Greenlight Capital Re Ltd (GLRE) 2009 Q1 法說會逐字稿

Thank you for joining the Greenlight Re first quarter 2009 earnings 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, 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 23, 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 obligations to update publicly or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

I would now like to turn the call over to Len Goldberg, Chief Financial Officer. Please go ahead, sir.

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

As we examine our first quarter 2009 performance and the significant opportunities that lie ahead, we continue to be excited about what we have built and the prospects for our Company. 2008 tested our differentiated business model and we emerged with even greater confidence in our future.

In the first quarter, we increased our book value by 5.2% over the value at year-end 2008. This was primarily due to an investment return of 4.6% achieved in the quarter, which compared favorably to an 11.7% drop in the S&P 500 during the same period.

We continue to find mispriced investment opportunities in both equities and debt instruments. While investment markets are always volatile, we are pleased with the results we achieved in the first quarter in a challenging investing environment.

On the underwriting side, we recorded a loss in the quarter, driven by a reported loss on an aggregate catastrophe contract written in 2008, which Bart will explain in greater detail.

Our underlying business continues to perform to our expectations. The business we wrote in 2007 and 2008 is now producing significant growth in our earned premium. This growth has, in turn, reduced our internal expense ratio. While we will continue to add staff as underwriting opportunities increase, we believe our internal expense ratio will continue to decline.

While insurance market pricing has begun to change, we have not yet experienced broad improvements in overall profitability. During the first quarter, we saw some significant price increases in the property cat retro market, and we continue to see pricing improvements in employer stop loss business. We believe that more widespread price increases will take hold during the second half of 2009 and into 2010, so we continue to be patient in our approach, as we await coming opportunities.

Overall, in the first quarter, we wrote an additional large severity cat retro account and we lost one frequency account due to price competition. While our gross premiums were flat, our net written premiums were up about 15%. Both Greenlight Re and our clients are well-positioned for a pricing upturn that we would expect to see in the coming quarters, as balance sheets continue to shrink.

During the first quarter of 2009, we completed two strategic investments, which will allow us to leverage our clients' expertise and utilize our financial strength to create long-term partnerships. Bart will discuss the details later in the call.

We are pleased to have some good partners who will help us develop and maintain strong, profitable reinsurance and other income streams. A side benefit to this strategy is that we generated a small amount of fee income in the quarter, which offset our underwriting loss.

We continue to build our staff to seize upcoming market opportunities. We are pleased to tell you that, pending work permit approvals, two new senior underwriters with a wealth of reinsurance experience and deep market contacts will shortly join our already strong underwriting team.

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.

Thanks, Len, and thanks, everyone, for joining us today. In the first quarter, Greenlight Re's investment portfolio had a better result than it did in the prior two quarters. There's several factors that contributed to this. First, we entered 2009 with a very conservative posture, about 80% long and 40% short, or about 40% net long.

Although we were holding a good amount of cash, we became more concerned about the market as it sold off in January, and became even more defensively positioned, ending January at just 29% net long. As things continued to dislocate through February, we used this as an opportunity to cover a number of short positions, and entered March slightly more net long.

We also added to our debt portfolio, particularly in Ford Motor secured bank debt. At the beginning of the year, our debt portfolio was about 12% of capital. We ended the quarter with about 17% weighting in debt instruments.

Greenlight has always invested in debt instruments when that part of the corporate capital structure has offered compelling, unlevered returns. We started accumulating our debt portfolio in October of last year, and have built our allocation in a patient fashion as markets became further dislocated. (multiple speakers)

Our current debt portfolio is invested in US companies, and we have been mindful of the liquidity in each of the issues of which we are invested.

In addition to moving up the corporate capital structure, we have also constructed a less concentrated portfolio than we have historically. Although we have found many compelling investments that appear to be at bargain prices, this is tempered by the worst economy most of us have seen.

It is very difficult to develop a high degree of confidence in corporate revenues and earnings, even in well-established, profitable companies with conservative balance sheets. So we have offset some of this idiosyncratic risk by holding a more diversified portfolio.

