David Einhorn - Chairman Simon Burton - CEO Tim Courtis - CFO.

Bob Glasspiegel - Janney Montgomery Scott Meyer Shields - KBW Mikel Abasolo - Solo Capital Management SL.

Thank you for joining the Greenlight Re Conference Call for the Third Quarter of 2018 Earnings. Joining us on the call this morning are David Einhorn, Chairman; Simon Burton, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Brendan Barry, Chief Underwriting Officer.

The Company reminds you that forward-looking statements that may be made in this call are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not statements of historical fact but rather reflect the company’s current expectations, estimates and predictions about future results and events and are subject to risks, uncertainties and assumptions, including those enumerated in the company’s Form 10-K dated February 20, 2018, 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 vary materially from what the company projects.

The company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please note today’s event is being recorded. [Operator Instructions] At this time, I’d like to turn the conference over to Greenlight Re’s CEO, Mr. Simon Burton.

Sir, please go ahead..

Although painful, Lloyd’s must quickly modernize and embrace some of the many innovators standing ready to assist. Finally, we are pleased that on October 11th, A.M. Best affirmed a financial strength rating of A- excellence and a long-term issue of credit rating of A- of our operating reinsurance subsidiaries. The outlook of this rating is stable.

Now I’d like to turn the call over to David..

Thanks, Simon, and good morning, everyone. The Greenlight Re investment portfolio declined 8.4% in the third quarter. Our longs lost 2%, and our shorts lost 5.7%. During the quarter, the S&P 500 Index returned positive 7.7%. Two short positions were among the largest losers in the quarter.

A profitless health care company reported a positive revenue surprise, and the shares advanced despite very low margins on the additional revenue. A technology short also proved costly as the market supported a bullish narrative based on insights that won’t materialize for at least a year.

Our long position at General Motors declined 14.5% in the quarter. The shares were weak due to general fears about auto industry cyclicality and a marginal reduction in GM’s forecast due to higher steel prices and adverse foreign currency movement.

GM is currently rolling out its next-generation pickup trucks, which should continue to deliver high margins and profitability. Last week, GM exceeded third quarter earnings estimates by a wide margin. In October, Honda joined SoftBank by investing in Cruise, valuing it over $14 billion.

At that value, GM’s stake at Cruise is worth about $7.50 per GM share, meaning GM’s core auto business trades at 4x current earnings. If we include the $2 billion of future Honda payments to Cruise over the next 12 years, which smell like disguised equity investment, the implied valuation of GM Cruise is roughly $50 billion.

Today, all of GM is valued at about $51 billion. Brighthouse Financial was our biggest winner in the quarter. In August, the company announced a $200 million buyback.

We’re pleased that the company is commencing a capital return program 2 years earlier than projected, yet the shares continue to trade at about 40% of book value, while comparable insurance companies trade closer to book value. The Tesla short was our second biggest winner in the quarter.

Since settling securities fraud charges with the SEC in September, Tesla recently announced a rare quarterly profits. We believe this will be as good as it gets for the company.

While Tesla expects to make 65,000 Model 3s in the fourth quarter, we believe it exhausted most of the demand from customers who can afford the highest priced versions of the Model 3. Tesla is contending with a litany of competitive, regulatory, human resources, vehicle quality and capital structure issues.

We initiated a medium-sized long position in Altice USA, which trades at a discount to its pure-play cable peers despite better free cash flow conversion and a better, new investment opportunity profile. We also purchased shares in BT Group, the incumbent telecom operator in the UK.

The company is paying an attractive 6% dividend, and we believe that sentiment will turn incrementally more positive as BT exceeds reduced earnings expectations. During the quarter, we exited long positions in Micron and Twitter. We exited our long position in Mylan with a small loss as U.S. generics declined more than we’d anticipated.

We also covered a couple of industrial shorts with medium-sized losses. In October, the heavy selling and growth in momentum stocks and the relative outperformance of value stocks resulted in a gain of 1.2% in our investment portfolio despite our net long exposure to a week equity market, that saw the S&P 500 decrease by 6.8%.

At month end, the portfolio was approximately 92% long and 67% short. Our underwriting operations continue to perform in line with expectations despite moderate hurricane activity during the quarter.

