Thank you for joining the Greenlight Re Conference Call for the Third Quarter of 2021 Earnings. The Company reminds you that forward-looking statements that may be made in this call are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not statements of historical fact but rather reflect the company’s current expectations, estimates and predictions about future results and events and are subject to risks, uncertainties and assumptions, including those enumerated in the company’s Form 10-K for the year ended December 31, 2020, 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. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Greenlight Re’s CEO, Mr. Simon Burton.

Please go ahead, sir..

Good morning, everyone, and thanks for joining today’s call. In the third quarter, the reinsurance industry was challenged by an unusually high incidence of large losses related to cat events.

Our exposure to Hurricane Ida, flooding and hailstorms in Europe and riots in South Africa drove us to an underwriting loss for the quarter with a combined ratio of 109.3%. Excluding the impact of catastrophes and minor reserve adjustments, the adjusted combined ratio for the quarter was 90.3%.

We have seen a steady reduction in our adjusted combined ratio over the past few quarters, which reflects improvements in both the quality of our underwriting business and in the overall rating environment. I’d like to summarize some of the major movements in written premium by class during the quarter.

We are now seeing a reduction in motor liability premium that I discussed in the past 2 investor calls. We believe the reasoning behind our decision to reduce exposure has been validated as we are seeing an uptick in accident frequency along with increases in claims severity driven by elevated repair costs as U.S.

drivers have reverted to normal driving habits over the past few months. Our auto exposure will likely take another step down in 2022 as we have decided not to renew a further portion of this book at January 1.

In the financial class, written premium increased during the quarter driven mainly by a rebound in demand for reps and warranty insurance from M&A activity that had decreased in earlier stages of the pandemic. Accident and health is a fairly small class for us, but a couple of things are going on there.

First, our traditional A&H business has reduced as we replace it with support for our innovations partners who are doing a great job on offering new products and disrupting an otherwise inefficient class.

Second, we have restructured some of our exposure from quota share to excessive loss with equal or greater dollar margin potential but much lower written premium. Looking forward to 2022, it’s not clear how the market will respond to yet another loss-making year in the property catastrophe class.

Rate increases last January were disappointing as new capital arrived to replenish supply, which leaves us skeptical that sufficient capacity will be removed to support the needed catastrophe price improvements at this year-end.

On the other hand, we expect the cat losses this year will help support and extend the generally favorable market conditions in most other classes. The continued low investment interest rate environment provides further support for pricing conditions overall.

Our innovations unit continues to perform well with an investment gain of $9.6 million during the quarter, which is an increase of 31% from the prior quarter carried value.

While the investment success is the welcome results of great execution by the innovations team, our central objective continues to be to enhance our underwriting products and quality of return by establishing a range of proprietary strategic partnerships. Year-to-date, innovations business represents approximately 6% of our total written premium.

We see the potential for significant growth from innovations-derived underwriting opportunities going forward. Finally, we completed our annual review with A.M. Best last quarter, which resulted in reaffirmation of our A- rating and an uplift in outlook to stable. We’re pleased that A.M.

Best concurs with our own view of the balance sheet strength, underwriting prospects and the compelling strategic potential of our innovations business. Now I’d like to turn the call over to David..

Thanks, Simon, and good morning, everyone. The Solasglas fund returned negative 2.7% in the third quarter, longs detracted 3.5%, shorts contributed positive 1.1% and macro was flat. During the quarter, the S&P 500 Index returned 0.6%. Our long positions in Green Brick Partners and Chemours were our largest detractors.

Positive contributors included our long position in Atlas Air Worldwide and our short exposure to several so-called story stocks. Our largest position, Green Brick Partners, held an Analyst Day in August. At the meeting, the company highlighted that its revenues have compounded at 28% annually since its 2014 IPO.

In 2020, the company earned $2.24 per share, which is a 93% increase from 2019. The analyst community has taken its estimates for the year and next higher, and they now expect the company to earn $4.06 per share in 2022. This would represent a remarkable 250% cumulative growth in its bottom line in 3 years.

