Greenlight Capital Re Ltd (GLRE) 2007 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Greenlight Capital Re second-quarter 2007 earnings conference call. Joining us on the call this morning is David Einhorn, Chairman; Len Goldberg, Chief Executive Officer; and Tim Courtis, Chief Financial 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 provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements that 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 risks, uncertainties and assumptions that are enumerated in the companies prospectus dated May 24, 2007 and other documents filed by the company with the SEC.

If one or more risk 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 event or otherwise. Today's call is being recorded. All lines are in a listen only mode, and you will be given the opportunity to ask questions following the company's remarks.

I would now like to turn the call over to Mr. Len Goldberg. Please go ahead, sir.

Thank you, Brandy. Good morning. My name is Len Goldberg, and I am Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us this morning. As this is our first earnings call since the completion of our initial public offering in May we would like to begin by introducing David Einhorn, our Chairman, who will briefly discuss the IPO and provide an overview of Greenlight Re's vision and strategy. Following David's remarks, I will discuss Greenlight Re's underwriting philosophy and portfolio performance to date. And finally, Tim Courtis, our Chief Financial Officer, will provide financial details before we open up the call for questions. Bart Hedges, our President and Chief Underwriting Officer will join us for the Q&A.

Thanks, Len. First of all, I would like to thank all of our investors for your confidence and support of Greenlight Re. The IPO required a lot of hard work from a large and talented group of people and we thank all them, too. We at Greenlight Re recognize that this is just the beginning, and we hope to continue to earn your confidence. Greenlight Re is a Cayman Islands based specialty property and casualty reinsurer focused on providing a variety of custom tailored reinsurance solutions to the insurance, risk retention group, captive and financial marketplaces.

The company with a strong management team of Len Goldberg, Bart Hedges and Tim Courtis began underwriting business in April 2006. In August 2006 received an A- rating from A.M. Best. Since Greenlight Re's formation, our goal has been to create a reinsurance company capable of driving long-term growth in book value per share. This is the most important metric we used in evaluating our business and performance. We strive to create value by earning an attractive risk-adjusted return on both sides of the balance sheet, a return from underwriting good business and a return on our investments.

The philosophy of the Company's risk selection for underwriting and investments are similar. Each intended to be concentrated and focused on individual ideas with favorable risk reward characteristics. We pay careful attention to capital preservation and with respectable underwriting and investments we employ a bottom up opportunity-by-opportunity approach to building the portfolios.

Regarding underwriting, Len and Bart will provide more detail, but our underwriters concentrate on opportunities we perceive will position us to achieve our goal of increasing book value per share over the long-term. The company will not necessarily participate in all property and casualty lines of business. But does have capacity and expertise across a wide range of exposures globally.

Greenlight Re's underwriting philosophy is not focused on GAAP results or combined ratios. Rather the company seeks to earn an appropriate economic return on each contract relative to the exposed risk. Our underwriting team has no premium target, and our goal is for each contract we write add economic value to our portfolio. This means that the number of good opportunities will vary based on the overall market environment.

However, based on our opportunistic strategy and team of skilled generalists, we believe we are well situated to take advantage of any good opportunities. On the investment side of the balance sheet our activities which are subject to written guidelines adopted by the Board are managed by DME Advisors, an affiliate of Greenlight Capital. DME Advisors investment approach is based on a concentrated long/short strategy primarily invested in equities. Greenlight Re's investments are invested pro rata with other Greenlight Capital clients, with some exceptions primarily relating to historical positions existing prior to Greenlight Re's startup in 2004, and the requirement to abide by Greenlight Re's investment guidelines.

While we will generally not be discussing individual investments on these calls, I want to bring your attention to certain information relating to the monthly performance of the investment portfolio is available on Greenlight Re's website. Greenlight Re's differentiated underwriting and investment strategy will likely result in unpredictable quarterly results. However, we believe that over the long-term this strategy is the best way to generate compelling returns for our shareholders.

Now I would like to turn the [question] back over to Len to discuss Greenlight Re's underwriting operations.

Thanks, David. As I stated earlier as this is our first investor call since our IPO, I would like to spend a few minutes giving a more detailed overview of our underwriting strategy and describe our execution of this strategy through the second quarter. As David mentioned, we concentrate our capacity on what we believe are our best opportunities. We seek to build relationships in which Greenlight Re is strategically important to the clients' business. Our sweet spot is with small, medium and specialty insurers, reinsurers, captives and risk retention groups where we can structure transactions that are important to both our clients and to Greenlight Re.

We want to be the lead underwriter on the business we bind. We believe this helps us to understand our clients business better and leads to stronger, long-term relationships. However, we will also participate in shares of business that we believe offer superior returns. We will write both frequency and severity business but over the long-term we expect that we will be oriented more towards the frequency business. As David mentioned, we have no premium targets. We think this is an important component of our model.

We were able to find a number of good opportunities in the second quarter to add to our portfolio in an increasingly difficult market. We are a team of generalist underwriters who underwrite transactions, nonspecific lines of business. We can capitalize on situations where market conditions have resulted in reduced capacity or a change in competition. We diligently survey the property and casualty landscape on a global basis in an effort to identify and seize what we believe are the best opportunities. As such, we expect that the lines of business we write will evolve and change over time based on market conditions and on the size and availability of attractive opportunities.

