Greenlight Capital Re Ltd (GLRE) 2013 Q2 法說會逐字稿

Thank you for joining the Greenlight Re conference call for the second quarter 2013 earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; and Tim Courtis, Chief Financial 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 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.

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 2013, we increased our fully diluted adjusted book value per share by 3.2% from $23.45 to $24.20, bringing our year-to-date increase to 10%.

During the quarter, we earned profits from both our underwriting and investing operations. Our underwriting operations produced a combined ratio of 95.7% for the quarter, bringing our combined ratio for the year to date to 98.3%. Our investment portfolio managed by DME Advisors gained 2% for the quarter and has increased by 7.9% for the year to date. The return from our underwriting operations was driven by profitable performance in each of our four core areas of concentration; specifically, Florida homeowners, nonstandard auto, employer stop loss, and catastrophe retro. The composite ratio for these four areas for the quarter and year to date was 90.8% and 85%, respectively. Our core areas represent approximately 89% of our net earned premium year to date.

Gross written premiums for the quarter and year to date increased from the prior year, although the environment for new business relationships remains quite competitive. Our growth in gross written premiums is mainly attributable to increased writings with existing clients. In particular, several of our nonstandard automobile clients are experiencing hardening market conditions with higher rates and higher premium retention levels, which has resulted in higher premium sessions under our quota share contracts. We believe this is good, quality business, and our concentration in this area is helping to drive our combined ratio lower.

Second quarter was active for natural catastrophes with significant flooding events in Europe and Canada and light season tornado events in the US. However, we do not believe we will experience any losses to our contracts from these events.

With respect to our property catastrophe aggregates, our maximum exposure to a single event is $110.8 million, and our maximum exposure to all events is $143.9 million.

During the quarter, loss reserve actions did not have a material effect on our earnings. We also commuted our relationship with one of our clients that produced multiline business which included commercial automobile. The commutation means that we have resolved the risk for this portion of our runoff portfolio, representing approximately 30% of the portfolio, and there is no impact from the commutation on our earnings for the quarter. We will continue to closely monitor the runoff for the remaining relationships for commercial automobile and general liability and report to you if there are any significant developments.

The underlying market conditions for our nonstandard automobile, Florida homeowners, and employer stop loss clients are each stable or improving. We continue to experience high renewal retention rates with these clients, and we are growing these relationships.

Pricing for catastrophe retro is fairly stable, but the pricing for catastrophe reinsurance continues to be negatively impacted by the glut of nontraditional sources of capital. If the new sources of capital move heavily into catastrophe retro, we would remain disciplined and shed business if we do not believe the risk-adjusted returns are adequate.

Now I'd 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.

Good morning, everyone. The Greenlight reinvestment portfolio returned 2% in the second quarter, which brings the 2013 net return to 7.9%. Our longs outperformed the market, as gains from many positions outweighed losses from Apple and the gold miners. Our shorts performed in line with the market, and macro was a slight contributor as gains on our yen put position roughly offset our loss in our gold position in the quarter.

During the gold selloff in the quarter, we sold a small amount of gold to take advantage of opportunities in gold mining stocks that were in freefall. Overall, we modestly increased our exposure to this area, and our view towards gold has not changed. The market has continued a relentless climb higher despite year-over-year earnings growth in the low single digits. The increase in stock prices seems driven by a more stable environment and the perception of supportive monetary policy.

In the face of a challenging earnings backdrop, a Chinese slowdown, and a continuation of emergency policies, we believe the market's rapid advance is creating a potentially unstable condition, which could resolve a number of ways and is difficult to predict. We decided to proactively lower both our long and short exposures to better position us to withstand volatility and take advantage of new opportunities. Accordingly, we reduced our gross exposure 17% during the month of May.

So, through this portfolio reduction exercise, we eliminated a large number of long and short positions. During the selloff in the month of June, we found a few new, long opportunities and ended the quarter 105% long and 62% short.

Our top contributors in the quarter were long positions that benefited from strong business performance.

General Motors' North American business continues to improve, even as it is still in the early stages of a substantial product refresh cycle. With the recent launch of the new pickup trucks, we believe GM is poised for rapid earnings growth later this year.

Marvell Technology Group announced a good first quarter result and has gained share in its core storage controller business and demonstrated substantial new product wins in mobile handsets and tablets.

Aetna and Cigna posted strong first quarter results based upon improving medical trends, and both raised guidance for full year 2013.