These days, it’s not uncommon for the market to reward a company experiencing this amount of growth with a double-digit valuation multiple on its revenues or an above-market multiple on its earnings. Green Brick ended the quarter down 10% to $20.52 and was valued at just 5.6x 2021 expected earnings.

Our long position in Atlas Air was the largest positive contributor as the stock advanced 20% during the third quarter. The company had a nice beat on reported second quarter earnings and gave strong third quarter earnings guidance, signed a number of new multiyear customer contracts.

Atlas continues to benefit from what now appears to be a structural support shortage of air cargo capacity. The airfreight market is benefiting from e-commerce growth and global supply chain disruptions.

Meanwhile, airfreight supply has shrunk as international passenger belly capacity remains significantly below pre-pandemic levels, and there are long lead times to deliver new freighters. Atlas trades at a P/E multiple of around 5x.

Lately, it feels like many of our longs have been exceeding both consensus and our own often more optimistic expectations for their operating performance. But the share price reactions to these positive developments have been minimal. We believe this dynamic ultimately cannot persist.

If the stocks don’t rerate higher, it will eventually be resolved through share repurchases. There are several companies in our portfolio that appear poised to return their current market caps to shareholders over the next few years.

As we continue to hold the quaint view that shares represent a fractional ownership of a business, as the denominator of shares goes down, the fraction of the business that each share represents goes up. Year-to-date through October, Solasglas has returned 0.7%.

Net exposure was approximately 35% long in the investment portfolio at the end of the third quarter and roughly 46% at the end of October. While our underwriting suffered in the third quarter from several cat events that Simon discussed, the underlying reinsurance trends are favorable.

We continue to make progress with the overall repositioning of our portfolio, in addition to the reaffirmation of our A.M. Best A rating with a stable outlook. We just returned from a Board meeting with our new Board members, and I want to welcome Urs, Victoria and John to the team.

It was terrific to have fresh viewpoints from industry practitioners that should help enhance our business and strategy over time. Now I’d like to turn the call over to Neil to discuss the financial results..

Thank you, David, and good morning. At the end of the third quarter, our fully diluted book value per share was $13.25, representing a 2.6% reduction from June 30. Our net loss for the quarter was $13.9 million or $0.42 per share. We reported an underwriting loss of $12.6 million during the quarter and a combined ratio of 109.3%.

The quarter’s underwriting results included $26 million of catastrophe losses, which contributed 19.1 percentage points to our combined ratio. Most of this loss was due to Hurricane Ida. We did not recognize any material adjustments to prior year loss estimates, including those related to COVID-19.

Gross premiums written were $128.7 million for the quarter, down 5% from the third quarter of 2020. The bulk of this decrease related to motor contracts on which we elected to reduce or withdraw our participation. Premiums ceded were insignificant in the third quarters of 2021 and 2020.

Total general and administrative expenses incurred during the quarter were $6.1 million, representing an 18% increase over the third quarter of 2020. This increase was driven by the growth of our innovations unit, higher professional fees and increased technology expenses.

We reported total net investment income of $4 million during the quarter, which includes $9.6 million of unrealized gains on our innovations investments. We incurred a $6.1 million loss from our investment in the Solasglas fund during the third quarter. I’ll conclude with an update on our share repurchases.

During the third quarter, we repurchased 354,000 shares at an average price of $9.18 per share, equating to a discount of 31% off our September 30, 2021, fully diluted book value per share. Now I’ll turn the call back to the operator and open it up to questions..

[Operator Instructions] And our first question will come from David Bell of Bell Brands [ph]..

Yes, David Bell. Simon, I had a question on the $9.6 million innovation gain.

Did you all sell one of the companies to realize the gain? Or did you mark it up? Can you elaborate on this part of the business?.

