Greenlight Capital Re Ltd (GLRE) 2011 Q3 法說會逐字稿

Thank you for joining the Greenlight Re conference call on third quarter 2011 earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer, Brendan Barry, Chief Underwriting Officer, and Claude Wagner, Chief Actuary. All participants will be in listen only mode. (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 Bart Hedges, Chief Executive Officer. Please go ahead.

Good morning. I'm Bart Hedges, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us today.

We are very pleased to announce that during the third quarter, A.M. Best upgraded our Cayman-based operating company to full A from A-. We believe that this upgrade represents a significant step forward for our reinsurance platform, and recognizes the strength of our capital position, the experience of our team, the success of our differentiated business model, and our financial performance.

In the short term, we believe the effects of the upgrade will be modest. Over the long term, however, we believe the higher rating will allow us to access certain classes of casualty business and larger transactions.

In short, we expect to be able to develop more opportunities from which we can select the best partners, and best risk adjusted returns.

In the third quarter of 2011, in what remains a challenging market for reinsurers and investors alike, Greenlight Re generated a small loss in our underwriting portfolio, and a small gain in our investment portfolio. Overall, our fully diluted adjusted book value per share decreased by 0.4% in the quarter, and by 7.7% for the first nine months of the year.

Our year to date combined ratio of 103.3% has deteriorated slightly, from our combined ratio of 102.1% reported last quarter. This is mainly due to adverse development on a commercial auto program that is in runoff.

Our gross written premium is flat for the year to date when compared to the same period in 2010. Overall, an increase in premiums written for frequency business, primarily Florida homeowners business, has offset a reduction in the severity business we have written in 2011.

The Florida homeowners market continues to show signs of improvement, but our partner is experiencing double digit rate increases. In addition, there have been recent positive legislative changes implemented to mitigate fraud associated with sinkhole claims.

We continue to focus on frequency oriented business. Our existing underwriting portfolio reflects this, with a split of gross premium written of 96% in frequency business, and 4% in severity business.

We recently wrote two new significant non-standard automobile contracts with private passenger automobile writers in the United States. The typical non-standard automobile policyholder purchases very low limits of liability in order to meet state financial responsibility requirements, and typically does not purchase physical damage protection for their own vehicle. These opportunities for their underwriting model of supporting these specialists, who are experts in their field, and finding areas of the market that are experiencing some dislocation.

One of the contracts is for a Florida provider. The Florida private passenger automobile market has suffered losses in the recent past, and as a result, significant price increases are now being implemented. We believe this new partner is well positioned to take advantage of these market dislocations.

Our other new partner is a regional writer with a concentration in Louisiana and several other states. Our Property Cat Retro portfolio did not change during the third quarter. The US hurricane season is traditionally a less active quarter for new Property Cat Retro accounts. We do not believe we suffered any losses from the US storm season to date, nor have we experienced any adverse development from earthquake losses reported in prior periods.

Our maximum Catastrophe exposure is $66 million for any one event, and $94 million for a maximum aggregate exposures to all events. These exposures are unchanged from the second 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.

We are continuing to pursue appropriate opportunities to grow our European business through our Greenlight Re Ireland subsidiary, and have a number of productive conversations underway. We are seeking to build partnerships with small and medium sized insurance enterprises that need a reliable capital partners. These are typically specialist insurers that recognize that when Solvency II regulations are implemented, introducing a new approach to risk based capital, they'll want to have a partner who can provide quick access to capital.

While we are only one year into the process of building our presence in Europe, we are encouraged by the acceptance of our model and the identified needs in the marketplace.

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

Thanks, Bart, and good morning, everyone. The Greenlight Re investment portfolio was up 10 basis points in the third quarter of 2011, bringing the 2011 net returns to negative 5.1%. The conservative stance that we maintained throughout the first half of the year in a rising market was rewarded in the third quarter, as we were able to preserve capital in the Greenlight Re portfolio and generate a flat result in a quarter where the S&P fell approximately 14%.

As we went through the first half of the year, we became even less convinced that the markets were pricing in the global economic challenges, and we entered the third quarter about 23% net long, down about 10% from where we entered the second quarter.

In the first half of the year, we consolidated our short positions into our highest conviction ideas, and sold a number of our lower conviction long positions, including some of our more cyclical exposure in Europe. Our long portfolio lost a bit more than the market in the third quarter. However, our short portfolio generated an absolute portfolio return of about 12% on an average short exposure of 60%, reversing more than all the loss in the short book during the first half of the year.

Our macro hedges also helped in the quarter, with slight positive returns coming from gold, and our European sovereign and CDS positions, where we have taken some profits.

As the market retreated over the past few months, we added to a few of our existing long positions, found a few new investment opportunities, primarily in the technology and auto sectors, and covered several shorts. We also existed a long standing position in Pfizer profitably, as better opportunities presented themselves.