At the date of our last conference call on February 24, the S&P was down 18%. Although it continued to descend another 7% before the recent rebound, the S&P is slightly positive so far in 2009.

As we follow companies and watch the economy, we have not seen much evidence that there are economic, quote, green shoots, or that things are materially improving anywhere. It is true that companies saw such rapid descent in business last year that they couldn't estimate how bad things might get. They can now see about how far business has fallen.

From where we sit, this hardly amounts to a sign of a recovery, which we would very much like to see. One exception is that pricing seems to be hardening in certain insurance and reinsurance lines of business, which is a good thing for Greenlight Re, and Bart will discuss this in greater detail.

The underwriting team continues to think outside of the box, and I'm pleased with the strategic initiatives that we have implemented during the first quarter, which will hopefully be reflected in increases to our book value per share as these opportunities mature.

We continue to be cautious about the environment, especially in light of the market's latest rally, [in order to have convinced us some] others of the government's response to the crisis to date will actually fix the problems in the economy. We think this will take some time to play out as the normal courses of supply and demand exert themselves. We continue to be worried about monetary actions and the fiscal situation, and continue holding some of our cash and gold for the time being.

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 1 renewal season and the development of our strategic relationships.

Thanks, David. I'm pleased to report that we continue the progress in our underwriting business during the first quarter of 2009. We added a significant new retro sessional catastrophe account in the first quarter of 2009, and renewed our existing severity deals, so we had an increase in the severity premium for the quarter.

Even after adding this new account, our maximum exposure to any one event is $84.4 million, and our aggregate maximum exposure for all catastrophic events is $106.9 million. While the demand for property retro sessional has slowed, we have additional capacity at these levels if we see good opportunities to deploy our capital.

Even though we escaped damage from Hurricanes Ike and Gustav in 2008, we took a first quarter 2009 loss on an aggregate property catastrophe cover underwritten in 2008. We sold a cover to a client that protects them from multiple large events affecting their capital in a given year, by protecting the deductibles they keep on their traditional catastrophe programs.

As of the beginning of the first quarter, the seated losses under the contract, which related primarily to Hurricanes Ike and Gustav, were below our retention. However, during the first quarter, the client reported a significant loss due to a snowstorm in the UK, which resulted in losses seated to our layer.

This event caused us a $3.6 million net loss in the quarter after additional premiums and reversal of accrued profit commission. Since the inception of this contract, we are about breakeven.

We would like to report that we found a number of great new frequency opportunities, but the market has not yet cooperated. As we mentioned last quarter, we have seen a halt in massive price reductions due to the extraordinary difficulties of 2008, but we haven't seen significant price increases.

At 1/01, we lost one frequency renewal due to price competition. However, our net frequency premium was flat compared to the first quarter of 2008.

The good news on frequency business is that our pipeline is strong. Several important factors are contributing to the increased activity we are seeing.

First, companies are critically accessing the credit quality of their counterparties. Many companies want to diversify their exposure if they have accumulated significant credit risk to reinsurers that had been weakened by the financial crisis.

Second, many insurers have taken painful hits to their balance sheets, requiring them to buy more reinsurance or a different reinsurance structure to replace capital that was lost.

Lastly, some reinsurers have told their clients they need to reduce current commitments.

We believe that all of these issues will, in time, serve to move prices upwards. We believe Greenlight Re is an attractive counterparty, thanks to our solid balance sheet, and our ability and willingness to tell our clients specific solutions.

Since we have to provide collateral to our US-based clients, many companies are seeing the collateral plus our financial strength as desirable belts and suspenders in these turbulent times. They would prefer this double level of protection to taking the counterparty risk of a larger company without that secondary production. When pricing improves, as we expect it will, we should be right in the sweet spot for our core frequency business.

On our last call, we discussed some of the strategic partnerships we have established. In the first quarter of 2009, we successfully closed two additional transactions that we believe will add value to Greenlight Re in the future. We are very excited about this developing area of our business model.

Similar to our reinsurance transactions, each strategic partnership is unique and structured to maximize the benefits to all parties.

