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Operator
Hello, and thank you for joining the Greenlight Capital REIT first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. You may press star 1 at any time to be placed into question queue. It's now my pleasure to turn the call over to Karen Daly, Greenlight REIT's investor relations representative and vice president at the Equity Group. You may please go ahead, Karen.
Karen Daly
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 the conclusion of the event. An audio replay will also be available under the investor section of the company's website at www.greenlightre.com. Joining us on the call today will be Chief Executive Officer Simon Burton, Chairman of the Board David Einhorn, and Chief Financial Officer Fairmars Romer. On behalf of the company, I'd like to remind you that forward-looking statements may be made during the call and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather 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 during their remarks. The reconciliations to these measures can be found in the company's filings with the SEC, including the company's Form 10-Q for three months ended March 31, 2023. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. With that, it's now my pleasure to turn the call over to Mr. Simon Burton.
Kevin
Thank you, Karen. Good morning, everyone. Thank you for joining us. I'd first like to welcome Faramaz Roma, who is joining his first earnings call as CFO since his promotion effective April 1st. The CFO transition went well, which is not surprising as Faramaz has been an integral member of the team for the past 16 years. He is now fully up to speed. For the first quarter of 2023, we reported growth in book value per share of 1.1%, a net income of $5.9 million, despite each of our three pillars of underwriting, innovations, and SILPI performing below our expectations for the quarter. Starting with the underwriting results, the combined ratio of 99.8% was impacted by 5.7 points of winter storm and convective storm losses, along with 5.6 points of non-cap reserve deterioration in our honor book. The storm losses relate to a single innovation U.S. homeowners program written in 2022 that experienced higher than anticipated volatility from a winter storm in late December and from convective storms in March. We had identified these concentration issues leading up to the renewal of the homeowners program at January 1st when we restructured at favorable terms. So this volatility is contained to a single policy that's now running off. Otherwise, our book of innovations underwriting risks is running well, and we expect that this is an isolated situation. The reserve pressure we experienced in the first quarter is in part coming from the auto class, where claim severity continues to escalate. Auto insurers as a whole have struggled with rate adequacy in the face of extraordinary repair cost inflation. You will recall that we had almost completely exited this class by the middle of 2022. So we expect this pressure to be short-lived with respect to our reserves. The theme of claim inflation is also present elsewhere in our reserves and is responsible for another portion of the deterioration. Our reserve duration is relatively short at under three years, and this inflationary pressure is generally confined to a minority block of reserves in runoff. We grew net written premium by 25% in the first quarter to $175 million. which is the highest first quarter volume we have achieved under our new underwriting strategy. Some of the increase is from the portion of the book that was repriced at January 1st at significantly better terms, including property, marine, specialty, and multi-line, which includes our Lloyd's FAL positions. We were also able to expand and diversify the overall book into a market that is supply constrained in many of the classes that we write. Renewals at April 1st were similarly compelling. We grew our Japanese catastrophe book as we saw rate improvements that exceeded 20% as just one example. Given that we continue to see increases in reinsurance demand as sedents attempt to reduce their own volatility, coupled with persistent supply constraints, I believe that the outlook for our underwriting model is excellent for the rest of 2023 and into 2024. Moving on to our innovations business, InsurTech valuations continue to be relatively depressed. This provides us an opportunity to access attractive underwriting business via our partnership approach at compelling valuations. We completed two new investments during the quarter and had a small write-down on one of our positions. Our Lloyds Syndicate 3456 is proving to be an attractive option for partners seeking risk capacity, despite some bumps in navigating the Lloyds onboarding processes. We have a strong pipeline of opportunities for the syndicate. Finally, we are pleased to welcome David Sigmund, who joined last month as General Counsel. David comes to us with significant reinsurance experience, and we are excited to have him on the team. Now I'd like to turn the call over to David.
