Greenlight Capital Re Ltd (GLRE) 2011 Q1 法說會逐字稿

Good morning. Thank you for joining the Greenlight Re first-quarter 2011 earnings call. Joining us on this call this morning are 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 provision 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 22, 2011, 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 that this event is being recorded. I would now like to turn the conference over to 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 first quarter of 2011, Greenlight Re reported loss in both our underwriting portfolio and our investment portfolio.

Overall, our fully-diluted adjusted book value per share decreased by 5.4% in the quarter. Included in our 107.4 combined ratio for the first quarter of 2011 is $10 million in combined losses relating to the Christchurch earthquake in New Zealand and the Tohoku earthquake and tsunami in Japan. As we expected, given our business model, we benefited from writing catastrophe retrocessional business on peak exposures.

In addition, we had decreased our catastrophe risk to exposure in early 2011, due to a softening in market prices. Bart will discuss our underwriting results in greater detail later in this call.

Our gross written premium increased more than 50% compared to the first quarter of 2010. At the same time, during the quarter, the frequency-oriented business we prefer grew by 76%, while severity business declined by 42%. This is a reflection of the continued progress in executing our strategy. Most of the increase in frequency premiums came from further successes in our Florida homeowners' portfolio, which continues to perform well, particularly as we have seen significant and continued rate increases in the Florida insurance market.

Whether the unfortunate events in Japan and New Zealand will lead to a strengthening in primary insurance pricing is too early to tell. However, we've built a strong and deep team which is assessing the impact of these events and will allow us to identify and capitalize on any opportunities as the year progresses.

Our investment portfolio lost 3.4% in the first quarter of 2010. During that time, we maintained a defensively positioned portfolio in what was a very strong quarter for the equity markets, the best first quarter for US equity markets since the tech bubble of 1999.

We had a particularly tough time in the short portfolio, which David will discuss later in the call. In the month of April, we reported a 0.8% gain on our investment portfolio.

As you probably saw on our announcement yesterday, I am retiring and will be stepping down as CEO of Greenlight Re effective at the end of my current contract on August 15 to spend more time with my family in the US. Over the past five-and-a-half years, we have built one of the best teams in the industry and I'm pleased to report that Bart Hedges, our current President and Chief Underwriting Officer, will be appointed CEO.

I intend to continue to serve Greenlight Re, but from a different seat and will remain on the Board of Directors of the Company. I was the first employee of Greenlight Re and in the last six years, we've developed from the ground up a great franchise with a strong following in the marketplace.

From the beginning, Bart has led the development and implementation of our underwriting strategy. It has been my pleasure to work alongside him and the talented, dedicated team we assembled together. I have no doubt that Bart will be an excellent leader for Greenlight Re.

Now, I'd like to turn the call over to our Chairman, David Einhorn, to discuss our investments results in more detail and the progress in Greenlight Re's overall strategy.

Thanks, Len and good morning, everyone. When we hired Len to be Greenlight Re's CEO back in 2005, we gave him the task of developing an organization from scratch, assembling a first-class team and building Greenlight Re's brand in the reinsurance industry.

Lenny has accomplished these tasks with enthusiasm and diligence. He's built a terrific reinsurance team with a strong culture and a track record of success. Len moved from his home to New Jersey to the Cayman Islands six years ago. Len has decided it's time to go home. And, although we're sad to see him go, he will remain intimately involved with the future success of the Company as a member of the Board of Directors and as a valuable resource to the Greenlight Re team.

We're also pleased to announce that Bart Hedges, our President and Chief Underwriting Officer for the past five years, will assume the role of CEO when Lenny departs. Bart has been instrumental to Greenlight Re's success since he joined the Company.

When we hired Bart, he had a wealth of experience managing the Bermuda subsidiary of a reinsurance company and we debated whether it was actually too senior for one of our first hires. We gave him the title of President as well as Chief Underwriting Officer to reflect his level of experience and he has been Len's partner in successfully building Greenlight Re.

With five years of experience at Greenlight Re, we know that what are getting with Bart and we're confident that this transition will be nearly seamless and will not cause a change in our business model. We could not be more pleased with this choice as it is a natural evolution for Bart and the Company.