We price every deal that we bind utilizing our own pricing models and take a data intensive approach to our analysis. Do not focus on the GAAP combined ratio of the business we underwrite. Instead, we focus on the opportunity to make an attractive return relative to the risk we accept. We pay careful attention to the potential downsides of each transaction. Our pricing includes a capital allocation methodology that incorporates risk aversion into the pricing of every transaction. When we write catastrophe business as we have in certain markets, we do not and will not manage our aggregates based on the modeled result, such as one in 100 years or one in 250 years.

Instead, we look at the total potential exposure based on the limits and number and amount of reinstatements on each contract we underwrite. In other words, the worst case. We feel this is the only measure that accurately and definitively reflects the total amount of exposure to our capital base. As a result when we have losses our downsides should be more controllable.

With respect to the execution of our strategy, we are generating a solid flow of submissions from brokers. We were the lead underwriter on 68% of the gross premium written through the first six months of 2007. In addition, over 90% of this lead premium related to exclusive deals where we are not only the lead underwriter, but also the only underwriter on the program or layer. Our business has been frequency oriented. 62% of the gross premium written through June 30, 2007 is frequency business. Tim will provide further details in his discussion of financial results.

Our portfolio currently includes property catastrophe, casualty clash, medical malpractice, professional liability, personal lines, general liability and health insurance. And we have bound business with clients from the US, UK, European, Cayman and Bermudan markets. As of June 30, 2007 our property catastrophe portfolio had an aggregate loss exposure to natural perils of $44.2 million. We have deployed additional capacity since June 30 which has increased this figure to $76.7 million. This is the amount of risk we are exposed to from multiple events in multiple regions. Our maximum exposure to a single event is $51.7 million.

As David stated, our investment assets are managed by DME Advisors and employing a strategy that is considerably different from most of our competitors, these assets are liquid should we need to pay a claim. In addition, our current investment guidelines require that at least 80% of our portfolio be invested in tradable securities in developed markets, cash or cash equivalents. In conclusion while we recognize it is early in the Greenlight Re lifecycle and our portfolio is still maturing, we believe that we off to a strong start in successfully implementing our business strategy. And now I would like to hand it over to Tim Courtis to discuss our financial results for the quarter.

Thanks, Len. First I would like to provide some details on our recently completed IPO and then provide some further information on our financial results for the second quarter. On May 24th we successfully raised approximately $256 million of additional capital net of all fees and IPO related expenses. The IPO price of $19 less fees was significantly above our book value at that time, so on a post money basis the IPO increased book value by approximately 10%.

As you analyze our results, you should keep in mind that our mix of business is changing continuously. Since we did not begin underwriting until April 2006, and did not receive our A.M. Best rating until August 2006 we were somewhat limited in the lines of business we could offer a year ago. Second quarter 2007 net income was $21.3 million compared to $6.6 million for the comparable three month period last year. On a fully diluted basis net income was $0.76 per share compared to $0.31 per share for the second quarter of 2006. For the six months ended June 30, 2007 net income was $8.2 million compared to $22 million for the six months ended June 30, 2006. On a fully diluted per share basis net income was $0.33 per share compared to $1.03 per share for the six months ended June 30, 2006.

As mentioned earlier, we believe that long-term growth and fully diluted book value per share is our most important metric. When we look at a full 12-month period from July 1, 2006 to June 30, 2007, fully diluted book value per share has increased to $15.81 at June 30 this year, up from $12.68 of June 30, 2006. This represents an increase of 24.7%, which includes the increase associated with the IPO.

For the first half of 2007 frequency business accounted for approximately 62% of our gross written premium. While this is consistent with the emphasis we place on frequency business the percentage has been affected by one very large severity account that we bound in the second quarter. The composite ratio for our frequency business at June 30, 2007 is 94.3% and 31.6% for severity business, resulting in an overall composite ratio of 81.4%.

When we add on internal expenses of 12.9% it results in our combined ratio of 94.3%. Investment income was $19.9 million for the second quarter, reflecting a net return of 6.8% on the account managed by DME Advisors. The impact of the 6.8% return was not reflected as it normally would be in our earnings per share because the account generated strong positive returns in April and May prior to receiving the proceeds from the IPO, and a negative return in June after the proceeds were received. As a result, the dollars of income earned were less than they would have been had the positive returns been generated later in the quarter. It is unlikely that the investment account balance will change so dramatically intraquarter in the future.

Finally, I would like to make a couple points about our financials. First, we believe all returns count, whether they are dividends, coupons, realized or unrealized capital gains from the investment portfolio, or any gains and losses on our underwriting portfolio. All returns from our investment portfolio including realized and unrealized gains are reported directly into investment income and therefore are included in net income.

Second, as part of our primarily equity base long short investment strategy we run a short portfolio which accounts for the securities sold not yet purchased line in our financials. Some of the cash we hold is restricted due to these short positions. Additionally from time to time we may invest in equity base derivative products. To get a better feel for the amount of invested assets, some would call this our capital plus flow. From the balance sheet should take the line total investments, add on cash and restricted cash, as well as any financial contracts receivable. From this number you would deduct securities sold, not yet purchased, and financial contracts payable.