Sure. David, thanks for the question. No, we have not realized -- none of those gains represent realized gains. The way we address valuations is we actually don’t carry these investments technically at fair value, we carry them at cost less impairment.

And what the markups represent is if there is basically the identical security in a subsequent raise, capital raise, we will mark up our carry value on the basis of that new valuation. So that’s what you see there. It was a capital raise and a new valuation, and so we marked up our building [ph] accordingly. That’s the bulk of it..

Right. And can you share -- I mean I’ve been following them from the news, from the press releases.

Can you share which ones are doing better? Or any clarity on that or detail?.

David, it’s Simon here. We don’t do that. In fact, we don’t share information on any of our partners or customers. And these are private companies still, so I’m reluctant to do that..

That’s logical. Okay. Well, you said that innovations are 6% of the premiums now, that, that business is growing. Can you share what you expect this to grow to? And I guess more on the vision of -- I mean innovations seems to be a big part of the future. And so I’d like to better understand how you’re growing the written premiums in that area..

Sure. As I said in my prepared remarks, innovations is a -- it has long been an important strategic elements of the company, and we’ve been growing it steadily. We launched the unit in early 2018. Frankly, I started thinking about this day 1 on the job, mid-2017. We’ve been steadily growing our portfolio.

As I mentioned, the characteristic of these partnerships are both an early-stage investment typically and often rights into the subsequent placement of reinsurance business. So that’s generally a right to access that business but not necessarily an obligation to provide the capacity.

These early-stage start-ups are on a runway, and we’re backing companies who are very methodical in the way they execute. They’re not purely looking for growth. So this takes time. And we’re really just starting to see, on the reinsurance side, the fruits of that sort of 4-year path.

I’m reluctant to give you any guidance on what future premium volumes could be, but it stands at around 6% of written premium to date this year. And I do expect that to increase perhaps materially.

Certainly, the opportunity is increasing materially, and we have a large and increasingly sizable portfolio from which to choose reinsurance opportunities from. So watch this space, but I’m going to hold off on giving you a specific guidance there..

Okay. Fair enough. It’s great, the progress it’s making so far. So congratulations with it. And this is another question, I guess, on the broader portfolio. David Einhorn mentioned the progress on repositioning of the portfolio. Can you elaborate more on that? I understand you’re moving away from cat.

But this past quarter, there’s a 19 percentage points on cat.

Is it going forward? Or are you now moving away from cat? Or will there always be a certain amount of cat? Can you help me understand that?.

Sure. Yes. So our view on cat is, let’s call it, middle of the road. The exposure that we take on were well paid for, notwithstanding that there’s been some volatility over the past few years and a loss this quarter. We don’t consider cat sufficiently well priced to be outsized in terms of our portfolio. That may change in the future.

But I’m skeptical, as I said in my prepared comments, that cat tends to be one of those classes where losses appear to drive sentiments, and the industry may demand price increases. Ultimately, price is a function of supply. And the supply that’s to be available to address the market at January 1 is unknown at this point. So we’re skeptical.

I’m not currently expecting that we’ll take an outsized position in the cat business. It’s quite unlikely. We think our current exposure is reasonable given the cat prospects. So something around where we are today..

And David, just so there’s not any confusion, when I talked about repositioning the portfolio, I actually meant away from auto as opposed to away from cat..

Away from auto, okay. Just one more, if I still have time, I might be the only one on the call.

But the peers, did they have -- maybe Arch or Ren Re, Partner Re, do they also have a difficult quarter on the cat?.

No. So this is an industry event, so I’m not going to discuss any individual peers. But the third quarter was a very substantial quarter for natural catastrophe losses. And the industry as a whole -- certainly, any company with a significant weighting to reinsurance was almost certainly heavily impacted..

And is that -- if I have time, just one more. I guess this is more on the portfolio side for David Einhorn. I’ve read in the K in the past, there’s a gold position. And I’m trying to understand how that relates to the $220 million total investment. Is that part of it? Or is there a separate piece? Because I see it’s 80% long, roughly 40% short.

