Greenlight Capital Re Ltd (GLRE) 2014 Q2 法說會逐字稿

Presentation

Thank you for joining the Greenlight Re conference call for the second quarter of 2014 earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Brendan Barry, Chief Underwriting 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 18, 2014, 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. Please also note today's conference is being recorded.

I would now like to turn the conference over to Bart Hedges. Please go ahead, sir.

Good morning and thank you for taking the time to join us today.

In the second quarter of 2014 Greenlight Re generated a small net underwriting loss after all expenses and a gain in our investment portfolio. Overall, our fully diluted adjusted book value per share increased by 10.4% in the quarter and has increased 9.2% for the year to date.

Our combined ratio for the second quarter of 2014 was 101.5% compared to our combined ratio for the first quarter of 2014 of 99.9%. Our combined ratio for the first 6 months of 2014 was 100.7% as compared to 98.3% for the same period in 2013. The modest deterioration in our underwriting results was driven by a higher G&A expense ratio, which Tim will discuss in more detail later in the call. Our composite ratio, which is the measure of the profitability of our underwriting portfolio without consideration of our G&A expenses, was 93.9% for the year to date, as compared to 94.3% for the same period in 2013.

Given our strategy of writing a small number of large accounts, we expect the premium flow to be somewhat lumpy and this was the case during the second quarter of 2014. Our written and earned premium for the quarter and year to date were significantly less than in the comparable period in 2013. The reduction is due to several factors. We are writing less new business than we have been in previous periods due mainly to the soft market environment. Additionally, while our renewal business is performing well and we have been successful at continuing these relationships at terms and conditions that we believe are acceptable, some of these relationships shrunk during the quarter's renewals due to our partners' decisions to purchase less reinsurance. This is particularly true for certain Florida homeowners' relationships which renewed during the second quarter of 2014. We continue to be a lead or exclusive reinsurer on these accounts, but the overall size of the transactions offered by these clients decreased over the previous year causing the written premium to decrease.

Due to the mechanics of quota-share reinsurance transactions, the impact on the second quarter premium was significant. As an example, imagine the quota share of the primary insurer's numerous individual homeowners policies that we bind on June 1st for a one-year term. Now let's consider a single underlying insurance policy in that quota-share contract that is sold starting the following January 1 where we receive our share of the premium for the full year and earn it evenly over the year. But if the quota-share contract expires on May 31st and is not renewed, then we return in this example the unearned seven months of the premium. Similarly, if we renew a reinsurance contract for a smaller quota share than the expiring contract, we return more unearned premium than we receive for the new contract. This accounting for premium and the reduced participation affected our second quarter by reducing our premium written by approximately $51.2 million or about half of our reduction in gross premiums written. But keep in mind this is only a one quarter event. We expect our premium written will be higher in the third quarter.

Outside the reduction of some Florida homeowners' renewals that took place in the second quarter, we successfully renewed several of our larger relationships in non-standard automobile and employer stop-loss space at shares that were similar to our expiring share. Our client-centric underwriting strategy has allowed us to form deep relationships with our customers who value their reinsurance partners and has resulted in high client retention rates. This is important during the competitive market where some reinsurers are willing to write premiums solely for top-line growth. We continue to look for profitable areas of the market to deploy our capacity, but the market is competitive in nearly all sectors. We believe the disciplined underwriting during periods of heightened competition will pay off in the long run.

We continue to monitor the runoff of our commercial automobile and general liability books of business. These accounts are developing as expected based on our current estimates of ultimate losses. There is still uncertainty with respect to the final settlement of claims, but with each quarter we continue to resolve risks in this portfolio.

With respect to our property catastrophe aggregates, our maximum exposure to a single event is currently $80.5 million and our maximum exposure to all events is $99.7 million. Our maximum exposure to all events has decreased roughly 33% from the previous quarter end. The reduction in exposure relates to us writing less cat retro business as it did not meet our return hurdles in the current very competitive market. Our current aggregate exposure is the smallest we've had going into hurricane season since 2011.

During the quarter we exited our strategic investment in a Florida homeowners insurance carrier. We made a small positive return on this investment and we maintained our reinsurance relationship as we have a right of first refusal to continue providing quota share reinsurance capacity until June 2016. We continue to have several other strategic investments which have helped drive profitable, ongoing reinsurance relationships.

Though the drop in premium was significant in the second quarter, our strategy is to be disciplined and avoid accepting risks that don't have adequate compensations. We believe this discipline is the best means of growing our book value per share over the long term. Even so, we have a pipeline of attractive opportunities that we hope to underwrite over the intermediate term.

