Greenlight Capital Re Ltd (GLRE) 2012 Q4 法說會逐字稿

Thank you for joining the Greenlight Re conference call for the fourth-quarter and full-year 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, the 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 risk, uncertainties, and assumptions, including those enumerated in the Company's Form 10-K dated February 19, 2013, and other documents filed by the Company with the SEC.

If one or more risk 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 Bart Hedges. Please go ahead, sir.

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

Reinsurance market remained challenging during 2012. In general, the market remains overcapitalized and there is a high degree of competition, especially for new business. The investment environment was more favorable in 2012 as the markets reflected reduced concerns about economic uncertainty, particularly in the last part of the year.

In the fourth quarter of 2012 Greenlight Re generated losses in both their underwriting and investment portfolios. Overall, our fully diluted adjusted book value per share decreased by 6.6% in the quarter and increased by 1.9% for the year. Earnings for the year were negatively impacted by the need for material adjustments to prior period loss reserves, mainly for commercial automobile and the Christchurch, New Zealand, earthquake of 2010.

Additionally, severity losses from Superstorm Sandy contributed 2.4% to the combined ratio for the year and 10.5% for the fourth quarter. Greenlight Re's combined ratio for the fourth quarter and year ended December 31, 2012, were 108.2% and 112.9%, respectively.

Gross premiums written for 2012 increased by 7.6% over 2011 and net premiums earned increased by 22.8% over 2011. This growth was mainly attributable to the growth in our nonstandard automobile liability business; however, we wrote less business than we expected to write at the beginning of 2012 related to the soft market and the competitive environment. Our market -- our strategy in soft markets is to accept premium declines rather than misprice risk.

During our previous call I commented that if industry-insured losses due to Sandy were less than $20 billion we did not believe we would have losses from this event. Since then estimates of industry losses developed upward. We believe industry-insured losses for Sandy are in a range between $20 billion and $30 billion.

Based on this range of estimates and based on preliminary information received from our cedents, our best estimate of our gross losses before the impact of reinstatement premiums is $15 million. After reinstatement premiums earned the net impact for the quarter is $12.4 million. We believe the losses from Sandy are limited to a single property catastrophe retro contract and we've booked reserves to our maximum exposure to this contract.

We did not adjust reserves for any other property catastrophe events during the quarter. With respect to our property catastrophe aggregates, our maximum exposure to a single event is $102 million and our maximum exposure to all events is $118.7 million.

Now let's turn to the run-off at our commercial automobile book of business. We earned $2.3 million of premium relating to commercial automobile during the fourth quarter. We discontinued writing commercial automobile as of the end of the first quarter of 2012 and we have one more quarter, the first quarter of 2013, for policies that we support to be in-force.

We continue to monitor new claim activity and claim settlements closely on this book of business, and we did not make any adjustments to our commercial automobile reserves during the quarter. There continues to be uncertainty as to the ultimate losses in this run-off business.

Our nonstandard automobile liability, Florida homeowners, and employer stop-loss businesses are all developing as expected and generating underwriting profits. These frequency businesses represent 75.3% of the earned premium for the quarter and 76.4% of the earned premium for the full year 2012. For the year ended 2012 the composite ratio associated with these businesses was 96.2%.

Our retention with these clients has been good. We continue to like these business lines and are looking for new opportunities in these areas of focus.

At January 1 we renewed a number of contracts and entered into one significant new relationship. Included in the renewals was a nonstandard automobile liability contract. The renewal pricing was in line with the expiring terms.

However, the underlying business for our nonstandard automobile contracts continues to experience positive rate activity in excess of the underlying loss cost trends. In particular, our Florida nonstandard automobile book of business, which makes up roughly half of our nonstandard automobile portfolio, experienced rate increases of approximately 15% during 2012.

