Greenlight Capital Re Ltd (GLRE) 2007 Q4 法說會逐字稿

Good morning, and thank you for joining the Greenlight RE fourth quarter 2007 earnings call. Joining us on the call this morning is David Einhorn, Chairman; Len Goldberg, CEO and Tim Courtis, CFO. Forward-looking statements that may be made on 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 the risks and uncertainties and assumptions that are enumerated in the company's Form 10K dated March 18, 2008 and other documents filed by the company with the SEC. If one or more risks and 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 remarks.

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

Thank you very much and good morning. My name is Len Goldberg, Chief Executive Officer of Greenlight RE. Thank you for taking the time for joining us this morning. The fourth quarter of 2007 was an interesting period in the re-insurance industry dominated by the impact of the credit crisis on both the liability and asset side of the Balance Sheet of many companies. However due to the net short credit position that David described on our last call and our limited exposure to credit related events on the liability side we earned $0.80 per share in the quarter. While our business model is built for the long-term it is how we perform during these kind of turbulent markets that will help define Greenlight RE. On the underwriting side fourth quarter written premiums were down due to factors that Tim Courtis will explain in his remarks, we are excited about the January 1 renewals where we had success in an increase significantly difficult market. During the IPO process we also discussed the importance of increasing our capital base from approximately $300 million to greater than $.5 billion and the difference that would make and the opportunities we would see and be position to do seize. This has happened as we expected as we are now a lead market for an even wider range of clients. Before discussing some of these new opportunities I want to introduce our Chairman, David Einhorn, who will discuss our overall progress and recent investment results. David?

Thanks, Lenny. The last ten months dating all the way back to the IPO has been a difficult an investment environment as any that we can remember. The unwinding of the credit bubble has had a large impact on the global markets and the economy. From the end of last April through February the S&P 500 declined about 10% and in local currency European markets have fared even worse. During this time E. M. E. advisors generate add positive return in excess of 4%. While that sounds like a fixed income return we believe that it is a reasonable result considering the environment. Indeed some conservative fixed income strategies have performed even worse.

Last July we became concerned about the implications occasions of the bursting of the credit bubble and we shift to do a more conservative stance in our portfolio which we have maintained. We are doing our best to preserve capital and to take advantage of opportunities that we see. We encourage to you keep in mind that one of the inefficiencies we try to take advantage of is having a longer time horizon than many other market participants. In order to do this we have to be willing to have positions that have favorable risk reward profiles but may not achieve good results in the very short term.

Our goal remains to drive long-term growth and book value per share by focusing on both sides of the Balance Sheet. Our performance in the fourth quarter demonstrated our ability to generate returns in a difficult environment. The net quarterly return to the investment account was 4.2% in the fourth quarter even as the S&P fell 3.3%. We accomplish this by maintaining a conservative posture in our portfolio with an average net long exposure of 37%. We generated all of the return from our short portfolio which returned about 7% on a gross basis as our average short fell approximately 12%, and we lost about 2% gross in our long portfolio. About half the short exposure was in credit sensitive financials.

We entered 2008 with a fairly fresh portfolio, approximately 40% of our long portfolio and 70% of our shorts are comprised of positions initiated in 2007. I'd like to remind everyone that our web site which we post the results, they are updated monthly of the investment portfolio and they come out before the first trading day of the month. Greenlight RE investment account declined about 2.8% in January and February. As we moved through this period of this location we've been both patient and opportunistic. We were 41% net long at the end of February which was just slightly higher than at the beginning of the year. We maintained a healthy short portfolio and we were about 53% gross short at the end of February.

It becomes more difficult to maintain short exposure and shorts contribute to performance and fallen value. They naturally become smaller positions and in a steadily falling market it is challenge to go find replacement shorts at high values with poor prospects. However, we remain cautiously positioned. We continue to pursue underwriting opportunities that we believe will generate superior risk adjusted returns on capital over time. Our underwriting team is intensified to right profitable business, not quantity business. So far this has served Greenlight well as the insurance portfolio has contributes to do our growth in book value.

The market has been softening, but we continue to work hard to find good opportunities that fit our business model and we are pleased with the specific new opportunities we underwrote in the January renewal season. As Len will discuss them in a greater detail in a moment. 2008 will be our first full underwriting year with our team in place and our capital rates complete. Greenlight RE has differentiated underwriting and investment strategy will consult to result in unpredictable quarterly results and I might add a likely loss in the current quarter. However we continue to believe that over the long-term this strategy is the best way to generate compelling returns for our shareholders. I'd like to thank everyone for their continued interest and support of Greenlight RE and now I'm going to turn the call back to Len to discuss the underwriting portfolio and particularly the success we had during the January 1 renewal season.