Karen
Thanks, Simon, and good morning, everyone. The Solace Glass portfolio lost 1.1% in the first quarter. Our longs contributed 8.9% to the gross return, Shorts and macro cost us 9.0% and 0.3%, respectively. During the quarter, the S&P 500 index advanced 7.5%. The first quarter was a challenging investment environment, as many investments that performed well in 2022 reversed in 2023. We repositioned the portfolio from bearish to neutral while we await further economic developments. Long positions in GreenBrick Partners, Kendra Holdings, and Gold were the largest positive contributors to the quarterly result. Bright House Financial, a single name short position, and a basket of housing sector shorts hedging some of our GreenBrick exposure were the material detractors. GreenBrick shares advanced 45% in the first quarter, mostly as analysts' expectations for this year's earnings stopped coming down. It appears that the market is gaining confidence in the housing sector again, after 2022's fear that higher interest rates would cause an imminent collapse. Greenberg remains well-positioned. Its margins are the highest in the industry, and it maintains an enviable land position in some of the country's best markets. Just last week, the company reported extremely strong new orders, revenues, gross margins, and earnings that simply blew away consensus expectations that were formed during last year's housing slowdown. The stock appreciated another 40 percent so far this quarter. Kendrel is an IT services business that was spun out of IBM in late 2021. Prior to the spin, IBM positioned this unit as a loss leader in order to sell more hardware. This investment is a turnaround story as Kendrel can now offer solutions from multiple vendors and is better positioned to raise pricing on the no margin contracts that are expiring in the next couple of years. With an enterprise value of $4.5 billion and $17 billion of revenue, Kindrel trades for less than 0.3 times sales. Meanwhile, its peers trade for at least twice that multiple. We expect the shares to re-rate over time as Kindrel closes the margin gap with its peers. Gold advanced 8% in the quarter. The gain occurred after several bank failures as the market expectations for further rate hikes reversed into expectations of rate cuts starting as soon as this summer. One concern is that the problems with the banks may force the Federal Reserve to prioritize preserving financial stability over defeating inflation, causing the next leg up for inflation. A higher gold price appears to be taking some of that risk into account. Bright House financial shares dropped by 14 percent in the quarter in response to the bank failures, partially caused by a few banks buying long-duration bonds that fell in value when interest rates rose, and the market sold off many companies in the insurance sector that also owned long-duration bonds. Even though Bright House is a beneficiary of higher rates by virtue of having very long duration liabilities, which are quite different from the short-term deposits that can leave abruptly for a bank, the market decided to simply ignore this difference. We don't believe any of the concern is specific to Bright House. It is our view that rate cuts are unlikely to happen this year, and while the market is expecting them in the back half of the year, As such, we added to our interest rate positions by federal fund futures. Expressing this thesis directly means that we are only subject to the central bank's decisions for the balance of the year rather than being subject to the market's expectations. Tuesday, I presented our analysis on Vitesco Technologies at the Soane Conference. Vitesco is the spinoff of the powertrain unit from Continental AG. It is an auto parts supplier that is poised for enormous growth in its EV segment. where it supplies the key components of the drivetrain systems and other than batteries. Despite its leading-edge technology position and important product wins with many leading EV makers, the shares trade cheaper than most other auto suppliers. The solid-class portfolio gained 3.4 percent in April and has returned 2.3 percent year-to-date through April. Net exposure in the investment portfolio was approximately 43 percent at the end of the first quarter. We don't usually comment on mid-month performance, but given the strong performance of GreenBrick in May, this month is off to a strong start. Given the significant rate increases we achieved on the underwriting portfolio, we are cautiously optimistic that our combined ratio will continue to improve as 2023 progresses, and that we will improve profitability on both sides of the balance sheet for the remainder of the year. Now I'd like to turn the call over to farmers to discuss the financial results. It is farmers' first call as CFO though many of you got to hear from him at our investor day last year.
Simon
Thank you, David, and good morning, everyone. While I have been with GreenLight Reef for several years, it is an honor to now serve as the company's chief financial officer. I look forward to continue working closely with Simon and the rest of the highly talented team as we take advantage of the current market conditions to create value for our shareholders. Now turning to our results for the first quarter of 2023. Our net income for the quarter was $5.9 million, or 17 cents per diluted share. We reported underwriting income of $0.4 million during the first quarter and a combined ratio of 99.8% compared to an underwriting loss of $7.7 million and a combined ratio of 106.2% during the equivalent 2022 period. While the overall underwriting performance improved this quarter, the result was negatively impacted by $10.3 million, or 7.2 combined ratio points, of catastrophe and weather-related events. $4.1 million of the CAAT losses related to winter storm Elliot, which hit the northeast of the United States in late December 22. The severe convective storms in the month of March resulted in $4.1 million of losses. The remaining $2.1 million of catastrophe losses came from the earthquake in Turkey and Cyclone Gabrielle in New Zealand. Adjusted for catastrophe event losses, our current year loss ratio decreased 7.4 percentage points to 55.1% compared to the same period in 2022. Excluding Winter Storm Elliott, we experienced $7.9 million or 5.6 combined ratio points of unfavorable prior year loss development during the first quarter. We reported total net investment income of $5.2 million during the first quarter of 2023. We lost $3.1 million on our investment in the Solus Glass Fund and earned $8.4 million of other investment income, primarily from interest income earned on our restricted cash, which benefited from the higher interest rates compared to the same period in 2022. Total general and administrative expenses incurred during the quarter were $9.9 million, up from $7.2 million in the first quarter of 2022. The increase was due primarily to non-recurring expenses relating to legal fees and severance costs during the first quarter of 2023. We recognized $4.9 million of foreign exchange gain in the first quarter of 2023 due primarily to a strong PAN sterling. At the end of the first quarter, our fully diluted book value per share was $14.75, an increase of 1.1% from December 31, 2022, and an increase of 8.1% from March 31, 2022. During the first quarter, we repurchased $17.5 million of our senior unsecured convertible notes. The remaining $62 million of notes mature on August 1, 2023. We are actively working on plans to refinance them with non-convertible debt. Now I'll turn the call back to the operator who will open it up for questions.
