Greenlight Capital Re Ltd (GLRE) 2014 Q3 法說會逐字稿

Thank you for joining the Greenlight Re conference call for the third quarter of 2014 earnings. All participants will be in listen-only mode. (Operator Instructions). 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; and Jim McNichols, Chief Actuarial Officer.

The company reminds you that the forward-looking statements that may be made on 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 facts, but rather reflect the company's current expectations, estimates, and predictions about the 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 note this event 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. During the third quarter of 2014, Greenlight Re generated a small net underwriting gain after all expenses and a loss in our investment portfolio. Overall, our fully diluted adjusted book value per share decreased by 4.3% in the quarter and has [increased 4.5% for the year-to-date]. Our combined ratio for the third quarter of 2014 was 99.2% compared to our combined ratio for the third quarter of 2013 of 94.6%. Our combined ratio for the first nine months of 2014 was 100.2% as compared to 96.8% for the same period in 2013.

Gross written premiums in the quarter and year-to-date were $97.2 million and $249.8 million as compared to $148.8 million and $410.9 million respectively in the same period to last year. The higher combined ratio and our year-to-date underwriting results was driven by a reduction in overall premium volume and to a lesser extent by changing the mix of business. As we have reduced our frequency premium volume primarily from the non-renewal of a non-standard auto contract, our expenses have remained fairly constant resulting in a higher expense ratio that increases our combined ratio compared to last year.

Regarding our change in business mix, the competitive market conditions for catastrophe retro have resulted in less attractive opportunities and a reduction in our cat retro writing where we have historically had higher margins. However, we have recently found certain opportunities for non-cat retro severity business. We believe this business has attractive risk adjusted returns but it does result in the reporting of higher combined ratios when compared to the more volatile cat retro business. Another strength of our business model is to be able to reduce premium writings when we believe business is not priced appropriately. Our underwriting team is doing an excellent job of exercising discipline and executing our customer centric strategy.

As I mentioned last quarter, our pipeline for new business opportunities are strong and we continue to be well positioned for growth. The third quarter is typically the peak of the US hurricane season. This year, we had a limited activity and overall, we do not believe there are any events during the quarter that impacted our contracts. The market for natural catastrophe reinsurance continues to be competitive with plenty of capacity being offered by both traditional and non-traditional sources. In our view, the floor on pricing per contract exposed to natural catastrophe has not yet been reached.

As a reminder, we write a small number of catastrophe retrocession contracts, which provide protection to primary writers of catastrophe reinsurance. As of September 30, 2014, our maximum exposure to a single property catastrophe event is $82 million and our maximum exposure to any series of events is $102.7 million. Please note that these numbers are net of any additional premium collected after the event. We continue to monitor the run-off of our commercial automobile and general liability books of business.

These accounts continue to develop 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 risk in this portfolio. Last week, we announced that A.M. Best upgraded the financial strength rating of our Irish reinsurance company to "A" and maintains a "A" rating for our Cayman reinsurance company. A.M. Best also affirmed a stable outlook of the ratings for both companies.

I am pleased with the steady progress the team has made building Greenlight Re's Irish operations. This upgrade from A.M. Best is one more step along the way to establishing our business model in Europe. We believe the upgrade is validation of our efforts and it will open some doors for additional opportunities in the UK market and throughout the EU.

As you may have seen recently, we added three new staff members during the quarter. Cliff Dunigan joins our underwriting team from Berkeley Re where he was the Senior Vice President, managing a casualty reinsurance portfolio. Tim Adair joins the underwriting team from Guy Carpenter where he was broking casualty reinsurance business. Cliff and Tim hit the ground running and we are looking forward to them helping us to expand our relationships in an effort to identify the opportunities offering us the best risk adjusted returns.

Also joining us is Jim McNichols. Jim joins as Chief Actuarial Officer and will be a member of the senior management team. We are pleased to have these experienced professionals on the team. 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 everyone. The Greenlight Re investment portfolio lost 3.7% in the third quarter, which brings the 2014 net return to 3.2%. It was a frustrating quarter as a lack of winners combined with the normal amount of individual losers led to losses from our longs, shorts, and macro positions. Nothing terrible happened but we just got ground down gradually. In such circumstances, it's not obvious what to do other than stay the course and be patient. Apple, which still trades well below our market multiple was our only notable contributor for the quarter as its stock price began to reflect the strength of its iOS platform and the enthusiasm for new phones and services.

The gain in Apple was roughly offset by a loss in our long position in Civeo, the accommodations business spun off from Oil States International. The stock sold off and management surprised the market with a substantial operating shortfall in a decision to not move forward with the REIT conversion. We disagree with the company's actions and believe the company should be a levered real estate entity that distributes most of its cash flows.

On the short side, US Steel temporarily benefited from panic ordering due to a shortage of raw materials, which led to a spike in hot rolled steel prices. Given the near record spread between domestic steel prices and foreign steel prices, we believe that imports will arrive shortly, steel prices will retrace, and US Steel's great third quarter will likely be the best result it reports for a long time. We also had a loss in Mallinckrodt, whose shares advanced after the company completed its acquisition of Questcor. We believe the accretive acquisition proved too tempting for management despite the risks that come along with it.

We ended the quarter 40% net long, which is our lowest net exposure so far this year at any month end. We were well positioned to be opportunistic in the dislocation in early October, which was the first real dislocation we've seen in a long time. We added to our net long exposure during the correction, which unfortunately was brief. We returned 2.1% in October. We just spent several days last week at our Board meeting reviewing the business pipeline and our underwriting plan for 2015.