During the third quarter, we shifted a portion of our gold investment from physical gold into GDX, an ETF of gold mining companies. Throughout the course of this year, a substantial disconnect has developed between the price of gold and the mining companies. With gold at today's price, the mining companies have the potential to generate double digit free cash flow returns, and offer attractive risk adjusted returns even if gold does not advance further. Of course, since we believe gold will continue to rise, we expect gold stocks to do even better.

Late in the quarter, we increased our net long exposure to 35%. Although we didn't expect it, the strong market advance in October immediately rewarded us for our more positive view, and the Greenlight Re investment account reversed all year to date losses, and generated a positive return of 6.9% in the month of October, with gains coming primarily from our long portfolio.

Despite the strong October, we believe that the environment remains challenging. Many equities, especially in large capitalization, appear quite attractive. This is balanced by the continuing impact of dangerous macro policies. Most of our portfolio is assembled from the bottom up, and we continue to see reasonable opportunities on both sides of the portfolio.

As markets have quickly priced in a few positive recent data points in October, we have slightly reduced our net long portfolio exposure, and ended October 33% net long.

As we discussed on our last call, Len Goldberg retired as CEO of Greenlight Re in August, and completed the transition of his responsibilities to Bart Hedges. I spent several days in the Cayman last week with Bart, Len and the rest of the Board, and was pleased with the smoothness of the transition and the energy of the team. Under Bart's leadership, the underwriting at Greenlight Re continues to exercise patience and discretion, and is finding pockets of opportunity.

I am also excited that after five years of building Greenlight Re, A.M. Best has upgraded our rating from A- to A, reflecting the hard work that the team has achieved to establish our unique reinsurance company.

The rating increase should provide significant future benefits to Greenlight Re. Now I'd like to turn the call over to Tim, to discuss our financial results.

Thanks, David. For the third quarter of 2011, Greenlight Re reported a net loss of $4.5 million, compared to net income of $29.0 million for the comparable period in 2010. The net loss per share was $0.12 for the third quarter of 2011, compared to net income of $0.78 per share on a fully diluted basis for the same period in 2010.

For the nine months ended September 30, 2011, we reported a net loss of $63.4 million, compared to net income of $34.3 million for the nine months ended September 30, 2010. The net loss per share was $1.75 for the nine months ended September 30, 2011, compared to net income of $0.92 per share on a fully diluted basis for the same period in 2010.

Net premiums earned for the nine months ended September 30, 2011 were $302 million -- sorry, $302.7 million, an increase of 64.4% compared to the net earned premiums for $184.1 million reported for the first nine months of 2010. This large increase is primarily a reflection of the increased premium earnings on our frequency business, and in particular, increased premiums earnings on our Florida homeowners quota share business.

The composite ratio for our frequency business during the first nine months of 2011 was 101.8%, and it was 57.5% for severity business, resulting in an overall composite ratio of 99.7%. Internal expenses were 3.6% of net premiums earned for the first nine months of 2011, compared to 6.3% reported for the comparable period in 2010. This reduction in the expense ratio reflects continued leverage of premium growth over our operating expense, and a reversal of prior bonus accruals, due to the negative development of the commercial auto contract that is now in runoff.

Overall, this resulted in a combined ratio of 103.3% for the first nine months of 2011. We reported net investment income of $1.1 million during the third quarter 2011, reflecting a net gain of 0.1% on our investment portfolio. We reported a net investment loss of $54.6 million for the first nine months of 2011, reflecting a net investment loss of 5.1%.

The fully diluted adjusted book value per share as of September 30, 2011 was $19.74, a 0.7% decrease from $19.87 per share reported as of September 30, 2010.

I'd now like to turn the call back to Bart, who will provide some concluding remarks.

Thanks, Tim. Third quarter of 2011 has continued the successful expansion of our underwriting franchise, both in Cayman, and now in the European Union through our new Dublin office, where we are building solid relationships with brokers and potential partners. In addition, we continue to believe that our investment portfolio is well positioned in what we are still -- in what are still uncertain financial markets. We believe we have the right platform 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 will continue to do so in the future. The upgrade to an A rating by A.M. Best is a testament to our model, our team, and the successful execution of our plan. Our goal is to build long-term shareholder value by writing a concentrated underwriting portfolio with the best risk adjusted returns we can find, and to use the float generated from these contracts to invest in our value oriented long/short investment program, which has 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 fully diluted book value per share.

Appreciate your continued confidence in Greenlight Re. Thank you again for your time, and now, we would like to open up the call to questions.

We will now begin the question and answer session. (Operator instructions) At this time, we will pause momentarily to assemble our roster.

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.