Greenlight Capital Re Ltd (GLRE) 2014 Q4 法說會逐字稿

Good morning and thank you for joining the Greenlight Capital conference call for the fourth quarter and full year 2014 earnings. Joining us on the call today are David Einhorn, Chairman, Bart Hedges, Chief Executive Officer, Tim Courtis, Chief Financial Officer, and Jim McNichols, Chief Actuarial Officer. The Company reminds you that 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 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 17, 2015, and other documents filed by the Company with the SEC. If one or more risks or uncertainties materialize, or the Company's underlying assumptions prove to be incorrect, actual results may differ materially from those the Company projects. The Company undertakes no obligations 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. Thank you for taking the time to join us today. The reinsurance market remained challenging during 2014. In general, the market remains overcapitalized and is highly competitive especially for new business. In the fourth quarter of 2014, Greenlight Re generated a $4.6 million loss on our underwriting portfolio and a $72.8 million gain in our investment portfolio. Overall, our fully diluted adjusted book value per share increased by 5.5% in the quarter, and increased by 10.2% for the year to $30.76. Our 2014 underwriting results deteriorated primarily due to adverse reserve development on certain commercial, automobile and general liability contracts and run-offs which I will describe more fully in a moment.

Our combined ratio for the full year 2014 was 102.9% compared to 97.1% for the prior year. The adverse development added 5.1 points to our 2014 combined ratio. Our written and earned premium decreased from the prior year primarily due to the non-renewal of a non-standard automobile contract while general and administrative expenses were flat for the year. This deleveraging increased our expense ratio and added 2.2 points for the combined ratio. During the fourth quarter, we strengthened loss reserves relating to commercial automobile and general liability contracts and run-off by $6.9 million, and $6 million respectively, while we released approximately $4.5 million of loss reserves relating to employer stop loss.

Reserve deterioration for commercial automobile relates to one contract where we appointed a new claims handler who reviewed all the claims in the portfolio and more actively closed claims, reducing the count by over 60%. The adverse development on general liability reserves relates to a contract that has suffered a large number of asserted claims for construction defects by small contractors. A majority of these claims closed without any indemnity payment and a majority of the adverse development relates to claims handling costs. Overall, this is not a large contract and while further development is possible, it has a much lower level of exposure than we had to commercial automobile contracts that deteriorated a couple years ago.

While the reinsurance market remains challenging, we are winning new business in both our Cayman and Irish operations. Some new contracts are with larger syndicated reinsurance placements for general casualty and professional liability business which has a longer duration of claims payments than the business we currently write. Pricing on these opportunities is competitive but acceptable and we believe we have partnered with the best in class underwriters with whom we can grow over time.

Our relationships with key brokers and underwriters in these markets, our history, solid balance sheet and A.M. Best A rating were key factors in attracting these opportunities. Additionally, we are developing products to help attract new business with targeted companies to help us expand the amount of business that we do with existing partners. The team is energized and we feel good about the start to 2015. Our property catastrophe retro accounts continue to benefit from the light year from catastrophes. However, this was the most competitive area in the market due to the influx of alternative capital and the recent history of years without a major loss.

We have renewed a couple relationships in this space and we wrote two deals January 1 with new partners. We have repositioned our catastrophe retro book of business from predominantly excessive loss contracts to quota share contracts because there's less available capacity from alternative capital providers in this area, and we believe the terms and pricing are better now for quota share than for excess loss. Our maximum exposure to a single event as of January 1, 2015 is $162.5 million, and our maximum exposure to all events is $216.2 million. As a reminder, we measure our aggregates as the maximum amount of limit available less the amount of reinstatement premiums due.