Although the underwriting environment continues to be very competitive, I'm pleased with the progress we are making. The addition of Cliff, Jim, and Tim should enhance our market reach and the recent business we've underwritten gives me optimism about the upcoming year. The team is energized but cognizant that our main priority is to protect capital. Now I'd like to turn the call over to Tim to discuss our financial results.

Thanks David. For the third quarter of 2014, Greenlight Re reported a net loss of $51.8 million compared to net income of $56.5 million for the comparable period in 2013. The net loss per share was $1.40 for the third quarter of 2014 compared to net income of $1.50 per fully diluted share for the same period in 2013. For the nine months ended September 30, 2014, we reported net income of $48.9 million compared to $141.8 million for the comparable period in 2013. Net income per share on a fully diluted basis was $1.29 for the nine months ended September 30, 2014 compared to $3.78 for the same period in 2013.

Our net earned premiums for the first nine months of 2014 were $279 million compared to $406.4 million reported during the same period in 2013. The decrease in premiums earned is primarily due to the non-renewal of a private passenger automobile contract, which was terminated at the end of 2013. Additionally as we described in our second quarter earnings call, decreases in our quota share participation in ongoing private passenger auto and Florida homeowners' contracts also attributed to the comparative decline in earned premiums.

The composite ratio for our frequency business for the first nine months of 2014 was 98.3% compared to a composite ratio of 97.5% during the comparable period in 2013. For our severity business, our composite ratio was 33.8%. It should be noted that the composite ratio for the comparative period in 2013 benefited from favorable development as reserves on Superstorm Sandy were taken down in the first quarter of 2013. Overall, our composite ratio for the first nine months of 2014 was 94.2% compared to 92.7% for the comparable period of 2013.

Our total expense ratio being the combination of internal expenses and corporate expenses were 6% for the first nine months of 2014, compared to 4.1% during the comparable period in 2013. Our internal expenses of $15.4 million for the first nine months of 2014 were in line with our expectations and compare to $14.2 million incurred in the comparable period in 2013. The increase of roughly $1.2 million is due primarily to increased accruals on incentive compensation.

Our corporate expenses include a foreign exchange gain of $1 million primarily from the revaluation of our loss reserves denominated in British pounds. This compares to a foreign exchange loss of $0.2 million for the same period reported during the comparable period in 2013. Resulting combined ratio of 100.2% for the first nine months of 2014 compares to a combined ratio of 96.8% for the same period in 2013. We reported a net investment loss of $54 million during the third quarter of 2014 reflecting a net loss of 3.7% on our investment portfolio. For the first nine months of 2014, we reported a net investment gain of $49.8 million reflecting a net investment return of 3.2%. The fully diluted adjusted book value per share as of September 30, 2014 was $29.16, a 13.5% increase from $25.70 per share reported in September of 2013. I'll now 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 market. 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'd like to open up the call to questions.

Brett Shirreffs, KBW.

Bart, first, I was wondering if you could just touch on your expectations for some of the new underwriting hires and when you think we might begin to see some of the impact?

Well, the expectation is quite high actually for the guys in that we were fortunate timing-wise to get them on in September. So we think that with their contacts that they will bring to the company, they're going to help us at [1/1]. Traditionally, we've been I think a little bit light in terms of renewal cycle at [1/1] but we're expecting for some new opportunities to come in early. Of course that premium we'll earn over a long period of time, so I think it will take a little while for it to show up in the financials but in terms of activity and pipeline, I think we're hoping to see some new things fairly shortly.

And then I think you said last quarter that a number of your non-standard auto and employer stop-loss contracts renew in 3Q and 4Q. Can we assume that those are renewing as planned?

Yes, I think that's a good assumption to make.

Then lastly just a broader question. There's been some talk in the market about some of the larger primary insurers setting up captive reinsurers with more aggressive investment strategies like yours. Two questions off that. Do you think this would impact your business in anyway and also have you had any discussions with large primary insurers to establish partnerships of any kind?

Well, I think that in terms of the impact on our business, it's funny because I think as a direct competitor, I wouldn't see those kinds of facilities directly competing with the spaces that we've traditionally been in but seeing others utilize parts of our model, I think it's a good thing in some ways for us because it is showing -- validating what we've been doing. In terms of the strategy and potential discussions with others, that's not something I would feel comfortable commenting on now.

Edward Williams, Capital Returns Management.

With the declines in written premiums over the past two quarters, while I really commend your underwriting discipline given the backdrop of current market conditions, if the trend in written were to persist and begin to flow through into earned, could you just refresh us on the PFIC income test and whether or not that's a consideration you're managing towards going forward?

As we described last quarter, the reduction in premiums return and obviously that will ultimately flow through to the earned premium line, was mostly a one-off transaction and kind of what you're seeing in the current premium writings and earnings more reflects the ongoing earnings and writings of our current books. As Bart said, we have expectations of growth, particularly with the new hires. Certainly PFIC as we described in our risk factors is something that we're cognizant of and whilst there is no bright-line test, we continue to analyze our book and certainly don't have a concern at present and certainly the pipeline would suggest we shouldn't in the future.

(Operator Instructions) This concludes our questions-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 would 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. Thank you for attending today's presentation. You may now disconnect.