Our innovations unit announced its first three investments during the quarter in diverse areas, such as digital insurance distribution, a self-insured health market, and blockchain insurance applications. We’re excited how our innovation efforts can provide us new business opportunities over time.

Now I’d like to turn the call over to Tim to discuss financial results..

Thanks, David. The third quarter of 2018, Greenlight Re reported net loss of $89.1 million compared to net income of $19.9 million for the comparable period in 2017. Net loss per share was $2.48 for the third quarter of 2018 compared to net income of $0.53 per share in the prior year period.

For the nine months ended September 30, 2018, we reported a net loss of $269.2 million compared to a net loss of $7.2 million for the first nine months of 2017. Net loss per share was $7.49 for the nine months ended September 30, compared to a net loss of $0.20 per share for the same period in 2017.

As Simon outlined, gross premiums written were $432.4 million for the first nine months of 2018, a decrease of approximately 22% for the same period in 2017.

Our net earned premiums for the first nine months of 2018 decreased by 19.8% to $388.8 million from the prior year period, primarily due to lower premiums written as well as the retrocession of certain nonstandard automobile business that commenced during the third and fourth quarters of 2017. The composite ratio for the third quarter was 100.9%.

It was negatively impacted by estimated catastrophe losses principally from Hurricane Florence. Catastrophe losses added 5 points to composite ratio. For the first nine months of the year, the composite ratio was 96.4%.

Total general and administrative expenses incurred during the first nine months of 2018, were $20.1 million, which was slightly lower than the prior year. Underwriting expenses of $10.6 million for the first nine months of 2018 were lower when compared to the prior year expenses of $12.3 million. It’s a decrease mainly due to lower personnel expenses.

Resulting underwriting expense ratio for the first 9 months of 2018 was 2.7%, giving a combined ratio for the year-to-date of 99.1%. Our corporate expenses of $9.4 million for the first 9 months of 2018 compare to $9 million reported during the same period in 2017.

It is a small increase in part attributed to cost associated with the newly formed innovations unit. We reported a net investment loss of $80.9 million during the third quarter of 2018, reflecting a net loss of 8.4% on our investment portfolio.

The first 9 months of 2018, we reported a net investment loss of $266.8 million, reflecting a net investment loss of 22.3%. As we announced in September, we have restructured our investment program that we are transitioning away from a joint venture and instead investing in a limited partnership called Solid Glass Investment LP.

Any adviser is ultimately investment adviser of the limited partnership, and our investment strategy and liquidity remain the same. You will note that this restructuring has caused our GAAP balance sheet presentation to change as we reported our investment in the Solid Glass fund.

Substantially, all our investable assets that are not required for collateral or operational purposes were contributed to Solid Glass on September 1st through a participation agreement and are now reflected on our balance sheet as an investment in a related party investment fund and reported at their net asset value.

During September, we transferred the legal title of many of the asset in the Solid Glass. As of September 30th, we had not been able to transfer all of the investments. Assets not legally transferred remain part of the joint venture and are reported as such at September 30th, along with the liability to the investment fund.

Given the complexity of the accounting rules, we provided in our earnings press release a comparison of our current GAAP balance sheet to a non-GAAP balance sheet that depicts the accounting presentation as if the legal title on all assets have been transferred at September 30th.

We believe this presentation can assist readers in understanding how our balance sheet will look once all transfers are made. Expect the transfer to be fully completed early in the new year. Also, during the quarter, Simon mentioned we successfully raised additional capital through $100 million convertible debt offering.

As part of that offering, we repurchased 1 million shares at a price of $13.75 per share. Any annual interest payment on the debt will commence in February 2019. Substantially, all of the capital raised, net of share repurchased, contributed to our Cayman Islands operating entity.

We continue to monitor and review proposed regulations relating to the passive foreign investment company, or PFIC, rules. We still await the specific interpretive regulatory guidance to be issued.

As it relates to the bright-line test contained in the PFIC rules, we expect that we will pass this test and, therefore, will not be considered a PFIC for 2018. Fully diluted adjusted book value per share as of September 30, 2018, was $15.29.

