Greenlight Capital Re Ltd (GLRE) 2012 Q2 法說會逐字稿

Thank you for joining the Greenlight Re conference call on second-quarter earnings. Joining us on this call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Claude Wagner, Chief Actuary.

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

Good morning, I'm Bart Hedges, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us today. During the second quarter of 2012 Greenlight Re generated a small gain in our underwriting portfolio after taking account of all general and administrative expenses and a loss in our investment portfolio.

Overall, our fully diluted adjusted book value per share decreased by 4.1% to $22.34 per share during the quarter. Greenlight Re's combined ratio for the quarter ended June 30, 2012 was 99.7% which was a marginal improvement over a combined ratio for the first quarter of 2012.

Reinsurance opportunities in the Florida homeowners market generally renew at June 1 each year. As you know, for several years we have been supporting specialist writers of homeowners insurance in the state with limited wind quota share arrangements.

During the third quarter we renewed -- during the quarter we renewed our existing Florida homeowners accounts on terms and conditions similar to last year. However, there was substantial competition for new business and in some cases we witnessed what we consider irrational behavior. For instance, we observed certain reinsurers doing transactions without contractual limitations on losses due to sinkholes, one of the most problematic cause of loss in the business.

Historically, fraudulent sinkhole claims have been a big driver of results for Florida homeowners business. Although recently enacted legislation is designed to mitigate this fraudulent practice, we believe sinkhole losses can still be quite volatile and contractual supplements are necessary. All of our contracts contain a sinkhole sub limit.

As a result of the competitive environment we did not write any new business in Florida during the quarter and our existing book was reduced. We are comfortable with the relationships we have and this business continues to perform in line with our expectations.

We did not make any material adjustments to our commercial automobile reserves this quarter. As discussed previously, we ceased writing this business during the fourth quarter of 2011. However, we continue to earn premium on several discontinued contracts and will continue to do so through the first quarter of 2013. We are actively monitoring this business and will report on any material reserve movements.

Our nonstandard motor liability business continues to experience rate increases, especially in Florida. This book is growing as a percentage of our earned premium and is performing in line with our expectations.

Our catastrophe retro book was negatively impacted during the quarter by an increase in the reported loss from one of our partners due to increased loss estimates on the first earthquake that struck Christchurch New Zealand. The impact was approximately $2.5 million of additional loss reserves.

This contract has an additional $7 million of potential exposure if losses were to deteriorate further. In order to exhaust the entire $7 million of available limit, reported ground up losses would have to deteriorate an additional 13% which we are not expecting. We did not experience any loss developments from any other catastrophe events this quarter.

In general the reinsurance marketplace remains competitive. The number of new business opportunities that we reviewed so far this year is up considerably over the same period last year. However, we are converting fewer of these opportunities to new business.

In addition to the competition for new homeowners business in Florida we experienced intense competition for new business in specialty insurance areas. In one instance a competitor completed a large quota share with an expected profit margin that is roughly 25% of our offered terms with a potential downside that is 150% of our offered terms. These risk/reward characteristics fall well below our acceptable return threshold.

We continued to remain disciplined during this period and will keep on searching for underwriting opportunities with the best risk-adjusted returns. When we don't find them we simply wait and keep our powder dry.

On May 21 we held our biennial investor meeting. During the meeting we provided detailed information about our underwriting portfolio and updated investors on our overall progress. A video of the presentation and the Q&A session is available on our website. I encourage you to check it out.

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; good morning, everyone, and thank you for joining us today. The Greenlight Re investment portfolio was down 3.3% in the second-quarter of 2012 bringing our 2012 return for the first six months to 3%. The short portfolio led by Green Mountain Coffee Roasters was up 6.3% in the quarter and generated positive [outlook].

However, while our shorts went down more than the market, our longs also went down more than the market and get back some of the first-quarter gains. We believe that there is now further embedded value in some of the longs that have underperformed in the quarter including General Motors and Marvell Technology. Both companies trade at mid-single digit PEs of current earnings and have strong cash positions. GM is currently trading around gross cash and Marvell has about 35% of its market cap in cash.

During the quarter we added some of our existing positions and found a few new positions in the healthcare sector including CIGNA and Coventry Health Care, which increased our net exposure from 33% at the end of the first-quarter to 51% at the end of the second quarter. We like the HMO positions as they have unlevered balance sheets and trade at single digit PEs having been battered in anticipation of Obama Care. They also have unpriced upside given the possibility of changes in the political landscape.

We also exited a few positions during the quarter including Dell and Best Buy as our investment theses in both companies did not materialize. Although our net exposure has increased a bit as we found compelling bottom up long investment opportunities we remain cautious about the macro headwinds which remain. The European crisis appears to have no simple solution while most large economies, including China and the US, appear to be slowing down.

