This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good morning, and thank you for joining the Greenlight Re conference call for the second quarter of 2022 earnings. At this time, all participants are in a listen-only mode. 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 and uncertainties and assumptions, including those enumerated in the company's Form 10-K for the year ended December 31, 2021, and other documents filed by the company but 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. After the prepared remarks, we will be conducting a question and answer session. For those that would like to ask a question, please press star 1 on your telephone keypad to be added to the question queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Greenlight REIS Chief Executive Officer, Mr. Simon Burton. Please go ahead, sir.
Simon Burton
Good morning, and thanks for joining the call today. Our second quarter performance was strong as we grew book value per share by 3.3%. with a positive contribution from each of underwriting, innovations, investments, and the SILPE fund. The second quarter underwriting result produced a combined ratio of 91.6%. Although this is a significant improvement compared to our performance over the past couple of years, it's not unexpected. We completed the major repositioning of the underwriting book last January, and although we faced some headwinds as our auto exposure has rolled off, The result this quarter more closely reflects our underwriting potential. Looking ahead, we see the potential for further upside in underwriting performance. Putting our financial results aside for a moment, there are a couple of significant themes the industry is tackling right now, and I'd like to touch on each of them. The widespread inflation we have seen is a significant concern to the industry, as it can add great uncertainty to the cost of claims. particularly for classes of business with long payout tails. As a result, it creates pricing challenges for new business and valuation challenges in claims reserves. Inflationary pressure is not uniform, with large differences between supply chain-driven price spikes that may be temporary and wage inflation which may last longer. We are addressing these concerns in several ways. First, our underwriting strategy is to focus on relatively short-tailed business. which is inherently less exposed to high inflation. We estimate the payout duration of our existing reserves at around two years, which is particularly short in an industry context. Second, we have reduced our exposure to classes that are experiencing severe supply chain driven inflation, such as auto. Third, we incorporate inflation assumptions in all our pricing, currently at around 7% to 8% per year. We reassess these assumptions frequently. While we are working hard to manage the downsides of inflation, it also comes with the benefit of increased demand for coverage limits, which will support the demand side of the pricing equation and help to extend the currently favorable market conditions. The second industry theme I'd like to note is the question of pricing for catastrophic losses, both natural and human-driven. This category includes natural perils, cyber risk, the Ukraine-Russia war, and other similar exposures and scenarios. In general, we have seen a reduction in available capacity industry-wide to address these risks, which appears to now be driving significant changes to both coverage and price. This is welcome development, since our opinion is that the reinsurance industry overall has been neglectful in pricing tail risk. We currently have relatively low exposure in some of these areas, for example, cyber and secondary cap perils, but it's possible that they become areas of compelling opportunity over the next six months. The last industry theme is the impact of rapid upward shift of the yield curve on the market values of bond portfolios, which for some of our peers has reduced book values by 10% or more. Greenlight has relatively little exposure to these shifts in bond pricing, and in fact, our overall investment performance has been excellent through the turmoil. Finally, I'd like to update you on the progress of our innovations business. From an investment and partnership perspective, we now have 23 portfolio companies, having made one additional investment during the quarter, and we have a strong pipeline of interesting opportunities. Overall, the portion of our net written premium that we categorize as innovation related is around 13% year to date. The underwriting volume in our innovation syndicate at Lloyds was immaterial in the second quarter, but we are pleased with the volumes that are committed for the third quarter and beyond. Some of this business derives from partnerships where we are an investor, but we have also seen significant interest in our products from the broader marketplace. This market validation is gratifying And the syndicate is off to an excellent start. Now I'd like to turn the call over to David.
