Greenlight Capital Re Ltd (GLRE) 2008 Q3 法說會逐字稿

Good morning, everyone, and welcome to the GREENLIGHT CAPITAL RE Third Quarter 2008 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 fact but rather reflect the company's current expectations, estimates and predictions about future results and events that are subject to risks, uncertainties and assumptions including risks uncertainties and assumptions that are enumerated in the company's annual report on Form 10-K for the fiscal year ended December 31, 2007, and other documents filed by the company with the SEC.

If one of 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 or that are as a result of new information, future events or otherwise.

(Operator Instructions) I would now like to turn the call over to Mr. Len Goldberg.

Thank you very much, and good morning. My name is Len Goldberg, Chief Executive Officer of GREENLIGHT RE. Thank you for taking the time to join us this morning.

The third quarter of 2008 was a good quarter for our underwriting portfolio and a difficult quarter for our investment portfolio.

Our net loss for the quarter was $118.4 million or $3.29 per share. Our fully diluted book value per share was $14.22 as of September 30, 2008, a 9.9% decrease from $15.78 per share as of September 30, 2007. In addition, we had an October investment loss of 12.7% or approximately $79 million.

While we are not pleased with our performance, we believe we have proven our ability to navigate through some of the most difficult obstacles we could ever imagine and remain in a strong position to capitalize on new opportunities. We believe that our premium to capital ratio is among the most conservative in the industry. This should serve us well in the near term as we expect reinsurance pricing to improve, in some cases dramatically so.

We intend to continue to pursue our strategy of maximizing risk-adjusted returns on both sides of the balance sheet.

Gross written premium increased for both the third quarter and the year-to-date compared to the corresponding periods in 2007. In the second quarter, we told you that premiums were coming in lower than initially expected as our clients were protecting their interests and ours in a softening market. Even at these lower-than-initially-expected levels, our premiums have increased year-over-year as we continue to expand and diversify our portfolio.

As of September 30, 2008, frequency business makes up 79% of our premium volume compared to 59% as of September 30, 2007. These statistics reflect the implementation of our focus on expanding our frequency business. This focus served us well in the third quarter as we did not suffer an insurance loss from Hurricanes Ike or Gustav. Our President and Chief Underwriting Officer, Bart Hedges, will talk in greater detail about our underwriting portfolio in a few minutes.

Now, I would like to introduce our Chairman, David Einhorn, who will discuss our overall progress and recent investment results. David?

Thanks, Lenny. We appreciate everyone taking the time to join us for the call this morning. As you know, GREENLIGHT RE's investment portfolio is managed by DME Advisors LP, an affiliate of GREENLIGHT CAPITAL.

GREENLIGHT RE's third quarter investment portfolio result of minus 15.9% was the worst quarterly performance result in GREENLIGHT RE's history. We're extremely disappointed with this result. We have been cautious about the environment since last July. A more conservative net long portfolio exposure compared to our compared to our historical positioning helped us weather the financial crisis in the last half of 2007 and the first half of 2008.

By adding additional short exposure, particularly in the financial sector, which was more directly responsible for the credit crisis, we believed that we positioned the portfolio to preserve capital should the financial markets deteriorate further. We were wrong.

Through the third quarter, GREENLIGHT RE's portfolio was approximately 17% net long. This is the lowest net long quarterly weighting we've maintained. We made the mistake of thinking that our significant short portfolio would protect a fairly fully invested long portfolio that we estimated to be attractive and cheap. In hindsight, we should've been more conservatively positioned from a gross invested standpoint, and we took measures to bring down overall exposures in September as global financial markets deteriorated further.

In September, the US government took an unprecedented action by banning the short selling of approximately 1,000 financial firms in order to prevent a systemic collapse of the financial system. The stocks that GREENLIGHT RE was short, which were the center of the problems in the financial industry, are the same stocks that investors believe to be direct beneficiaries of government actions. While the short selling ban failed to prevent a decline in the overall market, it didn't support the short-term share price of certain companies.