Thanks, David. The market continues to become more competitive but we have been able to renew some good deals and add some new transactions to the portfolio. Some of this is a direct result of our increased capital base. Since the IPO we have seen an improvement in the quality and quantity of opportunities we are evaluating. Our success was also the result of a significant amount of communication with the brokers we work with, who represent clients we believe would be good business partners for us. We spent a great deal of time in 2007 telling the Greenlight RE story and cultivating relationships that are now paying dividends in the form of attractive opportunities and bounds transactions. January 1 is an active renewal date in the insurance business. Even for our book of non-commodity business we have a number of transaction that renew the at that time. We also looked at quite a few new opportunities. We wrote about gross written premium of about $70 million for the first quarter of 2008. This is about double over the first quarter of 2007. Since it's majority of the January business is quota share, this business will also generate significant premium for Greenlight RE throughout the year under GAAP accounting rules.

I'd like to describe some key decisions we made that will impact our underwriting portfolio for 2008. We signed a large commercial automobile quota share with a recognized specialist underwriter. This transaction is a good example with a contract with Greenlight RE features, a specialist underwriter, a private transaction, good risk adjusted return and financial success for our partner only when the business performances well. We successfully converted one January renewal for a Cayman captive writing medical malpractice with a small share of a traditional reinsurance contract to a multi-year contract with a structure not generally available in the market. Because of this restructuring which was been beneficial both the client and to us we were able to take 100% of this deal. We decided to redeploy some of our property aggregate from non U.S. exposed business where the pricing was dropping precipitously to U.S. and peak zone exposures where we can continue to generate acceptable risk adjusted returns.

We signed several new frequency transactions where we were the lead underwriters. We believe all of these deals meter or exceed our risk adjusted return hurdles even as margins continue to be compressed in an increasingly competitive market. The transactions covered workers' compensation, general liability and personal automobile where our business partners are experts in their respective fields. These transactions require extensive due diligence including meetings with the brokers and clients at our offices and on-site due diligence visits. Though early we believe we are establishing excellent working relationships through direct communication and the creation of unique transaction structures. We are finding that clients generally appreciate our high touch, cradle to grave underwriting approach which we expect to result in mutually beneficial long-term relationships. We also decided not to renew several transactions including the largest frequency transaction from our 2007 portfolio, a non-catastrophe quota share from a writer of Florida homeowner's insurance. This decision was largely an economic decision as the Florida market is becoming increasingly competitive and our expected return at the renewal terms was not acceptable. We believe Greenlight RE is position to do partner with this company in the future should the need arise.

The cumulative impact of these decisions are make our 2008 business more diversified than in 2007. Our efforts around January renewals have put news a good position for the 2008 underwriting year. We have been selective in choosing our partners and we continue to position the book more towards frequency accounts and contracts where we are the lead or private reinsurer. Though general market conditions continue to worsen we believe we are still finding good opportunities to review. We also expect to renew many of the transactions we bound throughout 2007 as they come up the over the year. We will continue to be disciplined in our risk selection and expect to only right transactions that produce superior risk adjusted returns on deployed capital. Our property catastrophe portfolio had an aggregate loss exposure to natural perils of $75.7 million compared to $77.8 million recorded for the ends of the third quarter. This is the absolute amount of our risk exposure for multiple events in multiple regions. Our maximum exposure to a single event is $60.2 million. These numbers include all January 1 renewal activity on our natural catastrophe exposed portfolio. Now I'd like to hand it over to Tim to discuss our financial results for the fourth quarter and for year end.

Thanks, Lenny. Good morning everyone. As you analyze our results once again we ask you to keep in mind that our mix of business is changing continuously. Since we did not begin underwriting until April of 2006, and didn't not receive our A minus rating from AM Best until later in that year, we were somewhat limited in the lines of business we could offer during 2006. This is clearly evident in any comparative analysis you might do amongst reporting periods.

From an overall financial perspective our fourth quarter 2007 results are a reflection of a successful implementation of our underwriting and investment strategies as both sides of the Balance Sheet contributed to our fourth quarter results. In total Greenlight Re reported fourth quarter 2007 net income of $29.2 million, compared to a net income of $17.4 million for the comparable period in 2006. On a fully diluted per share basis the net income was $0.80 per share compared to net income of $0.81 per share for the fourth quarter of 2006. For the year ended December 31, 2007, net income was $35.3 million, compared to $57 million for the year ended December 31, 2006.

On a fully diluted per share basis net income was $1.15 per share compared to $2.66 per share for the 2006 calendar year. For the full year 2007 frequency business accounted for just over 60% of our gross written premium. While this is consistent with the overall 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 total amount of frequency premiums to be reported as written premiums. However, if you look at net earned premiums for 2007, frequency business accounted for 37% of total net earned premium. For the year ending December 31, 2007, the composite ratio for our frequency business was 94.2% and for our severity business it was 41.7% resulting in an overall composite ratio of 80%.

