Greenlight Capital Re Ltd (GLRE) 2013 Q1 法說會逐字稿

Thank you for joining the Greenlight Re conference call for the first-quarter 2013 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.

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 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 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.

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 am Bart Hedges, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us today. During the first quarter of 2013, we increased our fully diluted adjusted book value per share by 6.5% from $22.01 to $23.45 per share. Our investment portfolio performed well and generated a gain of $61.1 million. Our underwriting operations net of all expenses produced a combined ratio of 101.7% or a loss of $1.9 million.

During the quarter, we took reserve actions, which resulted in adverse development of $1.6 million. The most significant reserve adjustments related to our general liability reserves. In total, we increased loss reserves for a general liability line of business by $16.8 million. The majority of our general liability business was produced through two significant relationships and covered small contractors during the period from 2008 to 2013. The last remaining exposure will expire in August 2013.

Our analysis of the experience included claim reviews by both in-house and external resources to verify proper claims handling procedures are in place and actuarial review of the claims data to date and a review of results for other carriers that we believe wrote similar books of business. We believe that the worse-than-expected results are mainly attributable to the downturn in the economy, which led to a higher incidence of bankruptcy for small contractors and a higher-than-expected frequency of small claims.

Moving on to commercial automobile, we made some adjustments to individual accounts this quarter, but the overall net impact was no change to the reserves as the business continues to mature. Last quarter, we established a reserve for losses relating to Superstorm Sandy. The entire reserve of $15 million related to a single property catastrophe retro contract. That contract renewed April 1 and during the renewal process, we were able to get more detailed experience relating to the claims resulting from Sandy.

Based on our review, the losses subject to our contract are materially lower than we estimated and we do not believe the contract will attach to our layer. Therefore, we have reversed the reserve we established last quarter. As with each of our accounts, we believe our reserve represents our best estimate of reserves based on all available data.

Gross premiums written for the quarter were $127 million, a decrease of $25 million from the first quarter of 2012. The decrease in premium primarily relate to the novation of a Florida homeowners contract, which occurred during 2012 and a more competitive reinsurance pricing environment. As the reinsurance market continues to soften, our strategy is to reduce premium writings rather than accept mispriced risk and to conserve our capital for a more opportune environment.

Our nonstandard automobile liability, Florida homeowners and employer stop-loss businesses, which form the core of our current underwriting portfolio, are all developing as expected and generating underwriting profits. These frequency businesses represent 85.6% of premium written for the quarter. We continue to experience a high renewal retention rate on the stable frequency-oriented business. We believe that the high renewal retention rate is attributable to delivering on our strategy of developing long-term partnerships and providing high levels of client service.

The first quarter is usually a light renewal period for us, but we did renew one significant nonstandard automobile quota share and one catastrophe retro contract. In each case, we believe the risk-adjusted returns we achieved on these contracts is in line with the expiring transactions.

In terms of the overall market, we have observed a glut of flexible capital from nontraditional sources such as pension funds, which is mainly being deployed in peak zone catastrophe excess-of-loss business. Many of the Florida homeowners companies purchased their catastrophe protection with an inception date of June 1, which coincides with the beginning of hurricane season. We believe that one short-term result of the new capacity in the market may be a significantly lower cost of purchasing catastrophe protection for these carriers.

We will continue to look for opportunities to expand existing relationships and look for new areas to deploy capital that offer superior risk-adjusted returns. 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 reinvestment portfolio managed by DME Advisors returned 5.8% in the first quarter led by gains in Marvel and Vodafone and a continued weakening yen. Marvel reversed much of its 2012 decline in the first quarter as investors shifted their focus to Marvel's robust product pipeline and aggressive stock buyback plan. Vodafone shares appreciated as it is now clear that Verizon is interested in buying Vodafone's 45% stake in Verizon Wireless.

Our biggest loss in the first quarter came from Apple, which declined about 17%. The biggest problems for our Apple investment are disappointing earnings and a diminished forecast. Our thesis remains that Apple has a terrific operating platform and its loyal, sticky and growing customer base will make repeated purchases of a growing portfolio of Apple products.

Apple took a major step forward by issuing debt and announcing it will return $100 billion to shareholders over the next three years. This is a vastly more shareholder-friendly capital allocation policy then where Apple stood a few months ago. We have added to our Apple position. Now we just wait for the release of Apple's next blockbuster product.

Our short portfolio modestly detracted from our performance as our shorts rose less than half as much as the market. About a quarter of the first-quarter result came from our macro portfolio led by gains in yen puts. Through April, our yen put position has reversed nearly all of the losses from 2010 and 2011, our portfolio's biggest losing position in each of those years. These gains had more than offset the gold price decline in the first quarter and April. We were somewhat surprised by the swift decline in the price of gold in April.

