Greenlight Capital Re Ltd (GLRE) 2007 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Greenlight Capital Re third quarter 2007 earnings conference call. Joining us on the call this morning is David Einhorn, Chairman; Len Goldberg, Chief Executive Officer; Bart Hedges, President and Chief Underwriting 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 provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical facts 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 Company's prospectus dated May 24, 2007 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. 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.

Thank you. Good morning. My name is Len Goldberg, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us this morning. David Einhorn, Chairman of the Board will begin and briefly discuss the third quarter progress at Greenlight Re. After that, Bart Hedges will discuss some details of the construction of the underwriting portfolio to date, and then Tim Courtis, our Chief Financial Officer, will review our financial performance. And I will conclude with some final comments before we open up the call for questions.

Thanks, Len. This is our second call as a public company. Since Greenlight Re's formation our goal has been to create a reinsurance company capable of driving long-term growth and book value per share by focusing on both sides of the balance sheet. While of course we did not wish to have a loss in our first quarter after the IPO, the results were certainly within our historical ranges in a difficult market. Overall, we made important progress in executing against our overall business plan during the third quarter, and I would like to mention a few key areas.

First, we continue to pursue only those underwriting opportunities that we believe will generate superior risk-adjusted returns over the long-term. In a softening market we exercise underwriting discipline and our gross written premium in the third quarter declined from the prior quarter. In our mind this shows focus as our team feels no pressure to underwrite for topline growth in a difficult market. We continue to work hard to seize attractive underwriting opportunities that fit our business model, and Bart will walk and talk you through them in greater detail.

Our premium will continue to be lumpy as we focus on select opportunities that we believe will generate long-term value for our shareholders. Second, the financial markets were quite turbulent in the third quarter; even though we did not generate a positive return it is important to recognize that we do not manage the portfolio for quarterly results. Preservation of capital on both sides of the balance sheet is one of our top priorities, preserving capital in a turbulent market condition helps us deliver superior growth and book value over the long-term.

Our investment performance suffered this past quarter from a challenging market, a few unfortunate events and a number of individual small bad decisions. In July the short portfolio had the misfortune of having three companies bought out near the end of the private equity window. These three buyouts left the portfolio with less short exposure just as the credit crisis turned the market upside down. In the early days of the selloff in late July we watched our loans underperform our remaining shorts. As the credit crisis developed in July we decided to become net short credit. We added short equity positions in a variety of broker-dealers, banks, credit rating agencies, financial guarantors and other participants in the credit bubble.

The prices of these equities in our opinion were not properly discounting the reality of the credit crisis. We also sold a number of our long positions. Essentially we position the portfolio to be more market neutral. The portfolio performed according to our expectations; as the market sank in early August we preserved capital. Then when the market recovered in late August and September we didn't participate in the appreciation. Notably in September our remaining longs underperformed the growth and momentum market that ensued. Despite the sharp rally we believe the July August correction represented in early innings of the credit crisis. There has been -- this has been bearing out since quarter end as we've seen bad news from several large financial institutions. The early fourth quarter results have been good with a 3.9% return in October.

Greenlight Re's differentiated underwriting and investment strategy will likely continue to result in unpredictable quarterly results. However, we continue to believe that over the long-term this strategy is the best way to generate compelling returns for our shareholders. 2007 is a building year for Greenlight Re; one in which we completed building the team and infrastructure and we had our IPO. We are very excited about 2008. And now I would like to turn it over to Bart Hedges, our President and Chief Underwriting Officer, to discuss the development of Greenlight Re's underwriting portfolio.

Thank you, David. On the last call Len described our underwriting strategy. Today we would like to focus on the development of the underwriting portfolio. I will now provide some more color on the types of opportunities that we have found attractive to give a summary of the portfolio. Reinsurance renewal cycle is not uniform throughout the year. Many programs renew during the first and second quarters but the third quarter is traditionally a slow production quarter. Although our business will not always follow the broader reinsurance market, if there are fewer deals in the market overall we will have fewer deals from which to select. We still are, however, seeing quality opportunities. Although we will not discuss any individual transaction in great detail, we can describe them in general terms.

Of the three transactions that I will discuss, one is a severity program and two are frequency programs. We are the lead reinsurer on all three of these transactions and we control a majority of each of the placements. We wrote an excess of loss program for a multistate medical malpractice writer, that concentrates its capacity in states with favorable tort reform legislation or disruptive market conditions. Generally speaking, we believe the medical malpractice market is competitive. However, the imposition of appropriate tort reforms in a number of states have reduced claim frequency and in some cases claim severity. We believe that by differentiating on a state by state basis we can find attractive opportunities and structures in medical malpractice.

We renewed a casualty Clash program during the quarter. This is a good example of a niche product that is currently capacity constrained. We are providing protection to a casualty reinsurer for an accumulation of loss across multiple casualty lines of business emanating from a single event. There are few sellers of this coverage since most of the casualty writers are buyers of this product. While casualty reinsurance pricing is softening, we were able to retain similar prices and terms for this transaction in 2007. We believe the risk-adjusted returns for Clash will be better than standard casualty reinsurance over the near-term and that we can be more important to our client by providing coverage not readily accessible in the market.

We wrote a nonstandard automobile program concentrated in a small number of states. Program business generally consists of specialized books of business controlled and underwritten by an individual managing general agent for MGA. We continue to believe the program business can be profitable when working with a small number of MGAs that understand their marketplace. Most importantly, we structure this business so that the program managers economics are aligned with the economics of Greenlight Re. In this particular program we liked the market focus and distribution advantage that the program manager has created, and we believe there's a significant opportunity for growth in the future.

