Greenlight Capital Re Ltd (GLRE) 2011 Q4 法說會逐字稿

Thank you for joining the Greenlight Re conference call on fourth-quarter and full-year 2011 earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Brendan Barry, Chief Underwriting 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 10-K dated February 21, 2012 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.

All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded and I would now like to turn the conference over to Bart Hedges. Please go ahead.

Good morning. I am Bart Hedges, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us today. In the fourth quarter of 2011, Greenlight Re generated a small loss in our underwriting portfolio and a gain in our investment portfolio. Overall, our fully diluted adjusted book value per share increased by 9.5% in the quarter and by 1% for the year.

Greenlight Re's combined ratio for the year ended December 31, 2011 of 103.8% stayed relatively stable compared to our combined ratio of 103.3% for the first nine months of 2011. While our combined ratio for the year compares favorably with many in the reinsurance industry, it reflects 2011 as being a challenging year for both the industry as a whole and us.

During the year of record-setting insurance industry losses as a result of a series of natural catastrophes, we were fortunate to experience a loss to only one property catastrophe contract in the amount of $5 million. We do not believe we suffered any adverse development from earthquake losses reported in prior periods.

Our maximum catastrophe exposure currently is $71 million for any one event and $99 million for our maximum aggregate exposures to all events. These figures are up marginally from the prior period as we deployed slightly more capacity at January 1 with our existing partners. As a reminder, we always state our catastrophe aggregates as the absolute amount of limit we have at risk less any reinstatement premiums.

Also, our Florida homeowners business performed well this year with loss activity at or below our expectations. However, as we discussed previously, our commercial motor liability account experienced increased large claim activity during the first and third quarters of 2011, which caused an increase to our combined ratio for the year.

During the fourth quarter of 2011, our small account commercial liability business experienced some increased large claim activity causing an underwriting loss for the quarter.

As you will recall, we reserve each contract every quarter based on the most recently available information and select our best estimate of reserves. We are working closely with our partners to implement rate changes and further improved risk selection in order to improve the overall profitability for ongoing accounts.

Our gross written premium was down 4% in 2011 compared to 2010. Overall, both frequency and severity business had small decreases in premiums written primarily as a result of the commutation of a Florida homeowners account and a small reduction in severity business written in 2011. This reduction in premium writing is a function of the opportunities in the market. We believe we are disciplined in passing up unattractive business and we continue to focus on frequency-oriented business, which was 96% of gross written premium for the year.

Based on rate change activity that our partners have been able to achieve in recent quarters, we are cautiously optimistic that, absent an unexpected spike in claim costs, the market is slowly hardening in areas of the commercial market where we currently participate. We wrote one new significant private passenger automobile account at January 1 with a regional rider of nonstandard automobile. The business reinsured with this partner complements geographically the two nonstandard automobile accounts we discussed during our last call.

On January 1, we renewed our catastrophe retro book with significant rate increases and in some cases with improved terms and conditions. While the catastrophe retro market improved over prior periods in response to significant loss activity in 2011, we did find that there was ample capacity to fill programs.

New nontraditional capacity from hedge funds, pension funds and other fixed income managers continues to flow to this part of the market. As long as the spread remains high between fixed income yields and the perceived margin in the catastrophe retro market, we believe new capacity will continue to be dragged into this space. Even with this new capacity, we were pleased with the renewals we achieved and we continue to look for new business that meets our return objectives.

Now I would 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 returned 7.6% in the fourth quarter of 2011 bringing the 2011 full-year return to 2.1%. During the quarter, both longs and shorts were profitable with longs contributing about 85% of the return. For the full year, more than all the return was generated by the short portfolio.

We made two notable new investments in the fourth quarter in Dell and Xerox. We ended the quarter about 37% net long. We had a positive start to 2012 with a January return of 2.7%. In October, we increased our net long exposure because the economic picture in the United States had shown steady improvement while the business results of many companies have performed better than their stock prices, which made them more attractively priced.

We are finding good investment opportunities, both long and short, and continue to hedge macroeconomic uncertainty with a significant position in gold and other macro positions. Market sentiment right now is extremely bullish and we recently lowered our net exposure a few percent.