Anyway, maybe you can provide some clarity because I’m just a little confused on how that total number adds up. I think DME too holds the 20% [ph]..

When we think about, whatever, the capital in the account, the gold is counted against whatever the limits are for the investment policy. When we give the long/short ratio, that does not include gold..

Okay.

So the $222 million, does that include roughly $20 million of gold?.

That sounds right to me, yes. I don’t have it in front of me, but that sounds about right..

Okay. So 10%. Okay. I’m trying to come up with a cash book value, which I don’t know if that exists in this business. But I understand the GAAP book value, but I’m trying to kind of get the simple pieces of the liquid books, the simplest piece, and then I can back out the bond debt and then add back the cash on the balance sheet.

And anyway, I’m trying to look at it very simple terms to try to understand cash book value, if that makes sense. So that helps..

I’m not really sure. I’ve got the balance sheet here. I’m not really sure what you’re getting at exactly. Unless you’re just talking about like the deferred acquisition costs or something..

No, I’m trying to understand, I guess, the difference between the restricted cash and the unrestricted and how that adds into the book value. Maybe I’ll be able to form this question better next quarter..

Look, I think a lot of the -- Neil can elaborate, but I think a lot of the restricted cash is pledged as collateral as part of the reinsurance business. So it’s in cash, but it’s in some kind of a trust account. And so we don’t have direct claim on it until policies are resolved..

That’s correct..

That helps. And the total amount, you can invest is half the equity, half the shareholder equity..

That’s the current situation, yes..

Okay. Great. And then lastly, if I still -- grant me one more, on the share repurchase. Was there a restricted period during the quarter where you’re going to continue to buy as it went quite a bit lower? Are you allowed to share any -- so we can understand.

I guess, even though there’s an authorization, is there the available cash to buy shares currently, without affecting the equity or A.M.

Best?.

Yes. Look, there’s a continued balance between the business needs, the need to post collateral, the rating agencies and our ability to compete in the market. And so we balance the capital in the business with the different opportunities, including share repurchase, which we’ve been pretty active with.

I think we’ve bought back about 15% of the company since the beginning of 2020..

Yes. It’s impressive. Okay. Well, I really appreciate it..

Our next question comes from Kyle Labarre of Dowling & Partners..

A few questions for me. Just one more on the innovations units. Simon, I certainly appreciate that you don’t want to give too much color on all the moving pieces in there.

Just curious how you look at the profitability profile on the reinsurance you’re writing within the innovations partnerships versus sort of the overall book or the non-innovations piece, if there’s any gap there..

Yes. So this is a key element of what we’re doing here. As I said in my remarks, the investment results of the innovations portfolio is welcome. It’s been a great experience this year. But the central objective is reinsurance, and to strengthen our business and improve the quality of business. So that flow is increasing.

The idea here is that we have the optionality to write it with partners who we understand very well. So by nature of our relationship, our early-stage sponsorship of these companies and our visibility into their operations and oversight to their governance and so on, we have a very good understanding of that business, number one.

So that is, frankly, from a reinsurance underwriter perspective, tremendously valuable. This isn’t a relatively unknown third-party client where we receive a reinsurance submission. We know them far better than that. Number two is, typically, there’s less frictional expense in writing this reinsurance than open market.

I mean there may be a broker involved. But often, the fees are lower than the full run rate. And third, of course, is that we are -- it’s a one-way option. We’re assigning the option, and it’s not an obligation. So those things combined has led me to conclude -- and certainly, it’s our belief in the current portfolio, and it will be going forward.

Let me conclude that the margin potential of this business is generally, or certainly on average, better than the margin potential of our open market business, which itself is quite healthy at the moment. That’s why we’re so excited about innovations. It does 2 very important things for the company. It’s creating strategic relationships.

It’s creating optionality on well-priced reinsurance business..

