Greenlight Capital Re Ltd
NASDAQ:GLRE
Earnings Call Analysis
Q4-2023 Analysis
Greenlight Capital Re Ltd
Greenlight Re's new CEO, appointed on January 1, brings a fresh perspective to the company. The CEO acknowledges the company's solid condition and exciting prospects mirrored by robust 2023 financial results, outlined in his first earnings call. The team has been proactive, meeting with senior brokers and clients, signaling a positive market perception. Greenlight Re's diversified underwriting portfolio that eschews property catastrophe and long-tail casualty lines has performed commendably, sidestepping issues that have afflicted peers.
The company witnessed a notable 16.8% growth in book value per share and reported a combined ratio of 91.4% for the fourth quarter, maintaining a streak of underwriting profitability. Net income for Q4 stood at $17.6 million, indicating a decrease from the previous year's $34.8 million, reflecting a lower earnings per share at $0.50 down from $0.91.
Greenlight Re's investment arm, Solasglas fund, showed a muted performance with a 0.3% return in Q4, lagging behind the S&P 500 Index's 11.7% return. Despite this, the fund's selective positions in companies like Green Brick Partners and Kyndryl Holdings paid off. For 2023, the fund's return was 9.4%, indicating room for improvement when compared to the S&P 500's 26.3% return.
Earnings from net premiums showed a mixed picture. Net premiums written dipped by 9.1% in Q4 due to timing factors, whereas the year saw an overall increase of 13.1%. The Property business bolstered the company's portfolio with a 32.8% jump in written premiums, reflecting new contracts and innovative ventures.
Net investment income decreased year-over-year to $13.6 million in Q4; however, the Innovations investments realized an unrealized gain of $4 million in the same period. The shareholder's equity reached a peak of $596 million, the highest since 2017, and book value per share climbed to $16.74, a sign of financial health and investor confidence.
General and administrative expenses saw a significant rise by $6.5 million to $15.4 million in Q4, attributed partly to the one-time costs associated with management transition and an increase in headcount. Controlling and optimizing future costs will remain a critical component for maintaining profit margins.
January 1 marked a crucial renewal period for Greenlight Re, with the company successfully navigating it to generate a modest uptick in premium volume, despite not renewing a problematic homeowners account. Strategic offerings and early lines on target accounts contributed to this success, positioning the company's portfolio favorably with higher margin potential as 2024 unfolds.
Greenlight Re's Innovations business, akin to venture capital investing in insurtech, continues to impress leadership without any immediate plans for strategic alterations. The business focuses on experienced veterans and niche early-stage investments. Despite the inherent risks, the company maintains a vigilant approach to valuation, with an acknowledgment of unrealized gains and a lack of realized gains due to the long-term nature of these investments.
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Hello, and welcome to the Greenlight Capital Re Limited's 2023 Fourth Quarter and Full Year Financial Results Conference Call and Webcast. [Operator Instructions] At this time, I'd like to turn the call over to David Sigmon, Greenlight Re's General Counsel. You may begin.
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 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 our Chief Executive Officer, Greg Richardson; Chairman of the Board, David Einhorn; Chief Financial Officer, Faramarz Romer; and Chief Executive Officer of Greenlight Re Ireland, Pat O'Brien.
On behalf of the company, I'd like to remind you that forward-looking statements may be made during this call and are intended to be covered by the safe harbor provisions of the federal securities laws. These forward-looking statements 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. The reconciliations to these measures can be found in the company's filings with the SEC, including the company's recently filed Form 10-K for the year ended December 31, 2023. The company undertakes no obligation to publicly update or revise any forward-looking statements.
With that, it is now my pleasure to turn the call over to Greg.
Thanks, David. Good morning, everyone, and thank you for joining us today. This is my first earnings call since appointment as CEO of Greenlight Re effective January 1 of this year. I'm delighted to have the opportunity to engage with our investors, and I look forward to meeting you in time.
My first 8 weeks have been busy. I'd like to share some of my initial impressions. First, Greenlight Re is in good shape and with exciting prospects. Our 2023 financial results are strong, and we will talk more about those later. I'm based full time at our home office in Grand Cayman, and I've been able to visit our offices in Dublin and London. So I've had the chance to meet everyone in the company and to get to know most of them.
Greenlight Re has a high-quality team that is very engaged and motivated. Together with senior colleagues in January and February, we met with senior brokers and key clients in London and Bermuda. There's a positive perception of Greenlight Re and its role in the reinsurance marketplace. Our underwriting portfolio is highly diversified with a focus on short-tail exposures. Over the recent years, we have been underweight in both property catastrophe and longer-tail casualty lines. This has served us well by avoiding some of the challenges our peers have encountered with large cat losses over several years and material deterioration in industry casualty reserves during 2023.