Despite a challenging pricing environment in 2011, the team continued to exercise patience and find new underwriting opportunities. We completed the successful transition of Len Goldberg's CEO responsibilities to Bart Hedges and the team is ready to take advantage of a hardening market.

2011 was an important year for Greenlight Re in which we transitioned leadership, established our Irish operations, grew the platform by adding six new staff, received a full A rating from A.M. Best and protected capital in a tough environment. We believe we are well-positioned for 2012.

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

Thanks, David. For the fourth quarter of 2011, Greenlight Re reported net income of $70.2 million compared to a net income of $56.4 million for the comparable period in 2010. The net income per share on a fully diluted basis was $1.89 for the fourth quarter of 2011 compared to net income of $1.51 per share for the same period in 2010. For the year ended December 31, 2011, we reported net income of $6.8 million compared to net income of $90.6 million for the year ended December 2010. On a fully diluted basis, net income per share was $0.18 compared to $2.44 for 2010.

Gross premiums written were $90.5 million during the fourth quarter of 2011, a decrease from gross premiums written of $107.8 million in the fourth quarter of 2010. This decrease is primarily a result of the commutation of a Florida homeowners contract during the last quarter of 2011. The ceding insurer underwent a restructuring and we agreed to terminate the relationship.

For the year ended December 31, 2011, gross written premiums were $397.7 million, a 4.1% decrease over gross written premiums in 2010. The composite ratio for our frequency business for the 2011 fiscal year was 103.1% compared to a composite ratio of 105.6% during 2010. For severity business, our 2011 composite ratio was 46.3% compared to 22% in 2010. This higher composite ratio on severity business was primarily due to a $5 million loss reported from 2011 catastrophe activity related to the second New Zealand earthquake. The overall composite ratio was 100.1% for 2011 compared to 97.2% for the prior year.

Internal expenses were 3.7% of net premiums earned for the 2011 fiscal year as compared to 5.6% for 2010. Operating expenses of $13.9 million for the 2011 year decreased by approximately $2.3 million versus 2010. This was primarily the result of reduced employee bonus accruals in light of adverse loss development relating to underwriting in 2009 and 2010. The combined ratio for the full-year 2011 was 103.8% as compared to 102.8% for 2010.

We reported net investment income of $77.7 million during the fourth quarter 2011, reflecting a net return of 7.6% on our investment account. We reported net investment income of $23.1 million for 2011, reflecting a net investment return of 2.1%. The fully diluted adjusted book value per share as of December 31, 2011 was $21.61, a 1% increase from $21.39 per share reported at December 31, 2010.

During December, we amended two of our letter of credit facilities, which provide us with an additional $150 million of letter of credit capacity for our underwriting operations. Currently, we have a total committed letter of credit capacity of $760 million, of which approximately $400 million is utilized. I will now turn the call back over to Bart for some concluding remarks.

Thanks, Tim. In 2011, we continued the successful expansion of our underwriting franchise both in Cayman and now in the European Union. Through the efforts of our management team and our new Dublin office, we are building solid relationships with brokers and potential partners across Europe.

During the year, we realized significant progress on several fronts. We improved the A.M. Best rating of our Cayman subsidiary from A- to full A. We also added bench strength to our staff, improved focus in executing our strategy, preserved capital during a volatile year and managed a successful CEO transition.

Our goal is unchanged. We aim to build long-term shareholder value by writing a concentrated underwriting portfolio for 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. This investment approach 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. 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, UBS.

Yes, good morning, everybody. Two quick questions. First, for Tim, did the commutation have any impact on the loss ratio or expense ratio in the quarter?

Yes, the expense ratio, yes, but certainly not the loss ratio. Actually it was a difficult time for the Company and we believe we commuted it at the right time and for the right reasons.

Okay, so there was some impact on the expense ratio, so did it lower it, go up --?

Yes, slightly, Brian.

Slightly? Okay, great. And then second one, Bart, I wonder if you could talk a little bit about the Florida market. You guys, obviously, have a big presence down there. Kind of some of the stuff that is going on down there with legislation and citizens, kind of give us your thoughts on that.

Sure. We do have a good-sized position there and mainly it is with the limited wind quota share contracts where we are partnering with the specialist companies to provide them capital support. The big hurdles of late have really related to sinkhole activity, which was partially and maybe largely addressed by legislation that is now coming into effect and we think is being pretty effective at reducing claim frequency and severity.