Got it. And then, Simon, last quarter, I thought you gave some helpful comments on sort of how you’re viewing the social inflation environment. Now that’s clearly still an issue for the overall insurance industry, but there’s been sort of a shift in focus to the economic inflation side and cost of goods sold and supply chain issues.

Just wondering, based on the sort of shorter to medium tail of your book, how you’re thinking about economic inflation.

And are you seeing any effects on that in the portfolio?.

Yes, we are. I mentioned auto, and that’s probably the part of the book that I’d point to as potentially being impacted. As you know, as I said earlier today and for the last couple of investor calls, we’ve been dialing down our auto exposure steadily. We took a big step down at July 1. There will be another step down at January 1.

And that’s a class where we are seeing not only the sort of return to normality and the increase in miles driven but some of the supply chain effects and increased cost of sourcing replacement parts after accidents. So yes, we have seen it. We’ve taken action quite proactively. I think on reflection, it’s been a good decision to take that book down.

Across the rest of the portfolio, there’s a thread of this theme, but I’d say the auto piece was perhaps most impacted..

Got it. And then maybe one for Neil. Any chance we can get the split on the cats between what were idle losses, what were flood losses and what was the South African riots. May not be possible to run through or not, but just curious..

No, not any retro there. As I said in the call, Kyle, the biggest ones, I’m just going to my -- the exact rate down here, the biggest loss was Ida. Net of sort of our total amount, that was about $18 million. The European floods and the European hail together came a little bit higher than $4 million.

And then the South African riots, included in the total catastrophe loss, was about $3.5 million. And we also included, even though it was a prior quarter, but it was current year, there was a few hundred thousand of development on Uri. So that was the breakdown..

Got it. And one more for me, and I realize there’s probably no answer yet, but a lot of talk on global minimum tax and what may happen there. Curious how Greenlight Re is thinking about that and how you might manage what’s still an unknown situation..

Yes. So as you say, it is an unknown. I guess I’d just point out a couple of things that, clearly, we’re thinking about and you should consider in the context of Greenlight in the industry. One is that we don’t have substantial sort of overseas affiliates that are writing -- generating sort of local business. That’s now ceded to the Cayman Islands.

We do have an office in Dublin. But otherwise, we don’t have that large operational structure that is often characterized by some of our peers in the industry. And that makes the question of how any global minimum tax might manifest will be applied rather simpler for us than it might be.

And the second thing is, I know that all of this is up in the air, but there’s been a revenue threshold of sort of north of $700 million or $800 million cited. Again, that’s not set in stone. We are south of that, although we could be approaching that at some point.

I’d also add that there’s every potential for sort of an industry carve-out for reinsurance in the Cayman Islands which is, of course, something we’re exploring. So at this point, Kyle, I’d characterize this as we’re very aware. We’re following it closely.

There’s some work being done behind the scenes, but this isn’t very high on our radar of concerns right now..

The next question comes from Mikel Abasolo of Solo Capital Management..

This goes back, just very top down. But from my point of view, the market seems not to trust that your insurance operation is viable long term. And I think that it’s unlikely that adjusting your combined ratio by the cat losses will change that.

So my question would be, what needs to happen for you to wind down the insurance operation and just manage the proceeds like the hedge fund with a permanent capital? I see your investees, and you’re happy to see Brighthouse or Atlas Air shrink and rightly so, in my view, despite the fact that they are operating very profitably as opposed to Greenlight Re.

So that’s a puzzle to me. I acknowledge that you’re buying back stock.

But why not apply the recipe to Greenlight Re more aggressively and just follow the insurance operation? And the last question would be, is this issue discussed at all by the Board?.

Mikel, this is Simon. David may want to jump in. And please do, David. I want to be clear that we are, of course, a reinsurance company. That is our core operational objective. Our investment platform is critical to us. It is inherent in the value proposition to our shareholders. It’s meaningful. We expect it will continue to be meaningful.