Finally, I've spent time getting to know our Innovations team. Greenlight Re Innovations is a key part of our overall strategy. We have built a strong position in early-stage insurtech space. Our model of capital and capacity, along with a dedicated team of experts, is truly differentiating us in this space.
Turning to our results. Greenlight Re performed well in 2023 and Q4 in particular. We reported a combined ratio of 91.4% for the quarter, our fifth consecutive quarter of underwriting profitability. We reported a 94.5% combined ratio for the full year, our best performance since 2009, and we delivered a strong 16.8% growth in book value per share.
Now I'd like to turn the call over to David Einhorn.
Thanks, Greg, and good morning, everyone. The Solasglas fund returned 0.3% in the fourth quarter. Our long portfolio added 8.6%, our short portfolio detracted 9%, and our macro added 1.3%. During the quarter, the S&P 500 Index returned 11.7% as the new consensus emerged that inflation has been brought under control without triggering a recession. The largest positive contributors in the fourth quarter were our long position in Green Brick Partners, a macro position tied to higher interest rates and lower stock prices that paid off in October, and our long position in Kyndryl Holdings. Three short positions were the largest detractors.
Green Brick Partners advanced 25% during the quarter, recouping most of its third quarter decline. The company released another strong quarterly update, showcasing again the highest gross margin in the industry as well as faster growth in new home orders than its peers. The company appears poised for another strong year in 2024. Our dual binary derivatives position, which benefited from both a lower S&P 500 level and higher 30-year interest rates, was the second largest contributor. This position expired in mid-October, just before the strong rally for stocks and a material move lower for rates into year-end. Kyndryl Holdings advanced 38% over the quarter. The company announced improved margins and a smaller loss than expectations. Loss estimates for 2024 ended the year at $0.47 per share, down from $1.80, which was expected at the start of the year. Gold was also a positive contributor, advancing 11.7% during the quarter.
Losses in the short portfolio were concentrated in 3 positions, including our innovation basket and 2 unprofitable tech companies. In November and December, we saw bubble-like conditions return to the most speculative stocks and the insurance went parabolic. We don't believe there is any material fundamental improvement for either of these companies during the period.
We established 4 new long positions during the quarter. These included medium-sized positions in ALIT, a software-based benefits provider; and Viatris, a manufacturer of generic and off-patent branded drugs. We initiated a small position in Syensqo, a Belgian chemicals company spun off from Solvay. We are building a new large position in an undisclosed materials company.
We've maintained neutral net exposure of late. On one hand, wages and employment remain strong, while inflation is well off its recent peak. On the other hand, we entered election year with the market disregarding heightened geopolitical risks, and with corporations and commercial real estates nearing down a growing wall of debt maturities to refinance, which were arranged when rates were near 0.
The Solasglas fund returned 9.4% in 2023 compared to a 26.3% return for the S&P 500. It returned 2.9% in January and negative 1.4% in February, bringing the 2024 year-to-date return to 1.4%. Net exposure in the investment portfolio was approximately 39% at the end of the fourth quarter and 43% at the end of February.
It is a pleasure to welcome Greg to the team as our Chief Executive Officer. You just heard what he has accomplished in his first 8 weeks. I just came back from Cayman from our Board meeting. And what Greg didn't tell you is that he and the team also had to prepare for that meeting during the transition. Greg brings enthusiasm and significant experience and has energized the team in a few short months. I look forward to partnering with Greg for many years to come.
Now I'd like to turn the call over to Faramarz to discuss the financial results.
Thank you, David, and good morning, everyone. 2023 was one of the best years for Greenlight Re, as we posted the largest full year underwriting income in our history and delivered the best growth in book value per share in a decade. As Greg mentioned, we rounded the year with the fifth consecutive quarter of underwriting profits.
Our net income for the fourth quarter of 2023 was $17.6 million or $0.50 per diluted share compared to $34.8 million or $0.91 per diluted share in the comparable period. For the full year 2023, we earned net income of $86.8 million or $2.50 per diluted share compared to $25.3 million or $0.73 per diluted share in 2022. We reported an underwriting income of $11.8 million during the fourth quarter and a combined ratio of 91.4% compared to $6.5 million and a combined ratio of 94.2% during the equivalent 2022 period. The fourth quarter of 2023 combined ratio included 2.5 percentage points related to increase in reserves on casualty and workers' compensation contracts that I will discuss later.
For the 2023 year, our underwriting income was a record $32 million or 94.5% combined ratio, compared to a loss of $11 million or 102.3% combined ratio. The 7.8% improvement in combined ratio was partially related to lower catastrophe losses during 2023, and partially related to improved pricing on the in-force book. Adjusting for casualty event losses, our current year loss ratio for 2023 improved by 4 percentage points to 54.9% compared to 58.9% during the comparable period in 2022.