Let me also add a few comments regarding our balance sheet. We currently do not have any debt on our balance sheet. We continue to believe that we will not need to raise any additional capital in the foreseeable future as our current capital base and premium flow are expected to be sufficient to support ongoing operations. And finally, regarding loss reserves we establish reserves quarterly on a contract by contract basis. When we obtain information that leads us to believe that loss reserves for specific contract are either deficient or in excess of our expectations we adjust reserves immediately.

I will now turn the call back to Len who will provide some concluding remarks.

Thanks, Tim. Our second quarter results represent important progress in our ongoing effort to deliver long-term growth in book value per share for our shareholders, through our differentiated reinsurance model. It is our long-term objective to develop a profitable liability portfolio and to earn above average risk-adjusted returns by actively managing both sides of the balance sheet. We appreciate your confidence in our business model and our company. Thank you again for your time, and we would like to now open the call up for your questions.

(OPERATOR INSTRUCTIONS) Dean Choksi, Lehman Brothers.

Good morning, gentlemen. Can you just provide a little bit more color on some of the reinsurance customers you signed? Larger or smaller companies?

I think it's fair to say, Dean, that the majority of the business we've signed up is with smaller companies, and also with captives.

And then on your homeowners business that you signed, is that catastrophe exposed?

No, the homeowners account is written on an ex catastrophe basis.

And just one final question. What was kind of the cause of the uptick in the acquisition cost ratio?

Actually the acquisition cost ratio includes profit commissions, Dean. So whenever you have a contract which has a profit commission element to it, obviously that would factor into that calculation.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS) Brian Meredith, UBS.

Good morning. Len, I was wondering if you can talk a little bit more marketing conditions, what you're seeing out there? And we are hearing from other reinsurers how companies continue -- the primary companies continue to retain more and more risk and how the market is getting increasingly more competitive in terms and conditions or softening up. Are you seeing the same thing happening?

Clearly the market is in a softening phase right now, but I think based on the client base that we have, we actually work with a number of clients who do require reinsurance. It is not a financial decision to a number of them, it is either a strategic decision or it is capital support or some other reason for purchasing.

Okay, so generally speaking you're seeing the competitive marketplace, but it just doesn't matter for your client you're seeing -- so you are not seeing other reinsurers even impeding on your marketplace more?

Brian it clearly matters. But I think we are probably a little less affected by those that are reinsuring some of the large cap primary companies.

Ryan, this is Bart Hedges. One of the things about our strategy that is a little bit different is that we don't focus on what we consider to be commodity-driven opportunities. So a lot of times when we are receiving submissions, the first thing we do is try to figure out why is somebody bringing this opportunity to us, and what are they looking for? If they are looking for the cheapest price or if they are simply looking for capacity, it is a very good chance that it's not going to go anywhere with us.

Now there is going to be certain times where supply and demand dictates that there is just not enough capacity in the market and we're going to support something because it has a very good risk-adjusted return. Those opportunities are opportunistic in nature, and they will come and go. But by and large the people that we are seeking to form relationships with will be, will gravitate towards our underwriting style, and they will be seeking something slightly different than just the cheapest price or capacity. And that is kind of fundamental in our strategy; if we execute this properly a lot of the market conditions and the impact of the market conditions will sort itself out through the weeding out process and the risk selection.

That's helpful. And maybe give us a little bit more perspective here. Who would you bump into most in your types of business as far as competitors?

There is a wide variety of opportunities that we look at, so it definitely depends on the opportunity. To list a few of the people that we've competed against I guess most recently, they are definitely familiar names, people like Max Re, Swiss Re. On the CAT side they would be the typical Bermuda property CAT companies. It definitely is a wide range of names that you would be very familiar with.

Thanks. And then one quick numbers question, when you are calculating the return you have on your investment portfolio, should I use as a base number the number that you just defined as kind of calculating what your total invested exposure is?

That would be a very good proxy for the level of our investment portfolio. Clearly what cash is used for liquidity purposes might vary from time to time but to get a general proxy, that would be the way to do it?

But for instance, if it is just a performance number you gave for the quarter I would just figure out what that number was for the first quarter of '07 and take whatever -- take the $19.9 million divide that into it and that would give me the number?

Yes, the only caveat to that is the calculation for our investment return is based upon the kind of a weighted average of what is in the investment portfolio. So clearly with the IPO you would have to weight it for when those proceeds were received. Obviously the same for any reinsurance premium that goes into the investment portfolio would depend upon when it is received.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) At this time there are no further questions. I will turn the call back to Mr. Goldberg for any closing remarks.

Thank you all for participating in the call this morning. Again, we appreciate your support. Should you have any follow-up questions please direct them to Alex Stanton of Stanton Crenshaw Communications at 212-780-1900 or Alex at StantonCrenshaw.com, and he will be happy to assist you. Thank you once again.

This concludes today's Greenlight Capital Re second quarter 2007 earnings conference call. You may now disconnect.