Greenlight Capital Re Ltd (GLRE) 2011 Q2 法說會逐字稿

Thank you for joining the Greenlight Re conference call on second-quarter 2011 earnings. Joining us on the 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. All participants will be in listen-only mode.

(Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). 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 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 this event is being recorded. 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 second quarter of 2011, in what remains a challenging market for reinsurance and investors alike, Greenlight Re produced a small gain in our underwriting portfolio and a small loss in our investment portfolio. Overall our fully diluted adjusted book value per share decreased by 2% in the quarter and by 7.3% for the year to date.

Our year-to-date combined ratio of 102.1 has improved from our first-quarter 2011 combined ratio of 107.4. This is mainly due to a small reduction in our ultimate losses for storms during this period offset by limited adverse development on a commercial auto program that is in runoff.

In addition, we had no additional storm-related losses in the second quarter of 2011 as we continue to benefit from writing catastrophe retrocessional, [strategic] exposures and high attachment points. Bart will give us more details when he discusses our underwriting results.

Our gross written premium increased by 27% in the quarter compared to the same period in the prior year and by 37% for the year to date. In addition, the frequency oriented business we prefer grew by 44% on a year-to-date basis while severity business declined by 22% reflecting the execution of our strategy.

Much of the increase in frequency premiums is the result of further success in our Florida homeowner's portfolio which continues to perform well as we have seen strong rate increases in the Florida insurance market.

Our investment portfolio lost 1.9% in the second quarter of 2011 as we maintained a defensively positioned portfolio. We believe our investment portfolio is well-positioned for the uncertainty that is ahead of us, but we did have some things work against us in the quarter which David will discuss further. In the month of July we reported a 1% gain in our investment portfolio.

In a week's time I will officially step down as CEO of Greenlight Re and hand the reins over to Bart while I continue to serve Greenlight Re as a Director. I am proud of the team we have built and our ability to capitalize on opportunities in the market. It has been a great partnership for the last five and a half years and I am confident that Bart will continue the successful development of our Company.

Together we have developed a strong, deep and talented organization that we believe will excel in both good times and difficult times. 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 of Greenlight Re's overall strategy.

Thanks, Len, and thanks, everyone, for joining us today. The Greenlight Re investment portfolio was down 1.9% in the second quarter of 2011 bringing our first half of 2011 net returns to negative 5.2%. In the volatile yet relatively flat second quarter for the S&P are long portfolio was up slightly, but our short portfolio was up a little bit more than the market and losses in our euro and yen positions more than offset a slight gain in gold.

In July we had a small loss on our longs and positive returns for our shorts and macro positions which added up to a gain for 1% for the month. Although we had a slight gain in our short portfolio in June and July, the loss in our investment portfolio for the first half of the year came from our shorts. As we saw at the end of the Internet bubble, market tops are formed when it simply becomes too expensive on the day-to-day basis to hold well researched short positions.

In the first half of the year we witnessed a bifurcated market where a small number of momentum stocks rose mostly because -- well, because they were rising. These markets continue until they don't and we have seen what can happen when the enthusiasm ends.

It is also becoming increasingly clear that the Fed's intended economic stimulus through QE2 was not only ineffective but has brought about inflation in items that consumers use on a daily basis such as food and energy. This has caused consumers to have to reduce other consumption which has caused the global economy to slow.

In the second quarter we exited a number of long positions and covered a short position with a gain. Exposures on both sides of the portfolio came down in the month of July and our gross exposure fell by about 15%. The Greenlight Re investment portfolio ended the month approximately 87% long and 62% short, down from 93% long and 70% short at the end of the second quarter.

We believe there are quite a few stocks and sectors, such as REITs, that are trading at all-time highs and overvalued and we're short some of them. It is our belief that the global economic situation has deteriorated so far this year and is in worse shape than we thought it would be at this point in the cycle.

Given these concerns in addition to consolidating our long and short positions in our highest conviction of estimates and maintaining a modest net long position we continue to hold a significant position in gold, some foreign sovereign CDS, options on higher interest rates and a few currency positions and hedges. We reduced exposures because we believe the opportunity set had become less attractive.

Though we don't usually comment on mid-month performance, given the recent market volatility we believe it's important to provide some additional commentary.

In recent days the market has suffered a very large decline. Our conservatively positioned portfolios held up reasonably well with gains in the short portfolio in gold almost offsetting the losses in the long portfolio. We've taken the opportunity of falling prices to cover some shorts and make modest long investments. As of now our quarter-to-date performance is approximately flat; we are approximately 86% long and 53% short.

As this is Lennie's last official call as the CEO of Greenlight Re, I want to thank him for his many years of service to the Company. Lennie joined us soon after inception of Greenlight Re while it was still private, and helped us to shape its business and strategy to where it has become today. Though we'll miss Lennie, he will continue to add value at the Board level and we're confident in Bart's leadership and the seamless transition to his management team.

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

Thanks, David. I'm looking forward to working with our shareholders, the Board and our team to continue to build Greenlight Re. This is a Company with its own approach to the market, one that I firmly believe in and I'm excited about helping to realize the opportunities that we see in the market.

During the second quarter of 2011 we took several steps to continue to develop our four core areas of business. We expanded our presence, renewed key business in high-growth areas, added some significant accounts and began to de-lever -- or to leverage our new Dublin operation.

The quarter was particularly active due to our concentration of business in the Florida homeowners market. The traditional dates for finalizing reinsurance placements for this market is June 1, just prior to the start of hurricane season.

