Greenlight Capital Re Ltd (GLRE) 2009 Q2 法說會逐字稿

Thank you for joining the Greenlight Re second-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 facts but rather reflect the Company's current expectations, estimates and projections 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 are 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.

(Operator Instructions). As a reminder, this conference is being recorded. At this time we would like to turn the call over to Len Goldberg, Chief Executive Officer. Mr. Goldberg, please go ahead.

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.

The second quarter of 2009 showed what our differentiated business model is capable of producing. We increased our fully diluted book value per share by almost 18% in the quarter and by more than 23% for the year-to-date. We continue to make great strides on our underwriting portfolio and generated strong investment returns with a conservative defensively positioned asset portfolio.

Our underwriting portfolio performed better than expected. The small catastrophe loss that we booked during the first quarter was reversed and its updated claim estimates have been lower than initially expected. Our gross written premium increased 176% in the second quarter versus the same period a year ago and is up 48% for the first six months versus the comparable period in 2008.

Our earned premium increased 100% in the quarter compared to the second quarter of 2008 and is up 83% for the first six months of 2009 over the same period in 2008.

The entire insurance marketplace seems to be waiting for a significant turn in the market. We continue to see meaningful price increases in catastrophe, retro-sessional and employer stop loss business. Across the rest of the portfolio, a number of our clients are seeing a reduction in competition, resulting in better premium opportunities at what we believe is good economic pricing. This is a reversal of the trend we have seen in the second quarter of 2008 when we reported relatively small premium numbers as many of our clients were reducing their portfolios in difficult underwriting environments protecting both their capital and ours.

We are also seeing increased opportunity in the premium intensive frequency business that we find attractive for our portfolio. We believe this is happening for a number of reasons.

First, we felt the reinsurance market was quite competitive in 2007 and 2008, so we were very selective as we wrote business. And, as a result, we believe we have more dry powder than a number of our competitors.

Second, many clients and potential clients are capital constrained to not obtain new capital in this marketplace and need more reinsurance coverage to transfer significant premium from their balance sheets.

And finally, many of our competitors are finding it difficult to expand their premium base at the current time.

Accordingly, while the pricing of the underlying insurance has not improved substantially, the terms and conditions we are able to negotiate on the select set of reinsurance transactions we pursue are significantly better than they were in 2008. Bart will discuss the portfolio in more detail.

On the investment side, we performed well in the first half of 2009 with a net return of 19.1%, plus an additional 3% return in July. The most significant part of this performance is that we have not accomplished this by taking big bets in a volatile marketplace. We have performed with a portfolio that has been quite defensive with a net long equity position usually in the single digits. At the same time, we have been able to use the market dislocations to diversify our portfolio and to add significantly to our debt portfolio, both of which have reduced our volatility.

Now I would 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 second quarter, Greenlight Re investment portfolio was up 13.9%, bringing the year-to-date net returns to 19.1% in the investment portfolio. Coupled with our July results of 3%, I'm pleased to report to our shareholders that we have fully recovered the 2008 investment portfolio loss. In contrast to the first-quarter return where all of the return came up from our short portfolio, all of the return in the second quarter came from the long side of the portfolio, which was up 30% gross in the quarter. On the long side, about three quarters of the return came from equity loans and a quarter came from debt instruments. The short equity portfolio lost 14% in the quarter, primarily from our short financial exposure.

The largest winner in the quarter was the Ford Motor Co. debt position we mentioned on our last call as one of the positions we were adding to opportunistically in February of this year. Most of our losses in 2008 came from the long side of our portfolio where a number of our holdings fell more than the market. Our next three equity long winners after Ford debt in the second quarter were three of our four biggest losers in 2008. Essentially the only decision we made regarding these securities was not to sell them at prices that we did not believe made sense as we were able to recover some of our losses on these positions that we believe had overshot to the downside.

One of the benefits of mark-to-market accounting is that we don't get to make a subjective determination if the losses are "temporary". We simply recognize them on our books, and if we are right and the market is wrong, sooner or later the losses reverse. Besides our position in the Ford debt, much of our positive return so far this year is based on having the time to be patient of some of the investments we have owned for a while. Although we strive to produce attractive risk-adjusted returns over time, evaluating performance quarterly or even annually can be a misleading exercise. We believe that the performance of our portfolio is better judged over somewhat longer periods.

The current bear market started in the second half of 2007, during which time the Greenlight Re investment portfolio has made a small positive return as the S&P fell by more than one-third. We judge that to be reasonable but not exceptional result all things considered. We entered the quarter in a conservative posture about 83% long and 50% short or 33% net long, including about 14% net long equities and the balance in debt. We ended the quarter with even a more conservative posture, 76% long and 55% short, only 21% net long and only 7% net long equities. Given our long portfolio return, the fact that we ended the quarter with less gross long exposure gets you an idea of what we have been up to during the most recent market rally. We have been sellers.

