Greenlight Capital Re, Ltd. (GLRE) on Q1 2023 Results - Earnings Call Transcript
Operator: Hello, and thank you for joining the Greenlight Capital Re First Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] It's now my pleasure to turn the call over to Karin Daly, Greenlight Re's Investor Relations Representative and Vice President at the Equity Group. You may please go ahead, Karin. Karin Daly: Thank you, Kevin, and good morning. I would like to remind you that this conference call is being recorded and will be available for replay following the conclusion of the event. An audio replay will also be available under the Investors section of the company's website at www.greenlightre.com. Joining us on the call today will be Chief Executive Officer, Simon Burton; Chairman of the Board, David Einhorn; and Chief Financial Officer, Faramarz Romer. On behalf of the company, I'd like to remind you that forward-looking statements may be made during the call and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather reflect the company's current expectations, estimates and predictions about future results and are subject to risks and uncertainties. As a result, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may impact future performance, investors should review the periodic reports that are filed by the company with the SEC from time to time. Additionally, management may refer to certain non-GAAP financial measures during their remarks. The reconciliations to these measures can be found in the company's filings with the SEC, including the company's Form 10-Q for three months ended March 31, 2023. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. With that, it's now my pleasure to turn the call over to Mr. Simon Burton. Simon Burton: Thank you, Karin. Good morning, everyone. Thank you for joining us. I'd first like to welcome Faramarz Romer, who is joining his first earnings call as CFO since his promotion effective April 1. The CFO transition went well, which is not surprising as Faramarz has been an integral member of the team for the past 16 years. He is now fully up to speed. For the first quarter of 2023, we reported growth in book value per share of 1.1% and net income of $5.9 million, despite each of our three pillars of underwriting, innovations and SILP performing below our expectations for the quarter. Starting with the underwriting results. The combined ratio of 99.8% was impacted by 5.7 points of winter storm and convective storm losses, along with 5.6 points of non-cat reserve deterioration in our runoff book. The storm losses relate to a single innovation U.S. homeowners program written in 2022 that experienced higher-than-anticipated volatility from a winter storm in late December and from convective storms in March. We had identified these concentration issues leading up to the renewal of the homeowners program at January 1, when we restructured at favorable terms. So this volatility is contained to a single policy that's now running off. Otherwise, our book of innovation's underwriting risks is running well, and we expect that this is an isolated situation. block of reserves and: Some of the increases from the portion of the book that was repriced at January 1st at significantly better terms including property, marine, specialty and multiline, which includes our Lloyd's FAL positions. We were also able to expand and diversify the overall book into a market that is supply constrained in many of the classes that we write. Renewals at April 1st were similarly compelling. We grew our Japanese catastrophe book as we saw rate improvements that exceeded 20% as just one example. Given that we continue to see increases in reinsurance demand, as cedents attempt to reduce their own volatility, coupled with persistent supply constraints, I believe that the outlook for our underwriting model is excellent for the rest of 2023 and into 2024. Moving on to our innovations business. Insurtech valuations continue to be relatively depressed. This provides us an opportunity to access attractive underwriting business via our partnership approach at compelling valuations. We completed two new investments during the quarter and had a small write-down on one of our positions. Our Lloyd's Syndicate 3456 is proving to be an attractive option for partners seeking risk capacity despite some bumps in navigating the Lloyd's onboarding processes. We have a strong pipeline of opportunities for the Syndicate. Finally, we are pleased to welcome David Sigmon, who joined last month as General Counsel. David comes to us with significant reinsurance experience, and we are excited to have him on the team. Now I'd like to turn the call over to David. (0:04:34): Some of the increases from the portion of the book that was repriced at January 1st at significantly better terms including property, marine, specialty and multiline, which includes our Lloyd's FAL positions. We were also able to expand and diversify the overall book into a market that is supply constrained in many of the classes that we write. Renewals at April 1st were similarly compelling. We grew our Japanese catastrophe book as we saw rate improvements that exceeded 20% as just one example. Given that we continue to see increases in reinsurance demand, as cedents attempt to reduce their own volatility, coupled with persistent supply constraints, I