Also, at January 1 we renewed several of our catastrophe retro contracts. While the risk-adjusted returns on the contracts we renewed our down from the prior year, we believe they continue to be at acceptable levels. There were some catastrophe retro contracts up for renewal that were heavily competed which we decided not to renew, mainly based on what we believe was inadequate pricing.

In addition, at January 1 we wrote a new catastrophe retro contract with a Lloyd's syndicates that is a respected leader in the business.

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 reinvestment portfolio lost 4.4% in the fourth quarter of 2012, which lowered our 2012 return to 7.1%. This was a disappointing result in a generally favorable investing environment.

In the fourth quarter losses in our short portfolio included Green Mountain Coffee Roasters, Moody's, and companies sensitive to declining iron ore prices, which accounted for more than all of the losses in the quarter. The loan portfolio showed slight gains as General Motors and other loans outpaced losses in Apple and Marvel Technologies.

Our macro positions were also slightly positive as gains on a weakening yen exceeded loss on gold and various other positions. In January, the investment portfolio gained 3% helped by a recovering in Marvel, which reversed about half of its 2012 loss. January also had contributions from the yen continuing to weaken and from gains in long investments in Vodafone and the Dutch insurer, Delta Lloyd. The short portfolio lost money in January.

In 2012 profitable, long positions in Apple, Arkema, Delphi, GM, Seagate, and Sprint drove our returns as all the businesses generally performed at or above expectations. Although our shorts rose less than the market, our short portfolio detracted from performance and our biggest loser on the short side last year was Moody's. We believe the recent case against S&P is a negative for the rating agencies and Moody's is not immune. We are short both Moody's and S&P's parent, McGraw-Hill.

Our exposures at the end of January are 104% long and 75% short. Our current largest equity long positions are Apple, GM, Marvel, and Vodafone.

GM has lots of cash on the balance sheet and recently initiated a buyback of a portion of the US government stake. Prior to its January advance, Vodafone was trading at levels where we believe we get their 45% Verizon Wireless ownership stake for free, in addition to a 6% dividend yield. Apple, one of the world's premier brands, trades at a mid-single-digit PE net of cash and has a fortress balance sheet with opportunities to unlock significant shareholder value.

Though the market made strong gains in 2012, many stocks are still attractively priced. On the other hand, the domestic economy has slowed down. US GDP went negative in the fourth quarter and earnings growth has all but come to a halt.

As the market continues to advance, even as the economy doesn't, we tend to become less enthusiastic and we lowered our net long exposure from 39% at year-end to 29% at the end of January as we took some gains in our long portfolio and added to our shorts.

Overall, we are disappointed with our performance in 2012. Our investment returns were pedestrian despite the more favorable investment environment. Our underwriting results in 2012 were poor due to both adverse development on our commercial automobile contracts in run-off as well as the higher property catastrophe losses.

Even though overall we protected capital and increased our book value per share, we need to do better. The team is motivated and I am confident about our prospects.

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

Thanks, David. For the fourth quarter of 2012 Greenlight Re reported a net loss of $16.6 million compared to net income of $70.2 million for the comparable period in 2011. The net loss per share was $1.65 for the fourth quarter of 2012 compared to net income per share on a fully diluted basis of $1.89 for the same period in 2011.

For the year ended December 31, 2012, we reported net income of $14.6 million compared to net income of $6.8 million for the year ended December 2011. On a fully diluted basis, net income per share was $0.39 compared to $0.18 for 2011.

Gross premiums written were $124 million during the fourth quarter of 2012, an increase from gross premiums written of $90.5 million in the fourth quarter of 2011. This increase is primarily a result of increased premiums written on 2012 nonstandard automobile contracts and the commutation of a Florida homeowners' contract during the fourth quarter 2011. As Bart mentioned, for the year ended December 31, 2012, gross written premiums increased by 7.6% over 2011 to a total of $427.8 million.

