Greenlight Capital Re Ltd (GLRE) 2008 Q1 法說會逐字稿

Good morning, everyone, welcome to the Greenlight Capital Re 2008 earnings conference call. Joining us today on this morning call is David Einhorn, chairman, Len Goldberg, Chief Executive Officer, Bart Hedges, President and Chief Underwriting Officer and Tim Curtis, 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 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 historical facts that rather reflects the company's current expectations, estimates, predictions, about future results and events and are subject to risks and uncertainties and assumptions including risks and uncertainties and assumptions that are enumerated in the company's annual report on Form 10-K for fiscal year ended December 31st, 2007, and other documents filed by the company with the SEC.

If 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's remarks.

I'd like to turn the call over to Mr. Len Goldberg.

Thank you Tabitha, good morning. My name is Len Goldberg, Chief Executive Officer of Greenlight Capital Re. Thank you for taking the time to join us this morning. The first quarter of 2008 brought fresh challenges to our business with the continuation of the credit crisis affecting the balance sheets of many in the industry and a softening reinsurance environment making marketing conditions more difficult.

We ended the quarter with a small underwriting gain and small investment loss. In total, we had a net loss of $0.13 per share for the quarter. While we did not increase our book value per share in the quarter, we successfully added new business that we believe has adequate returns and we preserved capital in a turbulent investment environment. Gross written premium for the first quarter increased about 86% to over $70 million compared to the first quarter of 2007. The new business was mostly private or lead positions on frequency accounts with expert partners. As we head into the 2008 windstorm season, we have further reduced our catastrophe exposure as pricing continues to soften and we prefer to lose the exposure rather than underprice it. On the asset side we have a fairly fully invested portfolio of long-and short ideas.

In April, as reported on our website, we achieved a 2% return on our investment portfolio. Before discussing our first quarter underwriting performance in greater detail I want to introduce our Chairman, David Einhorn, who will discuss our overall progress and recent investment results. David?

Thanks, Lenny, May 24th will mark the anniversary of our IPO, during the past year the S&P declined 8% and reinsurance pricing has softened, nonetheless we weathered this tough environment. The Greenlight Re investment account has returned 8.2% during the 12 months ended April 30th. The first quarter of this year proved to be challenging as the S&P fell about 9.4% and European markets declined even more. This was particularly difficult for our investment portfolio as we have more net long exposure in Europe than in the United States. The Greenlight RE reinvestment portfolio fell about .9% in the first quarter.

Overall, our shorts contributed 7.8% to our gross returns. The gains were broad-based throughout the short portfolio headed by shorts of credit sensitive financials particularly investment banks. Longs cost us about 8% on a gross basis. The losses were also broad based lead by Helix, Microsoft, URS and most of the European holdings. In April we generated 2% return so our investment account is up 1.1% for the year.

As we went through the first quarter our net long exposure rose from 34% on January 1st, to 56% on March 31st as we exited 13 short positions. When the shares fell to prices that made them no longer attractive shorts we covered them and lived with greater net long exposure. As stocks went on sale in the first quarter, some for good reason and others in sympathy, we took advantage of some select opportunities. We added a couple of new long positions and increased a few of our existing long positions. As we invest from a bottoms up we do not generally let macro forecasts drive the portfolio composition. However, this happens naturally as we evaluate the long and short opportunity sets.

When there are an abundance of cheap stocks we generally get more net longs, when get things fully valued we're less net long. Given what we see as a difficult consumer and inflation issues, it is tough to be particularly optimistic at the moment. And the recent rally we added several new short positions in April which reduced our net long waiting to about 42% entering May. We remain cautious about the current environment. In our long portfolio we primarily own unlevered companies that we believe will do well over the long run and are fundamentally positioned to withstand a tough economic environment. We are short companies which should have a difficult time given the current head winds, investment banks, commercial banks, the rating agencies and several companies that are trading at high multiples of earnings guidance that assumes the second half economic rebound.

While it would have been great to start our first full underwriting year post-capital raise in a healthier pricing environment, we are confident that we can continue to find underwriting opportunities that we believe will generate superior risk adjusted returns on capital over time. There is little low-hanging fruit in the reinsurance markets currently, but our underwriting team continues to develop interesting ways to attack the market. The team has reduced natural catastrophe exposure in the face of softening rates and is focusing on specialist frequency accounts.

While better pricing environment might have translated into a quicker ramp up, we are pleased with the current measured pace of premium growth and the associated increase in float for our investment programs. We plan to hold an investor meeting in New York on June 3rd. We will be providing logistical details at the end of the call. I hope to see everybody there. Thank you all for your continued interest and support in Greenlight RE. I'd like to turn the call over to Bart Hedges to discuss Greenlight Re's underwriting portfolio and in particular look at the natural catastrophe exposures as we head into the 2008 wind storm season.