Operator
Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question is coming from Anthony Motelis from Dowling and Partners. Your line is now live.
Anthony Motelis
Hi, good morning. Simon, just a couple questions for you on the underwriting side of the business. There was really strong property growth in Q1. Just wanted to know, is this a good run rate for growth as we think about the rest of the year? And that could be specific to property, business, or even broader for the whole portfolio.
Simon
Hey, Anthony.
Kevin
So our property business is in parts, some of the homeowners business that I that I mentioned earlier in the call, and in part, some of our cat retro positions that we established at one one. So it's a bit lumpy. In fairness, that's a considerable amount of our businesses quota share. So should uh, right through the, through the year. Uh, but I'm reluctant to guide you to any particular run rates on, uh, on our property business.
Simon
Um, uh, because it, it, it can come and go.
Anthony Motelis
That, that makes sense. Um, and I appreciate the fact, uh, you were mentioning the reserve durations were relatively short term, uh, Do you think these pressures are going to persist in future quarters, specifically on the auto? And I think there were pockets with workers' comp as well.
Kevin
Well, I think it's a good question, and I think it's one that the entire industry is asking itself. So from an industry perspective, will these pressures persist? I think so, yes, although in fairness, I think we've already received the bulk of bad news on the inflationary pressure, and we should all be getting ahead of repricing our reserves based on a new inflationary outlook, temporary or long-lived, whatever your view might be. With respect to our reserves, though, and I think that's more your question, because the duration is so short, and particularly on the auto side, we got out of that business almost entirely almost a year ago, and it was tapering considerably before that, I would be surprised if that continues to kick for much longer. Quite apart from that answer, look, at every point in time, we established our best estimates of reserves, and this is our best estimates of reserves. At no point am I going to expect future deterioration.
Simon
I think we've got it all
Anthony Motelis
Okay, that's helpful. And if I may, I just have one more question. You pointed to underlying loss ratio improved seven points in the quarter, despite the reported combined ratio being also improving six points. But on the underlying position, is this mostly due to the book kind of shifting to property business? Or is there anything else to highlight here that would benefit the underlying results?
Kevin
Yeah, I wouldn't say that it's necessarily a shift towards property. The property volume is up, but a fair amount of that is rate and not exposure. If you look at our PML profile, it's about the same for our peak perils. It's a little up in Japan where we did grow our book. So there's growth in the portfolio and property, but it's not that considerable. A lot of it is rate. But there's growth pretty much everywhere through the book, with the exception of perhaps, you know, workers comp, which we've taken a more cautious view of. The picture is really an underlying improvement in rates in almost every class that we write and the continuing diversification and build out of the entire portfolio. I wouldn't necessarily focus on property or any individual class as being the driver of that.
Anthony Motelis
All right. Thank you so much. That's all I had to ask.
spk08
You're welcome.
Operator
Thank you. As a reminder, that's star one to be placed into question Q. One moment, please, while we pause for further questions. Our next question is coming from David Schiff from Schiff Insurance and Preserver. Your line is now live.
David Schiff
Hi there. You had mentioned that you were going to, looking into replacing the convertibles with fixed debt, fixed rate debt. I was just wondering roughly what amount were you thinking? The other question is, is there really any reason that you need to have any debt whatsoever? Hi, David.
Simon
It's Farmart here. It's a good question. We started five years ago with convertible debts of $100 million, and we have now since then repurchased a bunch of it, and the remaining balance is about $62 million. So our current view is to look at refinancing the outstanding debt balance. The discussions are progressing well, and we think we're going to close in the second quarter. So size-wise, we'll be looking to replace what our existing outstanding debt amount is.
David Schiff
And I guess the second part of my question was, is there a reason that you need to have any debt?
Simon
Look, I think we're in a market where we see opportunities on the underwriting side, and we want to have as much liquidity and cash available to deploy in those markets. So we are assessing and always looking at opportunities for our capital structure. And at this time, we believe that this is the best option for us.
spk08
Thank you.
Operator
There are no additional questions at this time. Should you have any follow-up questions, please direct them to karendailyoftheequitygroupinc at ir at greenlightree.ky, and she'll be happy to assist you. This now concludes Greenlight Re's first quarter 2023 earnings conference call. Thank you. You may now disconnect.
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