Greenlight Capital Re Ltd (GLRE) 2016 Q1 法說會逐字稿

Thank you for joining the Greenlight Re Conference Call for First Quarter 2016 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. 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 joining us today. In the first quarter of 2016, Greenlight Re generated a profit from both underwriting and investing. Overall, our fully diluted adjusted book value per share increased by 3.2% from the prior quarter end. Our combined ratio for the first quarter of 2016 was 97.3%.

Written and earned premiums continued to grow due to retaining quality business and selectively adding new business. In the first quarter of 2016, we generated $166.8 million of written premium and $138.1 million of earned premium compared to written and earned premium for the first quarter of 2015 of $129.7 million and $94.8 million respectively.

Our four core areas, non-standard automobile, Florida homeowners, employer stop loss, and property catastrophe retro represent 78% of the earned premium for the quarter and generated a composite ratio, which is the loss ratio plus the acquisition cost ratio of 94.4%. Composite ratio for entire book of business was 93.8% for the quarter. Our loss reserves were generally stable this quarter.

There were no significant property catastrophe events in the quarter and thus our catastrophe retro count continues to perform well. With respect to our property catastrophe aggregates, our maximum exposure to a single event is currently $166.7 million and our maximum exposure to all events is $236.7 million.

Largest segment of our underwriting portfolio is non-standard automobile. This business continues to perform in line with our expectations, and the underlying rate environment is favorable, with rates increasing in excess of underlying loss trends. Our casualty business has grown and is now approximately 15% of the overall portfolio. This business consists of professional liabilities like D&O and E&O, medical malpractice, hospital professional liability and employment practices liability. While the reinsurance pricing environment for this business is competitive, we believe the underlying loss trends are stable at a profitable level.

Our Florida homeowners' book shrunk in 2015, and the renewal period for these accounts is approaching at June 1. Insurance fraud in Florida is always high, and the current spike in fraudulent water damage claims known as the assignment of benefits issue is the most recent example. There was no progress made to address this threat to the insurance industry during the most recent meeting of the Florida Legislature, and as a result, the underlying rates need to increase significantly in order for this business segment -- this segment of our business to remain attractive for us. If we do not believe the underlying profitability of these accounts justifies our risk capacity, we expect to reduce this segment of our book further.

Our customer-centric underwriting strategy, speed of execution and innovative ideas continue to differentiate us in a highly competitive environment. The team is working well, and we are selectively adding underwriting and business production talent to the team. I'm pleased with the overall progress and believe we are well positioned for the rest of the year.

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 returned 2.5% in the first quarter. During the quarter we made money on longs, shorts and macro positions. We had a few significant winners during the quarter. CONSOL Energy gained 43%; the Company announced further successful drilling results, an improved cash flow profile, and a $420 million sale of its met coal assets. Michael Kors Holdings beat earnings expectations for the third quarter in a row, and the shares rallied 42%. Our thesis that Kors is not a fad but a fundamentally healthy brand is playing out. Earnings estimates are rising, and the stock still trades at just 11 times earnings when you back out the net cash position. Stock is cheap on an absolute basis and trades at a large discount to similar branded consumer goods companies.

Our bubble basket of shorts fell 13% during the quarter, as investor sentiment shifted away from momentum in January and February and investors were less forgiving of earnings disappointments. We actively trade and update the basket composition, and during the quarter we covered a few positions, including Mobileye and Viva.

Gold was up 16% in the quarter as the ECB announced a kitchen sink policy, the Bank of Japan announced negative interest rates and the US Fed reduced its forecast for future rate hikes. These increasingly aggressive and counterproductive monetary policies are bullish for gold.

Our two biggest performance detractors for the quarter were Resona and SunEdison. Resona Bank shares fell 32% on the DOJ's implementation of the negative rates. Although negative rates present a headwind to all Japanese financials, Resona trades at just 60% of its book value, which we believe is too low for a bank earning a double-digit ROE without a credit or capital issue.

SunEdison collapsed during the quarter and filed for bankruptcy subsequent to quarter end. Unfortunately, we underestimated the fragility of the situation; we are very disappointed with the outcome.

During the quarter, we found a few new long positions in mortgage REITs American Capital Agency and Hatteras Financial, the global apparel company PVH Corp, natural gas and Yelp. In our current portfolio, we're both bullish and bearish. We're bullish on companies that trade at low multiples, have a higher margin of safety and are fundamentally executing, as we've seen from the excellent quarterly results from CONSOL Energy, Michael Kors and GM.

We continue to own Apple, which has traded down to a single-digit PE of a bear case earnings. We believe there is tremendous value in Apple's brand and growing global customer base that periodically buys new devices and increasingly buys additional services.

We're bearish on companies that are fundamentally challenged in pricing and a good bit of hope for the future. These include the oil frackers, heavy equipment manufacturers, our bubble basket of shorts and individual company specific shorts. We generated a good underwriting result during the quarter. I just returned from our Board meeting in Cayman, where we spent time discussing the 2016 underwriting plan and our strategic direction. During the difficult 2015 we experienced -- despite that, the team is energized, and the first quarter of good results in a volatile environment sets Greenlight Re on the right path to an improved to 2016 performance. I look forward to seeing everyone next Thursday at Greenlight Re's bi-annual meeting.

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

Thanks, David. For the first quarter of 2016, Greenlight Re reported net income of $28.7 million compared to a net loss of $24 million for the comparable period in 2015. The fully diluted net income per share was $0.77 for the first quarter of 2016 compared to a net loss of $0.65 per share for the same period in 2015. As Bart described, the gross premiums written for the first quarter of 2016 increased by 28.6% from the prior year period. Net earned premiums increased by approximately 45.7%, primarily as a result of the earning out of the higher premiums written that were booked last year.

