Greenlight Capital Re Ltd (GLRE) 2010 Q3 法說會逐字稿

Good day, and thank you for joining the Greenlight RE Third Quarter 2010 Earnings Call. Joining us on the call this morning are Dave 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 10K dated February 24th, 2010, 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.

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions.)

I would now like to turn the conference over to Mr. Len Goldberg. 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 third quarter of 2010, I am pleased to report that our balanced approach produced approach produced a 4.2% increase in fully diluted adjusted book value per share. While we had a small loss in our underwriting result for the quarter, we produced a positive return in our investment portfolio.

Greenlight RE continued to build in our strong reinsurance franchise during the quarter, despite the fact that it is increasingly difficult to generate significant returns in most reinsurance lines. We are navigating this difficult market by focusing on our core areas and staying disciplined in our underwriting while awaiting improvement or dislocation in the market.

The core areas of focus at Greenlight RE continue to be employer stop loss, Florida Homeowners, Small Account Workers' Comp and General Liability and Property Catastrophe Retro. These businesses continue to perform well.

In the third quarter of 2010, in particular, we were able to grow our Florida Homeowners business significantly, although a large part of the increase in premium for that line represents unearned premium that was transferred to us at the start of one new contract.

We now have Quota Share relationships with four specialist insurers in Florida and -- that we believe will generate opportunities for us to create strong economics and cash flow while at the same time controlling the down side risk, in part, through minimal wind exposure.

The principal contributor to our underwriting result during the third quarter of 2010 was adverse development on a motor liability contract we had placed in runoff during the first quarter. While we cannot ensure there will not be further developments, the 2008 and 2009 years are maturing, and we are getting a better view of the ultimate loss.

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 estimate. When the data in our analysis tell us we need to increase or decrease the reserves on a contract, we do it in that quarter.

For the first nine months of 2010, our combined ratio was 101.4%. Our gross written premium for the nine months ended September 30th, 2010, increased by 48% over the same period in 2009. This was driven by an increase in our targeted frequency business and a reduction in severity business.

Frequency business currently makes up in excess of 92% of our premium written year-to-date. Bart will discuss in more detail why we believe this success is mainly attributable to getting our message out to the market consistently and actively identifying and seizing opportunities in the market. Meanwhile, we remain focused on only writing accounts that we believe can generate an acceptable return on capital deployed.

Greenlight RE's investment portfolio gained 3.6% in the third quarter of 2010 and has produced a 4.2% gain for the first nine months of the year. Market gains in the third quarter were strong, and we were pleased with the returns, considering our defensive positioning.

In the month of October of 2010, we reported a 3.4% gain on our investment portfolio. Finally, during the third quarter, we opened Greenlight Reinsurance Ireland Limited, or GRIL, for short. GRIL is a Dublin-based reinsurer that we believe will help us more effectively serve the European union. Just as we did in Cayman, we will carefully build our team with professionals we believe can help us extend the Greenlight RE franchise.

Given the current market realities, we do not expect to write a significant amount of new business at GRIL in the near future, but we ultimately believe the EU marketplace will require more reinsurance in the face of increasing capital requirements under Solvency II. We intend to be a reinsurer of choice as those new reinsurance relationships are established in the run-up to 2013, when Solvency II becomes effective.

And 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 everybody for joining us today. As Len mentioned, our investment portfolio returned 3.6% in the third quarter, as the stock market reversed its second quarter loss of 11.4% in advance to 11.3%. It was a fairly quiet quarter for Greenlight RE's investment portfolio as a whole, and we didn't establish any significant new long position.

Our longs rose a little bit more than the S&P 500 while our shorts, on average, rose a good deal less than the Index. Our largest and only significant loser was Moody's, which gave up about half the gain in the prior quarter. There were good operating results from a number of our investments, including Akema, CIT Group at Pfizer, and there were several other -- also several company-specific events that aided our shorts. We continued to maintain a conservatively-positioned portfolio with an average net long exposure of 29% in the third quarter.