The other sort of overhang in the market is the situation with citizens, which the legislature I think is currently trying to address and they are in session now and certainly no predictions about it, but I think people have gained a much better awareness of the situations with citizens whereby there being a competitive market as opposed to a market of last resort and they are creating a stumbling block to rates really moving up to an acceptable level.

But overall, we are very happy with the business that we have and our partners are performing very well there.

Great. And then one other just quick one. On Europe, obviously, some of the financial issues that we have been seeing in Europe have put some strain on some of the insurance companies over there as well and I was hearing that there was a number of companies looking for surplus relief and other type of capital relief-type deals out there. I am wondering have you all been approached with any of those opportunities. Is it a potential market for you there?

Yes. I think, as we think about Europe, we have positioned this Company in Ireland to really write business in the UK and the rest of the EU and I think that Solvency II with the higher cost of capital in addition to the current problems being caused by the debt crisis and other economic problems will certainly create opportunities for us and we think that we will be able to find good partners that need capital support and will be good frequency-oriented business that produce good risk-adjusted returns.

Great, thank you.

Michael Bunyaner, (inaudible) Capital. Please go ahead.

Good morning. I have two questions. One on the insurance, in terms of the pricing, if you look at the catastrophe business and the opportunities in Europe, what is the capacity to write the premiums over the next, let's say, two years do you see for yourself?

Sorry. Michael, could you say that again? Was it more specifically about the cat business or about the European business or just in general about both?

Essentially what type of opportunities do you see in terms of being able to write the premiums over the next two years now that the prices are up?

Yes, well, first, our portfolio is fairly concentrated in a couple of areas and property cat is one of those areas. We think that, at 1/1 and hopefully again at 4/1, that prices were up and we think that the market is responding to loss activity. But there is still a pretty ample amount of capacity in the market, so it is certainly not -- I wouldn't call it a hard market. It is harder than it was previously, but it is certainly not a fantastic market. We are pleased with the accounts that we wrote and we were happy to expand the relationships with our existing partners and we continue to look for those kinds of opportunities.

On the broader market in Europe, we are being very patient there and slowly getting out with the brokers meeting with companies that meet the criteria that we like. We like to find people that are experts in their business. We like to find people that are capital-constrained that we think are going to have a very long-term view of the market. And I think it is still sort of spotty over there as it is in the US. There are pockets where it is getting a little bit better and generally speaking, it is still a difficult market out there.

But do you see the opportunities to be able to put capital to work in terms of finding additional premium or is it still, as you said, because of the availability of the capacity, it is not as hard as you would like it to be?

Well, I think certainly the market is not as good as we would like it to be. I think we will continue to do what we have done in the past, which is we take a very bottom-up approach to the market and we look for the people that meet the criteria that we like in the partnerships and we look for the best risk-adjusted returns. Because the business that we like is fairly large-sized transactions, our premium growth tends to be fairly lumpy and one or two new transactions can make or break -- new ones or ones that go the other way can make or break the Company in terms of the amount of premium volume that we write.

But certainly we don't target that. We are targeting profitable underwriting results first and our belief is that, over the long term, that is going to drive good shareholder value.

Thank you so much. And David, in terms of the investment outlook, there is clearly still a variety of macro issues that have not been resolved. Do you have any conviction about the outlook over the next couple of years economically in the US and Europe?

Most of the portfolio we have is constructed from the bottom up where we are trying to look for individual opportunities where we think that the longs are undervalued and misunderstood and the shorts are similarly misunderstood and overvalued. And that is really where we aim to drive most of our return.

Additionally, we do sort of manage the portfolio a bit based upon our feeling for the quality of opportunities that are available, so things seem cheaper which may mean that we are more bullish. We would have more long exposure and if it is harder to find longs then sometimes we would have a little bit less net long exposure. Right now, we are at what I would consider to be sort of a neutral-type of position. We additionally do try to protect ourselves from some of the bigger picture risks through additional positions, which we would characterize as macro positions. Those include gold, various investments in interest rate-type of instruments and currency instruments as well.

Thank you very much.

(Operator Instructions). Having no further questions, this will conclude 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. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.