During the quarter, our long portfolio under performed the S&P, which declined about 9%, while our short-term portfolio only made a minimal gain. Our long portfolio suffered from analytical errors in a couple of names and from the widespread deleveraging occurring across the globe.

GREENLIGHT RE generally does not employ leverage in its investment portfolio because we want to be able to expand systemic shock and not be put into a position to be forced to sell longs or cover shorts that we believe to be long-term attractive investment because of temporary dislocations.

We entered October with a small positive net exposure. Despite this positioning, our investment portfolio sustained a further loss of 12.7% during the month. The biggest contributor to the loss was our long position in Helix Energy Solutions, an energy company that was hurt by both declining oil prices and the recent hurricanes in the Gulf of Mexico.

The second biggest loss came from a relatively small position we held in the Porsche stock whereby we long of Porsche stock and shorted Porches ownership in Volkswagen stock. As has been widely reported, Volkswagen shares appreciated over 350% in two days after Porsche announced they had cornered a market in Volkswagen shares and invited short sellers to "close their positions unhurriedly and without bigger risk." Even though this was not a large position, a move of this magnitude did create an outside loss.

I'd like to talk a bit about how GREENLIGHT RE's portfolio is positioned today and where we stand going forward. Our portfolio is more net long than at the beginning of October as GREENLIGHT RE has been a net buyer, and the global equities collapsed in the first half of October, while our short exposure increased at the same time. We remain long cash flow positive companies with generally un-levered balance sheets that we'd believe have already priced at a severe downturn.

We continued to be short companies that we believe will be challenged given the real and present headwinds our economy faces today. Namely, we continue to be short large financial institutions with levered balance sheets thought to be the best-of-breed companies that are being severely impacted by the contraction of credit.

We are also short companies with optimistic assumptions that are exposed to a weakened consumer. There are plenty of opportunities to evaluate, and we think that there will be an expanded opportunity set in the future, although we currently remain in the conservative posture and plan to be patiently opportunistic.

The most important ongoing concern at GREENLIGHT RE is preservation of capital and generating positive risk-adjusted returns. Although our investment portfolio hasn't accomplished this more recently, we believe our investment approach and discipline will allow us to general positive risk-adjusted returns to our shareholders in the long term.

On the underwriting side, we're excited about the current changes in the market. We believe that the price of risk has increased everywhere, including in the reinsurance industry. GREENLIGHT RE was built specifically to opportunistically write business in markets where demand for reinsurance greatly exceeds supply. We believe that, given our conservative underwriting approach to date, we have the capacity and the expertise to take advantage of any dislocations arising in the market.

Now I'd like to turn the call over to Bart to discuss GREENLIGHT RE's underwriting portfolio, in particular, going forward into 2009.

Thanks, David. The third quarter of 2008 was a continuation of the same underwriting strategy that we've employed since we began our underwriting business in early 2006. We continue to find excellent partners in a number of lines of business, which has allowed us to diversify our portfolio.

As Lenny previously mentioned, we have been building out the frequency portfolio, which is now significantly larger than the severity portfolio. While we have no targets and the mix of business will fluctuate from time to time, we believe our portfolio will always maintain a frequency orientation.

There were two major hurricanes that made landfall in 2008, Gustav and Ike. There were also a number of smaller cat events. We have taken no losses from these events. The major reason for this was a well-defined strategy in 2007 and 2008 to deploy our catastrophe capacity at higher layers mixed with a bit of luck.

We took this high-access approach for two reasons. First, we thought the pricing was better. And second, if we did take a loss, we wanted the event or events to be large enough to move pricing prospectively so that we could be in a position to redeploy capital the following year at those higher rates.

Even though Ike loss estimates continue to move up, we believe our covers are far enough away from the action that even significant increases to current estimates would not present an issue for us.

