Greenlight Capital Re Ltd (GLRE) 2012 Q1 法說會逐字稿

Thank you for joining the Greenlight Re conference call on the first-quarter 2012 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 Actuarial Officer.

After today's presentation there will be an opportunity to ask questions. Please note, 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 current Company's current expectations, estimates, and predictions about future results and events and are subject to risk, uncertainties, and assumptions including risk, 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.

I would now like to turn the conference over to Mr. Bart Hedges, Chief Executive Officer. Mr. Hedges, the floor is yours, sir.

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

In the first quarter of 2012, Greenlight Re generated a small loss in our underwriting portfolio after all general and administrative expenses, and a gain in our investment portfolio. Overall, our fully diluted adjusted book value per share increased by 7.8% in the quarter.

Greenlight Re's combined ratio for the quarter ended March 31, 2012, was 102.4%. Our combined ratio improved marginally over the fourth quarter of 2011. Our core businesses continue to produce acceptable results; however, our combined ratio continues to be negatively impacted by higher than expected severity trends in our commercial automobile book of business.

Our commercial automobile accounts improved unprofitable over several years. In particular, transportation business written by our partners in 2009, 2010, and to a lesser extent 2011 experienced unfavorable trends in the frequency of large losses compared to historical results.

We are no longer writing commercial automobile business, but we continue to be responsible for the runoff of the claims for the business we did write. We monitor the runoff of this business closely and continue to reserve quarterly based upon our best estimates.

Our gross written premium for the quarter was up 51% from the same quarter a year ago. The growth in written premium was mainly achievable to the relationships we entered into recently to write private passenger motor contracts.

This business is quite different from the commercial automobile business discussed earlier. The coverage is nonstandard motor liability for private passenger autos, not commercial vehicles used mostly in the long-haul trucking business. Additionally, the nonstandard motor liability business covers very low limits of liability compared to the commercial automobile business.

For example, an average nonstandard motor liability policy limit may be $20,000 compared to an average commercial automobile policy limit of $1 million. The lower policy limits mitigate the potential negative impact of large losses. Additionally, the nonstandard motor liability business we support is currently experiencing rate increases in excess of loss trends, which we believe will result in expanded profit margins.

During the first quarter we did not experience any movement on our reserves for natural catastrophes experienced during 2010 or 2011. We renewed one significant catastrophe retro account at April 1, 2012, with improved terms.

Although 2011 was a year of historic international property catastrophe losses, new capacity from collateralized markets reduced the ability to significantly increase pricing and therefore limited our ability to find acceptable new opportunities in this area. However, we are comfortable with our exposure in this part of our portfolio and continue to believe that we are achieving good risk-adjusted returns on the business we support.

Our maximum catastrophe exposure currently is $69.8 million for any one event and $102.7 million for our maximum aggregate exposure to all events. As a reminder, we always state our catastrophe aggregates as an absolute amount of limit we have at risk, less any reinstatement premiums.

We continue to see signs of improved rate conditions in our private passenger automobile, Florida homeowners, employer stop-loss, and small accounts commercial liability and workers' compensation businesses. This move towards higher rates is an encouraging sign for the future market conditions, particularly in combination with the low interest rate environment and the slowdown in releases of prior-period reserves being experienced by the broader industry. However, the turn in the market is slow, and we will stay patient and focused on writing business that fits our strategy and meets our return expectations.

During the quarter, we added a new senior member to our underwriting team. Caryl Traynor will join our Dublin, Ireland, operation as General Manager on June 1, 2012, with a mandate to drive implementation of our client-focused underwriting strategy in Europe. Caryl joins us from Canopius Ireland, where he was responsible for underwriting reinsurance business in the UK and Europe.

Additionally, we are pleased to welcome Matias Galker, a new actuary, to our team in Cayman.

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. Last week I was in the Cayman Islands for Greenlight Re's quarterly Board meeting and the Annual Shareholders Meeting. This gave me a chance to spend some time with the team.

I am pleased with the measured growth of the business. We continue to be disciplined in a challenging market; but we have found some good underwriting opportunities in areas of the market that have shown favorable pricing trends. As a result, our gross written premiums are up this quarter, and we remain positioned to capture future opportunities as they emerge.

Now I would like to discuss the investment portfolio. In the first quarter, Greenlight Re's investment portfolio had a 6.5% net return, driven by a 15.6% gross return on our loan portfolio. The most significant contributors to our performance came from long positions in companies that have been delivering solid operating results over the past few quarters, including Apple and Seagate. Although the stock prices of a number of our long portfolio investments lagged the fundamental progress made by these companies in 2011, market participants recognized and priced in some of the embedded value in these businesses during the first quarter of 2012.