We continue to support several of the Florida homeowner's specialist underwriters with quota shares. Under these contracts we have limited catastrophe exposure as we are only exposed to our proportional share of the wind losses before the catastrophe reinsurance kicks in.

We renewed these relationships at June 1 and in each case we believe our reinsurance terms and conditions remain attractive while the underlying fundamentals of the business improved due to rate increases as well as improved legislative environment. We believe the end result will be a higher level of profitability than in the expiring transactions.

Our premium volume in this portion of our portfolio is growing substantially and for the first six months of 2011 it represents nearly half of the premium volume. While this would appear to be a significant exposure, we write this business with tight combined ratio [cats], so if we are wrong about any piece of the business our downside is controlled. This measured downside risk also reduces the capital needed to write these transactions.

Our small account workers' compensation and general liability business continues to perform well and has shown some small signs of an improved rate environment. While the market is still quite difficult and competitive in workers' compensation and general liability, we continue to believe that the small account business is less price sensitive and our partners in this area have established good distribution channels and are producing good underwriting margins despite the challenging market conditions.

During the quarter we renewed our largest account in the employer stop-loss market, a relationship that is now in its fifth year. This particular partner has continued to outperform the market and has demonstrated disciplined underwriting. We also made the decision to non renew one relationship in this area.

We continue to support several accounts in the employer stop-loss market and are actively searching for several other accounts that meet our return hurdles with underwriters who exhibit the characteristics that we value in long-term partners.

We wrote one new property cat retro account during the quarter and a second new retro account since quarter end. Each of these opportunities benefits from improved pricing conditions in the cat retro market following the series of international losses earlier this year.

Although we believe these opportunities are compelling, absent a further significant catastrophe event we believe the market for property cat retro will not harden significantly and may begin to erode due to increased capacity in this area.

Our maximum catastrophe exposure is $66 million for any one event and $94 million for a maximum aggregate exposure to all events. These figures increased compared to $60 million for any one event and $83 million for all events in the aggregate as of the first quarter of 2011. As a reminder, we always state our catastrophe aggregates as the absolute amount of limit we have at risk less any reinstatement premiums.

In addition to the four core areas of our underwriting portfolio we have added a few new accounts. One of the new accounts represents our first piece of new business for Greenlight Re Ireland, the subsidiary that we established late last year.

We wrote a UK solicitor's professional indemnity cover, an area of the market that we entered late last year following severe market dislocation. This developing relationship includes a well rated insurance carrier and a large UK broker with retail, wholesale and [MGA] operations.

Additionally, we have taken a small position in a new nonstandard automobile opportunity. This is an area that we have been in and out of a couple of times over the past several years and that we feel is currently attractive to us as we believe we can successfully grow our relationship with our new partner.

We continue to be disciplined in our risk selection and we are pleased with our short tail frequency oriented underwriting portfolio. We believe we have a well-positioned underwriting portfolio in the event conditions continue to soften and are poised for additional growth should pricing begin to increase.

This quarter we added two new members to the underwriting team, [Bruno Landry] is Vice President and Actuary. Bruno has 13 years of experience, mainly in reinsurance pricing, with Alliance and Excel. [Rena Strucker] has joined us as an underwriting assistant. Rena is a chartered accountant and worked previously for Chartis and Goldman Sachs in the areas of capital management and reinsurance purchasing strategy. We continue to look for strong professionals to help us develop our franchise.

Now I'd like to turn the call over to Tim to discuss our financial results.

Thanks, Bart. For the second quarter of 2011 Greenlight Re reported a net loss of $16.0 million compared to net income of $17.7 million for the comparable period in 2010. The net loss per share was $0.44 for the second quarter of 2011 compared to net income of $0.47 per share on a fully diluted basis for the same period in 2010.

For the six months ended June 30, 2011 we reported a net loss of $59.0 million compared to a net income of $5.3 million for the six months ended June 30, 2010. The net loss per share was $1.63 for the six months ended June 30, 2011 compared to net income of $0.14 per share on a fully diluted basis for the same period in 2010.

Net premiums earned for the six months ended June 30, 2011 were $212.3 million, an increase of 102.7% compared to the net earned premium of $104.7 million reported for the first half of 2010. This large increase is primarily a reflection of the increased premium earnings on our frequency business and in particular increased premium earnings on our Florida homeowner's quota share business.

The composite ratio for our frequency business during the first six months of 2011 was 98.7% and it was 77.4% for severity business resulting in an overall composite ratio of 97.7%. Internal expenses were 4.4% of net earned premiums for the first six months of 2011 as compared to 7.9% reported for the comparable period in 2010. This resulted in a combined ratio of 102.1% for the first half of 2011.

We reported a net investment loss of $19.5 million during the second quarter of 2011 reflecting a net loss of 1.9% on our investment portfolio. We reported a net investment loss of $55.6 million for the first six months of 2011 reflecting a net investment loss of 5.2%. The fully diluted adjusted book value per share as of June 30, 2011 was $19.82, a 3.9% increase from $19.07 per share reported at June 30, 2010.

I'd now like to turn the call over to Lennie to provide some concluding remarks.

Thanks, Tim. The second quarter of 2011 has continued the successful expansion of our underwriting franchise both in Cayman and now in the European Union. In addition, our investment portfolio is well-positioned in what are still uncertain financial markets.

We believe we are positioned to 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 differentiated strategy consistently since we started operations in 2005 and we'll 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 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.

Under Bart's leadership we will continue to execute on this 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). And showing no questions in the queue I will conclude our question-and-answer session. The conference has now concluded. 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.