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.

Thanks, Bart, and good morning, everybody.

The Greenlight Re investment portfolio returned 8.1% in the second quarter, bringing the 2014 net return to 7.3%. Our long portfolio returned 13.9% as Apple and Micron led the way with strong operating results. Apple's earnings per share grew 15% last quarter and the company is forecast for more of the same. Apple also raised its capital return plan by 50% to $90 billion. Micron's earnings exceeded expectations as last year's DRAM memory price increase held steady. These long positions we established in the first quarter, Altise, Resona and SunEdison, also contributed as company-specific events made positive progress.

Finally, a position we established last year in Oil States International appreciated as the company spun off its accommodations business, which now trades publicly as Civeo. We continue to hold positions in these companies and believe that each is cheap on an absolute basis and has further value to be unlocked through shareholder-friendly management teams.

Our short portfolio detracted a bit less than the market gain this quarter as an unusual amount of takeover activity affected a number of our short positions. The last time we experienced takeover season in our short portfolio was back in 2006 and 2007 when a number of our shorts were taken out in succession. In the current environment acquirers are willing to overlook problems in companies because inexpensive debt financing makes deals EPS accretive in the near term.

Our macro position slightly detracted from quarterly results as our French sovereign bond short and our yen short cost us more than our gold position contributed.

We had a difficult time finding new investments this quarter. Despite a 13.9% increase in the long portfolio, we ended the quarter at 114% gross long, about 3% less gross long than we were at the beginning of the quarter. This reflects trimming of a number of appreciated positions. The investment portfolio ended the quarter 48% net long, which is down about 4% from the beginning of the quarter. As the market continues to rise in the face of conflicting economic data, global unrest and looming overdue Fed exit from quantitative easing, we remain cautiously positioned.

In the month of July our investment portfolio lost 2.6%. Despite a positive result from Apple, we had a large number of small losses throughout the rest of the portfolio that summed up to a losing month. None of the losses were large and the real problem was a lack of other significant winners.

On the underwriting front we clearly are facing challenges. As we've stated before, it's better to reduce the amount of business we write than to accept mispriced risk. On that, our balanced approach between assets and liabilities gives us an opportunity to earn a good return on equity, even in periods where underwriting volumes shrink as they did this period. The team has done a good job of protecting capital and developing new ideas for the future while waiting for a more opportune environment to increase our book of business.

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

Thanks, David.

For the second quarter of 2014 Greenlight Re reported net income of $109.6 million compared to net income of $28.5 million for the comparable period in 2013. The net income per share on a fully-diluted basis was $2.89 for the second quarter of 2014 compared to net income of $0.76 per fully-diluted share for the same period in 2013. For the 6 months ended June 30, 2014, we reported net income of $100.7 million compared to $85.2 million for the 6 months ended June 30, 2013. The net income per share on a fully-diluted basis was $2.66 for the 6 months ended June 30, 2014 compared to $2.27 for the same period in 2013.

Gross premiums written were $152.6 million for the 6 months ended June 30, 2014, a decrease of 41.8% from gross premiums written of $262.2 million for the first 6 months of 2013. As Bart described, this decrease is primarily the result of decreases in our participation on certain homeowners quota-share contracts during the second quarter.

Our net earned premiums for the first 6 months of 2014 decreased by approximately 17.7% to $199.5 million when compared with premiums earned during the same period in 2013. The decrease in premiums earned is primarily due to the nonrenewal of a private passenger automobile contract which was terminated at the end of 2013.

The composite ratio for our frequency business for the first 6 months of 2014 was 98.0% compared to a composite ratio of 100.6% during the same comparable period in 2013. For our severity business our composite ratio was 29.3%. It should be noted that the comparative period in 2013 showed positive developments as reserves on Super Storm Sandy were taken down in the first quarter of 2013. Overall, our composite ratio for the first half of 2014 was 93.9% compared to 94.3% for the comparable period of 2013.

Our total expense ratio, being the combination of internal expenses and corporate expenses, was 6.8% for the first 6 months of 2014 compared to 4.0% during the comparable period of 2013.

Our internal expenses of $10.1 million for the first 6 months of 2014 were in line with our expectations and compared to $9.8 million incurred in the comparable period in 2013. Our corporate expenses includes a foreign exchange loss of $1.6 million, primarily from the re-valuation of loss reserves denominated in British pounds. This compares to a foreign exchange gain of $1.9 million for the same reason reported during the comparable period in 2013. The resulting combined ratio of 100.7% for the first 6 months of 2014 compares to a combined ratio of 98.3% for the same period in 2013.