As a final reminder, we would like to welcome everyone to join us on Wednesday, November 14, at 11 AM, for our 6th Biennial Investor Day, which will be held at The Paley Center, 25 West 52nd Street in New York. Please contact Adam Prior at The Equity Group if you wish to attend. I’ll turn the call back to the operator and open up for questions..

[Operator Instructions] And our first question today comes from Bob Glasspiegel from Janney Montgomery Scott..

A question on the restructuring and the investment operations.

How much, in basis points, does it add to the calculation on the bright-line test? And where do you think you are on your math?.

Yes. Bob, it’s Tim here. Certainly, by investing through a limited partnership agreement, it collapses the balance sheet. At September 30, you will note that there has been a large reduction in total assets, which obviously improves the PFIC test. And at that month for the consolidated entities, it is over the 25% bright-line test.

So it has been a substantial increase to that..

Okay. You had a couple of legal and auto reserves of a small magnitude.

What was behind that?.

Bob, it’s Simon. The -- this primarily came from the Florida market, where we have a considerable portfolio of exposure there. We’re monitoring a couple of changes in that market that are peripherally related to the AOB issue, which we haven’t seen manifest in the nonstandard auto business until quite recently.

Previously, it played a very significant part, as you know, in the property business. So that’s behind the relatively modest change this quarter..

Any preliminary thoughts on what Michael could mean?.

It is too early. Michael is another one of those interesting events, very sad for those impacted, of course. It was devastating for the Gulf Coast line. But similar to Florence, Michael was unusual in its own way. It was quite recent.

[I see the] have not yet given us a particularly good guidance on their exposure, but we’re not expecting anything -- any surprise here..

So in line with Florence, a rough magnitude or could be worse?.

I hesitate to provide a dollar amount, but again, it wasn’t a giant loss to the industry. So you wouldn’t expect it to be a particularly material loss to us..

David, just some general comments. In October, you mentioned you were encouraged that another portfolio acted in the meltdown.

Were there any short of dramatic opportunities or chance to close out in the change in the fourth quarter or pretty much the same overall investment strategy?.

We used the market decline in October to reduce some of our short exposure. Other than that, we mostly left things alone..

And same question I asked you two years ago. Does the election matter to any of your holdings and....

It’s hard to say especially on election day. I guess we’ll know a lot more tomorrow..

But you’re not -- you haven’t taken any tactical moves in the anticipation?.

Well, I would say that we -- by reducing our shorts in October, we’re positioned a little bit more net long going into the election than we have been earlier in the year..

Our next question comes from Meyer Shields from KBW..

I was hoping to talk a little bit about the decision to pull back on mortgage reinsurance. I’m not hearing a lot of companies going in that direction..

We -- as part of the review of our portfolio later last year, a few months after I joined, we looked at areas of, let’s call it, spiky exposure, the pockets of exposure that aggregates among policies that, in an adverse scenario, could be material to the company.

The 2 biggest areas, no surprise, are property cat events and mortgage scenario related to a significant downturn in the economy. In other portfolios, there are other spiky areas, things like terrorism or credit collapse or so on, which, again, is related to mortgage. But we don’t have as many of the other spiky exposures as our peers.

So on cats and mortgage specifically, we made the decision on looking at the portfolio that we had enough exposure. Mortgage specifically is one of those classes where you rightly expose your upfront, and it sits on your balance sheet for a considerable length of time as the underlying mortgages run off.

That’s very different to cats, which is the weather exposure relates to the policy period only. It’s a very rapid runoff period of exposure. So mortgage, if you’re not very deliberate about assuming the risk, it can build very rapidly over time. We built those positions.

We’re very pleased with the positions we built later last year and decided to take our foot off the gas. It’s still very much a class of interest to us, but reducing the flow of new business over the last 12 months has enabled us to create some room for new opportunities, which we’re now looking out again..

That’s very thorough and very helpful.

Can you give us an update on what you’re seeing overall in terms of low-cost trends, whether there’s any inflection or evolution?.

We -- fortunately, our portfolio is not of a very significant duration on the casualty side. So we do have some casualty business. It’s relatively short to medium tail. There is some longer-tail casualty, but we’re relatively underweight given our peers’ exposure. I would say there is a fairly sharp interest here on the direction of inflation.