One transaction that we completed during the quarter was a package of a loan and a multi-year reinsurance transaction to a current insurance company client, which directly led to them receiving an A minus rating from A.M. Best. This will greatly expand our client's ability to write business, which will benefit them as well as Greenlight Re.

We believe this multi-year reinsurance commitment is at better-than-market terms, and allows us to lock in desirable business without competing with the market in the years ahead.

The other transaction is a strategic partnership with a newly-formed managing general agency, or MGA, in Florida, together with the simultaneous funding of a mutual insurance company that writes homeowners business in that state. We expect this opportunity to produce significant streams of fee income in the coming years, and may result in future reinsurance opportunities.

These initiatives further differentiate us from our competition, provide capital and capacity to our clients, and create value for our shareholders through investment returns, fee income streams, and underwriting profits.

While we don't expect to complete these types of transactions every quarter, and will not generally be announcing them, we think they demonstrate the strength of our business model and our ability to think beyond the traditional underwriting box.

Now I'd like to turn the call over to Tim to discuss our financial results for the first quarter.

Thanks, Bart. Greenlight Re reported net income of $27.8 million for the first quarter compared to a loss of $4.8 million for the comparable period in 2008. On a fully diluted per share basis, the net income was $0.77 per share compared to a loss of $0.13 per share for the first quarter of 2008.

As we have described on previous calls, our mix of business between frequency and severity can change dramatically from quarter to quarter, given the nature of our opportunistic underwriting platform.

During the first quarter of 2009, gross premiums written of $71.9 million were generally flat compared to gross premiums written of $70.8 million during the first quarter of 2008. However, it is important to note that 65% of this quarter's premiums were related to frequency business, as compared to over 80% for the first quarter of 2008.

Given our concentrated underwriting portfolio, not renewing a contract or writing a new contract can cause large fluctuations in the topline composition of our frequency severity book. However, frequency accounts generally recognize premium throughout the year, so we expect the percentage of frequency business to increase as we progress through 2009.

The composite ratio for the first quarter of 2009 was 95.6% for our frequency business and 90.6% for our severity business, resulting in an overall composite ratio of 94.1%. The composite ratio for our frequency business reported in the first quarter was slightly higher than what we experienced during the first quarter of 2008. This was primarily due to increased losses reported on certain specialty health contracts, partially offset by favorable experience on personal line contracts.

The first quarter composite ratio of 90.6% for our severity business is high when compared to the composite ratio of 59.4% reported during the first quarter of 2008. This increase reflects the loss reported on the natural catastrophe aggregate excess contract, which Bart described.

Internal expenses were 9.5% of net premiums earned as compared to 16.2% reported for the first quarter of 2008. The reduction in our internal expense ratio is a reflection of the increased earned premiums reported during the quarter and the development of the earnings in our frequency business.

We reported net investment income of $27.7 million during the first quarter of 2009, reflecting a net return of 4.6% on our investment accounts.

During the first quarter, we adopted Financial Accounting Standard Number 160 relating to non-controlling interest in consolidated financial statements. This standard mandates the non-controlling interest -- or what we previously referred to as minority interest -- be shown on the balance sheet as a component of shareholders equity.

Previously, we had reported this balance sheet item as a liability. This change affected the reported book value per share. Based upon this new required presentation, the Company's fully diluted book value per share is $14.25 as of March 31, 2009, an increase of 5.2% from the Company's revised December 31, 2008 fully diluted book value of $13.55, and a decrease of 14.1% from the revised fully diluted book value of $16.58 as of March 31, 2008. This accounting revision, as of December 31, 2008, added $0.16 to book value.

Yesterday, we filed with the Securities and Exchange Commission a shelf registration under a form S3. Under this registration, which has yet to be declared effective by the SEC, we have the ability to raise up to $200 million in additional capital in a variety of forms, including debt, preference shares and Class A ordinary shares.

While we do not currently have any plans to raise additional capital, this shelf registration will provide us with additional flexibility to access the public capital markets on a timely basis, should we require capital for our future business opportunities.

