Greenlight Capital Re Ltd (GLRE) 2009 Q3 法說會逐字稿

Thank you for joining the Greenlight Re third quarter 2009 earnings call. Joining us on the call this morning is David Einhorn, Chairman, Len Goldberg, Chief Executive 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 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 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.

Please note this event is being recorded.

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

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

We have continued our strong performance in the third quarter of 2009. We increased our fully diluted book value per share by over 5% in the quarter and by approximately 30% for the year-to-date. We continued to develop our profitable underwriting portfolio and generate strong investment returns with a defensively positioned asset portfolio.

Our underwriting portfolio continues to perform well. Our combined ratios for the nine months of 2009 is 97.8%, almost identical to the first nine months of 2008. For the third quarter our combined ratio was close to 100. This underperformance on a GAAP basis compared to the industry is namely due to our relative underweighting of property catastrophe business and a small amount of adverse development in the quarter from the casualty class contract written in 2007.

We only added one significant contract in the third quarter. Our premium growth is almost entirely due to organic growth of a number of existing reinsurance relationships. Our gross written premiums increased 75% in the third quarter versus the same period a year ago and are up 55% for the first nine months versus the comparable period in 2008.

Our net earned premium increased 98% in the quarter compared to the third quarter of 2008, and are up 88% for the first nine months of 2009 over the same period in 2008. Even with this growth, we believe we have significant dry powder and our capital base continues to grow.

An entire insurance marketplace is healthier currently than in the past several quarters. Many securities held by the industry have appreciated in value, restoring balance sheets. This, in combination with a very mild hurricane season, has increased the capital position in the industry. That seems to have delayed the improved market pricing that we were expecting.

We continue to see meaningful price increases in employer's stop loss business. However, we are now unsure about the future price directions out of catastrophe business given the mild season, although catastrophe business is a small part of our portfolio. We have not seen strong positive price movements across the rest of the portfolio.

We continue to see increased opportunities in the premium intensive frequency business that we find attractive for our portfolio, albeit it to a lesser extent due to the restoration of balance sheets in the last two quarters.

We believe there are a number of insurance companies that need capital support through reinsurance, and that many of our competitors are still finding it difficult to expand new premium writings. We expect this to continue at least until the capital markets open up enough to provide significant financing to the insurance sector.

We believe the terms of this type of frequency business are much better than in 2008, even as price competition continues to hurt the insurance market. In addition, our recent hire of [Andy] Welsch as head of Business Development, has helped us find opportunities with new brokers in new areas of the marketplace, so our pipeline is quite strong.

Our underwriting portfolio should weather any continuing softening in prices. Our portfolio is focused on business that is either on a pricing upswing, such as employer [stop] loss is insensitive to underlying price movements, such as our homeowners [ex wind] account in Florida, or is in less competitive small account business.

In 2010 we expect to be able to grow all of these opportunities. In addition, in every frequency contract that we write there is a sharing of both the up side and down side financial results. This alignment of interest between us and our client protects our capital base should prices decline from here.

We believe there will be near-term opportunities in the market in areas that have experienced poor underwriting results, particularly as a fallout of the worldwide recession. In some markets, such as subsectors of the credit and surety markets we believe prices are rising and reinsurance capacity is being withdrawn due to recent loss activity. We are currently exploring these opportunities.

We also believe that the industry as a whole is writing business at unprofitable levels. We suspect that current combined ratio for business underwritten is well in excess of 100 given normal catastrophes.

Cash flow generation is weakening substantially as previous years' paid losses begin to outstrip current year's cash premium. In short, we expect that market pricing will turn higher in the medium term, maybe faster than that should equity and credit markets prospects darken.

Our catastrophe aggregate exposures have increased from last quarter, as the one account that was outstanding at the end of the quarter was renewed under a different structure and was a better option for both the client and for us.

As a result, our aggregate exposures are similar to what we reported in the first quarter of 2009. Our maximum catastrophe exposure to any one event has increased to $64.2 million from $60.4 million in the second quarter of 2009, while our aggregate maximum exposure for all catastrophic events has increased to $99.4 million from $75.4 million in the last quarter.

On the investment side we performed well in the quarter and year-to-date with a net return of 4.3% for the quarter and 24.2% for the first nine months of 2009. In October we returned an additional 3.8%, bringing our 10-month return up to 29%.

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 averaging 6% in the quarter. At the same time, we have been able to use the market dislocations to diversify our portfolio and to add to our deposition.

We have added one new member of staff in the quarter, Jordan Comacchio, who joins us from PricewaterhouseCoopers. Jordan is an actuary by training, and he will add to our losses, earning, and analytical capabilities.

And now I'd like to turn the call over to our Chairman, David Einhorn. We usually have Bart Hedges, our Chief Underwriting Officer, on the call, as well, but he is not with us today.

David?

Thanks, Len. And thanks, everybody, for joining us this morning.

In the third quarter Greenlight Re's investment portfolio returned 4.3%, bringing the year-to-date net return to 24.2%. Over the course of the year we've maintained a conservative net exposure, which has averaged just under 30%, and we ended the third quarter with a net exposure of 32%. About 20% of our net long exposures is invested in corporate debt instruments. When the market fell last October through March of this year we took advantage of a number of different equity and debt opportunities, and we bought more securities than we sold.

As the market has steadily risen over the past six months we've sold more than we have bought. We have found a few high quality companies that have lagged the market rally. [Creates] of these companies include below leverage, a defensible market position and a diversified customer base. We believe these companies will continue to create shareholder value over time and they should hold their value better in more leveraged, cyclical businesses if the economic recovery doesn't live-up to the expectations the market has priced in.

