Greenlight Capital Re Ltd (GLRE) 2015 Q4 法說會逐字稿

Thank you for joining the Greenlight Re conference call for fourth-quarter and full-year 2015 earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; Brendan Barry, Chief Underwriting Officer; and Jim McNichols, Chief Actuarial 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 22, 2016 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 joining us today. In the fourth quarter of 2015, Greenlight Re generated an underwriting profit before general and administrative expenses of $6.8 million and a $45.5 million loss on our investment portfolio.

Overall our fully diluted adjusted book value per share decreased by 4.8% in the quarter and decreased by 27.9% for the year to $22.17. In the earlier part of the year, our 2015 underwriting results deteriorated primarily due to adverse reserve development on certain legacy general liability contracts and run off. During the fourth quarter, the claims emergence and settlement on these contracts is in line with our expectations, and no changes were made to these reserves.

Our combined ratio for the full year 2015 was 111.8% compared to 103.6% for the prior year. And combined ratio for the fourth quarter of 2015 was 98.5%. Our written and earned premiums continued to increase due to a combination of growth in our renewal portfolio as well as business from new clients.

During 2015 we redoubled our efforts to target new business, working with brokers to find appropriate opportunities that meet our return hurdles. Historically we have focused on a small number of large deals in the portfolio, and we continue to target large deals. However, throughout 2015 we also targeted new business with large carriers that purchased reinsurance across the wide range of lines of business.

Initially we focused on developing these new relationships and then on expanding them. This proved to be successful, as a good deal of the new business growth came from multiple transactions with a new partner. Our premium is still heavily concentrated in a small number of large deals, but the portfolio is becoming more diversified and we intend to continue targeting new business in this fashion.

Most of the underwriting activity in the quarter relates to business incepting on January 1, 2016. While the market remains competitive in all lines of business, we were pleased with our success during this peak renewal time. We renewed slightly less long-tail casualty business, but we gain new business in areas like northeast homeowners, employer stop loss, and mortgage insurance.

We renewed our property catastrophe retro accounts at terms and conditions similar to the expiring terms and conditions. While the underlying rates for property catastrophe continued to deteriorate, we still believe we are receiving an adequate price for the risk and that we are supporting some of the most disciplined underwriters in the market. Overall, we are pleased with the start of 2016.

There were no significant property catastrophe events in the quarter, and thus our catastrophe accounts continued to perform well. With respect to our property catastrophe aggregates, our maximum exposure to a single event is currently $165.4 million, and our maximum exposure to all events is $236.3 million.

2015 was a challenging year for the Company, but I am pleased with our overall progress. Despite the competitive market, we are winning new business and retaining our existing partners. The team is focused on continuing new business momentum into 2016 and expanding our existing partnerships.

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 4% in the fourth quarter, bringing the full-year return in 2015 to negative 20.2%. The short portfolio was responsible for most of the loss in the quarter. The environment continued to be unfavorable for our value style, though sentiment seems to shifted so far this year.

In the fourth quarter we initiated new long positions in Macy's, Mylan, and a European utility company, E.ON, all of which trade at single-digit PEs of expected earnings. Our notable exits include our long positions in Micron, Bank of New York, and Applied Materials, and we covered our short position in ARM Holdings.

We lost 17.2% of our long portfolio last year. We had three long positions that cost over 3% each: CONSOL Energy, Micron Technology, and SunEdison, which detracted a combined 14.9%. It's rare for us to have these three losers of this magnitude in a single year, and this is only our second year along with 2008 when this has been the case.

We also had a lack of winners to offset our losers and had our worst year by far in this regard. All of our winning positions in 2015 added up to a 19% gross investment return. The second worst year in our history was 31% and our 20-year average is 51%.

Many of the stocks in our portfolio had relatively solid fundamental performance last year, but went unrewarded. We hope this trend reverses in 2016. We believe that strong balance sheets and more multiples of cash flow and earnings are ultimately appreciated by market participants over time.

We maintained conservative positioning through the course of the year, averaging 21% net long exposure. As the year progressed, we saw that the environment was becoming increasingly unfavorable for our style; we reduced our gross exposure by 35 points. We maintained a significant short exposure, and despite being short several momentum driven stocks, the short book was up 0.4% for the year.

We entered 2016 with 16% net exposure, the lowest we've entered any year. The Greenlight Re investment portfolio returned 1.2% in January, while the S&P 500 fell about 5%. Our shorts have been helpful, and returned 7% in January.

We started to see some reversion in the market in January and February. As the markets have sold off we've become a little more net long as our shorts have fallen in value, and we've found a few things to buy.

In the long portfolio we continue to own well-positioned cash-rich companies, including Apple and GM, who are taking advantage of low stock prices to buy back shares. In both cases, fears of a slowdown in China have contributed to stock price declines so far this year, and the shares of both companies trade at single-digit multiples.

AerCap Holdings is our biggest loser in January, it's an aircraft leasing company that is exceptionally well managed and is growing earnings. We think this stock has been unduly punished by concerns over a slowdown in emerging markets in China in particular, and the stock is now trading at a mid-single digit multiple.