During the fourth quarter, our net premiums written decreased by $10.6 million or 9.1% to $105.3 million compared to the same quarter in 2022. The decrease is timing related, primarily due to premium adjustments based on updated reporting received from cedents on our FAL and transactional liability business. Net premiums earned was $137 million, an increase of $26.1 million or 23.4% compared to the same quarter in 2022. For the full year, our net premiums written increased 13.1% to $637 million, with the growth spread across Property, Casualty and Specialty books.
Within our Specialty book, we saw a small decrease in net premiums written of $1.9 million or 10% during the fourth quarter, mainly driven by a smaller participation on a homeowners contract renewed in 2023. On a full year basis, the property net written premiums grew by 32.8%, mainly from new commercial property contracts and new business generated from our Innovations portfolio.
The composite ratio for the Property business was 64.1% for the fourth quarter compared to 103.9% during the comparable period in 2022. The improvement was partially driven by reserve releases on a motor contract and partially due to an increase in earned premiums at better margins.
Moving to our Casualty book. Net premiums written decreased by $12 million or 16.4% during the fourth quarter, primarily relating to the FAL 2022 year of account due to premium adjustments booked during the quarter. On a full year basis, the net written premiums increased 6.7%, driven by new and renewed general liability, professional liability, and to a lesser extent, motor liability business. This increase was partially offset by the workers' compensation class, where we continue to move away from proportional business and are finding pockets of attractive excessive loss business.
The composite ratio for the Casualty business improved marginally to 100.1% in the fourth quarter compared to 101% during 2022. During the quarter, we bolstered our reserves on certain casualty contracts ranging between 2015 and 2017 treaty years, and on workers' compensation contracts relating to 2020 and 2021.
Turning now to our Specialty book. Net premiums written increased by $3.4 million or 14.5% during the fourth quarter, mainly within the Marine and Accident and Health classes. This was partially offset by a decrease in the Financial class resulting from premium adjustments on transactional liability business. For the full year 2023, net premiums written increased 11.1%, as we took advantage of the hard market conditions, primarily growing our marine, energy, aviation and cyber books.
The composite ratio for the Specialty business increased to 73.6% in the fourth quarter compared to 63% during the comparable period in 2022. The increase relates to losses on a 2022 energy contract, partially offset by reserve releases on the transactional liability business.
Our underwriting expense ratio for the fourth quarter increased to 5.5% from 3.7% in the same period in 2022. The expense ratio for this quarter included 1.5 percentage points of deposit interest expense. The deposit interest expense arose from a deposit accounted retroceded motor contract, which experienced favorable development during the quarter. Excluding the deposit interest expense, the underwriting expense ratio increased marginally related to personnel expenses.
Total general and administrative expenses increased by $6.5 million during the fourth quarter to $15.4 million compared to $8.9 million in the fourth quarter of 2022. Approximately $4.4 million of the increase related to nonrecurring costs of the management's transition and the remaining increase was due primarily to higher headcount compared to the same period in 2022.
We reported total net investment income of $13.6 million during the fourth quarter of 2023 compared to $32.5 million in 2022. We earned $8.6 million of interest income on our restricted cash and cash equivalents and on our funds at Lloyd's. Our investment in the Solasglas fund reported a gain of $0.9 million or 0.3%, and our Innovations investments reported a net unrealized gain of $4 million in the fourth quarter.
At the end of the fourth quarter, our fully diluted book value per share was $16.74, an increase of 3.7% from September 30, 2023, and an increase of 16.8% from December 31, 2022. I should mention that we have revised our calculation for basic and fully diluted book values per share. In prior years, we calculated the basic book value per share by adjusting the denominator to exclude certain unearned performance-based restricted shares. The revised calculation uses the total outstanding ordinary shares when calculating the denominator for basic book value per share. We then add all unvested restricted stock units and any in-the-money options to the denominator to calculate the fully diluted book value per share. We believe this better reflects the ultimate dilution to our shareholders. Please refer to our earnings press release and Form 10-K filed yesterday for the revised calculations.
Our shareholders' equity at December 31, 2023, increased by $93 million to $596 million, reaching the highest level since 2017.
In conclusion, the company ended the year with a very strong performance from both a financial and capital perspective, and we are well-positioned going into 2024 to continue delivering on our financial metrics and growing the book value for our shareholders.
Pat will now discuss the January 1 renewal season.
Thank you, Faramarz. Good morning, everyone. The January 1 renewal season is key for Greenlight Re, as over 60% of our business incepts on January 1. We are very pleased with how January 1, 2024, progressed. Market conditions remain very attractive and we took advantage of those conditions to grow our business in key segments. I will provide an overview of our January 1 '24 book in key areas.