And finally, I am pleased to report that on April 28, we held our annual general meeting, at which all of our incumbent directors were reelected for another one-year term.

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

Thanks, Tim. The Greenlight Re strategy was created to enable our Company to achieve sustainable advantage in all markets. However, we believe our business is particularly well-suited to the current environment.

We have judiciously kept our powder dry in difficult reinsurance markets. We believe that we are one of the only reinsurance companies that can now write a multiple of our current premium, should the markets indeed improve in 2009 and 2010. We continue to believe that deciding when to deploy reinsurance capital is one of the most important judgments we can make.

On the investment side, although we are still experiencing significant market volatility and uncertainty, we are finding mispriced securities, both long and short, which we believe will continue to contribute positively to our book value per share. Our good investment results in a difficult quarter highlight our differentiated value proposition.

We will continue to execute our strategy to earn above average, risk-adjusted returns by actively managing both sides of our balance sheet. We appreciate your continued confidence in Greenlight Re.

Thank you again for your time, and now we would like to open the call up to questions.

(Operator Instructions) [James Ray, Haltshaw Capital].

I think this question is for Bart. Bart, you talked about the formation of a number of entities that help align your interest with the agents and the insurers. Is that specifically Verdant, which is referenced in the 10-Q? And if it is, could you talk about -- could you kind of expound on the idea behind that and how specifically the formation of that entity serves to further align your interest with the insurers and agents?

Sure, James. Think about the strategy for these types of investments as an extension of our underwriting philosophy, which we like to align ourselves with some niche-specialty underwriters. We like to compete in ways other than in price. And we want to try to find ways to generate above-average risk-adjusted returns for our investors. So, by locking in these kinds of relationships over time, we think we do that by hopefully avoiding competition in the future.

So when I think about the philosophy, it's really just an extension of the same kinds of fundamentals that we apply in the underwriting. But the types of opportunities have come from current clients as well as spotting opportunities in the market.

And this Florida opportunity was an opportunity that we sort of seized upon and saw, and decided it was better to be in the seat of a producer than to be in the seat of a reinsurer currently. And Verdant -- the formation of Verdant was simply a vehicle to help us achieve these types of transactions in the most effective ways for our shareholders.

Okay, thank you.

[Marie Nomacova], UBS.

Good morning and thank you for taking my question. It's about the strategic new investments too. If you could tell us -- how do you earn the fees on these investments? And are these fees recurring?

Marie, this is Len Goldberg. Some of the fees will be recurring on -- particularly on the NGA investment, but it's going to take awhile for those fees to be -- to start to generate. We don't expect significant fees from that operation for maybe a year or two. And the fees that we earned in the first quarter of this year are not recurring.

Okay. And is there any time limit to these strategic investments? Or it's just -- you mentioned some [multi-tier ones], so there was a limit to it -- or it could be renewed?

Marie, just look at our underwriting strategy. Every one of these is unique. So every one is different now and every one we'll do in the future is probably going to be slightly different.

Okay, thank you.

[Thomas Cromwell], Houston Partners.

I just wanted to ask, when you look at the combined ratio going forward, is there a certain level that you feel would be sort of steady-state as you project the business out?

And then when you talked about a multiple of premiums written in the future, I just wanted to understand how high that could be.

The answer to the first part is we really have no combined ratio targets. The business that we write is a function of what we think the economics of that business is, compared to the capital that we have to put up for that particular opportunity. So we do expect our combined ratio to vary over time.

And I'm sorry, can you repeat the second question?

Oh, there was a comment about premiums -- how in the future you could write a multiple of your future premiums. So I was just trying to understand that -- what the magnitude of that could be.

If you look at year-end 2008, we wrote about $0.30 of premium for every dollar of capital, which is well under industry averages for reinsurers. So if you took a look at where industry averages are, that's a place that we could certainly get to at the peak of the underwriting segment.

Great. Thank you.

(Operator Instructions). Should you have any follow-up questions, please direct them to Alex Stanton of Stanton Public Relations and Marketing at 212-780-0701, 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 for participating in today's conference call. You may now disconnect.