David
Thanks, Simon. Good morning, everyone. The Solace Glass Fund returned 4.9% in the second quarter. Shorts contributed 15.3% and macro contributed 0.7%. Our longs detracted 10%. During the quarter, the S&P 500 index declined 16.1%. Equity markets continued their descent into an official bear market in the second quarter. Our macro position in high yield credit default swaps and an S&P 500 index short were our largest positive contributors. Single name short positions in bubble basket stocks were also large positive contributors. Our long position in Bright House Financial and ODP Corporation in gold were the biggest detractors. In mid-June, the bear market broadened and inflation beneficiaries fell sharply. Bright House and Gold suffered mostly as a result of this. ODP shares declined after the company's board announced in late June that it was scrapping plans to move forward with the divestiture or public spinoff of its consumer business. Generally speaking, some value stocks have become so cheap relative to the earnings of the underlying businesses that that the companies themselves are buying back a large portion of their own market capitalizations. Five of our largest positions are perfect examples of this. Bright House ended the quarter at about 25% of its book value and less than three times consensus earnings. We expect the company to repurchase 10% to 20% of its shares this year. While Consul Energy ended the quarter trading at 2.6 times its book value, we believe the company will generate close to its entire market cap in after-tax-free cash flow by the end of 2023. Capital returns have not yet begun, but we expect they will shortly, and we expect them to be significant. Greenberg Partners ended the quarter at 1.1 times book value and less than four times consensus earnings. The company bought back 5% of its shares as of the last quarterly announcement and authorized another buyback of an additional 10% of the shares. Tech Resources ended the quarter at about 85% of book value and less than four times consensus earnings. The company recently began buying back its shares. When the CEO was asked on the April 27th quarterly call what the plans were for playing his really strong hand of cards here, he responded with, I'd like to buy the whole company back myself. With commodity prices falling rather dramatically, the market has quickly come to expect disinflation and an economic slowdown. We recognize that near-term inflation will show improvement, but we believe the stickier components of inflation will persist. We have lowered our net exposure because we expect a bumpy ride for equity markets as the Fed continues to tighten. We're focusing our long investments in the types of companies that are poised to continue returning meaningful portions of their earnings and cash flow to their shareholders. Net exposure was approximately 20% long in the investment portfolio at the end of the second quarter. The solid-cost portfolio returned 1.1% in July and has returned 7.9% year-to-date. also had solid results in our underwriting activities. As Simon described, the transformation of the underwriting portfolio is now complete, and I believe we're in a good position to capitalize on the headwinds facing the reinsurance industry, as we've been less impacted than others, but will benefit from higher rates and better terms. Now I'd like to turn the call over to Neil to discuss the financial results.
Simon
Thank you, David, and good morning. Our net income for the quarter was $14.8 million, or $0.37 per share. For the six months ended June 30, 2022, our net income was $9.1 million, or $0.23 per share. Gross premiums written in the second quarter were $134.8 million, a decrease of 5% from the second quarter of 2021, due primarily to our decision to reduce our participation in motor and workers' compensation contracts. This decrease was partially offset by growth in specialty, general liability, and personal property business, including premium generated by the company's innovations partners. Premium seeded were $7.2 million in the second quarter of 2022. We entered into new retrocession agreements during 2022, primarily to reduce our exposure to large marine and energy loss events and certain property losses. Premiums seeded in the second quarter of 2021 were insignificant. We reported underwriting income of $9.3 million during the second quarter and a combined ratio of 91.6%. The quarter's underwriting results included adverse prior year development with a net financial impact of $3.5 million, relating primarily to our motor portfolio. We reported total net investment income of $17.2 million during the second quarter. We earned $11.9 million from our investment in the Solace Class Fund and recognized an additional $5.3 million of other investment income, primarily from our innovations investments. Total general and administrative expenses incurred during the quarter were $8.1 million, up slightly from $7.7 million in the second quarter of 2021. We incurred other non-underwriting expenses of $6 million in the second quarter of 2022, due to foreign exchange losses and investment losses incurred by Lloyd's syndicates in which the company participates. Other non-underwriting expenses incurred in the second quarter of 2021 were insignificant. At the end of the second quarter, our fully diluted book value per share was $14.10, an increase of 3.3% from March 31. Now I'll turn the call back to the operator and open it up to questions.
Operator
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Thank you. Should you have any follow-up questions, please direct them to Karen Daly of the Equity Group at ir at greenlightre.ky, and she 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. This does conclude today's conference call, and you may disconnect your lines at this time. Have a great day.
Disclaimer