Greenlight Capital Re Ltd (GLRE) 2015 Q1 法說會逐字稿

Good morning and thank you for joining the Greenlight Re conference call for the first quarter 2015 earnings. Joining us on the call this morning are Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Vinit Sethi, Director of Research of DME Advisors. The Company reminds you that the 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 facts, but rather reflect the Company's current expectations, estimates and predictions about future results and events that 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 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 and thank you for taking the time to join us today. In the first quarter of 2015, Greenlight Re generated small underwriting profit and a loss in our investment portfolio. Overall, our fully diluted adjusted book value per share decreased by 2.2% from the prior quarter end. Our combined ratio for the first quarter of 2015 was 101.5% compared to 102.9% for the full year of 2014. Several new business wins resulted in an increase in written premium for the quarter as compared to the first quarter of 2014.

Our four core areas, non-standard automobile, Florida homeowners, employers' stop-loss and catastrophe retro represented 79% of the earned premium for the quarter and generated a composite ratio, which is the loss ratio plus the acquisition cost ratio of 92.9%. The composite ratio for the entire book of business is 95% for the quarter. There were no significant property catastrophe events in the quarter, and thus our catastrophe retro count continues to perform well.

As we mentioned during our last call, we've repositioned the catastrophe retro book of business from excess of loss to quota share. We believe that there was less competition for quota share business and that we were able to achieve better risk adjusted pricing. One result of this repositioning is that the premium for the quota share contract will earn over a longer period of time than excess of loss contracts. With respect to our property catastrophe aggregates, our maximum exposure to a single event is currently $157.7 million and our maximum exposure to all events is $213.5 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 model probable maximum loss or PML approach.

The market remains competitive in all areas but we are having success finding new business in long tail casualty, medical stock loss, a new pet care program and catastrophe retro. The long tail casualty deals are quota share contracts of direct insurers writing casualty business and some quota share of other reinsurance casualty portfolios and our growing portion of our overall portfolio. The underlying exposure is a mix of professional liability and excess general liability. This business will bring a slightly longer duration to our overall loss reserve, which will in turn create investable flow. The new medical stop loss deal is a quota share reinsurance of the healthcare writer that distributes through various managing general underwriters in the US and the pet care program is the start up of a new managing underwriter led by an established industry veteran. We are pleased with each of these new wins and we continue to have a [further] pipeline of new business opportunities.

Our customer-centric underwriting strategy, speed of execution and innovative ideas continue to differentiate us in a highly competitive environment. I'm pleased with our overall progress and believe we are well positioned for the rest of the year. Unfortunately, David Einhorn could not join us today. He had a death in the family and is currently in transit. I've asked Vinit Sethi, Director of Research of DME Advisors to take us through the quarterly investment performance.

Thanks, Bart and good morning everyone. Greenlight Re Investment portfolio was down 1.8% in the first quarter. Our longs led by Apple and SunEdison outperformed the market. Our shorts went against us by more than our longs gained and macro positions were slightly negative. Apple's iPhone 6 has proven to be a blockbuster product that is driving extraordinary revenue and earnings growth. SunEdison announced that they will generate significant free cash flow sooner that the market anticipated.

Our biggest loser in the quarter was Micron. PC DRAM prices weakened in the most recent period as PC sales declined. We are watching closely to see how the industry's [three] players react to the current oversupply. The portfolio continues to underperform in April with a loss of 0.4%. During the quarter, we exited a few positions, including three shorts that were bought out and the remaining stake in our successful long investment in Aetna.

We established a few new long positions in the quarter, including AerCap, an airline leasing company, Chicago Bridge & Iron, an energy, engineering and construction firm that is down quite a bit along with the price of oil but has a significant multi-year backlog, and we reestablished a position in General Motors. All three companies traded about eight times this year's expected earnings. We also added several new shorts including shale oil frackers and increased our short exposure from 67% at December 31 to 88% as of March 31.

The investment portfolio's net exposure was 16% at quarter end, which is near an all-time low and reflects our concern about stretched valuations and challenges we see for corporate earnings in 2015. These challenges include the strong dollar, lower oil prices and difficult year-over-year comparisons the next three quarters.

Another issue that has worried us and is less discussed is the productivity bust and its impact on peak margins. Labor hours are growing faster than the GDP. Companies like Wal-Mart and McDonald's are raising wages suggesting that the low end of the labor market is tight. These issues lead us to believe that earnings have peaked and may even shrink this year. We are proceeding with caution and we'll let the alpha we aim to generate from the mix of longs and shorts drive our results. Our current thinking is that 2015 is setting up to be a challenging environment and we are positioned accordingly.

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

Thanks, Vinit. For the first quarter of 2015, Greenlight Re reported a net loss of $24 million compared to a net loss of $8.9 million for the comparable period in 2014. The net loss per share was $0.65 for the first quarter of 2015 compared to a net loss of $0.24 per share for the same period in 2014. Gross premiums written were $129.7 million during the first quarter of 2015, an increase of 9.1% from gross premiums written of $118.9 million in the first quarter of 2014, primarily a result of increased writings of private passenger auto business as well as increases in professional and general liability writing.