The Board has also approved two well-deserved promotions to round out our senior management team. Brendan Barry will assume Bart's current role as Chief Underwriting Officer. Brendan has been with Greenlight Re for almost five years in the role of Senior Underwriter and worked previously with Bart as Platinum Underwriters. Brendan has been instrumental to our recruitment efforts to build the team and has played a lead role in developing relationships with potential and existing clients, as well as leading the underwriting team on a day-to-day basis.

Claude Wagner will assume the role of the Chief Actuary. Claude has also been with Greenlight Re for almost five years and has been the lead pricing actuary on many of our transactions. Claude and the rest of the actuarial team have played a critical role in advancing our partnership-oriented approach to underwriting by providing our clients with insightful analysis of their data, which has helped our clients are maintaining profitability.

I want to personally congratulate Bart, Brendan, and Claude in their new roles.

Now shifting to our investment opportunities, the Greenlight Re investment portfolio was down 3.4% in the first quarter. Our long portfolio performed in line with the market and the stocks on our current short portfolio went up a good deal more than the market. Our average net exposure in the first quarter was 28%, and we ended the quarter approximately 34% net long, as our gross long exposure increased slightly to 98% at quarter-end and we reduced the number of shorts in our portfolio which brought the gross short exposure a few percent down to 64%.

While the price of gold was essentially unchanged during the quarter with modest losses in our various positions and currency's interest rates and credit spreads, nine of our 10 biggest winners in the quarter were longs. Three of our five largest disclosed divisions were our biggest winners as Delta Lloyd, Arkema, and Pfizer were up 24%, 19% and 16% during the quarter. Our five biggest losers were all shorts, including two consumer cyclicals, two energy technology stocks and Moody's.

As I mentioned, we covered a number of shorts this quarter and have centered our exposure into our highest conviction short positions. We exited a number of successful shorts in the for-profit education industry, three bank shorts which we had one winner and two losers in a losing technology short. We also exited several shorts where the Company's performance exceeded our expectations.

Additionally, we established new long positions in Best Buy, Delphi and Yahoo! in the first quarter. As we witnessed in the first four months of 2010, the equity market is trending higher. The market has been incredibly resilient in the face of continued escalation in commodity prices, turmoil in the Mid-East, and further European sovereign issues, the catastrophe in Japan and a deceleration of US domestic economic growth.

All of these factors individually are a cause for concern and coupled together, they're even more worrisome. Momentum-driven markets persevere until they don't.

We don't know when the turn may come, so we remain cautiously positioned and focused on identifying individually compelling long and short investments.

We remain worried that the government's quantitative easing experiment may not produce the desired result. So far, housing prices have not stabilized and continue to fall. Although the Fed denied the claim that its easy money policies are causing a rise in commodity prices, the prices of things consumers actually pay for -- like food, energy, and healthcare -- continue to rise at an accelerated pace.

A key question for the reminder of the year is how consumers react to higher prices and how much of the cost pressure in the supply chain will be absorbed by the corporate sector. If earnings don't turn out to be what the market is forecasting and currently pricing into many securities, the markets may turn quickly.

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

Thanks, David. Given the events of the first quarter of 2011, it makes sense to start with our property cat retro book. We've been writing this portfolio without a loss since 2006. In the first quarter of 2011, we estimate losses of $10 million from all the events of the quarter, partially offset by $1.25 million of reinstatement premiums. $5 million comes from the full limit loss on the Christchurch earthquake from a client with significant exposure in New Zealand.

We are also estimating another $5 million loss on an aggregate cat retro cover triggered by the Japan events. This particular contract protects our client against a string of bad events. The loss is our best estimate at this point. Additional new events in the first half of 2011 could increase our losses on this contract, although the maximum exposure to the Tohoku earthquake is cast at $5 million.

We've reviewed all our contracts and do not believe we're exposed to other losses as a result of the events of the first quarter. The advantage of writing a small number of peak exposure accounts is that we can review each account in detail to estimate our ultimate liabilities.

As Lenny mentioned, we were fortunate in the first quarter as we had begun to reduce our cat exposures as pricing came down and terms and conditions weakened in the cat retro market. We anticipate that some new private and hedge fund-sponsored retro writers experienced severe losses. We have significant spare capacity, if the market for cat retro hardens. But we've not yet seen solid signs of that happening.

