Edited Transcript of GLRE earnings conference call or presentation 10-Mar-20 1:00pm GMT

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 fund 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 a 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.

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [3]

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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 the 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 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.

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Tim Courtis, Greenlight Capital Re, Ltd. – CFO [4]

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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 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. 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Cory Reed from Otter Creek Advisors.

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Unidentified Analyst, [2]

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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.

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [3]

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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 its 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’s all I have to say about this.

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Operator [4]

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The next question comes from David Rocker from Rocker Partners.

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David Rocker;Rocker Partners;Analyst, [5]

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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? That’s the second question. Why was the company, obviously, in shrink mode, while your operating expenses are rising? Could you please comment on those 2 things, please?

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [6]

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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, that our — whatever our first course of action choice was it 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, do you want to answer about the expense.

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Simon Burton, Greenlight Capital Re, Ltd. – CEO & Director [7]

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And your question, David?

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David Rocker;Rocker Partners;Analyst, [8]

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Yes. The question is…

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Simon Burton, Greenlight Capital Re, Ltd. – CEO & Director [9]

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Absolutely. Your question, David, on us being shrinking.

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David Rocker;Rocker Partners;Analyst, [10]

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The G&A expenses were up $4 million.

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Simon Burton, Greenlight Capital Re, Ltd. – CEO & Director [11]

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We — if you look at our expense in 2 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 and 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.

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David Rocker;Rocker Partners;Analyst, [12]

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Can you — it was $4 million. Was that what 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?

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Simon Burton, Greenlight Capital Re, Ltd. – CEO & Director [13]

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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.

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David Rocker;Rocker Partners;Analyst, [14]

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

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [15]

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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.

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Operator [16]

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The next question comes from Jonathan Shafter from Clear Harbor.

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Jonathan Shafter, Clear Harbor Asset Management, LLC – Investment Manager [17]

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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?

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [18]

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

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Tim Courtis, Greenlight Capital Re, Ltd. – CFO [19]

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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 fund.

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Operator [20]

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(Operator Instructions) The next question is from [Daniel Schneeberger], private investor.

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Unidentified Participant, [21]

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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.

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [22]

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

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Unidentified Participant, [23]

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Okay. And have — during this process, have you become more agnostic towards what Greenlight’s role will be going forward in terms of managing the capital?

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [24]

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I don’t know what you mean by that.

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Unidentified Participant, [25]

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So let’s say, you would have 2 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?

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [26]

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

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Unidentified Participant, [27]

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Okay. 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?

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [28]

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

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Operator [29]

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The next question comes from John Levin from Levin Capital.

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John Andrew Levin, Levin Capital Strategies, L.P. – CEO, Portfolio Manager & Chairman [30]

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A great admirer of David. You mentioned PFOA and PFOS, 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 in a different way, the way I should have asked, but I’m not sure how I should have asked it.

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [31]

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Are you talking about Chemours?

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John Andrew Levin, Levin Capital Strategies, L.P. – CEO, Portfolio Manager & Chairman [32]

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Yes. Because we’ve lost a zillion dollars in DuPont on this thing already.

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [33]

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Yes. We’ve done a lot of work here. We believe that their exposure is largely limited to 3 plants that 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 just 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 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 structures.

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John Andrew Levin, Levin Capital Strategies, L.P. – CEO, Portfolio Manager & Chairman [34]

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Got it. That’s our understanding also, David. That’s why I asked the question to try to be helpful. Okay.

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [35]

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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.

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John Andrew Levin, Levin Capital Strategies, L.P. – CEO, Portfolio Manager & Chairman [36]

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That’s important. Great. Okay. That’s why I asked the question to clarify it. To be helpful.

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David Michael Einhorn, Greenlight Capital Re, Ltd. – Chairman of the Board [37]

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Sure. Thank you, John.

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Operator [38]

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There are no more questions in the queue. This concludes our question-and-answer session and the conference. Thank you for attending today’s presentation. You may now disconnect.