We do not use a probable maximum loss, or PML approach. While the calendar year underwriting result was below our expectations, our current portfolio is performing well. Our pipeline of opportunities is strong, and we are finding new business in a very competitive marketplace. 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 returned 5.3% in the fourth quarter, bringing the 2014 full year return to 8.7%. During the quarter, the portfolio profit from long, short and macro positions. Leading the way were Apple, our short positions in US Steel, and an undisclosed industrial company, and the Japanese yen. Our long position in Civeo was the only significant loser in the quarter as the real estate company proved to be more sensitive to plummeting oil prices than we had expected. For the full year Apple, which rose 41%, and Micron, which rose 61%, were the significant winners in our long portfolio which returned 17.8% for the year. The short portfolio went up less than the market but lost 4.2% for the year. In the fourth quarter, we exited our energy positions in Anadarko, BP, McDermott and National Oilwell Varco. We hedged our underlying exposure to oil midyear by shorting crude oil futures. This protected us from the sharp fall off in oil prices. Our current exposure to energy primarily consists of Consul Energy and Sun Edison, neither of which is in the oil business. We ended the year conservatively positioned with 39% net exposure, which is 15% less net long than a year ago.

The positives we see in 2015 include falling unemployment, lower oil and other commodity prices that should boost consumer spending in the short term, and the first quarter will be an easy comparison for corporate earnings given last year's first quarter was negatively affected by harsh weather. The negatives we see include stretched valuations and earnings headwinds later this year including a strong dollar which reduces the translated earnings of foreign subsidiaries. From a macro perspective, we are worried that emergency policies are now failing.

We continue to maintain a macro overlay with positions in gold, short Japanese yen and Chinese renminbi, and short French sovereign debt. 2014 has been a year of significant infrastructure build-out at Greenlight Re. Throughout the year we have organized a middle office team to help enhance our systems and data tracking. We have added three senior members to staff who are now fully integrated and have further enhanced our underwriting and actuarial capabilities. I just returned from our board meeting and reviewed our business activity for the beginning of 2015 and our pipeline appears strong. We are finding creative ways to write new business despite the continued soft reinsurance environment. I am pleased with the team's progress.

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

Thanks, David. For the fourth quarter of 2014, Greenlight Re reported net income of $60.7 million, or $1.60 per share, compared to net income of $83.9 million, or $2.22 per share for the comparable period in 2013. For the full year 2014, we reported net income of $109.6 million, and earnings per share of $2.89 compared to a net income of $225.7 million, and earnings per share of $6.01 in 2013. Gross premiums written were $74.3 million during the fourth quarter of 2014, compared to $124.8 million in the fourth quarter of 2013. For the full year 2014, gross written premiums decreased by approximately 40% over 2013 to $324 million.

As Bart discussed earlier, this was primarily driven by the non-renewal of certain business which we believe was inadequately priced. The composite ratio for our frequency business for 2014 was $101.1%, compared to a composite ratio of 97.2% during 2013. Adverse development on prior year reserves of 5.1 points was the primary reason for the increase in the frequency composite ratio. For severity business, the composite ratio was 35.8% for 2014. Our overall composite ratio was 96.7% for 2014 compared to 93.2% for the prior year. Our total general and administrative expenses for the year remained flat at $21.9 million.

However, lower premiums over flat expenses led to the expense ratio worsening to 6.2% in 2014, from 3.9% for 2013. As a result, the combined ratio for the full year 2014 was 102.9%, as compared to 97.1% for 2013. We reported a net investment gain of $72.8 million during the fourth quarter of 2014, reflecting a net return of 5.3% on our investment accounts.

For the full year we reported net investment income of $122.6 million, reflecting a net investment return of 8.7%. The fully diluted adjusted book value per share at December 31, 2014 was $30.76, a 10.2% increase from $27.91 per share reported at December 31, 2013.

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

Thanks, Jim. 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 to questions.

Yes. Thank you. (Operator Instructions).

And the first question comes from Rob (inaudible), with KBW

Good morning. Thanks for taking my questions.

Good morning.

Good morning. First, Bart, I notice it looks like you're sitting at the lowest level of underwriting and investment leverage in over five years. Could you comment on the decline, and, since we're more than halfway through the first quarter now, how you feel about growth opportunities in 2015?

