Greenlight Capital Re Ltd (GLRE) 2008 Q4 法說會逐字稿

Thank you for joining the Greenlight Re Fourth Quarter 2008 Earnings Call.

Joining us on the call are 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 are made in the 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 reflects 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 Form 10-K dated February the 23rd, 2009, 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.

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

Thank you and good morning. My name is Len Goldberg, Chief Executive Officer at Greenlight Re. Thank you for taking the time to join us this morning.

2008 was certainly a year for the record books, and it was also a year that severely tested Greenlight Re and our differentiated business model. While we are not pleased with our performance and our capital was reduced by 19.8% for the year, we believe that we have taken some of the very worst the markets could offer and have proven the resilience of our business model.

Our underwriting team continues to perform very well. We have completed our second full year of underwriting with another sub-100 combined ratio. We continue to diversify our portfolio and orient our book towards frequency clients as per our strategy.

In a year with significant catastrophe losses as well as reestimates of those losses, we suffered no natural catastrophe losses. In an age of reinsurance broker consolidation, we are pleased that our customers are well diversified by broker source without significant concentrations with what is now the Big Three. And as Bart will explain, we successfully renewed all but one small account on January 1.

We are doing a solid job of underwriting good business with the right counterparties and also establishing deeper strategic relationships by writing a smaller number of significant contracts.

Perhaps most importantly, as we migrate from an ultra competitive underwriting environment to an increasingly hardening insurance market, we have the ability to significantly grow our underwriting portfolio. While our annual premium written grew by almost 28% in 2008 as compared to 2007, at the end of 2008, we had $3 of capital per every dollar of written premium. While some of that is due to our controlled deliberate way of developing our portfolio, a good part is also due to our conscious effort to preserve our shareholders' capital in the south market in anticipation of a better pricing environment.

We are also optimistic about our investment portfolio, though it suffered a loss for the year. We have been able to utilize recent market turmoil to find a significant number of mispriced securities, and especially to develop a sizeable portfolio in distressed debt at attractive prices.

Until 2008, perhaps even we underappreciated the value of our strong strategic relationship with our investment advisor. We are in constant communication throughout the year on the various issues affecting the portfolio and we are able to consistently mark our portfolio to market in real time.

While this does not prevent us from experiencing additional losses should the portfolio perform poorly, we have the benefit of knowing that our assets do not suffer from a valuation overhang due to the difficulty or unwillingness to value troubled assets. As a result, we believe there is little doubt as to the value of our investment portfolio and the size of our capital base.

Now, I'd like to turn the call over to our Chairman, David Einhorn, to discuss our investment results in more detail and the progress in Greenlight Re's overall strategy. David?

Thanks, Len, and thank you, everyone, for joining us. In the fourth quarter of 2008, the S&P fell 22% as the economic crisis spread from the financial sector into the general economy. 2009 has not been immune to this trend and the S&P has declined another 18% already this year.

Greenlight Re's fourth quarter investment portfolio result was negative 5.3%, which included a very poor October result and positive returns for November and December. The investment portfolio also returned a positive 60 basis points in January.

While we're not happy that we did not manage a positive absolute return in the fourth quarter, we're pleased with the way the portfolio has performed since the middle of October. What -- we were disappointed we didn't do a better job reserving capital in 2008, but we believe that over the long term, our investment strategy will produce positive risk adjusted returns without the use of leverage. Since we really don't know what will happen to the markets, but believe that they trend up over the long term, our strategy is to remain net long throughout, but to vary our exposure based upon our top down assessment and bottom up opportunity setup.

As we discussed on our last call, we brought down overall gross exposure in the portfolio in the third quarter and exited a number of names. Over the past few months, we invested in many new opportunities created by the market dislocations we are all witnessing. We've been approaching the opportunity set both opportunistically and patiently. We're investing with restraint in order to be in a position to take advantage of additional opportunities that may arise should the crisis deepen. And as always, we are focused on the long term prospects of various companies. But, we realize that these long term values may be materially impaired by a sustained economic contraction.

The Greenlight Re investment portfolio actually became less net long in January, down from 40% at December 31st to 28% at January 31st. It is evident that we are in a historically atrocious economic downturn and the solutions offered by the government are imperfect and will likely be insufficient to fix the problems. The basic problem is the divested interest has so much influence over the decision makers that it is a challenge for leaders to take tough action to get ahead of the problem, particularly when tough action will not be judged favorably by the stock market on the day it is announced.

As a result, the official response to date has been limited to short term supportive measures such as lower interest rates, bailouts, loan programs and fiscal stimulus.

Now, Greenlight Re is a dollar based company and the government response thus far worries us. We have done a good job thus far in hedging our currency exposures over the past few years. In the fourth quarter, when it became clear that the Federal Reserve wishes to address the crisis through a program of currency debasement, we bought gold and some foreign currencies to hedge our dollar exposure.

