Greenlight Capital Re Ltd (GLRE) 2010 Q2 法說會逐字稿

Thank you for joining the Greenlight Re second-quarter 2010 earnings call. Joining us on the call this morning are David Einhorn, Chairman, Len Goldberg, Chief Financial 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 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 10K dated February 24, 2010, and other documents filed by the Company with the SEC.

If any 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.

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

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

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

In the second quarter of 2010, Greenlight Re continued to build in our strong reinsurance franchise. Overall, I am pleased to report that our fully diluted adjusted book value per share increased by 2.5% in the quarter.

While we had a small loss in our underwriting results for the quarter, we produced a positive return in our investment portfolio. The core areas of focus at Greenlight Re continue to be the lines of business we have discussed in the last year. Namely, employers' stock loss, Florida homeowners, small account workers comp and general liability, and property catastrophe retro.

These businesses continue to perform well. However, it is increasingly difficult to generate significant returns in most insurance lines outside these areas of focus. We plan to navigate this difficult market by staying disciplined in our underwriting, while awaiting improvement or dislocation in the market.

A principal contributor to our negative underwriting results during the second quarter of 2010 was the adverse development on a motor contract we had put into runoff last quarter. We believe we made the right decision in terminating this contract, but wish we had done so sooner. Discontinuing the account would certainly limit the underwriting loss going forward.

In addition, we added reserves to a 2007 casualty class contract based on new information received in the quarter. As we have mentioned in prior calls, part of our process is to reserve every account each quarter to what we think is an appropriate point estimate. We do not utilize reserve ranges to absorb unexpected losses while allowing deficiencies to build up on our balance sheet. When the data and our analysis tell us we need to increase or decrease the reserves on a contract, we do it in that quarter.

For the first six months of 2010, our combined ratio is just under 100%. Our gross written premium through June 30, 2010 increased about 10% over the same period in 2009. This was driven by a 22% increase in our targeted frequency business and a 40% reduction in severity business.

Overall market pricing continues to be challenged, but we believe that the business lines where we are focused remain areas of opportunity. We were able to expand in our success in these lines of business are in the second quarter, which Bart will discuss later. Meanwhile, we remain focused on only letting accounts that we believe can generate an acceptable return on capital deployed.

The Greenlight Re investment portfolio gained 2.6% in the second quarter of 2010 and has produced a 0.6% gain for the first six months of the year. We we benefited somewhat from our defensive reposition portfolio in what was a very difficult second quarter for the equity markets. Thanks to good stock selection, we were able to achieve a small gain in the second quarter even as our portfolio was net long.

In the month of July 2010, we reported a 2.5% loss on our investment portfolio, driven primarily by a decline in gold prices. Finally, during the second quarter, we were able to further expand the capacity under our letters of credit facilities. Efficient capacity in our letters of credit is important to the successful execution of our business strategy and we are pleased to have broadened our facilities with a number of highly rated institutions. Tim will talk more about this.

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.

The stock market fell about 15% from peak to trough[s] in the second quarter as investors realized that the economy might not have the V-shaped recovery they seemed to be pricing in during the first quarter. Over the past several years since the recession began, we have all witnessed both tremendous upside and downside volatility.

During the quarter, Greenlight Re managed to largely avoid the volatility of the schizophrenic market. We construct our investment portfolio with a long-term view and our position to take advantage of individual investment dislocations during volatile periods. Just as we did more buying and selling in the period from October 1, 2008 to April 1, 2009, we did more buying and selling in the second quarter of this year, beginning in May when the market fell about 9% from its peak.

We added a number of new long positions including a top -- a new top 5 long position in Ensco, an offshore oil drilling company.

As Len mentioned, the Greenlight Re investment portfolio returned 2.6% in the second quarter. We lost about 5.6% in our long portfolio running about 94% gross long and we made 8.7% in our short portfolio, running about 64% gross short. Our long's still less than half as much as the market and we had about an equal market participation by our short portfolio. Our portfolio is long companies that are cheap, well-positioned, global businesses paying healthy dividends, and companies which we believe have significant unrecognized, embedded value.

We are short companies that we believe will have a tough time in this economic environment, including a few specific real estate and consumer-related businesses.

The current environment holds a wide range of potential economic outcomes and we continue to be conservatively positioned as we navigate through the turbulence that comes with this uncertainty. We ended the quarter about 23% net long equities and 7% net long debt. We continue to hold a significant position in gold, which also added to our return in the second quarter, but gave much -- back much of that gain in July and we also have a few other macrohedges.