Sure. We've always said that the business is going to be a bit lumpy in terms of premium because of our approach in terms of the concentrated portfolio and wanting to try to avoid mispriced risk. As we've discussed before, the decline in premium this year is mainly as a result of deciding to get off the one large non-standard automobile contract last year. But it's also coupled with a pretty competitive market to find new business. I think in the first half, we certainly found it challenging to find new things but in the second half of the year we picked up.

I think we found some new relationships. We struck on a couple of new ideas in terms of new kinds of things to offer to existing partners, and I feel pretty good about it in terms of the going forward. But it's going to remain a competitive market and it's going to especially be competitive for new business. It will be challenging.

Okay. And I know this isn't something you traditionally have done but would you ever consider means of capital management if the underwriting opportunities don't present themselves and the valuation made sense?

This is David speaking. We have an authorized buy-back in place and if it makes sense to use it, we will do so.

Okay. Lastly, could you provide a little more detail on the reserve development? Were those the same contracts that caused issues back in 2012?

This is Bart. Basically, there's three contracts that have been in run-off for a while. One of them that actually there was no activity on this quarter is the most mature contract. It was a trucking commercial automobile contract where we're down to literally a handful of open claims. There's no exposure and that one's pretty well under control. The second one, which was also a commercial automobile contract from around the same time, but it's a little less mature, the exposure was less long haul trucking than the first contract.

That one we did put up additional reserves on this quarter, and as we spoke about it, it was mainly adverse development on an existing number of claims. The new claims handlers made a lot of progress in terms of closing out claims in the beginning of the year. There were as many as 700 open claims.

By the end of the year there was, like, 250 open claims. So, certainly, resolving risk and moving forward but there's still potential volatility there. But we do feel good about where we are today. And then the last one, which has been part of this bucket, was a general casualty. Mainly the claims are related to construction defect, mainly in California and to a lesser extent, Nevada and Arizona. And this one's really -- this is a frequency game. We're trying to figure out exactly when the peak is going to be in terms of claims that are coming in, but there are still claims coming in.

Most of them have no indemnity payments and we pay a couple thousand dollars to open the file and figure out there's no exposure and close the file. And then there's a small number with indemnity payments and even those are small dollar amounts, but in aggregate there's quite a few claims. I'm confident we've got the right people looking at it and I'm confident in the numbers that we've put up. But that one does still have some exposure to it.

Okay. Thank you.

Sure.

Thank you. And the next question comes from Michael Weinberg, with Protege.

Hey, David. I was wondering what your view of on how the Greek situation plays out in light of your view on the Greek banks?

The Greek situation is more than a bit unstable at the moment. They've elected a party that wants to bring in unclear amount of change, certainly some significant amount of change and they're in the process of negotiating things with other European countries and I think that at this moment, there's a wide range of possible outcomes there. Relating specifically to our position in Greek banks, what I would say is that a large amount of that position is structured as warrants and so there's really not a lot of gross dollar exposure to the downside. But there's a lot of leverage to the upside if the situation resolves favorably and the warrants go into the money.

Great, thank you.

Sure.

Thank you. (Operator Instructions). And we have a question from Ron Bobman from Capital Returns

Hi, good morning. I have a sort of PFIC related question. I was curious with the declining premium volume and the underwriting results, is there plenty of headroom to steer clear of any PFIC, heightened PFIC concerns, or are you well away from having a heightened degree of concern about PFIC compliance? Thanks.

Yes, it's Tim Courtis here, Ron. Certainly PFIC is an issue that we keep track of and look at. Certainly there isn't a bright line test but given our current level of premium writings and certainly looking at our pipelines, we don't believe there is a PFIC issue currently and as always we'll always keep monitoring it and act accordingly.

Thanks. Best of luck.

Thank you. And as there are no more questions right now, this does conclude our question and answer session. Should you have any follow-up questions, please direct them to Garret Edson of ICR at 203-682-8331 and he will be happy to assist you. We also remind you that a replay of the call and other pertinent information about Greenlight Re is available on our website at www.greenlightre.ky. This does conclude today's conference. Thank you for attending today's presentation. You may now disconnect. Have a nice day.