As Lenny and David mentioned, September and October were volatile months for our investment program. However, we believe our premium-to-capital ratios are still amongst the lowest in the reinsurance industry. Since we focus on frequency business, we believe our underwriting program should also be less volatile over time than cat focused reinsurers. We believe that our third quarter underwriting results have proven this point.

We do not believe, however, that that will have a significant impact on our underwriting strategy. Most of our existing clients are small specialty companies, single-state writers, risk retention groups, specialists, Lloyd's syndicates, captives and the like. We believe most of our current client base trades with us because of our value-added approach to the issues and our A-minus/A investor rating.

We also believe that there is a large potential client base of these specialist organizations that we will be able to selective add to the portfolio over time. We believe that it is very much business as usual for the underwriting portfolio except for one thing. As David mentioned, the price of risk has increased across the spectrum, and reinsurance is no exception.

For 2009, we are already seeing signs of a hardening natural catastrophe market. If these trends continue, 2009 could be a year in which we may opportunistically expand our natural catastrophe portfolio. However, since our orientation is for frequency business, we will seek to limit our exposure in this area. If natural catastrophe capacity is scarce, we will also judiciously utilize this capacity to deepen our relationships with clients in other lines of business.

The casualty picture is much less clear at the moment. We believe pricing will increase but not necessarily immediately. In fact, original pricing in some of this business could go down in the short term as the healthier insurers compete for market share at the expense of the less healthy companies. So we will tread carefully.

We believe that the credit crisis and the subsequent economic downturn will create liability issues in a number of lines of business, most notably directors and officers, or D&O coverage. We have a limited amount of D&O exposure through some of the clash contracts we've wrote and discussed on earlier calls.

We have recognized losses on some of these clash contracts, but we have yet to see the industry as a whole recognize the D&O issues that will emerge both on a primary and a reinsurance basis. We believe that once major players start recognizing these losses, the effect on pricing in both D&O and other casualty lines could be dramatic.

Overall, we believe our current portfolio will benefit from a hardening market and an increased cost of risk. We expect it will be in a good position to add new long-term frequency clients, as well as write both property and casualty severity contracts on an opportunistic basis. If the markets harden as expected, our strategy of preserving capital in softer markets and deploying more capital in harder markets will begin to play out more clearly in 2009.

And now, I would like to hand it over to Tim Courtis, our Chief Financial Officer, to discuss our third quarter financial results.

Thank you, Bart. GREENLIGHT RE reported a net loss of $118.4 million for the third quarter of 2008 compared to a net loss of $2.1 million for the comparable period in 2007. On a per share basis, the loss for the three months ended September 30, 2008, was $3.29 per share compared to a loss of $0.06 per share for the third quarter of 2007.

For the nine-month period ended September 30, 2008, the net loss was $89.6 million compared to net income of $6.1 million for the nine months ended September 30, 2007.

On a per share basis, the net loss was $2.49 per share compared to net earnings of $0.21 per share on a fully diluted basis for the comparable period in 2007.

Premium written during the third quarter of $37.7 million was higher than the $19.8 million of premium written during the third quarter of 2007. This increase is primarily the manifestation of the additional quarter share frequency business that we have written during the latter part of 2007 and continuing into 2008. As mentioned in previous quarters, it takes longer for the ultimate premium on these quarter share contracts to be reported.

The composite ratio for our frequency business for the first nine months of 2008 was 88.9%. This compares to the reported composite ratio of 93.7% for our frequency business for the comparable period in 2007. The improved composite ratio on the frequency business is primarily a result of favorable loss developments on certain 2006 and 2007 frequency contracts.

The composite ratio for our severity business for the first nine months of 2008 increased to 73.1% compared to 39.9% for the comparable period in 2007. The increased composite ratio in our severity business is a combination of writing a more diverse line of business mix during 2008, which have inherently higher loss ratios, as well as increased loss estimates on certain 2007 severity clash contracts.

The aggregate composite ratio of 83.7% reported for the first nine months of 2008 for both the frequency and severity business compared to an overall composite ratio of 81.2% reported during the same period in 2007.