We continue to hold the positions that cost us the most in the quarter. Apple announced that it will return $100 billion to shareholders over the next three years through dividends and share repurchases. This represents a 9% annual return of capital to shareholders. And many companies with similar shareholder-friendly capital allocation strategies are currently rewarded with a higher multiple in the market.

Green Mountain Coffee Roasters, the biggest loser on the short side, continues to face challenging business fundamentals as it reported disappointing sales in the first quarter, lowered its revenue forecast, and faces increased competition since the K-cup patent expiration last September. In addition, brewer sales were down year over year for the first time, which is a sign that it is approaching saturation of the single-serve, at-home market.

The underwriting team continues to perform well during the soft environment. Our business development efforts seem to be paying off, though we continue to tread carefully and wait for better opportunities. We've made several hires and are pleased with our staffing levels, though we may make a few additional hires in the second half of the year.

Now I'd like to turn the call over to Tim to discuss our financial result.

For the second quarter of 2013, Greenlight Re reported net income of $28.5 million, compared to a net loss of $36.1 million for the comparable period in 2012. Net income per share on a fully diluted basis was $0.76 for the second quarter of 2013, compared to a net loss of $0.98 per share for the same period in 2012.

For the six months ended June 30, 2013, we reported net income of $85.2 million, compared to $29.1 million for the six months ended June 30, 2012. The net income per share on a fully diluted basis was $2.27 for the six months ended June 30, 2013, compared to $0.78 for the same period in 2012.

Gross premiums written were $262.2 million for the six months ended June 30, 2013, an increase of 11% from gross premiums written of $236.2 million during the first six months of 2012. This increase is primarily a result of increased premium writings relating to nonstandard automobile contracts in which our ceding insurers are experiencing an increase in pricing and demand, as well as an existing contract being renewed with a higher quota share participation. Additionally, increased writings relating to our Florida homeowners business accounted for some of the overall premium increase.

Our net earned premiums increased by approximately 4.7% to $242.5 million for the first six months of 2013. The increase in premiums earned resulting from an increase in nonstandard automobile business was partially offset by decreases in premiums earned on commercial automobile business canceled during 2012, as well as a multiline contract that we commuted this past quarter. As Bart mentioned, there was no material earnings impact this quarter as a result of this commutation, although net loss reserves decreased by approximately $37 million as part of a final settlement on this account.

The composite ratio for our frequency business for the first six months of 2013 was 100.6%, compared to a composite ratio of 100.1% during the comparable period in 2012. For our severity business, our composite ratio showed positive development for the first six months of 2013 as loss reserves on Super Storm Sandy were taken down in the first quarter. Overall, our composite ratio for the first half of 2013 was 94.3%, compared to 96.9% for the comparable period of 2012.

Our total expense ratio, being the combination of internal expenses and corporate expenses, was 4% for the first six months of 2013, compared to 3.9% during the comparable period in 2012.

The resulting combined ratio of 98.3% for the first six months of 2013 compares to a combined ratio of 100.8% for the same period in 2012.

We reported net investment income of $24.2 million during the second quarter of 2013, reflecting a gain of 2% on our investment portfolio. For the first six months of 2013, we reported a net investment gain of $85.4 million, reflecting a net investment return of 7.9%.

The fully diluted adjusted book value per share as of June 30, 2013 was $24.20, an 8.3% increase from $22.34 per share reported at June 30, 2012.

Now I'd like to turn the call back over to Bart, who will provide some concluding remarks.

Overall, we had a good second quarter, increasing fully diluted book value per share by 3.2%.

Our underwriting performance improved, and we continue to resolve risk in our runoff commercial automobile and general liability portfolios. While reinsurance market conditions remain competitive, we are growing relationships with several of our profitable, existing clients, and I am optimistic about the prospects for profitable underwriting.

Our overall goal is unchanged. We aim to build long-term shareholder value by running 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, increasing fully diluted book value per share.

We appreciate your continued confidence in Greenlight Re. Thank you, again, for your time, and now we'd like to open up the call to questions.

(Operator Instructions). [Arthur Yeager], ICM.

Could you just shed a little more light on what the exposure of the portfolio is to gold and to what extent it's hedged? Thanks.

Yes. The portfolio is exposed in the mid, single digits to gold bullion and roughly an equal amount to gold miners, and it is not hedged.

There are no further questions. 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.