The investment portfolio gains this quarter were primarily generated by the long portfolio, which returned about 17% in the quarter and has returned about 50% so far this year. Some of those gains have been tempered by losses on the short portfolio which cost about 12% in the quarter and 21% for the year-to-date. Greenlight Re's investment portfolio ended the quarter 90% long and 58% short.

During the third quarter we established one new significant equity long position in Cardinal Healthcare and one significant long debt position in CIT Group. The current Greenlight Re investment portfolio is primarily invested in large and midcap equities and debt instruments. We continue to maintain a few [macro] portfolio hedges that should help us protect capital if the economy recovery falters.

The underwriting portfolio continues to generate a small positive return in a challenging environment which has not seen a return to more rational pricing as we were hoping. However, after our second year as a public Company we've now generated over $160 million of float or about 25% of capital to help drive our investment strategy. As our underwriting activities continue to mature this [gearing] affect will help compound our growth in book value.

We're pleased with how the Team is performing and how the new members have quickly contributed to our bottom line. In a Company of our size each incremental hire can have a significant impact, and we are excited to continue our organic growth and prospects going into 2010.

And now I'd like to turn the call over Tim to discuss the financial results for the third quarter.

Thanks, David.

Greenlight Re reported net income of $32.3 million for the third quarter compared to a net loss of $118.4 million for the comparable period in 2008. On a fully diluted per share basis the net income was $0.88 per share for the three months ended September 30th, 2009 compared to a loss of $3.29 per share for the third quarter of 2008.

For the nine months ended September 30th, 2009 net income was $152.3 million compared to a net loss of $89.6 million for the nine months ended September 30th, 2008. On a fully diluted per share basis net income was $4.16 per share compared to a loss of $2.49 for the comparable period in 2008.

Our third quarter 2009 results once again reflect the development of our underwriting portfolio, as both net premiums written and earned are substantially higher than in the comparable period in 2008. Net earned premiums for the nine months ended September 30th, 2009 were $152.2 million, an increase of 88% over the same period in 2008.

The composite ratio for our frequency business for the first nine months of 2009 was 98.2%, and it was 57.0% for severity business, resulting in an overall composite ratio of 88.7%. Internal expenses were 9.1% of net premiums earned for the first nine months of 2009 as compared to 13.8% reported for the comparable period of 2008, resulting in a combined ratio of 97.8% for the nine months ended September 30th, 2009.

We reported net investment income of $32.6 million during the third quarter of 2009, reflecting a net return of 4.3% in our investment account. We reported net investment income of $148.7 million during the first nine months of 2009, reflecting a net investment return of 24.2%.

Fully diluted book value per share increased 5.3% in the third quarter. For the 12-month period ending September 30th, 2009 fully diluted book value per share increased by 22.5% to $17.62 from $14.38 at September 30th, 2008.

I'd now like to turn the call back 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. In the current quarter we continue the profitable growth of our differentiated underwriting portfolio in a challenging environment, creating additional float for our investment program.

Our investment returns in the quarter continue what has been an excellent year. Both engines are working well and have contributed significantly to our capital base and book value per share. At current premium levels we still believe we are one of the only reinsurance companies with the flexibility to write a multiple of our current premium when the markets do improve.

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.)

And our first question comes from [Mike Zarinski] of Credit Suisse. Please go ahead.

Thanks, guys. First question for David on the investment portfolio. I know you talked about owning CIT debt. I guess would you be able to tell us I guess what debt you own of CIT given what's going on? And then I guess your just broad views on the market, I guess? Are you guys getting more bullish or bearish in the coming quarters?

Okay, on CIT we own many, many different QSIPs of debt. There's lots and lots of different bond issues. We've generally focused our investment on debt that was at the long end of the curve and some of the Euro denominated debt, particularly at the long end of the curve. We've also participated in both of the most recent senior financing, so part of the rescue financing, if you would. But I think that kind of explains it.

The bankruptcy, itself, was not an unanticipated event. We purchased all of the securities expecting that the Company would file bankruptcy or some other kind of workout that would eventually probably lead to the runoff of the portfolio or maybe some sales of a few assets, but basically the runoff of the portfolio. And we're anticipating good returns to creditors under that sort of a scenario, so the recent bankruptcy filing is actually sort of just a step towards resolving the uncertainty about the future business. So it's sort of a positive thing for our position.

Relating to the overall broader market and so forth, we are pretty agnostic about it. We've been kind of cautiously positioned for much of the last few months. I think we did a decent job of buying things last fall and earlier this year when prices were cheap and many opportunities were being created. And we've generally been reducing the exposure most of the way up to the point that we've remained pretty defensive throughout. And I think we are continued to be positioned in a reasonably defensive manner.

Okay, that helps. And in terms, on the insurance side, on the liability side, you guys kind of talked about kind of a more subdued outlook for the broader P&C pricing. Then you talked about you've -- growth potentially for next year due to new relationships you've struck, especially in frequency. So I guess I'm pretty sure you guys only have targets for growth for 2010, but I mean is it safe to assume the same level of growth we saw from last year or just really it all depends on what happens over the coming months?

Hi, Mike. This is Lenny. It's more the second thing that you said, it's, you know, we have no targets for growth, at all. We have baked in a few additional accounts that we've done in the last 12 months or so that we know will generate some additional premiums to us, especially in those less price sensitive areas that we talked about. But we will, if the markets continue to go down we will not hesitate to reduce our exposures. If the markets get stronger and pricing gets better then we would be happy to increase them.

Okay, thank you.

(Operator instructions.)

Thank you. 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 this call and other pertinent information about Greenlight Re is available on our website at www.greenlightre.ky.