. This quarter, there was relatively little financial contribution from our strategic investments, although investment gains are lumpy in this area of our business. Nevertheless, I can say with confidence that the overall basket of strategic investments has performed well through the pandemic conditions. Further, several of our innovations partners are benefiting from the surge of clients and investor interest in their products, but the benefits of digital transactions become clearer in lockdown situations. We continue to see compelling new opportunities for early stage strategic partnerships and expect further growth in this area of our business.
Now, I'd like to turn the call over to David
David Einhorn -- Chairman
Thanks, Simon, and good morning, everyone. The Solasglas fund returned 1.4% in the third quarter. Longs contributed 3.1%, while shorts detracted 1.9% and macro was slightly positive. During the quarter. The S&P 500 Index returned 8.9%. Long positions in Green Brick Partners and The Chemours Company were the biggest winners. Green Brick Partners shares advanced 36% in the third quarter as the company beat second quarter consensus earnings estimates by a wide margin.
Business momentum is accelerating as the combination of increased demand for single-family detached housing and low mortgage rates has contributed to a strong order rate and recent -- record backlog. Green Brick's high volume of sales has also contributed to higher profitability as operating expenses have remained stable. The company reported third quarter earnings per share of $0.69 last week, well ahead of expectations. Despite a sharp increase in the shares, they seem inexpensive at 8 times 2021 consensus estimates. Chemours shares returned 38% in the third quarter, while earnings were challenged in the spring. Due to the impact of COVID-related locked down, demand for paint has picked up as automotive production has come back online and it is projected to surge in the coming quarters, given the uptick in home construction and remodeling projects. As the global low cost supplier of high quality titanium dioxide, Chemours is well positioned to regain lost market share should demand remain strong in the coming quarters.
Our Tesla short detracted from performance. The stock nearly doubled in the quarter, driven in part by a surge in retail investor flows, following the company's announcement of a five-for-one stock split in August and a potential inclusion in the S&P 500 Index. We believe market behavior like this is emblematic of the mania surrounding a small universe of story and other tech stocks. It is our view that we are now in the early stages of the bubble popping. As a result, we have shorted a basket of high flying stocks in recent IPOs trading at excessive valuations.
Our loan book contains businesses that are uniquely positioned to do well in this environment, such as Change Healthcare, which owns the largest medical claims clearinghouse and has benefited from a ramp up in healthcare volumes as people have resumed elective procedures. And Atlas Air Worldwide Holdings, which owns and operates the world's largest fleet of freighters, with passenger travel down there is a shortage of airfreight capacity and freighters like Atlas Air have been able to command a premium to ship commercial goods. Solasglas returned 2.1% in October, bringing the 2020 year-to-date result for Solasglas to negative 4.5%. Net exposure was approximately 17% long in the investment portfolio at the end of the third quarter and roughly 21% at the end of October.
Our underwriting portfolio performed well during the third quarter despite catastrophes costing us 7 points of losses. The team is hard at work making preparations for a hard renewal market on January 1st, 2021.
And now, I'd like to turn the call over to Neil to discuss the financial results. Thank you, David. Our fully diluted book value per share grew 1.9% during Q3, ending the quarter at $12.03. Net income for the quarter was $2.2 million or $0.06 per share, driven primarily by gains in our Solasglas portfolio that David described earlier. The company reported a small underwriting loss of $0.4 million during the quarter and a combined ratio of 100.4%. The quarter's results included losses from Q3 cat events of $8.1 million, which contributed 7 percentage points to the combined ratio. Our estimate of COVID-19 losses did not change and we recognized slight benefits from prior year development during the third quarter. Gross premiums were $134 million for the quarter, up 23% from the third quarter of 2019. The increase was due primarily to increases in workers' compensation business and also on specialty lines, which includes crop and energy contracts as well as health business generated by our innovations initiatives. On a year-to-date basis, gross premiums written were down 15%, primarily as a result of our decision not to renew certain personal motor contracts. Total general and administrative expenses incurred during the quarter was $5.2 million, representing a decrease of $2.6 million or approximately 33% from the prior year period. This decrease was due primarily to lower stock compensation and other personnel costs as well as the non-recurrence of expenses related to our 2019 strategic review. We reported total net investment income of $6.9 million during the third quarter of 2020, which includes net investment income of $6.4 million on our investment in Solasglas. During the third quarter, we've repurchased approximately 700,000 shares at an average cost of $6.87 per share according to a discount to 43% of our September 30 fully diluted book value per share. Now, I will turn the call back to the operator and open it up to questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question is from Mikel Abasolo from Solo Capital Management. Please go ahead.