We are excited about the prospects for Consol Energy, as we expect the price of natural gas to recover significantly over the next year as natural gas producers have dramatically slowed drilling. Consol is one of the lowest cost producers of natural gas, and its stock price should have leverage to higher future gas prices.

Currently market participants seem to be concerned about a global slowdown and are losing faith in central bankers. The US economy is challenged due to the strong dollar and beaten-down energy sector, and policy makers have very little room to maneuver in the event of a real downturn.

On the bright side, the US consumer may come to the rescue as we are nearing full employment, wages are slowly rising, and there is an effective tax cut in the form of low energy prices. It remains to be seen whether the US consumer will provide support for corporate earnings, and if not at least we hope they buy iPhones, GM cars, and Michael Kors bags particularly at Macy's.

We remain short, a bubble basket of momentum stocks that seem disconnected from traditional valuation metrics, which is our biggest winner so far this year. We are short oil frackers, whose stock prices are finally starting to reflect their challenged business models.

We are short heavy equipment manufacturers, where bulls are assuming the current commodity environment is an ordinary cyclical downturn. We believe it is the end of a commodity super cycle, and this will exert a long period of earnings headwinds for these companies.

We continue to be conservatively positioned at 26% net long as of January 31. We're holding a bit of cash, and have the flexibility to be opportunistic as equity and distressed credit opportunities emerge.

I just came from a two-day Board meeting in Cayman, and I was pleased with our underwriting progress in 2015 and the new business written to date for 2016. While we experienced a difficult 2015 on a number of levels, we are encouraged by our recent performance and our current portfolio.

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

Thanks, David. For the fourth quarter 2015 Greenlight Re reported a net loss of $43.1 million, or $1.17 per share, compared to net income of $60.7 million, or a gain of $1.60 per share for the comparable period in 2014. For the full year we reported a net loss of $326.4 million and a loss per share of $8.90, compared to net income of $109.6 million and earnings per share of $2.89 in 2014. Gross premiums written were $144.9 million during the fourth quarter of 2015, compared to $74.3 million for the fourth quarter of 2014.

For the year ended December 31, 2015, gross written premiums increased by approximately 55% over 2014 to $502.1 million. This was driven by growing our renewal business from existing partners and the successful addition of new client relationships. During the fourth quarter of 2015, our composite ratio was 94.3%, which compares favorably with a composite ratio 106.1% reported during the previous year.

For the full year, our frequency business reported a composite ratio of 110.6%, compared to a composite ratio of 101.1% during 2014. Adverse development on prior-year reserves of 12.3 points was the primary reason for the increase in the frequency composite ratio. For severity business the composite ratio was 44.7% for 2015.

Overall our composite ratio was 106.1% for 2015, compared to 96.7% for the prior year. Our total G&A expenses for the year totaled $23.4 million, which is approximately $1 million less than the prior year, resulting in an expense ratio of 5.7% in 2015. As a result, the combined ratio for the full year 2015 was 111.8%, compared to 103.6% for 2014.

We reported a net investment loss of $45.5 million during the fourth quarter of 2015, reflecting a net loss of 4% on our investment accounts. For the full year we reported a net investment loss of $281.9 million, reflecting a loss of 20.2%. The fully diluted adjusted book value per share as of December 31, 2015, was $22.17, a 27.9% decrease from $30.76 per share reported at December 31, 2014.

I'd now like to turn the call back over to Bart for 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 slope generated from these contracts to invest in our value-oriented long-short investment program. This investment approach has historically generated superior returns with less volatilities in 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. We are looking forward to hosting our fifth biennial investment day on Thursday, May 12 at the French Alliance, located at 55 East 59th Street in New York City at 4 PM. We will be sending out invitations shortly. Anyone who is interested may RSVP to Rory [Ramore] at ICR at 203-682-8260.

Thank you again for your time, and now we would like to open up the call to questions.

(Operator Instructions)

Brian Meredith, UBS.

Yes, thanks. Bart, I was hoping you could give us the latest updates as far as discussions with rating agencies and potentially a resolution of the negative watch?

Sure. We've been -- as always we are tracking capital and capital usage internally based on our corporate model as well as rating agency capital models. And we continue to feel like we're more than adequately capitalized.

We have been in fairly frequent dialogues with the rating agencies, and at this point feels like everything is in good shape. We were told by them when we were put on negative outlook back in October that it would be -- it would probably be the year and it might be a little bit more than a year. So we need to be patient and we need to continue to work the plan, improve our underwriting results, and continue to monitor overall capital.

Got you. And I guess just curious, because of the watch is that why you aren't in the market buying back stock? I mean your stock was trading below net asset value for a while in fourth quarter.

Well there is certainly a certain aspect to that, we want to be careful, make sure we have enough capital to keep the rating agencies comfortable. But we also want to be watching it in terms of all other constituencies, such as clients, brokers, et cetera. But that did play a big part in it.

Great, thank you.

(Operator Instructions)

And showing no questions, we will conclude the 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.

We thank you for attending today's presentation. You may now disconnect your lines.