The composite ratio for our frequency business for the 2012 fiscal year was 108.8% compared to a composite ratio of 103.1% during 2011. For severity business, our 2012 composite ratio was 115.2% compared to 46.3% in 2011. The higher composite ratio on frequency business reported in 2012 was primarily due to the previously disclosed adverse development during the year on our commercial automobile book.

Severity business experienced a higher composite ratio due to a $15 million reserve resulting from Superstorm Sandy as well as adverse loss development reported earlier in the year from the 2012 Christchurch earthquake. The overall composite ratio was 109.1% for 2012 compared to 100.1% for the prior year.

Internal expenses were 3.8% of net premiums earned in 2012 as compared to 3.7% for 2011. Operating expenses of $17.5 million for 2012 increased by approximately $3.6 million versus 2011. This increase was primarily a result of increased compensation costs associated with hiring additional staff in late 2011 and in 2012, as well as lower compensation expenses booked in 2011 due to reduced employee bonus accruals in light of adverse loss development relating to underwriting in 2009 and 2010.

As a result, the combined ratio for the full year 2012 was 112.9% as compared to 103.8% for 2011. We reported a net investment loss of $52.2 million for the fourth quarter of 2012, reflecting a net loss of 4.4% on our investment account. We reported net investment income of $78.9 million for 2012, reflecting a net investment return of 7.1%.

The fully diluted adjusted book value per share as of December 31, 2012, was $22.01, a 1.9% from $21.61 per share reported at December 31, 2011.

I would now like to turn the call over to over to Bart to provide some concluding remarks.

Thanks, Tim. Our underwriting performance in 2012 was below our expectations, mainly due to the deterioration in our commercial automobile loss reserves. We continue to survey the market for underserved areas and to seek partners that value our capacity and long-term-partnership-oriented approach to the business.

However, the reinsurance market remains competitive and one of the strengths of our model is to be able to remain disciplined during times of heightened competition. If we cannot find opportunities to deploy our capital profitably, we will continue to manage our renewal relationships and remain ready for a better underwriting environment.

Our goal is 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 float generated from these contracts to invest in our deep value, long-short investment program. This investment approach has historically 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 up the call for questions.

++ q-and-a

(Operator Instructions) [Jeff Carrington], [Regen Kaplan].

Good morning. My name is Jeff Carrington from a company called Regen Kaplan. Basically an individual investor these days. I spent a career in the insurance and reinsurance industry, however, winding up with Gen Re.

I want to start with a complement. I am kind of a new devote to Greenlight; having gone through your information I have to commend you on your candor and your attention to detail. It is very refreshing.

My question concerns David. If you could comment -- I have noticed some renewed activity, if that is the right way to characterize it, in discussion of potential IRS attention to offshore reinsurance. In particular, the tax aspects of same with the reported renewed activity and interest in hedge fund involvement in offshore reinsurance.

I guess that is a little bit of a vague question in some respects, and I know it is speculative, but what do you think about the prospect for increased regulation impacting your business?

Yes, this is David. First of all, thank you for the nice words relating to the attention to detail and so forth that preceded your question.

Relating to the taxes and so forth, there was an article in the newspaper yesterday and I believe we all read it. It is really the first we have heard on this topic in some time. When we structured the Company we gave a lot of thought relating to what an appropriate structure was, what an appropriate jurisdiction was, what the various tax rules are.

We have designed this -- this is, in fact, a real reinsurance company. We have lots of people working in multiple countries, in the Cayman Islands and in Ireland, actually reinsuring actual risk in substantial size. As a result, we don't believe that there is any new reason or particular reason to worry on this topic.

On the other hand, we would have expected at some point sooner or later somebody would come and take a look. We are prepared for that to happen if and when it ever does, although all we have at this point is a newspaper article.

Reassuring response. Thank you, David.

Sure.

Court Dignan, Fidelity.

Thanks for taking my question. I just wanted to ask sort of a higher-level question I guess more directed towards you, David, as Chairman of Greenlight.