Currently, our maximum capacity exposure to any single event is $59.7 million, which is down from $69.5 million in the fourth quarter of 2010. Our aggregate maximum exposure to all catastrophic events is $83 million, also down from $93.8 million in the fourth quarter of last year.

As a reminder, we always state our catastrophe aggregates as the absolute amount of limit we have at risk, less any reinstatement premiums.

We grew our Florida homeowners book considerably, thanks to contracts found in 2010. As pricing continues to rise in Florida and some smaller competitors have had to cease writing business due to financial difficulties, the premium opportunities for our clients continue to grow.

We continue to write this business with limited catastrophe exposure. As we generally share our clients' net retentions on a pro rata basis, we have no exposure to excess catastrophe losses which are assumed by a number of other reinsurers.

We have been in this market for a couple of years and we believe we understand the dynamics very well and continue to believe this is a growth area for us in the near term.

Our small account workers' compensation, general liability and auto business look strong in the first quarter, with some clients reporting small rate increases. With the US economy exhibiting some encouraging signs of growth, this also looks like a growth area for us in 2011. We are still not participating in the mid or large-size workers' compensation and general liability, as we believe the pricing in that segment is still well below where it needs to be to make sense for us.

Our employer stop loss premium decreased from the first quarter of 2010. This is largely from reductions in premium estimates from some of our clients who are reducing exposures and holding on to profitable business in what looks to be an increasingly competitive market. We are happy that our clients are choosing profit over growth, and we will continue to monitor this segment carefully.

We have been in this market since 2007 and think it has further to run; we cannot and will not be complacent. We are actively looking for new markets to deploy our capital but, as always, we will do so judiciously.

In the meantime, we have begun to make strong inroads into the EU market for Greenlight Ireland, our Dublin-based subsidiary. We believe that the conversations we are having now will result in increased activity and growth for Greenlight Re in the European marketplace over the next couple of years.

Given the current uncertainty on the direction of pricing and overall inflation trends, we are comfortable with our defensively positioned short tail-oriented reinsurance portfolio. We are also happy that we have significant untapped underwriting capacity if indeed prices move up from here.

Finally, I want to thank the Board of Directors and, particularly, Lenny for their continued confidence in me. I wish Lenny all the best and I'm grateful to him for his leadership at Greenlight RE and his partnership with me and our team over the past five-and-a-half years.

We expect the leadership transition over the next couple of months to be smooth and we will continue to benefit from Len's experience at the Board level. I look forward to guiding the next phase of Greenlight RE.

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

Thanks, Bart.

Greenlight Re reported a net loss of $43.0 million for the first quarter of 2011, compared to a net loss of $12.4 million for the comparable period in 2010. On a per share basis, the net loss was $1.19 per share for the three months ended March 31, 2011, compared to a net loss of $0.34 per share on a fully diluted basis for the same period in 2010.

Gross written premiums were $100.7 million, an increase of approximately 51% during the first quarter of 2011, compared to the first quarter of 2010. Net earned premiums for the three months ended March 31, 2011, were $105.2 million, an increase of approximately 90% when compared to the net earned premiums of $55.3 million reported in the first quarter of 2010. This increase is a reflection of the earnings on our frequency business, particularly our Florida homeowners' quota share book.

We reported a net investment loss of $36.2 million for the first quarter of 2011, reflecting a net loss of 3.4% on our investment account. The composite ratio for our frequency business for the three months ended March 31, 2011, was 99.1% and it was 151.5% for severity business, resulting in an overall composite ratio of 102.6%.

The composite ratio on our frequency business continues to be negatively affected by losses booked as a result of a final earning of premiums on a motor liability account, which was terminated in 2010. As we have previously discussed, composite ratios on severity business will be volatile depending upon the size and activity of worldwide natural catastrophes. The events in Japan and New Zealand accounted for the large increase in our severity composite ratio.

Internal expenses were 4.8% of net earned premiums for the first quarter of 2011 compared to 9.3% reported for the comparable period in 2010. The decreased expense ratio was primarily a result of higher earned premiums during the first quarter of 2011.

The fully diluted adjusted book value per share as of March 31, 2011, was $20.23, a 8.8% increase from $18.60 per share reported at March 31, 2010. I am pleased to report that on April 27, 2011, we held our Annual General Meeting. All rate proposals contained in our proxy were approved by shareholders including the reelection of all of our incumbent directors for additional one-year terms.