Our short portfolio lost 7.2% or roughly the same amount as the market, based upon a 57% average gross short exposure. April was a challenging month, and we lost 2% while the S&P 500 lost approximately 0.6%.

Over the past six months, equity markets have stabilized as a healthier economic outlook in the US has unfolded and fears of an impending collapse in Europe have subsided for the time being. As the markets fell in the later part of last year, we increased our net exposure, given the enhanced opportunity set, and we entered the year 37% net long. In the first quarter our net exposure dropped a few percent, and we ended the quarter 32% net long.

Our gross short exposure increased about 9% as the market rallied and we added a couple new short positions. In April, we further increased our net long exposure, which stands at 39%.

Although corporate earnings have been improving for four out of every five companies in the S&P 500 have exceeded their earnings expectations so far this year, this enthusiasm is tempered by our continued concern about the structural sovereign debt problems in Europe and Japan, a slowing Chinese economy, and high oil prices, and general inflation connected to the Fed's continued insistence on maintaining an emergency 0% interest rate policy, which we believe is no longer useful or effective.

We continue to focus on identifying individually compelling long and short investments while maintaining our positions in gold, gold miners, as well as other macro hedges.

We invite you all to attend Greenlight Re's investor meeting on May 21 at the Time Warner Center in New York City. We look forward to you joining us so we can share in more detail the Greenlight Re story. Now I would like to turn the call over to Tim to discuss our financial results.

Thanks, David. For the first quarter of 2012, Greenlight Re reported net income of $65.1 million compared to a net loss of $43.0 million for the comparable period in 2011. The net income per share on a fully diluted basis was $1.75 for the first quarter of 2012 compared to a net loss of $1.19 per share for the same period in 2011.

Gross premiums written were $152.2 million during the first quarter of 2012, an increase from gross premiums written of $100.7 million in the first quarter of 2011. As Bart mentioned earlier, this increase is primarily the result of premiums written related to private passenger automobile contracts entered into during recent quarters.

Our net earned premiums were $101.6 million, a slight decrease from $105.2 million reported in the first quarter of last year. The decrease is attributable to a combination of factors including lower earned premium on personal lines business as a result of a Florida homeowners contract we commuted during the fourth quarter of 2011, the increase in premiums earned on our nonstandard motor liability business, and slight decreases in workers' compensation and general liability lines resulting from decreases in the underlying premiums written by our insureds.

The composite ratio for our frequency business for the first quarter of 2011 was 101.5% compared to a composite ratio of 99.1% during the comparable period in 2011. For severity business our composite ratio for the first quarter of 2012 was 19.1% compared to 151.5% during comparable period in 2011. Overall, our composite ratio for the first quarter of 2012 was 97.8%, compared to 102.6% for the comparable period of 2011.

Internal expenses were 4.6% of net premiums earned for the first quarter of 2012 as compared to 4.8% for the same period in 2011. The resulting combined ratio for the first quarter of 2012 was 102.4%, compared to 107.4% for the same period in 2011.

We reported net investment income of $71.6 million during the first quarter of 2012, reflecting a net return of 6.5% on our investment account.

The fully diluted EPS adjusted book value per share as of March 31, 2012, was $23.29, a 15.1% increase from $0.2023 per share reported at March 31, 2011.

At a recently held Board of Directors meeting, the Board approved the extension of the Company's share repurchase plan for an additional year. The plan now expires on June 30, 2013. There were no shares repurchased during the first quarter of 2012, and approximately 1.8 million shares remain authorized for repurchase under the plan.

Greenlight Re held its Annual General Meeting on April 25, 2012. I am pleased to report that all seven proposals contained in the proxy were approved by shareholders, including the reelection of all Directors for additional one-year terms.

I'll now turn the call back to Bart to provide some concluding remarks.

Thank you, Tim. Our goal remains unchanged. We aim to build long-term shareholder value by writing a concentrated underwriting portfolio with the best risk-adjusted returns we can find and to utilize the flow generated from these contracts to invest in our deep value, long/short investment program.

We believe this strategy will produce superior returns over the long term while preserving capital. We will continue to execute on this strategy and remain focused on driving our key yardsticks -- increased fully diluted book value per share.

We appreciate your continued confidence in Greenlight Re. As David noted, on Monday, May 21, we will host an investor day in New York and hope you can all join us. Details of the event can be found at our website at www.greenlightre.ky.