believe that the outlook for our underwriting model is excellent for the rest of 2023 and into 2024. Moving on to our innovations business. Insurtech valuations continue to be relatively depressed. This provides us an opportunity to access attractive underwriting business via our partnership approach at compelling valuations. We completed two new investments during the quarter and had a small write-down on one of our positions. Our Lloyd's Syndicate 3456 is proving to be an attractive option for partners seeking risk capacity despite some bumps in navigating the Lloyd's onboarding processes. We have a strong pipeline of opportunities for the Syndicate. Finally, we are pleased to welcome David Sigmon, who joined last month as General Counsel. David comes to us with significant reinsurance experience, and we are excited to have him on the team. Now I'd like to turn the call over to David. David Einhorn: Thanks, Simon, and good morning, everyone. The Solasglas portfolio lost 1.1% in the first quarter. Our longs contributed 8.9% to the gross return. Shorts and macro cost us 9.0% and 0.3%, respectively. During the quarter, the S&P 500 Index advanced 7.5%. The first quarter was a challenging investment environment as many investments that performed well in 2022 reversed in 2023. We repositioned the portfolio from bearish to neutral while we await further economic developments. Long positions in Green Brick Partners, Kyndryl Holdings and gold were the largest positive contributors to the quarterly result. Brighthouse Financial, a single-name short position and a basket of housing sector shorts hedging some of our Green Brick exposure were the material detractors. Green Brick shares advanced 45% in the first quarter mostly as analysts' expectations for this year's earnings stopped coming down. It appears that the market is gaining confidence in the housing sector again after 2022's fear that higher interest rates would cause an imminent collapse. Green Brick remains well positioned. Its margins are the highest in the industry and it maintains an enviable land position in some of the country's best markets. Just last week, the company reported extremely strong new orders, revenues, gross margins and earnings that simply blew away consensus expectations that was formed during last year's housing slowdown. The stock appreciated another 40% so far this quarter. Kyndryl is an IT services business that was spun out of IBM in late 2021. Prior to the spin, IBM positioned this unit as a loss leader in order to sell more hardware. This investment is a turnaround story as Kyndryl can now offer solutions from multiple vendors and is better positioned to raise pricing on the no margin contracts that are expiring in the next couple of years. With an enterprise value of $4.5 billion to $17 billion of revenue, Kyndryl trades for less than 0.3x sales. Meanwhile, its peers trade for at least twice that multiple. We expect the shares to rerate over time as Kyndryl closes the margin gap with its peers. Gold advanced 8% in the quarter. The gain occurred after several bank failures as the market expectations for further rate hikes reversed into expectations of rate cuts starting as soon as this summer. One concern is that the problems with the banks may force the Federal Reserve to prioritize preserving financial stability over defeating inflation, causing the next leg up for inflation. The higher gold price appears to be taking some of that risk into account. Brighthouse Financial shares dropped by 14% in the quarter in response to the bank failures partially caused by a few banks buying long-duration bonds that fell in value when interest rates rose and the market sold off many companies in the insurance sector that also own long-duration bonds. Even though Brighthouse is a beneficiary of higher rates by virtue of having very long duration liabilities, which are quite different from the short-term deposits that can leave abruptly for a bank. The market decided to simply ignore this difference. We don't believe any of the concern is specific to Brighthouse. It is our view that rate cuts are unlikely to happen this year. And while the market is expecting them in the back half of the year, as such, we added to our interest rate positions by federal fund futures. Expressing this thesis directly means that we are only subject to the Central Bank's decisions for the balance of the year rather than being subject to the market's expectations. Tuesday, I presented our analysis on Vitesco Technologies at the Sohn Conference. Vitesco is the spin-off of the powertrain unit from Continental AG. It's an auto parts supplier that is poised for enormous growth in its EV segment, where it supplies the key components of the drivetrain systems and other than batteries. Despite this leading-edge technology position and important product wins with many leading EV makers, the shares trade cheaper than most other auto suppliers. The Solasglas portfolio gained 3.4% in April and has returned 2.3% year-to-date through April. Net exposure in the investment portfolio was approximately 43% at the end of the first quarter. We don't usually comment on mid-month performance, but given the strong performance of Green Brick in May, this month is off to a strong start. Given the significant rate increases we achieved on the underwriting portfolio, we