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

Thanks, David. On our last call, we discussed in detail the four main areas where we have been seeing success. As Lenny mentioned, we still believe these businesses have good potential. Today I would like to discuss the success we had in the second quarter, expanding in these areas.

In the second quarter of 2010, Greenlight Re added two new Florida homeowners accounts. We wrote these accounts with capped wind exposure, sharing only in our clients' net retention for catastrophe losses and leaving the excess catastrophe to other reinsurance markets. Both of these clients are led by strong management teams that we believe are well equipped to successfully navigate the current market. In addition, there have been a number of large rate increases granted by the state of Florida, which should improve results and the health of the marketplace going forward.

In addition to these new accounts, we negotiated -- we renegotiated a current Florida homeowners account to secure a large increase in premium over the prior year. Since these accounts are generally bound on June 1, along with our clients' catastrophe reinsurance purchases, the economic impact of this business has not yet been felt and will be earned over the upcoming coverage period.

There are tight combined loss ratio caps on each of these contracts, so we believe the aggregate downside and our exposure to the Florida market is manageable. In fact, we expect to continue actively looking for more of this business if we can find the right opportunity with the right partners.

We added a new account for -- a new small account program in the quarter. The program is approximately 80% small general liability policies and 20% small commercial auto policies with a client that has experienced excellent results in recent years. While we have had our difficulties in commercial auto, experience shows that small accounts can act very differently from large accounts, which have seen competition in the current market environment. In addition, our existing small account programs continue to perform as well or better than expected.

We did not add to our employers' stop loss portfolio in the quarter. While this business has performed better than expected for us over the last three years, there are some early signs of increased competition, which could begin to squeeze our returns. We are monitoring this carefully and continue to be happy with our current clients.

We also renewed a property catastrophe retro session account. This is a long-standing relationship with a global reinsurer. Our program is positioned so that it would take a series of losses in order for us to need to pay a claim.

Our maximum catastrophe exposure to any one event is $89.1 million and our aggregate maximum exposure to all catastrophic events is $108 million. As a reminder, we always state our catastrophe aggregates as the absolute amount of limit we have at risk, less any reinstatement premiums.

While we do not see any imminent upturn in the pricing and the broader reinsurance markets, we will continue to look for opportunities in the market while vigilantly pruning the business that does not continue to make our return on equity hurdles. While we hope to find new areas of opportunity, we believe we have a well-positioned underwriting portfolio in the event prices fall further, and are poised for additional growth should prices begin to increase in 2011.

Now I would like to have the call over to Tim to discuss our financial results.

Thanks, Bart. Greenlight Re reported net income of $17.7 million for the second quarter of 2010, compared to net income of $92.2 million for the comparable period in 2009. On a fully diluted per share basis, net income was $0.47 per share for the three months ended June 30, 2010, compared to net income of $2.51 per share on a fully diluted basis for the same period in 2009.

For the six months ended June 30, 2010, net income was $5.3 million compared to $120 million for the six months ended June 30, 2009. On a fully diluted per share basis, net income was $0.14 per share, compared to $3.29 per share for the comparable period in 2009.

Gross written premium of $89 million increased during the second quarter of 2010 by 27% compared to the second quarter of 2009, primarily due to the writing of several new frequency-based personal property contracts. For the six months ended June 30, 2010, gross premium written were (sic) $155.8 million, a 9.8% increase over gross premiums written for the same period in 2009. Our reported premium is dominated by frequency business, which accounted for 89.2% of gross premium written during the first six months of 2010.

Net premium -- net premiums earned for the six months ended June 30, 2010 were $104.7 million, an increase of 9.6% compared to the net earned premiums of $95.5 million reported for the first half of 2009. This increase is primarily a reflection of the earnings on our frequency business, which have grown moderately during the past 12 months.

The composite ratio for our frequency business during the first six months of 2010 was 102.4%. And it was 33.3% for severity business, resulting in an overall composite ratio of 91.7%.

As Lenny discussed earlier, the higher composite ratio on our frequency business was primarily the result of reserve increases on a 2009 motor liability contract which is now in runoff. Internal expenses were 7.9% of net premiums earned for the first six months of 2010, as compared to 10.2% reported for the comparable period in 2009. This resulted in a combined ratio of 99.6% for the first half of 2010.

We reported net investment income of $22.6 million during the second quarter of 2010, reflecting a return of 2.6% on our investment account. We reported net income of $5.8 million for the first six months of 2010, reflecting a net investment return of 0.6%. The fully diluted adjusted book value per share as of June 30, 2010 was $19.07, a 15.4% increase from $16.53 per share reported at June 30, 2009.