When we add internal expenses of 12.2% our total combined ratio was 92.2%. In addition to underwriting profits of approximately $8 million in 2007 which is net of all operating expenses, we generated incremental investable float of $34 million. It's always great when our business generates float for our investment strategy but its even better when we make underwriting profits at the same time. This certainly illustrates our dual engine strategy. Gross and net premiums written for the fourth quarter were lower than the comparable period in 2006 due to several factors. In the fourth quarter 2006 we wrote a large homeowners contract that covered a fifteen-month period and had a sizeable inception unearned premium reserve session which increased premiums booked in the fourth quarter of 2006. Secondly during the fourth quarter 2007 we commuted a calendar year contract which resulted in a reversal of certain of the premium estimates previously written. Additionally the premium estimates on two other contracts were revised based upon updated information received from the insured.

Finally, during the fourth quarter 2007 we bound two quota share accounts which will generate written premiums and increasing float for us in future periods. Net loss and loss adjusted expenses incurred for the year ended December 31, 2007, was $39.5 million. Of this total, we had only $8.8 million of net paid losses. This low paid to incurred ratio once again reflects the start up nature of our underwriting portfolio. We reported investment income of $26.9 million during fourth quarter, reflecting a net return of 4.2% on the investment account managed by DME Advisors.

In closing we want to stress our believe that long-term growth and fully diluted book value per share is our most important metric. When we look at the full 12 months of 2007, fully diluted book value per share increased to $16.57 at December 31, 2007. This is up from $14.27 at December 31, 2006. This represents an increase of 16.1%, which also includes the increase in book value associated with the IPO. I'll now turn you back over to Lenny who will provide some concluding remarks.

Thanks, Tim. A quick correction, I believe Tim said 37% of the net earned premiums was frequency business, I believe the correct number is 73% of our net earned premium is frequency business. He must have read that number backwards. During the fourth quarter of 2007, Greenlight RE made important progress in the execution of our business plan as a company that operates a differentiated reinsurance strategy. It is our long-term objective to develop a profitable liability portfolio and to earn above average risk adjusted returns and actively managing both sides of the Balance Sheet. With a strong capital base, our team in place and our infrastructure fully built we are looking forward to a successful 2008 and beyond. We appreciate your confidence in our company. Thank you again for your time and now we would like to open the call up to questions.

(OPERATOR INSTRUCTIONS). Your first question is from Jim Bradshaw from Bares Capital Management.

I wonder if you could speak briefly about when you miss out or lose out on a deal underwriting what do you think the reasons are, is it mostly pricing or what other factors seem to be involved?

Jim, I would say pricing at this point in the cycle is generally the number one reason. But often before we get to that point we will have worked long enough with the client to know whether they want to really be a partner with us over the long-term. So those deals that do leave us for pricing reasons we usually don't get to the point where we are actually quoting those deals.

I see. So when you say long-term you mean future renewals you feel pretty confident that that's the type of company that would want to renew with you?

That's the intent. We put a lot of work into every renewal and we would like to think that our partners would be long-term partners with us.

And then for the renewals that you end up losing out on not including the ones like the voluntary losses, is that kind of a similar thing? You think it may be pricing at that point?

I think some of it is definitely pricing, absolutely.

I think most of my other questions were answered in your opening comments. Appreciate it.

(OPERATOR INSTRUCTIONS). Your next question is from Dane [Choksy] from Lehman Brothers.

Good morning, gentlemen. Len, can you talk about areas in the market where you see opportunities for better economic returns, kind of where you are focusing your marketing efforts?

Sure, I think as we described on the call today what we are really looking for are, rather than a particular line of business, is we are looking for a couple of things, number one, we are looking for market dislocations and they can come in all shapes and sizes. They are more difficult to find when there is excess capital in the industry than when there is not enough capital in the industry but they are still out there. But the other important thing about our model is we are looking for real long-term partners that will protect our down side in difficult markets and share our upside in good markets.

Thanks. And then for the first quarter you mentioned that there was a large commercial auto share contract, was that the largest contract for the quarter and how large was it?

That is the largest single contract for the quarter. We expect that contract, although it's early days, to generate over its life time about $70 million of premium annually.

Thanks.

At this time there are no further questions. Are there any closing remarks?

Just thank you again for your time and if you have any follow up questions, please direct them to Alex Stanton of Stanton Crenshaw communications at (212)780-1900, 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 Web site at www.greenlightre.ky Thank you very much.

Thank you. This concludes today's call. You may now disconnect.