are cautiously optimistic that our combined ratio will continue to improve as 2023 progresses and that we will improve profitability on both sides of the balance sheet for the remainder of the year. Now I'd like to turn the call over to Faramarz to discuss the financial results. It is Faramarz's first call as CFO, though many of you got to hear from him at our Investor Day last year. Faramarz Romer: Thank you, David, and good morning everyone. While I have been with Green Life Re for several years, it is an honor to now serve as the company's Chief Financial Officer. I look forward to continue working closely with Simon and the rest of the highly talented team as we take advantage of the current market conditions to create value for our shareholders. Now turning to our results for the first quarter of 2023. Our net income for the quarter was $5.9 million, or $0.17 per diluted share. We reported underwriting income of $0.4 million during the first quarter and a combined ratio of 99.8% compared to an underwriting loss of $7.7 million and a combined ratio of 106.2% during the equivalent 2022 period. While the overall underwriting performance improved this quarter, the result was negatively impacted by $10.3 million or 7.2 combined ratio points of catastrophe and weather-related events. $4.1 million of the cat losses related to Winter Storm Elliott, which hit the Northeast of the United States in late December 2022. The severe convective storms in the month of March resulted in $4.1 million of losses. The remaining $2.1 million of catastrophe losses came from the earthquake in Turkey and Cyclone Gabrielle in New Zealand. Adjusted for catastrophe event losses, our current year loss ratio decreased 7.4 percentage points to 55.1% compared to the same period in 2022. Excluding Winter Storm Elliott, we experienced $7.9 million or 5.6 combined ratio points of unfavorable prior year loss development during the first quarter. We reported total net investment income of $5.2 million during the first quarter of 2023. We lost $3.1 million on our investment in the Solasglas fund and earned $8.4 million of other investment income, primarily from interest income earned on our restricted cash, which benefited from the higher interest rates compared to the same period in 2022. Total general and administrative expenses incurred during the quarter were $9.9 million, up from $7.2 million in the first quarter of 2022. The increase was due primarily to non-recurring expenses relating to legal fees and severance costs during the first quarter of 2023. We recognized $4.9 million of foreign exchange gain in the first quarter of 2023 due primarily to a strong pound sterling. At the end of the first quarter, our fully diluted book value per share was $14.75, an increase of 1.1% from December 31, 2022, and an increase of 8.1% from March 31, 2022. During the first quarter, we repurchased $17.5 million of our senior unsecured convertible notes. The remaining $62 million of notes mature on August 1, 2023. We are actively working on plans to refinance them with non-convertible debt. Now I'll turn the call back to the operator, who will open it up for questions. Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Anthony Mottolese from Dowling & Partners. Your line is now live. Operator: [Operator Instructions] Our next question is coming from David Schiff from Schiff's Insurance Observer. Your line is now live. Operator: Thank you. There are no additional questions at this time. Should you have any follow-up questions, please direct them to Karin Daly of the Equity Group Inc. at ir@greenlightre.ky, and she'll be happy to assist you. This now conclude Greenlight Re's first quarter 2023 earnings conference call. Thank you. You may now disconnect.
Understanding Greenlight Capital Re, Ltd.'s (NASDAQ:GLRE) Financial Performance in the Reinsurance Industry
- Greenlight Capital Re, Ltd. (NASDAQ:GLRE) operates in the highly competitive reinsurance industry, providing crucial risk management services to other insurance companies.
- The company's Return on Invested Capital (ROIC) of 7.914% slightly exceeds its Weighted Average Cost of Capital (WACC) of 7.898%, indicating marginal profitability.
- Compared to peers like AMERISAFE, Inc. (NASDAQ:AMSF) with a higher ROIC/WACC ratio, GLRE shows mixed performance but maintains a positive ratio, highlighting its effective capital use in a competitive market.
Greenlight Capital Re, Ltd. (NASDAQ:GLRE) operates in the reinsurance industry, a sector known for its competitive nature and the importance of financial metrics in evaluating company performance. Reinsurance companies like GLRE provide insurance to other insurance companies, helping them manage risk. This industry includes several key players, and understanding how GLRE stands in comparison to its peers is crucial for investors.
The Return on Invested Capital (ROIC) of 7.914% and the Weighted Average Cost of Capital (WACC) of 7.898% are two important financial metrics used to assess a company's efficiency and profitability. GLRE's ROIC compared to its WACC results in a ROIC/WACC ratio of 1.002. This indicates that GLRE is just marginally generating returns above its cost of capital. In simple terms, the company is making a slight profit on the money it invests after accounting for the costs associated with raising that capital.