On the long side of the portfolio, we are primarily invested in companies that we believe have the balance sheet to withstand sustained downturn and who shares more than adequately discount the near term headwinds. We believe that we have a very broad investing mandate. We have the flexibility to invest boldly and across the capital structure as opportunities immerge.

We have always been cyclical investors in stressed and distressed debt when it offers attractive (unlevered) returns. We found a number of new debt opportunities in the fourth quarter including corporate bonds, bank loans and convertible debt.

All of our investments in debt to date have been in the US and we have focused on liquid issues with ready and servable market prices. We continue to stay diligent and focused on the short side of our portfolio and have recently initiated a number of new short positions in companies that we feel have been granted immunity from the global economic collapse.

It has been a challenge nevertheless to keep our short exposure, given the collapse of most financial companies globally. We are currently approximately 66% gross long and 33% short with about half of our net loan exposure in equities and half in debt. We exclude the gold position from these numbers as we view it more as a currency against the US dollar.

To reinforce some of Lenny's comments, we are very pleased as to how the underwriting thought process is developing at Greenlight Re. We believe that perhaps the single most important deciding the underwriting team can make is when to deploy underwriting capital.

If as we expect, reinsurance pricing begins to strengthen in 2009 into 2010, Greenlight Re is uniquely positioned to significantly grow our reinsurance portfolio. At the same time, we have good relationships with our existing clients and have established ourselves in the marketplace.

Now, I'd like to turn the call over to Bart to discuss Greenlight Re's underwriting, and in particular, the success we've had during the January 1st renewal season and the development of our strategic relationships.

Thanks, David. 2008 was a very good year for Greenlight Re on the underwriting front. We have been busy establishing new and differentiated ways of adding value to client relationships, turning them into long term partnerships rather than price sensitive renewals.

We continue to expand our frequency portfolio. In 2008, over 80% of our gross premium written was frequency business compared to around 60% in 2007. Frequency business is the more stable relationship oriented part of our portfolio. As Len mentioned, our written premium grew by 28% from 2007 to 2008, even though our frequency partners wrote less business than we originally expected as prices softened for most of the year, and they did an excellent job reducing volume to preserve profitability.

Even as Hurricanes Ike and Gustaf estimates continue to climb, we have had no natural catastrophe losses in 2008. As we mentioned last quarter, while this is somewhat lucky, it's also due to our strategy to generally write cat retro covers in high enough layers so that if we suffer a big loss, industry pricing would generally rise significantly in the follow year. We do not think Ike and Gustaf in the absence of asset related issues plaguing the industry would have been enough to move market pricing.

In addition, we avoided lines of business including directors and officers, surety, fidelity and credit, which we believe will see significant upward development as losses immerge caused by the current economic turmoil.

As Lenny mentioned, our January renewals have been concluded successfully. We spent quite a bit of time selecting partners, so retaining these partners is important to our business. At 1/1, we renewed all accounts but one, which moved for competitive reasons. We have kept all of our key relationships in tact.

As capital has been significantly reduced in the reinsurance industry, we are seeing prices starting to harden. We are seeing prices for property catastrophe retrocession rise approximately 25% in the US and 10% in the rest of the world. The medical stop loss business that we entered into beginning in mid 2007 is experiencing significant price increases in the 20% range. We entered this business at what we thought was the trough of the business cycle and we have seen prices come back strongly as we expected. Even casualty business pricing is holding up or slightly increasing for the first time in many years.

Our outlook is that pricing for all lines will continue to strengthen as asset issues continue to plague the industry and availability to new capital is restricted. What this means for us is that generally, we expect our existing portfolio to continue to improve both from a profitability and growth standpoint. We also expect to see a number of very good opportunities with experts that have great businesses but diminished capital bases.

We also expect that our property catastrophe retro portfolio will grow in 2009 after shrinking for the last two years as this capacity constrained line of business is the first to show real signs of improvement. We have significant underwriting capacity to take advantage of all these opportunities.

Finally, we have been working on a number of strategic partnerships in 2008, which should bear fruit in 2009 and beyond. We have finalized a strategic partnership with an insurance manager here in the Cayman Islands to establish the Segregated Portfolio Company. This company will allow our clients to official start up captive insurance companies to take risk alongside us, furthering our risk sharing strategy and creating new relationships, which should make our business more sticky.

In addition, we have made a small investment in an insurance company, which will allow our client to expand its business opportunities and lead to a more profitable reinsurance relationship. We have significantly concluded -- successfully concluded a reinsurance structure for one of our clients that will allow them to significantly improve the rating, financial rating of their insurance company. This will give them the ability to capture a significant share of the business in their market, and once again, should drive profitable premium to Greenlight Re.

This is a natural development of our non-commoditized approach to the reinsurance marketplace. It is our expectation that a growing percentage of our frequency portfolio will come from such strategic partnerships.