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

Thanks, Tim. The first quarter of 2011 included a number of large industry events that did not heavily impact us, due to our frequency-oriented underwriting philosophy. In addition, our investment portfolio is well-positioned in what are still somewhat uncertain financial markets.

We believe we will generate above average risk-adjusted returns over the long term without making huge bets on unpredictable and unmeasurable weather and quake events. We have executed this strategy consistently since we started operations in 2005 and we will continue to do so in the future.

Our objective is to write a concentrated underwriting portfolio with the best risk-adjusted returns we can find and to utilize the float generator 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 on the strategy and remain focused on driving our key yardstick, increased fully diluted 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). Brian Meredith of UBS.

Good morning, everybody. Len, I was hoping if you could elaborate a little bit on your comments from the 10-Q, that you're saying that you don't expect any kind of in a broad-based turn in the market till at least 2012. What do we need to see happen in order to get better pricing out there? I mean, the market is -- we are seeing some lift from some companies and some people out there are talking about that. Do you think we're on the verge of a turn?

Thanks for the question. I have -- we have seen those comments as well. We just haven't seen the evidence yet. We know that a lot of other reinsurers have lost a significant amount of capital, but what they are choosing to do is to stop buying back shares. And if there is a clean windstorm season, we don't think enough capital has been removed from the industry to make a significant difference.

What could change that is, obviously, a bad windstorm season. Or bad asset results from a number of our competitors that would produce the capital in those companies. But since we can't predict the hurricanes, we just don't see significant hardening right now.

And it doesn't sound like you really want to increase your exposure all that much for the property cat reinsurance area, which is the one area that there is some speculation there is some better pricing.

Well, we would increase it. We certainly have the scope to increase it and we would increase it if we thought the opportunities would be beneficial to our shareholders. And we haven't seen a lot of opportunities. We are starting to see some people get a little bit interested in buying backup covers or buying excess coverage for windstorm season. It would be a change in the R&S model, but a lot of it is talk right now. There hasn't been -- we haven't seen a lot of action.

Great. Thanks.

[Russell Mullin of Baird Capital].

First question, maybe you can elaborate a little bit on how the set up is with the frequency Florida homeowners? You know, with the rate increases that have been going on in the Florida homeowners market, I would think that over the near to medium term future, those P&C companies with those rate increases have less of a need to reinsure their business with you guys or any other reinsurers.

Thanks for the question. Actually they meed our reinsurance more. There are premium to capital rules in the state of Florida and in just about every state that -- in the US and if you -- premium goes up by 20% because of pure rate, it still goes up by 20% and it takes time to earn the money, to earn the profits to your capital base.

So actually it's short term for the next couple of years. We actually expect people will increase, have increased need for quarter share, due to price. And in addition, we're seeing a number of our clients being able to put on some increased exposure, something the smaller companies are not particularly doing well.

Got it. And then on the severity side, I think Bart had mentioned that you could see additional losses from the event in Japan. But did you say that that was maxed out an additional $5 million, or at the current --?

No. What Bart said was that the Japan then is capped at the $5 million that we've put up for the earthquake and tsunami, but it was part of an aggregate contract for a client. So additional events that happened in the next quarter could add losses to that contract. But they wouldn't be coming from the Japan (multiple speakers).

And then lastly on the investment side, David, you had mentioned that you had closed out some short positions on some for-profit education companies. And I was wondering if you close those out, what the thought process was on the initial investment's thesis and did you close it out that it played out as you had thought? Or where that thought process is now?

Yes. We have insured the for-profit education companies for a fair amount of time, certainly more than a year, maybe even two or three years. We covered one of them out -- well, we covered one of the shorts sometime last year but we left most of the positions in place. And then early this year, there was a disappointment by one of the companies, I think it was [Strayer] and the whole factor traded down dramatically in view of the disappointing results, the slowing enrollment growth and ultimately the regulatory risk and overhang that that industry continues to face. But at that point we felt that the stocks had gone down a lot and we took them all in. You know, at that point.

And we are just at this point just kind of sitting on the side kind of waiting to see which way the regulatory reform plays itself out.

Got it. Thanks.

(Operator Instructions). Having no further questions, this concludes our question-and-answer session. 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.