We reported a net investment income of $113.9 million during the second quarter of 2014, reflecting a net gain of 8.1% on our investment portfolio. For the first 6 months of 2014 we reported a net investment gain of $103.8 million, reflecting a net investment return of 7.3%.

The fully-diluted adjusted book value per share as of June 30, 2014 was $30.47, a 25.9% increase from $24.20 per share reported at June 30, 2013.

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

Thanks, Tim. 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 value-oriented 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.

(Operator Instructions) Brian Meredith, UBS.

Yes, a couple questions here. The first one, Bart, I'm wondering if you could give a little more kind of color on the PI, your solicitors' PI average development in the quarter, kind of what happened there and could we see some more development out of that book going forward?

I'm going to ask Tim to talk to the numbers a little bit and then I can give you a little bit more on the business.

Okay.

Yes, Brian, as we disclosed in the loss development numbers during the quarter, for the solicitors we showed $3 million approximately of adverse development, mainly due to a couple of large losses that were reported. That number, which you see as loss development, is offset by about $0.6 million of a slide change. So net, you're around $2.5 million of adverse development.

Okay.

And Brian, this is business that we've been on beginning in 2010. It's business that incepts late in the year, in October. Overall we're pretty comfortable with the business. We recently made the decision to renew and continue the business into 2014; again, renewing in October 2014. And even though there was a modest amount of adverse development in the quarter, overall it's a profitable business for us.

Great. And then just a second question. Just from a big picture perspective, Bart, as the reinsurance market continued to get more and more competitive here, not only on the property side, but we're seeing obviously on the casualty side getting some more price competition with seeding commissions, etc., how much more challenging is it going to be for you guys to show growth in the reinsurance business? And should we expect that perhaps there's just more contraction here to come as things continue to be competitive?

Well, thanks for asking that one. I think, obviously, there was a big movement in the premium this quarter, so it's natural to look at the growth going forward. And I want to try to give you a little bit more color on the way we think about the premium and our prospects in the market.

First off, it is a competitive market. We've said that for a while and it continues to be very competitive, especially on the cat side. And when it is like this, we think that our model allows us the opportunity to be selective on the underwriting side and really try not to write things that we believe are mispriced risk. So last year at the end of the year we decided to not renew a very large non-standard automobile contract, which we spoke about in the fourth quarter, and that has an impact on our premium writings during 2014. So it becomes an issue when you look at sort of a comparative of 2013 versus 2014. Overall, nonstandard automobiles we've got a good business for, but in that particular account we didn't think we were getting price for the risk so we walked away and we think it was a good decision.

Secondly, historically Florida has been a pretty good market for us. We've participated in the sort of limited wind homeowners quota shares for quite some time and we think that it is a good business. This year we were able to continue on a number of the renewals and we think we did a good job of maintaining our place as the lead market. We got some good terms and conditions that are really roughly in line with where they were the year before, but the clients decided to seed less business. And part of that decision was that the way they've been managing the risks on their own balance sheet, in the past they've been deciding to keep some of the cat risk on their own balance sheets or with their own capital and buy a lot of the non-wind or limited-wind quota share protection that we provide.

This year the cat market was cheap and they decided to purchase more of the cat, which left a little bit of risk-taking ability on their balance sheet. And so, at the end of the day, they decided not to seed as much of the business to the quota-share participants like Greenlight Re. So there'd be others as well, but that had a major impact. We actually think it was probably a smart decision from their perspective but, at the end of the day, it impacts our premium volume going forward.

And then you start thinking about the renewals and we have -- we've been executing this client-centric strategy, which we think is a real competitive advantage for the Company, especially in a very difficult and competitive environment like we're in because we have been successful at renewing relationships, large relationships that are profitable. And that's the case when we look forward to, say, the third and fourth quarter where we have a number of both our large non-standard automobile and employer stop-loss relationships that would come up for renewal. And we've been able to negotiate terms and conditions that we think are acceptable. And we've been able to renew those in advance of the third quarter. So I think -- or early in the third quarter. That will be business that will be coming onto the books in the fourth quarter and into the first couple of quarters of 2015. So, we feel pretty good about that part of the book of business and it feels pretty stable right now.