And now, I'd like to hand it over to Tim to discuss our financial results for the fourth quarter and year-end.

Thanks, Bart. From an overall financial perspective, 2008 was a challenging year for the Company and the reinsurance industry in general. We have always stressed the importance in book value per share, and therefore, we cannot be pleased with the 19.2% reduction book value per share experienced during 2008, resulting in a fully diluted book value of $13.39 per share as of December 31st, 2008.

While the Company was severely tested as a result of the global financial crisis, we believe we are uniquely positioned to capitalize on a hardening reinsurance market. Greenlight Re reported a fourth quarter 2008 net loss of $31.3 million compared to net income of $29.2 million for the comparable period in 2007. On a per share basis, the net loss was $0.87 per share compared to fully diluted net income of $0.80 per share for the fourth quarter of 2007.

For the year-ended December 31st, 2008, the net loss was $120.9 million compared to net income of $35.3 million for the year-ended December 31st, 2007. On a per share basis, the net loss was $3.36 per share compared to fully diluted net income of $1.15 per share for the year ended December 31st, 2007.

For the full year 2008, frequency business accounted for just over 82.5% of our gross written premium compared to just over 60% for 2007. Once again, this is indicative of our ongoing preference for frequency business.

Premiums written for the fourth quarter of 2008 of $28.6 million was higher than the $3.9 million of premium written during the fourth quarter of 2007. For the full year ended December 31st, 2008, premium written was $162.4 million compared to $127.1 million for the 2007 fiscal year. Both of these increases are the result of the continuing development of our underwriting activities and several new frequency based contracts written during 2008.

The composite ratio for our frequency business for the year ended December 31st, 2008 was 91.2% compared to 94.2% for the year ended 2007. The improved composite ratio for our frequency business is primarily due to favorable development on certain 2007 and 2006 frequency contracts.

The composite ratio of 68.5% for our severity business for the 2008 fiscal year is higher than the composite ratio of 41.7% reported for 2007. This increase in severity loss ratio is due to a combination of writing a more diverse line of business mix during 2008, which has inherently higher loss ratios, as well as increased estimates of certain 2007 severity clash contracts affected by the sub-prime meltdown during the 2008 tax year.

Net loss and loss adjustment expenses incurred for the year ended December 31st, 2008 were $55.5 million. Of this total, 38.5% related to paid losses. This compares to net incurred losses of $39.5 million for 2007, of which only 22.3% related to paid losses. This increase in the paid to incurred ratio is expected as the 2006 and 2007 underwriting years run off.

We reported an investment result of a net loss of $33.3 million during the fourth quarter of 2008, reflecting a net loss of 5.3% in the investment account managed by DME Advisors. For the full year 2008, we reported an investment loss of $126.1 million, reflecting a net loss of 17.6% on our investment portfolio.

I'd like to point out that the percentage loss in book value per share was higher than this investment loss due to the gearing effects resulting from slope generated from our profitable underwriting operations. We will be paying reduced incentive compensation of 10% to our investment advisor until we make up two and one half times the investment loss suffered in 2008.

As part of our 10-K filed yesterday, we have reported for the first time, as required by SEC regulations and the Sarbanes-Oxley Act on our evaluation of the effectiveness of the Company's disclosure controls and procedures. We are pleased to report that we have concluded that our Sarbanes-Oxley related controls are effective and our auditors both have provided their affirmation as to the effectiveness of our controls and procedures.

I will now turn the call back to Lenny for some concluding remarks.

Thanks, Tim. 2008 was a severe test of our business model, one which we came through very well. Our underwriting strategy has worked as well or better than expected. We have preserved underwriting capacity for what looks to be better reinsurance markets in 2009 and into 2010 while establishing ourselves with clients and brokers.

We took the opportunity in 2008 to develop a number of strategic tools and relationships that should bear fruit in the upcoming years. And we have positioned ourselves as one of the few reinsurers that have significant capacity for growth should the opportunities immerge as expected.

Although investment markets are still volatile, our investment portfolio is well positioned with the addition of a number of new positions and significant exposure to attractive distressed debt opportunities. We will continue with our strategy to earn above average risk adjusted returns by actively managing both sides of the balance sheet. Given the events of the last year, we believe we are uniquely positioned to take advantage of both a hardening reinsurance market and a more rational investment environment.

We appreciate your continued confidence in our company. Thank you again for your time, and now, we would like to open the call up to questions.

(OPERATOR INSTRUCTIONS.)

At this time, there are no questions. Should you have any follow up questions, please direct them to Alex Stanton of Stanton Crenshaw Communications at 212-780-0701 and he will be happy to assist you. We also remind you that a replay of the call and other pertinent information about Greenlight Re is available on the Company website at www.greenlightre.ky. Thank you. This conclude today's conference call. You may now disconnect.