Thank you again for your time, and now I would like to open the call up to questions.

(Operator Instructions) Marie Lunackova, UBS.

Good morning, everybody. I have a couple questions. One of them is on the loss reserve strengthening. On the commercial auto reserves in the runoff, what is the duration? When could we expect that they would mature?

The commercial automobile business, I mean most of this is what we would think of as sort of mid-tail type business. So think of a sort of three- to five-year maturity on these contracts.

And most of that will pay over the first 18 to 24 months of that exposure period. But we will continue with some exposure for probably at least the next two years as the contracts run off.

You mentioned that you wrote it all the way through -- some of it was in 2011, right?

Yes, we stopped writing the commercial automobile business at the end of 2011. So we will have some earnings on that business during 2012.

Okay.

But the vast majority of it was actually written in 2008, 2009, and 2010. That was by far the majority of the business was in those underwriting years.

Okay. Then in the 10-K you mentioned general liability. Was there some development on that line of business as well?

There was a small amount of development and we -- this is -- I guess just to back up a little bit to talk about our overall reserving process. Our overall reserving process is to reserve to the best estimate on every contract. You could think about that as sort of a mark-to-market type concept.

So as we see data emerge on different contracts, we react to that new data. And over the past couple of quarters we have seen some emergence of large losses, particularly in commercial auto as we have discussed; but additionally there was some during the quarter on general liability, and there was a small amount on our health book.

In each of those areas we put up additional reserves to respond to the large losses. A lot of these losses, they are coming up at rates that aren't indicative of what we've seen in the past. So there is a responding to some of this new information as it is reported to us.

Could you tell if it is a part of a larger trend that might be happening in the industry/ or is it something specific for those contracts?

I don't know that it is specific to the contracts per se. I would say some of it is probably bad luck, because these large losses are fairly unpredictable. But some of it can certainly be tied to the downturn in the economy, but we haven't been able to find anything in our data that we can link directly to that.

It is more of a feeling than a numerical exercise we have been able to perform. But it certainly feels that way.

Okay. Then my other question is on market conditions and specifically it would be Florida. I know you were not writing cat business there. But what is your view of the market there?

Then the other question is on Europe, what potential opportunities you see there.

Right. So Florida has been -- it's a pretty big state for us because we do both the limited wind, homeowners quota share contracts, where we have a couple of partners that have been pretty successful. The market conditions there for the business that we support continues to be pretty good.

The legislation that was passed in 2011 that addressed the sinkhole problem was very encouraging. I wouldn't say that that problem is completely under control, but it certainly is a lot better than when we originally entered the business. So that is a good sign.

The rates continue to be on an upward trend, although I would say the rate of increase is probably a bit slower than it had been in the prior 12 month period. But still, rates are going up.

We believe profit margins are expanding on the original business, which is good for us since we are participating on quota shares. So overall, we like that.

In terms of the motor business, the nonstandard business that we entered into recently, one of our relationships is Florida-only on the nonstandard automobile, and one of them has another concentration in terms of Florida. So again, we monitor both the rate situation as well as the political situation there.

Recently there was some new legislation to address pit fraud, which has been a big problem in the state. I don't know that it -- comparing it to the solution that they came up with for sinkholes on the homeowners' side, I would say that it's probably not quite as strong a solution as what they achieved on the homeowners' side. But still an encouraging sign that the legislature is addressing a fraud problem.

But like the homeowners' business, we are getting good rate changes there and they are well in excess of what we think the loss trends are. So overall we are encouraged by the Florida market.

Then in terms of Europe, that is a big greenfield for us. We had really not participated much in the European market. We have done limited amounts of cat retro that have European exposure, but we have not really done a lot of the more frequency-oriented type business where we tended to concentrate our portfolio in the US.

So as we grow the Irish platform, especially with bringing on a new senior fellow like Caryl and other people to support the team there, we are hoping that having the growth in that office combined with the Solvency II regulations that are coming on -- well, hopefully, we think they are coming on in 2014, scheduled to come on in 2014 -- that that will produce some opportunities for us to do additional frequency-oriented business in Europe.

Okay, thank you.

(Operator Instructions) It appears that we have no further questions at this time. Should you have any follow-up questions, please direct them to Alex Stanton of Stanton Public Relations & Marketing at area code 212-780-0701. 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. We thank you all for attending today's presentation.

Have a great day. At this time you may disconnect your lines. Thank you.