Thanks, David. Last call we talked about the success of our January 1 portfolio. And how the frequency business generates diversified premium throughout 2008. As you are aware, reinsurance market are difficult. Prices are dropping in many areas, interest rates are low and inflation level appears to be headed higher. Although it is a difficult market, we believe our bottoms up deal by deal underwriting approach will allow us to continue to find opportunities in niche areas supporting special underwriters. These opportunities are under less pressure than commodity products and continue to provide acceptable risk adjustment returns.

When one looks at the break down of our portfolio by line of business it is evident we're continue to go diversify and that now we have concentrations in motor and in health. While we think they're excellent opportunities in both lines we focus everything we do on the bottoms up deal by deal basis rather than line of business.

With wind storm season on our door step we thought it would be a good opportunity to review how we underwrite our natural catastrophe exposures. It is worth discussing as we tend to look at this differently than most reinsurers. We think it is of utmost importance to understand the outcomes in all of the business that we undertake. This is true for how we price business, how we look at the aggregate risk we commit to. It is also true for how we measure and report to you our natural catastrophe exposures. Models are very useful in our business but they are at a minimum estimates of reality. As well, interesting and off to unexpecting thing happen beyond the 99 percentile of the modeled results. In some cases the maximum amount of risk is equal to the 99 percentile and others can be multiples of 99 percentile.

An example from the current environment is the credit crisis. It seems like big chunks the credit crisis have been the result of both overreliance of models and under concerns about what happens in details beyond the 99 percentile. So when we measure our exposures to natural perils we report the maximum amount we can lose under the sum of our exposures. We measure this for a single event loss by adding up all of the exposed limits under all of our contracts and subtracting any reinstatement premiums that are--that we are entitled to receive. We calculate our potential aggregate loss simply by repeating the same calculations towards many reinstatements of limits that are in each of our contracts in all of the exposed loans.

The aggregate loss is the maximum potential loss and not the outfit for the model. We prepare this information in USA, including the Caribbean, Europe, Japan and the rest of the world. Currently our property catastrophe portfolio has an aggregate loss exposure to natural perils of $70.5 million compared to $75.7 million as of year-end 2007. Our maximum first loss event has been reduced to $50 million from $60 million as of year-end. You will note that in each of the last two quarters the USA single event aggregate loss equalled to total single event and aggregate loss. This means that each one of our contracts U.S. exposure which generates the best risk return characteristics. In addition to reductions of first event and aggregate exposure we concentrated behind a small number of underwriters that have proven to be responding to market conditions in an appropriate manner. We believe these clients are not changing price and repositioning their business to find the best risk adjusted returns. And now I'd like to hand it over to Tim Courtis to discuss our first quarter financial results.

Thanks, Bart. Greenlight reported loss of $4.8 million compared to a loss of $13.1 million for the comparable period in 2007. On a fully diluted per-share basis the loss was $0.13 per share compared to a loss of $0.61 per share for the first quarter of 2007. For the first quarter of 2008 frequency business accounted for just over 80% of our gross written premium which is consistent with the overall emphasis we place on this business.

As mentioned in previous quarters, for quarter share frequency business, it takes longer for the ultimate premium on these contracts to be reported. Due to our preference to write a small number of larger transactions, we expect that our mix of business between frequency and severity will fluctuate. The composite ratio for our frequency business for the first quarter of 2008 was 91.2% and 59.4% for severity business.

Resulting in an overall composite ratio of 80.2%. Although we are not currently a direct writer of public company or financial institution directors and officers' liability coverage, which we believe will suffer the greatest exposure to losses from the current credit crisis, we do have some exposure to loss through our casualty clash exposure. Our loss ratio of 44.1% during the quarter included reserving to our maximum limit for a potential casualty clash claim. First quarter 2008 loss and loss adjustment expenses incurred were $12.1 million. Of this total we only had $3.6 million of paid losses. This low pay to incurred ratio once again reflects the start-up nature of our underwriting portfolio.

Internal expenses were 16.2% of net premiums earned, so our combined ratio for the quarter was 96.4%. Approximately $1.5 million of internal expenses booked in the first quarter of 2008 related to additional accruals of 2007 bonuses which the board awarded due to good underwriting results. However, since a significant portion of the bonus for the 2007 year is deferred until 2010, this bonus accrual would be adjusted up or down depending upon any favorable or unfavorable loss developments that we experience on that book. Apart from this additional bonus accrual the total internal expenses planned for 2008 remains similar to those experienced in 2007.