Internal expenses for the nine months ended September 30, 2008, were 13.8% of net premiums earned, resulting in a combined ratio of 97.5% for the first nine months of 2008.

As previously mentioned, for the third quarter, we reported a net investment loss of $117.8 million reflecting a net loss of 15.9% on our investment account. For the nine months ended September 30, 2008, we reported a net investment loss of $92.5 million or a net loss of 12.9% on our investment portfolio for the year-to-date.

In closing, we wanted 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 September 30, 2008, fully diluted book value per share decreased to $14.22 from $15.78 at September 30, 2007. This represents a decrease of 9.9%.

I'll now turn the call back to Lenny who's provide some concluding remarks.

Thanks, Tim. While the third quarter of 2008 was difficult across all financial markets, we believe we have weathered the storm and are positioned to take advantage of an increasingly hardening market in 2009 and beyond. We will continue our strategy of maximizing risk adjusted returns on both sides of our balance sheet and will continue to proceed cautiously.

Finally, as part of our ongoing rating process, we continue to maintain close communication with A.M. Best. As is our normal practice, we have kept A.M. Best fully informed of all developments on both our underwriting and investment portfolios up through the presence. A.M. Best has confirmed to us that the events through the end of October will not create any issues related to our rating and that we are currently more than adequately capitalized, even under significant stress testing of our capital base.

And now we would like to open the call up to questions.

(Operator Instructions) Your first question comes from the line of Jim Bradshaw of Bares Capital Management.

Good morning. I wonder if you could just speak briefly about your credit facility with Citi and whether or not you're seeing any tightening of that at all?

Hi, it's Tim Courtis. We do have a $400 million letter of credit facility with Citibank. It is annually renewable and currently runs to the Fall of 2009. We have not had any discussions with them otherwise.

Okay, great. I think you guys already answered most of my other questions, so I appreciate it.

Thanks, Jim.

(Operator Instructions) At this time there are no further questions.

We now have a question of the line of Marvin Kline of Logan Capital.

My question has to do with the recent price of the stock. Do you have any reasons to suspect that there's been a lot of dumping in the stock by hedge funds who are trying to improve their liquidity?

Hi, Marvin. We really have no insight into whether that's the case or not.

Okay, thank you.

Your next question comes from the line of Ian [Macovere] of Blackhawk Capital.

Hi, good morning. David, I was wondering if you could comment on the extent to which currency movements may have contributed to the investment losses in the recent quarter.

I don't have that in front of me, but my instinct is that currency movements, believe it or not, were actually probably a positive. And I know they were a positive in October.

Okay. Thank you. That was my only question.

Sure.

(Operator Instructions) Your next question comes from the line of Andrew Sole of Esopus Creek Advisor.

Good morning, and I apologize for this question if you've already addressed since I got on the phone a little late. Can you tell me if the company still has exposure to this Porsche/VW trade?

Yeah, I can address the question. We do not have a practice of disclosing exactly what our current positions are or our current trading strategies relating to particular names. So it's something we're probably not going to answer at this time.

Your next question comes from the line of Mark [Stalum] of Mount Capital.

My question is for David, I guess relating to the previous question. But with what we see in Porsche/VW, at any time did you have any issues regarding margin calls or any kind of prime brokerage issues with that position?

We did not have any prime brokerage issues with that position, and we did not have a specific margin call. We run the account on an un-levered basis. And as such, we have significant ability not to have to worry about haircuts and things such as this.

And just a follow-up, could you give an idea of just -- you mentioned those two positions that contributed to the -- I mean, can you give us a rough idea of how much they contributed to October's performance?

Helix was the bigger of the two, and the two of them combined were much of the loss.

Thank you.

(Operator Instructions) There are no further questions.

Should you have any follow-up questions, please direct them to Eric Stanton of Stanton Crenshaw Communications at (212) 780-1900, and he will be happy to assist you.

This concludes today's conference call. You may now disconnect.