So the strategy from a high level is fairly straightforward -- offer reinsurance solutions, maybe more tailored, and over time provide low or even negative cost float, which you can utilize your investment capabilities. Obviously, the cost of float has been an issue for Greenlight and I just wonder now that you have a few years under your belt as Chairman of Greenlight why you think that has been such an issue.

If you take a step back and look at the broader sort of combined ratios produced by the reinsurance industry, they have been materially lower than Greenlight's. I just wonder if you don't come to the conclusion that Greenlight, for whatever reason, has been sort of adversely selected over time. And if you have come to that conclusion, what do you do about it?

I think those are good questions and they are topics that we need to think through and address. I can give you what my thoughts are at this point in this regard.

First of all, I agree with the premise of your question, which is that the cumulative cost of float or combined ratio or however you want to look at it -- we tend to prefer to think of it as a cost of float because combined ratios aren't discounted back for time -- it is higher than we would like it to be. It is higher than we would expect it to be and it is in need of some improvement.

I think that when we have looked at what the problems are they have been isolated into a couple of contracts which have performed well outside the boundaries of the expectations that we had when they were written. And I think the management team and the underwriting team has spent considerable effort evaluating, re-evaluating, Tuesday morning quarterbacking and so forth relating to those particular contracts. I know the Board had spent a lot of time going back through these particular couple of contracts.

Unfortunately, I don't think we are at the end of these contracts, which doesn't mean there is necessarily more bad news but it means there is remaining uncertainty. One of them we finished in 2010, I believe we discontinued; that one is further along. I am not 100% sure we are done with that one, but it is much further along than the one that we discontinued about a year ago which still has more time to develop. And so I think there is still significant potential volatility relating to those two contracts, most particularly the more recent contract.

I think when you get beyond that -- it is terrible in the investment business. You don't want to pro forma out your losers and say, well, except for the losers of course we did a great job, but there is a little bit of that. And I think we have to chalk it up at this point a little bit towards lessons learned and understand that everybody is really quite motivated to do a better job and to write risks that have better risk-adjusted returns. I think that the team is motivated and optimistic that we will be able to do so.

The only thing that I would add to that one as you compare the Greenlight results, especially on a combined ratio basis to others, is just the timing of when we started. We started writing in 2006 and others have had the benefit of writing during the hard market years of 2003, 2004, and 2005. And a lot of the current period earnings, especially in the last couple of years, have come from reserve releases from those hard market years.

We simply didn't have that and, frankly, our philosophy towards reserving would not have us build up that type of a reserve to be released over time. So I think you need to also take that into account when you compare the Company's results.

That it's a fair comment, but I would just point that the substantial amount of the reserves that we have seen, say in the fourth quarter or even in the last year, have come from the 2006, 2007 through 2009 accident years. But thanks for taking the question and good luck.

Thank you.

Ron Bobman, Capital Returns.

I just had a question on these two contracts. I was curious to know what is the outstanding reserve balance that Greenlight is carrying for these two sort of problem programs or contracts. Thanks.

Tim, I don't know if you have that number.

Unfortunately, I don't have the number of the two contracts combined at hand.

Roughly, would you hazard a ballpark, or if you would rather not I respect that, too.

Yes, I apologize; I don't have the information in front of me and I would be guessing at this point. Frankly, I am not really sure that that would be that meaningful because you would have to really judge it more in the context of the remaining exposures versus what has already been paid out.

Oh, I'm not interested in paid. I was interested in the reserve balance and when you talk about volatility to that reserve balance.

I don't know that anybody that has that, but still I think even if we knew what the number was I don't really know that it would be particularly informative.

That is all for me, thanks.

(Operator Instructions) It appears that we have no further questions at this time. Should you have any follow-up questions, please direct them to Garrett Edson of ICR at 203-682-8331. Again, that is to Garrett Edson of ICR at 203-682-8331 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. Again that is www.greenlightre.ky.

Thank you to management for your time and we thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you and take care.