We reported an investment loss of $5.8 million during the first quarter reflecting a net return of negative .9% on our investment account. It is worth noting that the first quarter of 2008 results reflect the establishment of an investment joint venture with DME advisors. As such, both our investments on the balance sheet and net investment income on the income statements reflect 100% of the ventures investment position and the investment result. The minority interest held by DME advisors is reported separately in both the balance sheet and the income statement. We have provided additional disclosures this quarter as regard by FFAS157 and 159 with respect to fair value measures and the fair value options. It should be noted over 98% of our assets are level 1 with only approximately $12 million representing less than 2% of our investment portfolio being invested in what is considered to be level 3 assets. Please also note that there's a different presentation on the statement of cash flows in the first quarter of 2008 with respect to investing activities. Cash flow movements with respect to our investments and securities and derivatives are now classified as investing activities, whereas previously these were reported as operating activities. This change is in accordance with the new GAAP guidance.

As you are aware we postponed our annual general meeting because of a failure of our transfer agent to deliver proxy statements to all our shareholders. New proxy statements will be sent out shortly after the revised record date of June the 2nd, and our annual general meeting will be rescheduled to July 10. In the new proxy statement. in addition to proposals to appoint a slate of directors, and ratify auditors, we anticipate that we will ask shareholders to approve a resolution removing restrictions in our articles of association requiring shareholder approval for share buy-backs. This change, if approved, should provide the company with additional flexibility to manage capital.

In closing we want to once again stress our belief that long-term growth and fully diluted book value per share is our most important metric. When we look at the 12 months ended March 31st, 2008, fully diluted book value per share increased to $16.40. Up from $13.67 at March 31st, 2007. This represents an increase of 20% which also includes the increase in book value associated with the May 2007 IPO. I'll now turn the call you will back over to Len who will provide some concluding remarks.

Thanks, Tim. The first quarter of 2008 continues to progress of Greenlight RE in a few important ways. We're increasing frequency orientation and reducing natural catastrophe exposure to run up to wind storm season. In all markets, but especially in the current environment of softening pricing and low interest rates, we believe that we are uniquely positioned to grow our book value, our single most important metric.

We are also pleased to announce our first investor meeting on Tuesday June the 3rd, 2008, beginning at 4:00 p.m., at the Scandinavia House at 58 Park Avenue, in New York City. A press release will be issued shortly. David, Bart, Tim and I look forward to seeing you all there for an in-depth interactive update.

Finally, we would like to thank Jerome Simon for his dedication and service to our board. As per our prior announcement Jerome resigned on May 1st, and we wish him the very best in hull his endeavors. At the May 1st board meeting we increased the number of board members to seven, and appointed Brian Murphy an Ian Isaacs to serve on the board. We will ask our share holders to ratify all our board members during the annual meeting. Thank you again for your time and now we would like to open the call up for questions.

(OPERATOR INSTRUCTIONS). Your first question comes from Eric Swergold with Gruber & McBaine. Your line is open.

Hi, it is Eric, good morning. Given your relatively negative view of the world as expressed by your load on exposure in the equity markets as well as your very cautious stance in the underwriting markets, it is a bit of a surprise to me that you haven't taken any position in the precious metals markets either directly in goal or in the gold mining companies. David, can you give us some explanation as to either your aversion to the sector why it doesn't fit within your thesis of a negative financial outcome?

Yes, certainly. Metals are interesting in the sense that a lot of people view them as stores of value. So as to replace, they fight the weaknesses and things like paper currencies, and view these things of stores of value and own them for diversification or because they think they will do well as a result. My own personal bias on the matter is that gold, like anything else, does not have an intrinsic value that is any different really from paper money other than the sense that you could use it in jewelry and electronics, and so forth.

And as a result of that, it, like the paper currencies, is also worth whatever everybody agrees that it is worth. So it is very hard to understand sort of a non-speculative case for why somebody needs to invest in gold or precious metals as a diversification away from currency that has its own issues and problems. I know that is probably not a popular majority opinion. I don't think it particularly harms us in the sense that on the worst day it is a missed opportunity for us and it does not play particularly well into our basic skill-sets. As it also turns out though, incidentally, we did have a short position in a precious metals company in Ecuador, that had some unfortunate developments that actually helped out our results in April based upon some of the nationalization efforts going on in that country.

(OPERATOR INSTRUCTIONS). Your next question comes from Jim Bradshaw with Bears Capital Management.

I wonder if you can speak briefly about what you think the Cayman Islands captive market opportunity is for you long-term. Either relative to your other opportunities or just kind of stand-alone, how ever you want to -- .

Sure, Jim. Oh, Jim, there's about 750 captives here in the Cayman Islands with invested assets in excess of $33 billion, roughly half of those are in the medical malpractice markets, and the other half are all lines of business. We've had a number of successful meetings with folks here and I think currently our portfolio is probably in the neighborhood of 15 to 20% in and around Cayman-based captives. I do think it is early days, and as people do change their buying habits, our penetration could increase even more.

Okay. Great. I appreciate your time.

Operator?

Yes, thank you, ladies and gentlemen, if you have any following 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 at our website at www.greenlightre.ky. Thank you. You may now disconnect.