Our net earned premiums of $94.8 million decreased by approximately 15.1% from $111.7 million reported in the first quarter of last year. While premiums written have increased, most of the earnings of these premiums have yet to occur over the underlying contract risk period. The decrease in premiums earned over the prior reporting quarter is primarily attributable to the effect of writing a reduced share of Florida homeowners' contract which were renewed in the middle of 2014 as well as changing some of our cat retro book to quota share contracts from excess of loss contracts.

The composite ratio for the first quarter of 2015 was 95% compared to a composite ratio of 94.1% during the comparable period in 2014. The composite ratio for frequency business for the quarter was 98.4% and it was 50.4% for severity business. General and administrative expenses incurred during the first quarter of 2015 were $6.2 million, virtually the same compared to the prior year period. However, given the lower earned premiums during the first quarter of this year, expense ratio of 6.5% was higher than the expense ratio of 5.5% reported in the prior year quarter.

Overall, the combined ratio for the first quarter of 2015 was 101.5% compared to 99.6% reported in the first quarter of 2014. We reported a net investment loss of $24.8 million during the first quarter of 2015. Our overall investment portfolio managed by DME Advisors reported a loss of 1.8% for the quarter. The fully diluted adjusted book value per share as of March 31, 2015, was $30.09, a 9% increase from $27.61 per share reported at March 31, 2014.

At a recently held Board of Directors meeting, the Board approved a renewal of the Company's current share repurchase plan, which expires on June 30 of this year. The plan provides for a repurchase authorization of 2 million shares and expires on June 30, [2016]. There were no shares repurchased during the first quarter of 2015.

Greenlight Re held its Annual General Meeting on April, 29. I am pleased to report that all seven proposals contained in the proxy were approved by shareholders, including the re-election of all directors for additional one-year term. I'll now turn the call back to Bart to provide some concluding remarks.

Thanks, Tim. Our 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 flow 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 the call up for questions.

We will now begin the question-and-answer session. (Operator Instructions). Brian Meredith, UBS.

Bart, I'm wondering if you could just quickly comment on the IRS proposed PSEC regulations and whether [that'll] have any bearing at all on you all?

I'm actually going to pitch that one right over to Tim.

As I'm sure you're very aware, this reinsurance industry and in fact, the insurance and reinsurance industry as a whole, are very interested in and keeping a close eye on what the Treasury and the IRS has proposed. Fair to say that when they came out with those regulations, we were interested in what they had to say. Clearly, they're looking for a discussion and industry input on it. We are working with CRAA as members who form a response for the industry and we're going to monitor what's going on. In some respect, it was encouraging because they're talking about active insurance business and certainly with the number of people and the activity that we do in Cayman from the reinsurance perspective, it seems clear to us that those tax should not cause a problem for us. But as with everybody in the industry, we're keeping a close eye on it and providing input as needed.

So, the initial proposals at least which was outlined wouldn't be a concern but obviously keep a good eye on it.

Correct. And obviously, it's a first draft and there'll be iterations of it and we'll keep a close eye on it and provide feedbacks.

Got it. Excellent. And Bart, just curious, you mentioned medical stop losses as an area that you've been writing some more business in. I'm just curious, your thoughts around that market, how're you controlling potentially escalation here, medical cost inflation et cetera, et cetera?

This is an area of the business that we've been in for quite some time. I think we started writing it back in 2007 and in terms of the medical inflation, the numbers from a pure inflation perspective haven't been too bad. There's been -- we're more concerned I guess with our utilization as a result of new people entering the system, but the medical stop loss side of the business I don't think is that susceptible to that particular type of utilization type of trend. We have seen a growing demand for the product because there's a lot of employers who are looking for ways to opt out if you will from the Affordable Care Act and becoming a self-insured employer is one of the ways out of that. So, we have seen a growing demand, which I think is playing well for us because this is a space that we know pretty well.

Great. And then last question, Bart, can you give us your thoughts on the current state of the Florida kind of homeowners quota share market kind of what's your thoughts there? Are there any opportunities there or do you think that, that market will shrink here going forward or some of those guys maybe retain more business?

Yes, I think there'll be a couple of things happening. Number one, it will be competitive, but it's been competitive the last few years. The lack of big storms and the reduction in the catastrophe reinsurance costs have made the balance sheets for a lot of these companies more stable. So, I would expect that some of these carriers who've traditionally bought maybe will buy less. I think we're well positioned with the strategic partners that we have in that area to at least be able to compete well for the business and maybe we have a few ideas that will put us in a better position. But I would expect it'll be a fairly competitive renewal season.

Eileen Aptman, Belfer Management.

A question for Vinit. Given the view on the productivity [buzz] than the attendant pressures in unit labor costs, give us a sense of your perspective on gold?

We are still positive on gold. We consider it to be, as we have in the past, a useful hedge in our portfolio.

(Operator Instructions). Should you have any follow-up questions, please direct them to Garrett Edson of ICR at 203-682-8331 and he'll 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. You may now disconnect. Thank you and have a nice day.