Mikel Abasolo -- Solo Capital Management -- Analyst
Thank you for taking my questions. Very quickly, the first one is, after the sale of the insurance operation was dropped, do you still entertain offers for the operation or that is an avenue that is permanently closed? Second question is a bit technical and perhaps I'm mistaken or I'm confused. But I believe that the hedge fund, the Solasglas is a mirror image of the hedge fund. And I believe that the hedge fund raised 7% during October versus the 2.1% that Solasglas may, perhaps those two are not comparable. But if that's the case, I would appreciate a clarification.
And finally, I was curious about the pace of buybacks. The share is trading at 55%, 60% of book value and you have plenty of room to accelerate the buybacks, but they're going slow. I was wondering if you could discuss what determines the pace or what the rationale behind buying more now versus buying more later years? Thank you very much. Good morning, Mikel. It's Simon here. So, I'm going to have a run at your questions one by one. And David may well want to add to this. So, the strategic review that we announced earlier in 2019 concluded early this year was a process that encompassed all options for the company, including a review of for our operations, of our strategy, of obviously potential for strategic transactions, partnerships, potentially even a sale of the company. A sale was only a small part of what we were considering, but it wasn't all encompassing strategic review. We concluded that process by determining that the company's go-forward strategy was the best option for our shareholders. And I think all the reasons that you're hearing on the call today and the improving market conditions, we continue to be highly convicted that that's the right approach. Should a good idea come upon us in the future, whether it's a strategic transaction or potentially something that changes our landscape entirely, of course, we will consider it. That's our obligation, but it's not our focus at this point. The second question, the hedge fund being highly pursued, that is not always the case. Clearly there are similarities between Solasglas -- strong similarities between Solasglas and Greenlight Capital Fund, but we diverge in certain ways because of risks -- certain risk constraints that the Board has asked Greenlight Capital to live within and also obviously capital constraints in the company. So, you shouldn't assume that Solasglas is an exact mirror of Greenlight Capital. Third, on the buybacks, we are pleased to have been buying back shares at what we consider to be a severely discounted and mispriced stock. Having said that, there is a great deal of competition for our capital. We have a lot of good ideas for our capital. And we are obviously balancing those interests as we go forward.
David Einhorn -- Chairman
Yeah, let me just jump in and add.
Mikel Abasolo -- Solo Capital Management -- Analyst
Okay.
David Einhorn -- Chairman
Let me just jump in and add there. Relating to the difference in performance, the-- when you talk about, for example, the relatively low net exposure and so forth at Solasglas, the overall level of investment is lower on a gross basis compared to capital than it is at the Greenlight hedge funds. And so, you should expect there to be less up and less down because there's just less balance sheet working relative to the capital within the company at this stage.
And relating to the buyback, we are limited somewhat by the trading volumes of the shares. And in our view, the shares represent too big of a discount. And I think that that's an extremely good use of capital. And to the extent the company has capital that wasn't going to run us into limitations in core business, I think repurchasing shares at these prices is the highest and best use for the incremental capital. And we will continue, so the shares improve.
Mikel Abasolo -- Solo Capital Management -- Analyst
Okay. Thank you, David. But you don't feel like the opportunity is now and that you have to push it higher now that the discount is too wide?
David Einhorn -- Chairman
I think the discount just too wide, but there's limitations, for example, as a percentage of volume, that buybacks can be and we're operating within the constraints that are there. If you compare what we actually bought back during the quarter to the actual trading volumes of the stock during the quarter, I think you would see that we would be relatively aggressive.
Operator
[Operator Instructions] The next question is from Dris Upitis with Ocho Investments. Please go ahead.
Dris Upitis -- Ocho Investments -- Analyst
Hi. Can you just help me understand the financial model that you expect longer-term to provide basically a return to shareholders in meaningfully in excess of the market return? And I guess what I'm wondering is, like what level of combined ratio and what level of gross exposure do you expect the company to use longer term outperformed the market such that basically it meaningfully outperforms the return of capital to shareholders at or approximately book value. But I guess I'm just wondering like the combined ratio and the gross exposure that is needed and how long it will be until you think you can operate at that level?