The most notable development in our portfolio exposure year-to-date is the reduction of our debt investments, which now stand at about 2% of capital, down from 11% at the beginning of the year. In the third quarter, we sold the last of our Ford bonds, the portfolio's biggest winner in 2009.

At the time we purchased the Ford debt, at an average of about $0.43 cents on the dollar, we thought that the Company had sufficient assets to cover the loan. More than just covering the loan, the business actually turned around. As a matter of fact, there are many businesses in corporate America that are doing quite well right now, and we believe that we own some of them.

We continue to hold gold as a hedge to our core fiscal and monetary policies. The potential additional quantitative easing the Federal Reserve is likely to embark on is designed to create a potential new asset bubble, which would be fraught with risk for both investors and for the real economy, and being net short such a situation would be painful.

Our strategy remains to have a modest net long position. We will ignore comparisons between government bonds, whose prices are now manipulated, and stocks and attempt to construct a -- and maintain a bottom-up portfolio of longs and shorts, where each investment has a favorable risk reward characteristics.

Turning to Greenlight RE's underwriting, we're pleased to see that Len, Bart and the team have both been opportunistic and disciplined in their underwriting. And although the pricing environment remains challenged, the team has been able to grow the portfolio year-over-year by focusing on inefficient pockets of frequency-oriented business. I'm pleased with our strategic expansion into the EU marketplace and believe it will result in an expanded opportunity set for the team in the future.

I want to welcome David McGuire, the manager of GRIL, to the team. It is particularly gratifying to see us attracting the highest-caliber experienced reinsurance executives to our organization.

And now, I'd like to turn the call over to Bart to discuss in more detail Greenlight RE's underwriting progress.

Thanks, David. We have continued to stick to our [knitting] in the four core areas of business where we have been seeing success. We have also written the smallest amount of opportunistic business in distressed areas that had seen significant losses in prior years. This quarter, I'd like to focus on why we are having success growing our underwriting portfolio in a difficult market.

As Lenny mentioned, the key to our success has been our ability to identify attractive lines of business as well as the potential clients in those segments with whom we would like to partner. Our core strategy has been to write a smaller number of larger frequency-oriented transactions for professional partners who take risks alongside us.

This is an unusual strategy for the reinsurance marketplace, and it has taken some time to get the broker community to understand which business we find attractive. We took a large step forward last year by formalizing and staffing our business development function. It is a team effort with all our underwriters and actuaries, providing the same consistent message to the marketplace.

We are now beginning to see the benefit of this focus, as the opportunities we are seeing now better fit with our business strategy. As a broker market company, Greenlight RE relies on brokers to bring us opportunities. However, we aren't taking a passive approach. We are spending less time reviewing submissions for new business the broker sends to multiple markets and more time working with brokers to identify opportunities like and that offer the potential for significant success.

Florida Homeowners market, where we write business with limited wind exposure and barely low combined ratio caps, is a good case in point. We have developed productive, new broker relationships in that market, and the last contracts we wrote didn't go out to the market. It came directly to us from the brokers, since they understood the business we prefer and because we performed well for another of their clients on an earlier deal. This is where our model really works. Brokers bringing us opportunities to work on -- with their clients exclusively, rather than sending them to 12 or 15 reinsurers at once.

We have had similar success in other areas of focus where we have bound deals that have been well controlled by the broker and were provided to us either exclusively or as one of a select group of reinsurers. In addition to our core areas of focus, we have found some opportunistic business in distressed areas of the market. This is -- include the trade credit and surety business, which we mentioned in earlier calls, and more recently, Solicitors Professional Indemnity Business in the United Kingdom.

Both of these segments suffered some bad years through the financial crisis and have experienced higher pricing and better risk management, thanks to lessons learned. We believe these type of -- types of opportunistic business can generate better returned in our core frequency business, although sometimes with shorter windows of opportunity. We will continue to look for these dislocations as we await a more compelling overall market. As we have always said, the reinsurance market is not monolithic. And if we remain patient and do our homework, we should find profitable opportunities in almost all environments.