In the same fashion where we were buying a little bit every day when the market dislocated in the fourth quarter and earlier this year, over the past few months, we have been selling just a little bit just about every day. We continue to assess attractive equity and debt instruments and are adding to those areas opportunistically. It is stunning to think that at one point this year the markets were roughly a third lower than they are today.

We have been selectively covering as well as finding new short ideas, and our gross short portfolio now stands back at a relatively robust weighting of almost 20% from the year low of 36%.

We continue to believe that this is a time for patiences and prudence. Notwithstanding the media reported coverage of second-quarter earnings, we are not hearing many positive things from any of the companies we are talking to on a regular basis. And given that we are in an environment of rising unemployment and overlevered consumer, decreasing real estate values and a national deficit of over $1 trillion, we are simply too worried to have large net equity exposures. We do not believe that valuations in general remain cheap. As a result, we may not do all that well if the rally continues for awhile. We believe that we stand a good chance to preserve capital if the market reverses some of its recent gains. We continue to hold a few macro hedges to further protect the portfolio in the form of gold, sovereign CDS and options of higher interest rates in the US and Japan should inflation become a problem longer-term.

Our underwriting team continues to do a fantastic job in finding good deals in an environment that has not hardened as much as we had expected. Much of the business has been frequency business, which fits well with our investment program as it generates high levels of longer duration premium. The economic returns on some recently written contracts appears superior to prior deals.

We have also continued to beef up the Greenlight Re team with the addition of two vice presidents, Andy Welsch and Tom Curnock, both very well-respected seasoned reinsurance executives. Despite the tumultuous environment over the last 18 months, I am very pleased with our position today.

Now I would like to turn the call over to Bart to discuss in more detail Greenlight Re's underwriting progress.

Thanks, David. I'm pleased to report that we continue the progress in our underwriting business during the quarter. In the last quarter, we reported a $3.6 million catastrophe loss on an aggregate catastrophe retrocessional contract 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 the traditional catastrophe programs.

At the beginning of the first quarter, the ceded losses under the contract related primarily to Hurricanes Ike and Gustav were below our retention. During the first quarter, the client reported a significant loss due to a snowstorm in the UK. And now in the second quarter, the subsequent development of some of those losses is less than originally expected, essentially reversing the loss booked in the first quarter. This account did not renew with us in its current form, and we are still discussing possible structures for the 2009/2010 year.

As a result, our maximum catastrophe exposure to any one event has dropped from $84.4 million in the first quarter of 2009 to $60.4 million in the second quarter. While our aggregate maximum exposure for all catastrophic events has dropped from $106.9 million to $75.4 million.

As Lenny mentioned, our clients by and large have been able to find more profitable opportunities in their respective markets in 2009 than in 2008. We were very pleased in 2008 when our clients reduced their writings to protect their capital and ours. We are more pleased that they are finding the right sort of opportunities in 2009.

These increasing opportunities with our current clients, as well as the success of some of our strategic investments, are the drivers behind the large premium growth we have experienced for the quarter and six months as compared to 2008. We believe we have found partners that are experts and leaders in their respective businesses.

We added two new frequency accounts in the quarter, both of which we believe will add significant stable frequency premium to Greenlight Re over the next few years. The first is another employer stop loss account where we continue to build our portfolio and believe that the current pricing continues to strengthen. This account will begin writing premium in the third quarter.

The second significant account is a Florida homeowners account written on an ex-windstorm basis similar to an account we wrote in 2006 and 2007. As Lenny mentioned, while the underlying business has not improved much, the economics to us as a reinsurer on this deal are significantly better than similar transactions that we have analyzed or bound in the past couple of years. This account generated about $17 million of written premium for us in the quarter. We are pleased to add these two new business partners to our Company.

Our pipeline particularly for frequency business continues to be strong. We still see the same factors as we mentioned last quarter. We believe that while underlying insurance rates have not yet increased, the economics for the type of frequency business we like has increased due to an increase in demand and a decrease in supply. Since many of our clients use our frequency structures for capital support, we are still benefiting from spotty capital markets. As always, we will continue to be disciplined in adding new clients to Greenlight Re's portfolio.

To add to David's comments, we are very pleased to have added two senior members to our growing team. Andrea Welsch has joined as Vice President of Marketing. In her role Andy will deepen our existing relationships with brokers and clients, develop new relationships in the reinsurance marketplace, and help find creative ways to keep our pipeline filled with strong opportunities. Tom Curnock has joined as Vice President of Underwriting.