Finally, we are involved in a number of transactions relating to the Cayman captive market. These opportunities are varied and often much less competitive as we are the only global reinsurer based in the Cayman Islands. We continue to successfully mine these opportunities. As we have mentioned before, our focus is on developing the right opportunities with the right partners, utilizing the structures which align our interests with our client's interests. In the examples I outlined the least important issue in our mind is the line of business. We are much more focused on each individual transaction and why we believe each transaction will add value to our portfolio.

With our recent IPO and increased capital base, we have seen both the number and quality of our submissions increase. And with increasing contact, the broker community understands more about our appetite for business. We expect the market conditions in both the underlying insurance business and in the reinsurance business to be competitive. However, we believe our generalist underwriting strategy and our lack of premium targets will allow our underwriters to focus on our core underwriting philosophies and to continue building -- finding only those transactions that we believe creates superior risk-adjusted results.

As of September 30, 2007 we were the lead underwriter on a large majority of the gross premium written. In addition, most of this lead premium is related to exclusive deals where we are not only the lead underwriter but also the only underwriter on the program or layer. We are viewed in the reinsurance market as a capable, technical, specialty underwriter, and we will continue to pursue this strategy in 2008.

As of September 30, 2007 our property catastrophe portfolio had an aggregate loss exposure to natural perils of $77.8 million. This is the same number we reported to you in the last earnings call adjusted for foreign exchange as we have not entered into any other catastrophe exposed contracts. This is the absolute amount of risk we are exposed to for multiple events in multiple regions. Our maximum exposure to a single event is $52.5 million.

And now I would like to hand it over to our CFO, Tim Courtis, to discuss our financial results for the quarter.

Thanks, Bart. As you analyze our results once again you should keep in mind that the mix of our business is changing continuously. Since we did not begin underwriting until April 2006 and did not receive our A- rating from A.M. Best until August 2006 we were somewhat limited in the lines of business we could offer a year ago. This is clearly evident in any comparative analysis you might do amongst reporting periods. From an overall financial perspective, our third quarter 2007 results are a reflection of the continuation of our underwriting and investment strategies.

In total, the company reported a third quarter 2007 net loss of $2.1 million compared to a net income of $17.5 million for the comparable period last year. On a fully diluted basis, the net loss was $0.06 per share compared to net income of $0.82 per share for the third quarter of 2006. For the nine months ended September 30, 2007 net income was $6.1 million compared to $39.6 million for the nine months ended September 30, 2006. On a fully diluted per share basis the net income was $0.21 per share compared to $1.85 per share for the nine months ended September 30, 2006.

For the first nine months of 2007 frequency business accounted for approximately 59% of our total gross written premium. While this is consistent with the emphasis we place on frequency business, the percentage measurement is affected by the fact that frequency based quota share transactions report premium writings on a quarterly basis. As a result, it takes longer for the frequency premiums to be reported as premiums written. The composite ratio for our frequency business at September 30, 2007 was 93.7% and 39.9% for severity business, resulting in an overall composite ratio of 81.2%. When we add on the internal expenses of 11.9% our combined ratio was 93.1%.

Net underwriting losses incurred for the nine months ended September 30, 2007 were $31.5 million. Of this total only $4.5 million was attributable to paid losses. This low paid to incurred loss ratio is reflective of an underwriting portfolio that is in development. An investment loss of $4.8 million was reported for the third quarter reflecting a net loss of 0.8% on the investment account managed by DME Advisors. We continue to believe that our investment strategy will enhance book value per share over the long-term and fully recognize that short-term results may be volatile.

We believe that long-term growth and fully diluted book value per share is our most important metric and when we look at a full twelve-month period from October 1, 2006 through September 30, 2007, fully diluted book value per share increased to $15.78 at September 30, 2007, up from $13.48 at September 30, 2006. This represents an increase of 17.1%, which also includes the increase in book value associated with the IPO.

Finally, we have amended our letter of credit facility with Citibank by increasing the available facility from $200 million $400 million. This increased facility along with the existing facility with our other LLC provider provides us with the necessary collateral capacity to pursue attractive underwriting opportunities for the foreseeable future.

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

Thanks, Tim. During the third quarter Greenlight Re made important progress in the execution of our business plan as a company that operates on the basis of a 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. With a strong capital base and our infrastructure fully built, we are looking forward to a successful 2008 and beyond. We appreciate your confidence in our business model and our Company. Thank you again for your time, and we would now like to open the call to questions.

(OPERATOR INSTRUCTIONS) Dean Choksi, Lehman Brothers.

Can you talk about what drove the change in net unearned premium reserves in the quarter?

Certainly the unearned premiums are going to be a function of obviously the severity in the frequency mix. As we add on severity contracts and those contracts which aren't quota share based, obviously you're going to have premiums written upfront followed by large unearned premiums. As those unearned premiums roll off you can expect to see a decrease in the unearned premiums which is what we saw this quarter.

Okay, thanks and I guess for David, it sounds like you're still pretty negative on credit sensitive financials. Can you just elaborate a little bit more on your thesis there?

Thanks, Dean. I don't think there is probably enough time today to give that in any sort of a detailed fashion. But I am genuinely of the view that the various things that have been generically called structured finance probably haven't made all that much sense and that there is an ongoing credit unwind that is taking place as some of these, as the results of these practices come to roost and some people's business franchises that have depended upon the growth of structured finance, find it even -- once the asset price is stabilized, sort of the new origination franchise disappears over time.

Are you expressing your views just in the equity market, or are you using CDS as well?

We're not involved in CDS.

Great. Thank you.

(OPERATOR INSTRUCTIONS) At this time there are no questions.

In closing should you have any follow-up questions, please direct them to Alex Stanton of Stanton Crenshaw Communications at 212-780-1900 or Alex@StantonCrenshaw.com, 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.ky. Thank you again for your time.

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