The last part of our growth story is our existing client base. We've been successful finding good, longs-term clients who have been with us for three, four or even five years. A vital component of our growth comes from finding opportunities to expand our relationships with these clients. Finding growth in our renewal book of business is a plus because it is a business that we know, written by clients with whom we have already built trusted relationships. When we write core business, we always try to think of a long-term partnerships. We will continue to work to grow these core renewal relationships as part of our overall strategy.

With regard to our natural catastrophe exposure, our maximum exposure to any one event is $99.9 million, and our aggregate maximum exposure to all catastrophic events is $118.8 million. Both of these figures are slightly higher than our second quarter exposure of $89.1 million and $108 million respectively. As a reminder, we always state our catastrophe aggregates as the absolute amount of [limit] that we have at risk, plus any reinstatement premiums.

While we do not see any imminent upturn in pricing in the broader reinsurance markets, we will continue to look for opportunities while vigilantly pruning business that does not offer attractive return on equity. 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 pricing begin to increase in 2011.

And now, I'd like to hand the call over to Tim to discuss our financial results.

Thanks, Bart. Greenlight RE reported net income of $29.0 million for the third quarter of 2010 compared to net income of $32.3 million for the comparable period in 2009. On a fully diluted per-share basis, net income was $0.78 per share for the three months ended September 30th, 2010, compared to net income of $0.88 per share on a fully diluted basis for the same three months in 2009.

For the nine months ended September 30th, 2010, net income was $34.3 million compared to $152.3 million for the nine months ended September 30th, 2009. On a fully diluted per-share basis, net income was $0.92 per share compared to $4.16 for the comparable period in 2009.

Gross written premiums of $152.2 million during the third quarter of 2010 increased 129% compared to the third quarter of 2009. This large increase in the third quarter premium was primarily a result of approximately $47.5 million of unearned premium on a new Florida Homeowners contract as well as increased premium on frequency-based employer stock loss business.

For the nine months ended September 30th, 2010, gross premiums written were $307.1 million, a 47.7% increase over gross premiums written for the same period in 2009. Net premiums earned for the nine months ended September 30th, 2010, were $184.1 million, an increase of 21.0% compared to net premiums earned of $152.2 million reported for the first nine months of 2009. This increase is primarily a reflection of the earnings on our frequency business, which have grown significantly during the past 12 months.

The composite ratio for our frequency business during the first nine months of 2010 was 104.3%, and it was 30.8% for severity business, resulting in an overall composite ratio of 95.1%. As Lenny discussed earlier, the higher composite ratio in our frequency business was primarily the result of increased reserves on a motor liability contract, which is now in runoff.

Internal expenses were 6.3% of net premiums earned for the first nine months of 2010, as compared to 9.1% reported for the comparable period in 2009. This resulted in a combined ratio of 101.4% for the first nine months of 2010. We reported net investment income of $33.9 million during the third quarter of 2010, reflecting a net return of 3.6% on our investment account. We reported net investment income of $39.7 million for the first nine months of 2010, reflecting a net investment return of 4.2%. Fully diluted adjusted book value per share, as of September 30th, 2010, was $19.87, a 14.1% increase from $17.41 per share reported at September 30th, 2009.

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

Thanks, Tim. The third quarter of 2010 was one of continued progress at Greenlight RE. Although we posted additional losses on a discontinued motor liability account, we were able to successfully grow our portfolio in areas of the market that continued to offer opportunity. We expect this gross -- growth to help drive our earnings and create positive cash flow to support our investment strategy over the next year or more. Meanwhile, our investment portfolio continued to perform in both the third quarter and in the month of October.

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 is generated superior returns with less volatility than the overall equity markets.

We will continue to execute on this strategy and remain focused on driving our key yardstick -- increased 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.

Thank you. (Operator instructions.) We are showing no questions at this time. 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 webcast at www.greenlightre.ky. Thank you, and this concludes today's conference. You may disconnect your lines.