In addition to his underwriting responsibilities, Tom will help us manage our strategic investments and continue our development of internal risk and pricing models. Both Andy and Tom have deep industry relationships, as well as skillsets that are complementary to our existing team. We believe the timing of these two hires could not have been better as the economics for frequency business appear to be increasing.

In the short time since their arrival, they have already proven to be valuable additions to our team.

And now I would like to hand the call over to Tim to discuss our financial results for the second quarter.

Greenlight Re reported net income of $92.2 million for the second quarter compared to net income of $33.5 million for the comparable period in 2008. On a fully diluted per share basis, the net income was $2.51 per share for the three months ended June 30, 2009 compared to net income of $0.91 per share for the second quarter of 2008. For the six months ended June 30, 2009, net income was $120 million compared to $28.8 million for the six months ended June 30, 2008. On a fully diluted per share basis, net income was $3.29 per share compared to $0.78 for the comparable period in 2008.

Our second-quarter 2009 results reflect the positive impact of the quota share frequency business we have reported. Net premiums written and earned are substantially higher than in comparable periods in 2008. Net earned premiums for the six months ended June 30, 2009 were $95.5 million, an increase of 83% over the same period in 2008. The composite ratio for our frequency business for the first six months of 2009 was 97.6%, and it was 55.5% for severity business, resulting in an overall composite ratio of 86.5%.

Internal expenses were 10.2% of net premiums earned for the first six months of 2009 as compared to 14.7% reported for the comparable period of 2008, resulting in a combined ratio of 96.7% for the first half of 2009. We reported net investment income of $88.3 million during the second quarter of 2009, reflecting a net return of 13.9% on our investment account. We reported net investment income of $116 million during the first six months of 2009, reflecting a net investment return of 19.1%.

On July 22 of this year, we reported that we have established a third letter of credit facility. This is a $50 million committed facility with Bank of America. Greenlight Re now has access to $475 million of collateral in the form of letters of credit, which will enable us to continue to execute the underwriting plan we have developed.

Fully diluted book value per share increased 17.4% in the second quarter. For the 12 months ended June 30, 2009, fully diluted book value per share decreased by 4.3% to $16.73 from $17.49 at June 30, 2008.

I will 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 results in the second quarter of 2009 have shown exactly how powerful our strategy can be. We were judicious in keeping our powder dry in 2007 and 2008. As a result, we believe we are one of the only reinsurance companies with the flexibility to write a multiple of our current premium should the markets continue to improve.

Our profitable growth in 2009 is proof positive of this strategy, and our under-leveraged balance sheet continues to provide the financial strength that our clients require.

On the investment side, our strong performance in the absence of outsized risk on individual positions underlines the strength of our deep value investments strategy. 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). [Mike Zeronski], Credit Suisse.

On underwriting are the homeowner premiums from Florida coming from MGA agreements, and I guess should we think about Florida exposure ramping up given Bart Hedges' prepared remarks? I have a couple other questions, too.

No, the homeowners account is a traditional contract with an insurance company in the state of Florida.

Okay. And going forward I guess you guys are thinking Florida is going to continue being a significant source of premiums?

Mike, as Bart mentioned, we had done a similar sort of transaction a few years back, which turned out to be quite successful for us, and we think we have learned a bit about the Florida market. And I think we were able to use our knowledge to create what was a very good deal, I think, for the client and for us.

Okay. On the investment portfolio, I know the big exposure is for debt, which I assume is yielding double-digit returns in terms of the interest payment. I guess all-in can you guys give us a sense for what the fixed income portfolio to lock in the yields are?

This is David. I don't know that we have really ever calculated it that way. I think when we were buying the debt portfolio between October and March and so forth, I don't know what the aggregate was, but I suspect that the average was really quite substantial. Since then there has been substantial capital gain out of the portfolio on unrealized capital gain. And I'm sure the yield are a lot less to maturity than the prices that we paid. Although I would imagine that they would still be well in the double digits, even with the appreciation.

And duration-wise are you guys looking to hold the fixed income assets most likely?

No, we look at each asset on its own, and there are some that will sell, and there are some that we will keep. And some of them will even turn out to be either because some of the situations in the portfolio probably are not going to repay at maturity and they were not bought on that basis. They were bought some of them more as workouts and as existing or future bankruptcies where we may wind up receiving equity or other types of securities.

Okay. Last question, can you comment on the shelf registration, the $200 million shelf you guys filed with the SEC?

Sure, Mike. We have no specific plans to use the shelf. It is for what we think is prudent capital management should the need arise over the next 36 months.

(Operator Instructions). At this time we have no more questions. Should you have any follow-up questions, please direct them to Alex Stanton of Stanton Public Relations & 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.

This conference has concluded, and thank you for joining us.