And then lastly, getting more to your point about the competitive environment, it is tough. Fortunately, our guys have been working on a number of initiatives. Some of them are very targeted approaches where we're working with brokers to identify seeding carriers who are buyers of the types of reinsurance products that we sell. And we've -- I've got a number of those in the pipeline that we're looking at. We think the prospects are good but, as you said, it's a competitive market. We will have to be price sensitive there, but we've shown that we can be disciplined and we won't write it unless we think we're getting a reasonable risk-adjusted return on that business.

And then the last thing that we're doing is we are working on some new products that we have been working on for the last couple of months. We've targeted a few brokers. We've targeted a few accounts. This is the kind of stuff that really -- these large types of relationships on new products, they take a little while to manifest themselves in terms of an actual contract. Fortunately, that work's been underway for a while, but I expect some of that to be successful and hopefully will result in some new premiums coming into the beginning of next year.

Of course, again, we've got to underwrite the business and we've got to compete in the marketplace. But we've got a lot of things going. I think our prospects are good, but it is a competitive and difficult market and I think our model allows us the opportunity to be selective here. But overall, I feel comfortable with our position. I think our strategy's working and I think our disciplined approach will pay off over time.

Great. Thanks for the answer.

Sure.

Brett Shirreffs, KBW.

Good morning and thanks for taking my questions. Bart, you answered most of them there, but just a couple quick numbers ones. I was wondering if you could quantify the non-standard auto contract that you non-renewed at the end of last year.

So, we've disclosed in the Q that for the first six months -- and this is in aggregate, so it would include not just the ones that we non-renewed, but kind of any changes in amount of premiums that would be going forward. But for the first six months of this year our private passenger automobile business was down $71.5 million. And that's for the first six months and that's compared to the previous 2013.

The contract that we decided not to continue had an annual amount of session to us in the neighborhood of about $125 million.

Okay. So that would be kind of the full-year impact to think about?

Well, if you were -- the comparison of 2013 to 2014, that would have been about what we would have expected if we had continued it in 2014, yes.

Okay, great. And then just lastly, so if I back out the unearned premium adjustment for the Florida homeowners non-renewal, it looks like premiums were down about 35% in the frequency segment. Is that correct?

Yes. I guess the $51.2 million that we described were kind of the quarter-on-quarter reduction due to the return of the UPR and the lower share. It'd be kind of the number to think about to get to a normalized number, if you want to use those words.

Okay, perfect. Thank you very much.

Thanks, Brett.

(Operator Instructions) Sachin Shah, Albert Fried.

Hi, good morning. I'm not sure if you could provide some more transparency or clarity on your comments earlier. I think it was mentioned maybe in your quarterly letter as well about the acquirers being overlooked, the problems that they had in the context that they did make some acquisitions. A few of them are kind of nearing completion. So, just wanted to see if there was any kind of transparency or clarity or -- that was before the deal was announced or you still feel the same way?

Hi, this is David. I'm not sure which deals you're talking about.

Safeway, Questcor, MNK, Lorillard Rentals.

Yes. Well, Safeway is going to be taken private by Albertsons. And the discretion of this narrative was, generally speaking, more backward looking in terms of things that have affected performance of the short portfolio over the last few quarters. And when it sort of compounded into sort of a number of transactions, we just kind of laid them all out.

Safeway -- assuming these deals get closed, which I'm not really opining one way or the other on at the moment, Safeway would be brought private and that would presumably be the end of that investment. Lorillard is being acquired by Reynolds, which has a lot of the same risks that Lorillard had in terms of menthol; just menthol is a much bigger percentage of Lorillard. So that's something that we'll evaluate, whether or not we wish to carry it forward post-merger if it happens.

The same is certainly true of Mallinckrodt and Questcor, where in fact Mallinckrodt is going to become extremely exposed to the single-product risk at Questcor, which could turn out to be an issue because the product appears vulnerable on a number of possible fronts.

The next one was -- there was one more you mentioned?

I think those are the three, but I think the one more that you may have mentioned is MLM with the PXI (inaudible)--.

Well, MLM is--.

That deal closed.

That deal closed and it's an acquirer and so--.

Yes.

We've taken sort of a negative view about their ability to achieve the forecasts that they put into their proxy. And we have a different view as to where we are in the cycle compared to maybe where the rest of the consensus is. So, we think that the mid-cycle earnings there are much lower than people seem to be pricing into the shares and so we've maintained that as a short position.

Okay, perfect. Thank you.

This concludes our question-and-answer session. 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 now concluded. Thank you for attending today's presentation. You may now disconnect.