When comparing GLRE to its peers, it's evident that the company's performance is mixed. For instance, AMERISAFE, Inc. (NASDAQ:AMSF) boasts the highest ROIC/WACC ratio of 3.809 among the peers, showcasing its superior efficiency in generating returns relative to its cost of capital. On the other hand, Hallmark Financial Services, Inc. (NASDAQ:HALL) has a negative ROIC, indicating it's losing money on its investments relative to the cost of its capital.
This peer analysis highlights the competitive landscape in which GLRE operates. While GLRE's performance is not at the top of its peer group, it still maintains a positive ROIC/WACC ratio, suggesting it is managing to generate returns slightly above its cost of capital. This is a critical aspect for investors to consider, as it reflects the company's ability to use its capital effectively in a highly competitive market.
Understanding Greenlight Capital Re, Ltd.'s (NASDAQ:GLRE) Financial Performance in the Reinsurance Industry
- Greenlight Capital Re, Ltd. (NASDAQ:GLRE) operates in the highly competitive reinsurance industry, providing crucial risk management services to other insurance companies.
- The company's Return on Invested Capital (ROIC) of 7.914% slightly exceeds its Weighted Average Cost of Capital (WACC) of 7.898%, indicating marginal profitability.
- Compared to peers like AMERISAFE, Inc. (NASDAQ:AMSF) with a higher ROIC/WACC ratio, GLRE shows mixed performance but maintains a positive ratio, highlighting its effective capital use in a competitive market.
Greenlight Capital Re, Ltd. (NASDAQ:GLRE) operates in the reinsurance industry, a sector known for its competitive nature and the importance of financial metrics in evaluating company performance. Reinsurance companies like GLRE provide insurance to other insurance companies, helping them manage risk. This industry includes several key players, and understanding how GLRE stands in comparison to its peers is crucial for investors.
The Return on Invested Capital (ROIC) of 7.914% and the Weighted Average Cost of Capital (WACC) of 7.898% are two important financial metrics used to assess a company's efficiency and profitability. GLRE's ROIC compared to its WACC results in a ROIC/WACC ratio of 1.002. This indicates that GLRE is just marginally generating returns above its cost of capital. In simple terms, the company is making a slight profit on the money it invests after accounting for the costs associated with raising that capital.
When comparing GLRE to its peers, it's evident that the company's performance is mixed. For instance, AMERISAFE, Inc. (NASDAQ:AMSF) boasts the highest ROIC/WACC ratio of 3.809 among the peers, showcasing its superior efficiency in generating returns relative to its cost of capital. On the other hand, Hallmark Financial Services, Inc. (NASDAQ:HALL) has a negative ROIC, indicating it's losing money on its investments relative to the cost of its capital.
This peer analysis highlights the competitive landscape in which GLRE operates. While GLRE's performance is not at the top of its peer group, it still maintains a positive ROIC/WACC ratio, suggesting it is managing to generate returns slightly above its cost of capital. This is a critical aspect for investors to consider, as it reflects the company's ability to use its capital effectively in a highly competitive market.
Comparative Analysis of Capital Utilization in the Insurance Sector
- Greenlight Capital Re, Ltd. (NASDAQ:GLRE) demonstrates a nearly balanced capital utilization with a ROIC to WACC ratio of 0.989, indicating efficiency close to its cost of capital.
- AMERISAFE, Inc. (NASDAQ:AMSF) showcases superior capital utilization efficiency with a ROIC to WACC ratio of 3.716, significantly outperforming peers like GLRE.
- Global Indemnity Group, LLC (NASDAQ:GBLI) and AMERISAFE, Inc. (NASDAQ:AMSF) efficiently use their capital to generate returns well above their cost of capital, in contrast to Hallmark Financial Services, Inc. (NASDAQ:HALL) which faces operational challenges as indicated by a negative ROIC.
Greenlight Capital Re, Ltd. (NASDAQ:GLRE) operates in the competitive insurance and reinsurance industry, where efficient capital utilization is crucial for generating sustainable returns and growth. The company's stock price stands at $13.97, reflecting the market's current valuation of its financial health and operational performance. With a Weighted Average Cost of Capital (WACC) of 8.00% and a Return on Invested Capital (ROIC) of 7.91%, GLRE demonstrates a nearly balanced but slightly less efficient use of capital compared to its cost. This ROIC to WACC ratio of 0.989 indicates that the company is almost generating returns at its cost of capital, which is a critical measure of financial and operational efficiency in the insurance sector.