Generally, our Funds at Lloyd's book incepts on January 1. We have been a material player in this market for a few years, and we are optimistic for the prospects of Lloyd's in 2024, after several years of material rate increases in the Lloyd's market. This year, we found an increase in the volume of capital interested in the Funds at Lloyd's market. But we leveraged our deep and ongoing relationships to continue supporting the Lloyd's syndicates where we see attractive opportunities.
A material element of our specialty book also renewed on January 1. In general, the Specialty market maintained pricing discipline with rates up low single digits, but it was very competitive in signings, as many of our competitors wanted to grow in this space. We anticipated this trend, and as a result, we offered lines early on target accounts. This strategy worked well.
We grew our Specialty book at January 1 significantly through a combination of increased signings and some new account wins. The third element of our book with the strong January 1 focus is our property book. We saw some weakening in this space with more capacity entering the market, which enabled some modest softening in seating commissions and profit commissions over January 1, 2023. Despite this, the market remains very attractive. And we grew this portfolio meaningfully over 2023 through a combination of new clients and improved signings.
Our North Atlantic hurricane exposure on a 1 in 250 occurrence basis increased by 11% to $89.7 million, reflecting this increased volume. Relative to our surplus, the 1 in 250 exposure is decreased marginally. We now renewed one large homeowners account that had caused us some pain in 2023, with the heavy convective storm season. The nonrenewal of this account improves the overall balance of the portfolio.
In total, we estimate our overall premium volume to be slightly up year-on-year despite the nonrenewal of the homeowners account, and our overall portfolio is now better balanced with increased margin potential. We are enthusiastic about the positioning of our portfolio for 2024. We are seeing indications that we are likely close to the peak of the hard market. And we are focused on taking full advantage of the current market opportunity. 2024 is off to a strong start.
Now I'll turn the call back to the operator, who will open it up for questions.
[Operator Instructions] Our first question is coming from Daniel DeYoung from Columbia Management.
I'm not from Columbia Management, but I have a few questions regarding the Innovations business. Do you expect any change in strategy there? And can it be compared to venture capital investing, which I would perceive as quite risky? And then I note the $4 million unrealized gain in the fourth quarter. If I can ask what the source of that was and if there have been any realized gains in the past from the Innovations business?
This is Greg. Thanks for your question. I'll start with the first part, and then I'll pass it on to Faramarz, our CFO, for sort of financial questions. I'm still getting my arms around the Innovations business. I'd tell you what I've seen impresses me, especially given some of my experience in that space over the years. First of all, it has sort of an insurtech flavor to it. But what I like about it is our strategy is also coupled -- we always look for experienced veterans. So I believe, in the insurtech space, a combination of technology with experience, that blend is really the winning combination. The other thing I'd like is it's very niche oriented. We get in these investments and these opportunities in pretty early stage. It's something where Greenlight, with our smaller size, we carry a bigger stick than we might, if we were competing head-to-head, say, with Munich Re or Hannover Re. So I think I like that aspect of it. We've put a dedicated team of experts in it. They know what they're doing. We focus a lot of resources. We're not just dabbling in it, we really invest in it. The other aspect being niche. We're avoiding segments where there's really strong entrenched incumbents that have significant economies of scale. And frankly, we do have a pretty good track record in this space. And I think Faramarz can talk about it. So at this point, I don't envision any change to it. I think we've got a sizable play in it. I think we've got to make sure that we're managing well the portfolio that we have, as we look for areas to grow or expand, but from what I've seen, I'm pleased with it. Faramarz?
Yes. So let me jump in on your second part, Daniel. In regards to the unrealized gains for the quarter, the $4 million relates to about 4 investments in total. As we've mentioned previously, the way we mark up our Innovations investments is based on a new round of financing by the same investee. And once they have closed around, that gives us an indication of a new observable price and that's the price we apply to the securities that we're holding. In terms of the unrealized gains versus realized gains, we look for any impairment on a quarterly basis. And if we notice that there is any indication that triggers a valuation allowance or an impairment, we will take that right away. And to write it up, we'll delay until we actually see some evidence of an increase in valuation.
To date, we've realized some losses from some of our older investments, but we haven't realized any gains, i.e., we haven't actually sold any of the investments in our portfolio. These are longer-term duration investments. We invest when they're in an initial start-up stage and seed investments. Generally, we would wait until they're fully matured until we are able to recognize any gains on them. But there are a number of positions in our portfolio that are moving in that direction. I hope that answers your question.
[Operator Instructions] 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 at ir@greenlightre.ky. She will be happy to assist you. This now concludes Greenlight Re's Fourth Quarter and Year-end 2023 Earnings Conference Call. Thank you. You may now disconnect.