Composite ratio for the first quarter of 2016 was 93.8% compared to 95% during the comparable period in 2015. The composite ratio for frequency business for the quarter was 96.7% and it was 56.2% for severity business. General and administrative expenses incurred during the first quarter of 2016 increased slightly to $7 million compared to $6.2 million incurred during the prior-year period, primarily a result of higher compensation expenses incurred.

Since our inception, we have included all G&A expenses in our calculation of our expense ratio. This methodology was different from most of our peer reinsurance companies, as most reinsurers make an allocation of expenses and assign them to underwriting expenses for purposes of calculating an expense ratio. In an effort to make our reported expense ratio and resulting combined ratio more comparable with our peers, we have started to allocate expenses to underwriting for purposes of calculating our reported combined ratio. We have revised prior-year period expense and combined ratios to reflect this change. As a result, our underwriting expense ratio for the quarter was 3.5%, with the resulting combined ratio being 97.3%, which is 1.6 points lower than our -- than under our prior methodology. We reported net investment income of $28.4 million during the first quarter of 2016, representing a return of 2.5% on our investment portfolio managed by DME Advisors.

The fully diluted adjusted book value per share as of March 31, 2016 was $22.88, an increase of 3.2% for the quarter and a decrease of 24% from $30.09 per share reported at March 31, 2015. At our 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, 2017. There were no share repurchases during the first quarter of 2016.

Greenlight Re held its Annual General Meeting on April 27, 2016. 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 terms.

Now I'd like to 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 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 the strategy and remain focused on driving our key yardstick, increased and fully diluted book value per share. We appreciate your continued confidence in Greenlight Re.

We're looking forward to hosting our fifth Biennial Investor Day on May 12 at 4:00 PM at the French Institute Florence Gould Hall at New York City. The program will consist of a formal presentation and Q&A session followed by cocktail party. To RSVP or for more information regarding the event, please contact Garrett Edson at ICR. 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, just curious, you gave us some cautionary comments with respect to the Florida homeowners market, yet your growth in the quarter came from a new property kind of quota-sharing homeowners. Can you explain what that is -- is it not Florida?

Yes, Sorry. We actually wrote a non-Florida homeowners account at 1.1 that would have had some written premium and earned premium in the quarter, so the Florida exposure would have remained pretty stable during the quarter. But as to my comments, we are expecting kind of a difficult renewal here, and if things don't go the right way, we would expect to reduce our capacity if the risk doesn't -- or if the return doesn't measure up with the risks we're taking.

Great, thanks. And then the second question, I'm just curious -- on the A.M. Best negative outlook, I know it happened way back on October, have there been any opportunities from a new business perspective that you may have thought you may have been able to get, but because of the negative outlook you haven't been able to get? And then also on top of that, how long do you think it will take for them to conclude their kind of the outlook negative and maybe it can stabilize the rating?

Right, so I'll address those in reverse order. So when we were first put on negative outlook and confirmed the A rating in October of last year, and the discussions with A.M Best at the time was that it would be probably one-year to two-year cycle and that the -- that they had no plans to look at the rating until our next annual period, which will be October this year, unless there was anything significantly positive or negative, and there hasn't really been anything significantly positive or negative. So we remain A rated with the negative outlook.

And then as to, I guess, market realities of the rating, as you mentioned, it's been a little while and we've gone through the 1.1 period and several other renewals. There's been very limited problems with respect to renewing business, the most rating sensitive portion of our portfolio is the longer tail casualty business that we started to accumulate sort of end of 2014 and throughout 2015; and certainly at 1.1, it was much more challenging to find new business there. Renewals went along pretty well, but the rest of the portfolio is just not very -- it's not that rating sensitive. A lot of this business we had when we were an A minus company, the non-standard automobile, homeowners, employer stop loss, especially those who are just not that rating sensitive, so it had limited effect on all of those.

Great, thanks. And then, David, I'm just curious -- in April, down a little bit on your investment results, can you discuss what your thoughts are for the market here for the rest of the year? What are the problems right now in picking stocks?

Yes, the April result was very nearly -- was down a fraction of a percent. We had a few good things that were going on in April. I think CONSOL Energy was good, I think gold was good, I think Time Warner was good, I suspect that GM was good. And we had some trouble in Apple. We had a little bit of trouble in a couple of the shorts, particularly in the bubble basket related areas and in the oil frackers, and so the month itself netted out to a small negative.

In terms of the overall outlook for the portfolio, I think it's very, very hard to forecast results on a periodic basis. I think what we do here is we assemble a portfolio that we think makes sense, mostly from the bottoms up with a little bit of top down. And we expect that over time that this is going to generate a good risk adjusted return. In terms of how we're positioned right now, we're probably long consumer both in places like GM and also Kors and Macy's and Dillard's and PVH, which is a new position that I think we just wrote about in yesterday's quarterly letter.

And on the short side, we're short a bunch of cyclical stuff that's rallied a lot, including oil frackers and some equipment companies and so forth, that -- it's not clear how great a recovery there actually is for those businesses, but some of those stocks have really moved a good deal and I would look for some of those things to revert as we get through the next period, where eventually the rubber needs to meet the road in terms of the expectations crashing into the realities of the Company's earnings.

Great. Thanks for the answers.

(Operator Instructions) Seeing no further questions, 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 your lines. Have a great day.