We continue to hold a sizable position in physical gold, Yen puts and protection against higher interest rates in Europe, the United States and Japan. For the month of July we are currently up over 2% with one day to go which offsets a portion of the investment loss for the second quarter. The game was broad-based with significant winners on both the long and short sides of the balance sheet. Our long position in Sprint has been the most significant contributor for the month.

We continue to expand our staff in the Cayman Islands and Ireland. Our team now totals 24 employees and is well positioned to take advantage of underwriting opportunities, especially when the pricing environment improves.

Caryl Traynor started in the second quarter as general manager in our office in Dublin with a goal of helping to tap European insurance opportunities. In addition, John Drake joined as head of business development to help us with our overall marketing activities. We expect several additional hires during the remainder of the year to enhance the team and to stay ahead of potential market opportunities over the next several years.

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

Thanks, David. For the second quarter of 2012 Greenlight Re reported a net loss of $36.1 million compared to a net loss of $16 million for the comparable period in 2011. The net loss per share was $0.98 for the second quarter of 2012 compared to a net loss of $0.44 per share for the same period in 2011.

For the six month ended June 30, 2012, we reported net income of $29.1 million compared to a net loss of $59.0 million for the six months ended June 30, 2011. The net income per share on a fully diluted basis was $0.78 for the six months ended June 30, 2012 compared to a net loss of $1.63 per share for the same period in 2011.

Gross premiums written were $236.2 million for the six months ended June 30, 2012, an increase of 10.4% from gross premiums written of $214 million during the first six months of 2011. This increase is primarily the result of premiums written related to private passenger automobile contracts entered into during the latter part of 2011 and 2012.

In line with our 10% increase in premiums written our net earned premiums also increased by almost 10% to $231.6 million for the first six months of 2012. The composite ratio for our frequency business for the first six months of 2012 was 100.1% compared to a composite ratio of 98.7% during the comparable period in 2011.

For severity business our composite ratio for the first six months of 2012 was 23.8% compared to 77.4% during the comparable period of 2011. Overall our composite ratio for the first half of 2012 was 96.9% compared to 97.7% in the comparable period of 2011.

Internal expenses were 3.9% of net premiums earned for the first six months of 2012 as compared to 4.4% for the same period in 2011. The resulting combined ratio for the first half of 2012 was 100.8% compared to 102.1% for the same period in 2011.

We reported a net investment loss of $36.9 million during the second quarter of 2012 reflecting a net loss of 3.3% on our investment portfolio. For the first six months of 2012 we reported a net investment gain of $34.7 million reflecting net investment income of 3.0%. Fully diluted adjusted book value per share as of June 30, 2012 was $22.34, a 12.7% increase from $19.82 per share reported at June 30, 2011.

On June 22 of this year we filed a form S-3 with the Securities and Exchange Commission which renewed our shelf registration. Under this registration we have the ability to raise additional capital in a variety of forms including debt, preference shares and Class A ordinary shares.

While we do not currently have any plans to raise additional capital, the renewal of this shelf registration continues to provide us with the flexibility to access the public capital markets on a timely basis should we require capital for our future business opportunity. I will now turn the call back to Bart who will provide some concluding remarks.

Thanks, 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 use the flow generated from these contracts to invest in our value oriented, 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 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 up the call to questions.

(Operator Instructions). [Samira Tari], Capital Returns Management.

I just wanted to ask about -- as some of these start-ups such as Third Point Re and S.A.C. Re are ramping up. I'm wondering if they have a competitive impact on your underwriting opportunities that you guys look at.

Good morning, Samira. We did actually see a couple of times; especially in the Florida market we saw one or two of the newer companies. But in general I think the amount of capital that they are bringing to the market is not going to be significant to change the overall marketplace. I do expect to run into them from time to time. But I don't think it's going -- I don't expect it to be a big problem for us going forward.

Okay. And I just wanted to ask a couple questions on the adverse development. You guys said some of this came from the 2010 New Zealand loss. Can you tell us how much unreserved limit you have left on associated contracts for the 2010 New Zealand losses? And then also if you can let us know how much you have -- how much unreserved exposure you have for the 2011 New Zealand earthquakes in Christchurch?

I can answer the first part of that question for you. Basically we have one ceding company that has an additional $7 million of unused limit on that contract. And in order for the $7 million of limit to be utilized the ground up losses need to increase by approximately 13%.

We have looked at the underlying contracts that make up our exposure there and we feel pretty comfortable that that is not going to happen, although certainly it is possible. That is with respect to 2010. On 2011, we'd actually have to get back to you on that one. I do not have all the figures on 2011 prepared at the moment.

Okay, thank you.

(Operator Instructions). Showing no further questions we will conclude the call. 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.