It seems to me that it’s a 2-way risk at this point and not 2-way, and that is never a comfortable position to be in. I would say though that the observation of loss trends, as we sit today, are reasonably benign.

We’ve seen a couple of relatively small peaks up in the workers’ comp area, a little on both the frequency and severity side, nothing that is at all alarming at this point nor really manifests in any meaningful economic exposure to us. But it’s something we pay close attention to.

It’s the medium to long-term outlook for inflation where we’re paying the most attention..

Our next question comes from Mikel Abasolo from Solo Capital Management SL. Please go ahead with your question..

Thank you for taking my questions. A couple of those, if I may. One is on your capital adequacy. I remember in early August when you rushed into the convertible and to issuing the convertible bond and on the premise that, that would substantially improve your capital position, but then the losses over the third quarter have been quite sizeable.

And I was wondering how your capital is relative to the agencies required, of course, but also with regard to the portfolio and the requirements of the insurance business. That’s the first question. And my second question is, if I may, on Brighthouse Financial. This one would be for David.

And David, if I am correct, Brighthouse has to incur any substantial cost to hedge its portfolio. And from your comment, it seems like those costs are not recurrent in nature, on your eyes.

Does that imply that you think that the company will be able to forgo those costs soon in the future? Or what’s your thinking there?.

I’ll take the first part of the question on capital adequacy and pass it on to David. So we did raise the debt in early August, as you mentioned there. I might get to the characterization of it being rushed.

Our access to capital markets is something that the board and management consider constantly, and this was part of a very deliberate process to strengthen our balance sheet. We did strengthen the balance sheet by a net amount -- our operating company balance sheet by a net amount that exceeded $80 million. So that was significant.

In terms of overall capital adequacy, we have had the benefit of quite recently going through this particular process with A.M. Best. It is something that A.M. Best are acutely concerned with for any company that they rate. And we’re pleased that the -- under that process, we were assigned an A- rating with a stable outlook.

Clearly, iCapital has significantly diminished to the CRN, but there’s an understanding both among our clients, the marketplace and, of course, A.M. Best that the capital that we currently carry as a company is more than adequately supports the particular risk profile of our liabilities, which we’re very careful about.

I answered the question a few minutes ago about the direction of accounts and, in particular, our mortgage exposure. And that really is an indication of how serious we are about risk management and matching opportunity and risk to our overall capital level.

David, would you like to jump in with the Brighthouse question?.

Sure. Brighthouse remains a large investment within the portfolio. The company hedges both interest rate risk and equity market risk. The interest rate hedges lose money when rates go up and make money when rates go down. The company marks through its P&L every quarter the profit and loss on those hedges.

They do not change on a mark-to-market basis, the corresponding change in the value of the related insurance liabilities. So in a market where rates go up, one should expect a GAAP operating -- a GAAP loss relating to the interest rate hedges and a reversal when rates go down. Overall, for the company, higher rates are a good thing.

And so if you look, for example, third quarter they announced last night, they had a loss on their interest rate hedge, but I think it does put the company in a better position overall going forward. They also hedged their equity risk, which is substantial.

They’ve changed in the process of evolving that strategy from a futures-based strategy to an options-based strategy. They now take essentially the first $1 billion of risk to the downside and equity decline.

The result of that strategy, compared to their prior strategy -- they were just describing on a conference call they had the last hour, was a substantial improvement over their prior strategy. Over the next few years, they intend to take an increasing amount of equity risk. This coming year, 2019, they expect to take the first $0.5 billion.

And the benefit of taking a little bit more risk means that the options that they buy are a little bit further out of the money, which means they cost less. So the hedging cost should decline over time.

All told, we think that the company, when you look out on a normalized basis a couple of years from now, should have minimal cost of their equity hedging program, net of the fees that they charge, the insurance policyholders for that risk. But in the meantime, it remains a bit of a drag on the GAAP recorded results..

[Operator Instructions] And ladies and gentlemen, it’s showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks..

Just thanks, everyone, for joining us and hope to see some of you on our Investor Day on November 14. Thank you, everyone..

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for joining today’s presentation. You may now disconnect your lines..