We have recently increased the letter of credit facilities we have available with two of our banks by a total of $85 million. We currently have total letter of credit capacity of $560 million. As of June 30, 2010, letters of credit outstanding totaled $245.5 million. Having multiple facilities continues to be a critical element in our business plan, and we will continue to ensure that we have sufficient capacity in case there is a rapid positive turn in the reinsurance market place, which would require additional collateral.

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

Thanks, Tim. The second quarter of 2010 was one of continued progress for Greenlight Re. Although we put out some additional losses on two older accounts, we were able to successfully grow our portfolio in areas of the market that continue to offer opportunity. And our investment portfolio performed well, despite a difficult quarter for the equity markets.

We have executed our strategy consistently since we started operations in 2005. Our objective is to write a concentrated underwriting portfolio with the best risk-adjusted returns we can find, and to utilize the float generated from these contracts to invest in our deep value, long-short investment program which has generated superior returns with less volatility than the overall equity markets. We will continue to execute our strategy and remain focused on driving our key yardstick -- increase book value per share.

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). Alec Ofsevit of Credit Suisse.

Good morning. Two questions. First, on the underwriting side -- specifically for the motor liability contract -- can you just let us know how much room there is between the losses incurred on that contract and the contract limit and over what period of time you expect this contract to run off?

And then the second question on the investment side for David, any updated thinking on the gold position? It's clearly a big driver in the July performance, and just updated thoughts on maybe intermediate term, inflation, expectations and sovereign credit concerns.

About the commercial auto account, there is a cap on the account. There is quite a ways between where we booked it and cap. But we do believe that we have the right number. As we talked about on the call, when we get the new information -- and we don't like to stairstep it, we try to pick what we think is the best number and we could be wrong, it could be high or low but we think we have it pretty well contained.

This is David, referring to the question about the gold and so forth. I don't think that there is much of a change in our view towards gold. I don't view this as a particularly short-term position and it is based upon the intermediates of long-term viability, official policies, which do not appear improved to us, leading us to ultimate risks that will make it, we think, prudent to have a portion of our assets in gold for the intermediate to very long-term.

Everett Weinberger of Merrill Lynch.

Good morning, gentlemen. A few questions. Number one, if you step back from a macro basis on your results, you know a year ago, we were coming out of the worst recession in postwar history. And you did very well. Now a year later, when we are coming out of recession, with most companies reporting better earnings, you are reporting dramatically worse earnings in the first six months.

So from a macro basis, you know, I would just like to understand. Are cyclical? Is this something one-off was [fixed]? Was a year ago an unbelievable period, because that sort of is on my mind because we have seen companies beat expectations for the first six months of this year. Which is kind of what you would expect coming out of recession, as opposed to having just ended the recession.

The second question is on the investment portfolio. Just maybe some of this is obvious, but number one, how large is it/ Number two, is it the same exact portfolio that is in Greenlight Capital? Or is it invested in Greenlight Capital? You know, that's what I never understood. Whether you have your own little version of Greenlight Capital or whether it actually just gets dumped into Greenlight Capital and you get the same results as Greenlight Capital.

And then thirdly, what percent of GLRE is owned by David and Greenlight Capital?

Well, that's a lot of questions. We don't seek to be countercyclical. We seek to make an absolute return in all markets on both sides of the balance sheet, but we did come off of a year last year where we had a 32% investment return and a 41% increase in book value. So I don't expect we will be doing that every year.

The second question was about the investment portfolio. We have our own managed account. It is invested essentially [car pursue] with other Greenlight Capital strategies. The [nonevent] that is in the account is essentially the total of the equity capital that we have, plus all of the investment float that we generate from the reinsurance operations today.

So right now all of that money, both the float and the equity capital, is in that managed account with DME advisors and a subsidiary agreement on capital.

And David's economic investment in Greenlight Re is 17% and his voting shares are 9.5%. He is limited to 9.5% of the vote and that's available in the Q. I think that was all your questions.

Yes, that was. One last silly question, but everywhere I see, you are now called Greenlight Re. And when you pull it up on the -- any site, you are Greenlight Capital Re. You know, are you (sic) officially changed your name to Greenlight Re? Were you -- you know, how -- you know, why keep the Greenlight Capital Re name?

Greenlight Capital Re is our legal mind, but we trade under Greenlight Re.

Okay.

Any other reinsurance company would shorten it for -- how we are getting the message out there to brokers and clients, but I am glad we are getting the message out there to brokers and clients. I think that is what you are telling us.

You are. 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.