In comparison, AMERISAFE, Inc. (NASDAQ:AMSF), a peer in the same industry, showcases a significantly higher efficiency in capital utilization with a ROIC to WACC ratio of 3.716. This indicates that AMSF is generating returns on its investments at a rate nearly four times its cost of capital. Such a high ratio is indicative of AMSF's strong financial health and operational efficiency, making it a standout among its peers, including GLRE.
Another peer, Global Indemnity Group, LLC (NASDAQ:GBLI), also shows strong performance with a ROIC/WACC ratio of 2.080. This suggests that GBLI, like AMSF, is efficiently using its capital to generate returns that significantly exceed its cost of capital. This level of efficiency is crucial for companies in the insurance industry to ensure they can sustain growth and return value to shareholders.
On the other end of the spectrum, Hallmark Financial Services, Inc. (NASDAQ:HALL) presents a stark contrast with a negative ROIC, leading to a ROIC/WACC ratio of -6.095. This negative ratio is a clear indicator of operational challenges or inefficient use of capital, which starkly contrasts with the efficient capital utilization seen in AMSF and GBLI.
The analysis of these companies within the insurance and reinsurance sector highlights the importance of not only generating a positive ROIC but also achieving a ROIC that exceeds the WACC. This is essential for sustainable growth and value creation, as demonstrated by the standout performance of AMERISAFE, Inc. in comparison to Greenlight Capital Re, Ltd. and other peers.
Comparative Analysis of Capital Utilization in the Insurance Sector
- Greenlight Capital Re, Ltd. (NASDAQ:GLRE) demonstrates a nearly balanced capital utilization with a ROIC to WACC ratio of 0.989, indicating efficiency close to its cost of capital.
- AMERISAFE, Inc. (NASDAQ:AMSF) showcases superior capital utilization efficiency with a ROIC to WACC ratio of 3.716, significantly outperforming peers like GLRE.
- Global Indemnity Group, LLC (NASDAQ:GBLI) and AMERISAFE, Inc. (NASDAQ:AMSF) efficiently use their capital to generate returns well above their cost of capital, in contrast to Hallmark Financial Services, Inc. (NASDAQ:HALL) which faces operational challenges as indicated by a negative ROIC.
Greenlight Capital Re, Ltd. (NASDAQ:GLRE) operates in the competitive insurance and reinsurance industry, where efficient capital utilization is crucial for generating sustainable returns and growth. The company's stock price stands at $13.97, reflecting the market's current valuation of its financial health and operational performance. With a Weighted Average Cost of Capital (WACC) of 8.00% and a Return on Invested Capital (ROIC) of 7.91%, GLRE demonstrates a nearly balanced but slightly less efficient use of capital compared to its cost. This ROIC to WACC ratio of 0.989 indicates that the company is almost generating returns at its cost of capital, which is a critical measure of financial and operational efficiency in the insurance sector.
In comparison, AMERISAFE, Inc. (NASDAQ:AMSF), a peer in the same industry, showcases a significantly higher efficiency in capital utilization with a ROIC to WACC ratio of 3.716. This indicates that AMSF is generating returns on its investments at a rate nearly four times its cost of capital. Such a high ratio is indicative of AMSF's strong financial health and operational efficiency, making it a standout among its peers, including GLRE.
Another peer, Global Indemnity Group, LLC (NASDAQ:GBLI), also shows strong performance with a ROIC/WACC ratio of 2.080. This suggests that GBLI, like AMSF, is efficiently using its capital to generate returns that significantly exceed its cost of capital. This level of efficiency is crucial for companies in the insurance industry to ensure they can sustain growth and return value to shareholders.
On the other end of the spectrum, Hallmark Financial Services, Inc. (NASDAQ:HALL) presents a stark contrast with a negative ROIC, leading to a ROIC/WACC ratio of -6.095. This negative ratio is a clear indicator of operational challenges or inefficient use of capital, which starkly contrasts with the efficient capital utilization seen in AMSF and GBLI.
The analysis of these companies within the insurance and reinsurance sector highlights the importance of not only generating a positive ROIC but also achieving a ROIC that exceeds the WACC. This is essential for sustainable growth and value creation, as demonstrated by the standout performance of AMERISAFE, Inc. in comparison to Greenlight Capital Re, Ltd. and other peers.