With Governor Kuroda's appointment, the Bank of Japan officially joined the global monetary printing race. It seems that every time a central banker takes a more aggressive action without short-term negative consequences, it reinforces the behavior of other central bankers. We believe that recent events, including the regime change at the Bank of Japan, support our long-term thesis of both a weaker yen and stronger gold.

We ended the quarter 38% net long, which was where our net exposure stood at the beginning of the year. During the quarter, we exited a few of our long positions and found a couple new longs and shorts. Corporate earnings for the March quarter have been anemic on a year-on-year basis, while the S&P 500 has written about 14% over the past year and stands at an all-time high as investors are drawn to equities given the lack of other investment alternatives. The markets move higher over the past year has been led by multiple expansion as investors have convinced themselves that central banks are in control and their actions support equity prices.

On the business side, although the underwriting results over the last year have been disappointing, the team is managing well through certain problematic legacy contracts and our focused on the future. Our team is now almost 30 strong. Suzanne Fetter joined us this quarter as Vice President of Claims. She will expand our experience in the claims area and is initially focused on overseeing the claims handling of the commercial auto and general liability contracts.

Our Irish operations continue to expand as we gain traction in the European marketplace. We are optimistic about 2013; although cognizant that we must proceed with caution in the current soft environment. Now I would like to turn the call over to Tim to discuss our financial results.

Thanks, David. For the first quarter of 2013, Greenlight Re reported net income of $56.7 million compared to net income of $65.1 million for the comparable period in 2012. Net income per share on a fully diluted basis was $1.52 for the first quarter of 2013 compared to net income of $1.75 per share for the same period in 2012.

Gross premiums written were $127 million during the first quarter of 2013, a decrease of 16.6% from gross premiums written of $152.2 million in the first quarter of 2012. This decrease is primarily the result of lower premiums written on Florida homeowners contracts resulting from the novation during 2012 of certain contracts, as well as a decrease in general liability premiums due to certain contracts being canceled during the fourth quarter of 2012.

Our net earned premiums of $109.5 million increased by 7.8% from $101.6 million reported in the first quarter of last year. The increase in net premiums earned is primarily attributable to our nonstandard automobile contracts, which were written during 2012. This increase was partially offset by decreases in previously canceled commercial motor contracts. The composite ratio for the first quarter of 2013 was 98.2% compared to a composite ratio of 97.8% during the comparable period in 2012.

For frequency business, our composite ratio was 108.8%, which reflects the increase in loss reserves on general liability business during the quarter. Offsetting this, our severity business reported positive development during the quarter as loss reserves on Superstorm Sandy were taken down.

This quarter, we have broken out our general and administrative expenses into internal expenses and corporate expenses. Since many other reinsurers calculate their combined ratios excluding corporate expenses, we believe the additional disclosure will help you make an apples-to-apples comparison; however, we will continue to report our combined ratio including both internal and corporate expenses.

Internal expenses were 4.5% of net premiums earned for the first quarter of 2013 as compared to 3.1% for the same period in 2012. The higher internal expense for the first quarter of 2013 is a reflection of the increased headcount, as well as the reversal of certain quantitative bonus accruals during the first quarter of 2012.

Corporate expenses include those expenses directly relating to being a publicly listed entity, as well as noninvestment-related foreign exchange gains and losses. During the first quarter of 2013, the Company benefited from foreign exchange gains, primarily as a result of the weakening of the British pound relative to the US dollar. Overall, the expense ratio was 3.5% for the first quarter of 2013, resulting in a combined ratio of 101.7% compared to 102.4% for the same period in 2012.

We reported net investment income of $61.1 million during the first quarter of 2013. Our investment portfolio managed by DME Advisors reported a gain of 5.8% for the quarter. This return was partially offset by a $6 million impairment charge on a note receivable relating to one of our strategic insurance investments. The fully diluted adjusted book value per share as of March 31, 2013 was $23.45, a 0.7% increase from $23.29 per share reported at March 31, 2012.

At a recently held Board of Directors meeting, the Board approved a replacement of the Company's current share repurchase plan, which expires on June 30 of this year. The new plan provides for a repurchase authorization of 2 million shares and expires on June 30, 2014. There were no shares repurchased during the first quarter of 2013.

Greenlight Re held an annual general meeting on April 30, 2013. 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 will now turn the call back to Bart for some concluding remarks.

Thanks, Tim. Overall, we had a good quarter increasing fully diluted book value per share by 6.5%. Our reported underwriting performance during the quarter continues to be below our expectations. We are working diligently to find new underwriting opportunities to profitably deploy capital, but market conditions remain quite competitive.

If we cannot find opportunities to deploy our capital with adequate risk-adjusted returns, we will continue to manage our renewal relationships and remain prepared 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 funds 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 increase 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). Seeing that there are no questions, I would like to mention that should you have any follow-up questions, please direct them 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. The conference has ended. You may disconnect your line.