Simon Burton -- Chief Executive Officer
Dris, good morning. It's Simon here. So, our strategy is and has been from the inception of the company to combine high-quality reinsurance returns with high quality investment returns. And we believe that the combination of those two things presents a very compelling opportunity for our shareholders. Clearly there are certain times in the marketplace where one or the other or perhaps both of those pieces are under stress. And we've seen a mix of that in recent years. Of course I'll let David comment and you you've heard David extensively comment on the investment management landscape. From a reinsurance perspective, we are looking at a marketplace and market opportunity that exceeds conditions that many of us have seen in our careers. Certainly I don't recall since post 9/11 or even earlier. They're exceptionally good. They're improving all the time. We feel very well positioned to participate in that. Of course, we don't provide guidance on future performance of the underwriting business. But we feel very good about where we're positioned about the strength of our balance sheets and our reserves and our ability to deploy capital into that significantly improved environment.
David Einhorn -- Chairman
I would just add to answer your question a little bit further. As we've done the planning for 2021, if we can get near our internal plan, we would achieve what you are suggesting next year.
Dris Upitis -- Ocho Investments -- Analyst
Meaning a return that exceeds cost of capital basically? Is that what you're interpreting? Okay. Okay.
David Einhorn -- Chairman
Yes. And I think that the cost of capital -- and I think that the cost of capital is high right now, given the implications of the stock price.
Dris Upitis -- Ocho Investments -- Analyst
Okay. And can you just elaborate a little bit? David, you said that share buybacks are the highest and best use of capital. I'm just trying to reconcile that comment with a basically 70% ballpark 70% risk free return to shareholders. And how you think about the option to use effectively all of your capital for that year by approximately returning that to shareholders.
David Einhorn -- Chairman
Yeah, we can't do it all liquid. We're not going to do a liquidation of the business. So we need to return enough capital to not be doing a liquidation in the business. Further, we think that there are opportunities in the business that have adequate returns on capital and should be taken advantage of, particularly in light of the rapidly improving market conditions.
Relating to the constraints, as I alluded before, there are trading constraints relating to percentage of volume and such. I just looked up, while we were -- while you're asking the last question, approximately 8 million shares traded last quarter. So we were approximately 9% of the trading volume in the share repurchase. We're somewhat limited by percentage of volume constraints. So, if people would like to sell more stock more quickly or trade the stock more quickly, we would probably be able to repurchase shares more quickly.
Operator
The next question is from Suleman Soorani with Tricap Investments. Please go ahead.
Suleman Soorani -- Tricap Investments -- Analyst
Hi. Thank you for taking my question. David, you mentioned about the divergence of performance between Solasglas and your hedge fund. And the reason is that the amount of capital that used and I think the position that we're taking at Solasglas is not as aggressive as for the hedge fund. And if I remember correctly, I think maybe last quarter or the quarter before, you said that gradually you will take it to the same position level as for your hedge fund. So, any insight into when we could expect that to happen? Because I remember last year, the year before when the capital position was strong, the returns of Solasglas or the funds managed for the insurance company used to very largely depict the returns on the hedge fund. So any timeline as to when the divergence will reduce?
Simon Burton -- Chief Executive Officer
Yeah. Last quarter, I believe I said that we would try to increase the amount, not converge the amount completely. So, I think you misstated what I said or misunderstood what I said a quarter ago. We have already made improvement in the level of investment as of September 30 vis-a-vis the hedge fund, but it is still substantially less and it will remain substantially less until we -- until the Board decides to change that. And I'm not sure that when that will happen further in the future. Among other things, we probably need to build more capital within the company in order for that to occur.
Suleman Soorani -- Tricap Investments -- Analyst
So in terms of the magnitude of divergence like, should we expect, for example, this quarter the return for the Solasglas is about 2% and the hedge fund was north of 7%. So that's quite a significant -- more than double the divergence. Is that what we should expect going forward or it will also change?
David Einhorn -- Chairman
It should be somewhat less than that. There is one particular acquisition, Green Brick Partners, which has an outsized weighting in the hedge fund. And at the Solasglas, it is constrained by the investment guidelines that we have. And so, our best performing thing, although it was a very large contributor to Solasglas, was more underweight there than some other things within the funds. And that contributed to the divergence.
Operator
This concludes our question-and-answer session. 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 Closing Remarks]
Duration: 26 minutes
Call participants:
Simon Burton -- Chief Executive Officer
David Einhorn -- Chairman
Mikel Abasolo -- Solo Capital Management -- Analyst
Dris Upitis -- Ocho Investments -- Analyst
Suleman Soorani -- Tricap Investments -- Analyst