In order to manage, and David touched on this earlier, the sort of markets and regulatory and rating agencies’ expectations of the company, we have to moderate the overall risk that is allocated to the various drivers of return. Let me just make a comment on your point about the reinsurance returns.

Actually, I think certainly over the past 2 years, so through 2020 and into 2021, I accept that reinsurance profitability has been weak. But we’ve compared quite favorably to the industry as a whole. Our 2020 return, our combined ratio in 2020, was approximately top quartile for the reinsurance industry, depending on the peers you select.

Our results this quarter with a very significant cat experience with Ida and others, again, are relatively favorable compared to many of our peers. I stand by our risk management. I think it’s unfortunate that with the backdrop of vastly improving underlying business.

And that’s -- when we disclose our adjusted combined ratio, that’s not really a financial measure, it’s a yardstick, to give you an idea of the improvements in the business without the complications and volatility from the large events. It’s unfortunate that you, as a shareholder, haven’t yet seen the fruits of this work. But I assure you it’s there..

I would just add that while the Board did do a sizable strategic review of all kinds of alternatives, including winding down the business in early -- during 2020, we conducted debt review. And the conclusion of the review was just the best outcome for shareholders to pursue what we have been pursuing.

I don’t think there should be any expectation that we will wind down the business and invest the money alongside -- along the way that we do in the hedge fund. Were we to wind down the business, I believe we would return the capital to the shareholders and let them decide how they want to invest it.

Let me say that, though, having been a considered alternative, we don’t think that it is a better alternative than what we are doing.

Finally, to compare to other companies and like the Greenlight portfolio, which are buying back stock and we advocate them buying back stock, fortunately, for them, unfortunately, for us, they’re in a better position to do so because of the strength of their balance sheet and the excess capital they have in their businesses relative to their business opportunities, which doesn’t mean we don’t buy back any stock, we have been buying back stock.

And I don’t want to set expectations higher or lower, it will depend on how we’re able to generate capital so that we can have capital to return. And lately, we’ve had a hard time achieving that. Nonetheless, at least personally, I’m optimistic that, that should improve..

Okay. Simon, just to be clear, I’m not making a judgment on your professional capability. I’m just skeptical that an operation of your size or your positioning can be profitable in the business or in the segments you’re trying to attack.

I’m far from an expert in reinsurance, but we do have in our portfolio some insurance or reinsurance companies, and they seem to be getting better results, perhaps because of their breadth, because of whatever, I’m not in the position to argue that, but the results. And you point out that 2020 was -- or 2021 was a good year. I cannot dispute that.

But it seems to me that there is not enough evidence to show that your combined ratio is below 100% systematically or sustainably or anything of that sort, and the market does not recognize the ability to manage the business profitably going forward. And I acknowledge that you guys are buying back stock.

But I was just curious as to whether the Board has this discussion on the table on an ongoing basis because I remember well there the strategic review at the time and the hiring of Credit Suisse and all that. But time has passed and the business and the stock don’t seem to get any better.

And it could be an imperfection of the market, but I think that it’s appropriate and it’s relevant to have that discussion, I mean the strategic discussion, back in the table again. That’s all I wanted to say..

I understand, Mikel. And thank you for your question. I certainly don’t take it personally, and I welcome the scrutiny. I would say that your top position that we’re relatively small in the reinsurance industry, and it can be challenging to make a pure reinsurance business of this scale work is a good observation.

But I need to go back to point out that that’s why we have a different strategy. We do have bucketing of capital allocation to our investment strategy. We have the growing innovations initiative, which we think is really a home run for a company of our size with relatively lower market power in open market reinsurance business.

So we are excited about where we’re positioned, notwithstanding the open market business can be challenging at our scale, but our strategy is designed to mitigate that..

This concludes our question-and-answer session. Should you have any follow-up questions, please direct them to Adam Prior of The Equity Group Inc. at 212-836-9606, and he will be happy to assist you. We also remind you that a replay of this call and other pertinent information about Greenlight Re is available on our website at www.greenlightre.com.

The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect..