Greenlight Capital Re Ltd (GLRE) 2016 Q2 法說會逐字稿

Thank you for joining the Greenlight Re Conference Call for Second Quarter 2016 Earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; and Tim Courtis, Chief Financial 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.

Good morning and thank you for joining us today. In the second quarter of 2016, Greenlight Re generated a loss from both underwriting and investing. Overall, our fully diluted adjusted book value per share decreased by 7.3% from the prior quarter-end to $21.20. Our combined ratio for the second quarter of 2016 was 119.6%. Written premiums were lower this quarter than the past several quarters due to the impact of return premium associated with the non-renewal of certain Florida homeowners' contracts that I will discuss later.

Our combined ratio was negatively impacted by two items this quarter. The first was the current period charge of $4.4 million related to the wildfires in Alberta, Canada. Our exposure to this event comes from our property catastrophe retro contracts. The second item was an increase to our general liability reserves and run-off of $19 million, which was associated with the reinsurance contract that we purchased during the quarter, generally referred to in the industry, as a loss portfolio transfer contract.

Our general liability reserves and run-offs are principally comprised of construction defect claims. Estimating the ultimate liability for these claims is proven to be difficult, and as a result, we have increased our estimate several times in the past. After several years of adverse development, we took aggressive action to put our poorly performing construction defect contracts behind us. Construction defect contracts have a long remaining period in which claims may be reported and there remains significant uncertainty on the ultimate liability associated with them.

In order to protect against further deterioration, with the assistance of TigerRisk Partners, we purchased reinsurance protection from a high-quality counterparty to transfer these liabilities to them. Transferring these construction defect liabilities enables Greenlight Re to have a specialist manage the run-off, while the Company focuses its attention on the current book of profitable business. Our exit from construction defect leaves us without significant exposure to poorly performing business for the first time in several years.

As we look across the rest of our underwriting portfolio, we don't believe there are other areas or contracts showing signs of material adverse performance. Tim will discuss more details of the contract shortly. These run-off contracts have been costly and have been a distraction to the underwriting teams. Purchase of the loss portfolio transfer allows us to put this chapter behind us and to focus on serving our clients and developing innovative ways to establish partnerships with new clients.

Turning to other parts of the underwriting portfolio, we've been a provider of quota share reinsurance for specialist Florida homeowners' company since 2007. During this time, we experienced the emergence of various fraudulent claim activities including sinkholes and water damage.

Florida Legislature eventually passed effective legislation addressing the sinkhole problem and the industry was able to regain stability. However, the more recent phenomenon of fraudulent water damage claims and abuse of what is known as assignment of benefits rights was ignored by the Legislature in 2016, resulting in increasing cost to settle claims. These higher costs have not translated into higher premium rates and thus profitability is decreasing.

At June 1, our remaining Florida homeowners contracts were up for renewal. Despite the decreasing profitability, other competitors offered discounts and wrote this business at what we believe is inappropriate pricing. As a result, we were willing to walk away as our philosophy is to prefer smaller premium volumes to an adequately priced business.

We will be prepared to support this market again when we can achieve attractive returns. Our largest business concentration, non-standard automobile continues to grow modestly due to the growth of our partners. This business makes up roughly 44% of our total premium volume and the profitability of this business continues to be in line with our expectations.

One part of the portfolio that we are growing is US mortgage reinsurance. We've been establishing relationships with several of the US private mortgage insurers and are providing quota share reinsurance on their more recent vintages of mortgages. This business will roll on to the book slowly, but the expected profitability on these transactions is higher than on much of our existing portfolio.

Overall, our in-force book of business continues to perform well and produce underwriting profits and adequate risk adjusted returns. Without the noise from reserve adjustments associated with the contracts and run-off, I expect our underwriting results to be more stable at a profitable level going forward.

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 minus 3.4% in the second quarter bringing the year-to-date return to minus 1%. In July, the investment portfolio returned 4.8%, bringing the year-to-date return to positive 3.9%. Our biggest detractors to performance in the quarter were two short positions, an oil fracker that we have not disclosed and Amazon.

We continue to be short oil frackers, which are near priced as where we originally shorted them, even though oil prices are considerably lower. Our long positions in Apple and Macy's both fell in the quarter. Our long-term thesis on Apple remains intact. Apple is one of the most valuable global brands with a recurring revenue stream and a shareholder-friendly capital return program. We sold Macy's after the company announced a significant reduction in 2016 earnings guidance, which was not consistent with our investment thesis.

Our biggest winners in the quarter were CONSOL Energy and gold. CONSOL rose 43% in the second quarter, fueled by rising natural gas prices and continued strong operating performance. We added to our position CONSOL in late 2015 when the stock was trading and we viewed it to be a material discount to its asset value, although we've trimmed the position, as the prices begun to recover, it continues to be a top five long position.

Gold and gold miners continued to rally in the second quarter as central bankers used the British exit as an excuse to extend accommodative monetary policies. In our view, Brexit is not a significant global macroeconomic event, yet the Federal Reserve used the event to signal that tightening is on hold.

We continue to be conservative on our overall net exposure, although we used the dip caused by Brexit to cover some shorts and became a bit more long at the end of the quarter. We ended June at 25% net long, up from 18% net long at the end of March.

During the quarter, we added to our position in Chemours, the 2015 DuPont spin-off that produces chemicals such as titanium dioxide and refrigerants. We started buying the stock when the share price fell along with the price of titanium dioxide. Chemours should benefit from a continued recovery in titanium dioxide prices and from EU regulations that are driving adoption of Chemours next-generation refrigerant Opteon.

We expect management will reduce costs and shutter unprofitable businesses. We remain excited about all of our top long positions including a new position in a European healthcare company that we are not identifying at this time. AerCap, Apple and GM are all fundamentally executing in buying back stock in mid-digit P/E multiples, net of cash.

We believe Time Warner has incredibly valuable independent media content assets and trades at a discount to its industry peers; and although CONSOL has recovered some of the ground lost in 2015, we believe there is significant unrealized value in the assets that the company holds. We remain short fundamentally challenged companies including Athenahealth, Caterpillar, the oil frackers and our bubble basket. Even though the reinsurance sector continues to prove challenging, I am pleased with the progress we've made.

The loss portfolio per transaction that Bart described allows us to move forward without the distractions the team has experienced over the last several years. With our commercial automobile exposure largely behind us, and now with the solution in place for our construction defect business, we don't believe there are other areas showing signs of material adverse performance. The team can focus exclusively on serving our clients and finding new opportunities. Now I'd like to turn the call over to Tim to discuss the financial results.

Thanks, David. For the second quarter of 2016, Greenlight Re reported net loss of $63 million compared to a net loss of $39.6 million for the comparable period in 2015. Net loss per share was $1.69 for the second quarter of 2016 compared to a net loss of $1.06 in the prior year period. For the six months ended June 30, 2016, we reported a net loss of $34.3 million compared to a net loss of $63.6 million for the first six months of 2015.

Net loss per share was $0.92 for the six months ended June 30, 2016 compared to a net loss of $1.71 per share for the same period in 2015. Gross premiums written during the second quarter of 2016 were $92.2 million compared to $93 million during the second quarter of 2015. As Bart mentioned, during the quarter, we did not renew certain Florida homeowners' contracts, and as part of those non-renewals, we returned approximately $27 million of premium related to the unearned portion of this business. As such, our premiums written for the quarter were lower than originally expected.

Gross premiums written were $259 million for the first six months of 2016, an increase of approximately 16% in gross premiums written of $222.7 million for the first six months of 2015. The increase in premiums written is primarily a result of the new mortgage insurance business, which includes a sizable incoming unearned premium component. Additionally, increased premium on our non-standard automobile business was written as our existing partners continue to grow their businesses.

Net earned premiums for the first six months of 2016 increased by approximately 41% to $263.7 million when compared with premiums earned during the same period in 2015. The significant increase in earned premiums is a result of our higher premiums written during 2015 and to a lesser extent the premium increases reported to date in 2016. During the quarter, we reported an underwriting loss of $24.5 million. As Bart mentioned, $19 million of this loss related to the impact of entering into a loss portfolio transfer contract with a run-off specialist company.

With effect from April 1, this loss portfolio contract retrocedes future loss and loss expense payment under our existing construction defect business, which is in run-off and provides us with an additional $58.5 million of coverage beyond currently booked reserves. This coverage provides protection above the high point in the range of actuarial estimates. As we detailed in our earnings press release, our historic underwriting results have been negatively affected by a significant amount from three relationships that provided general liability and commercial automobile coverages.

While these contracts remain in run-off, we believe the loss portfolio transaction provides sufficient coverage to protect the ultimate losses on our construction defect book. Our commercial automobile book is now down to a very small number of claims and without the ability for further claims to be reported, we believe we are fully reserved for our business in run-off.

Also, as we pointed out in the earnings press release, our inception to date underwriting results for all businesses apart from three problematic transactions is running as expected as we have reported an overall composite ratio of 90.9% on this business. The resulting composite ratio for our frequency business for the first six months of 2016 was 105.5% compared to a composite ratio of 106% during the comparable period in 2015.

Loss portfolio transaction added approximately 8 points to our frequency composite ratio. For our severity business, our composite ratio was 97.6%. The current period reserves booked for the Canadian wildfires adding approximately 22 points to the year-to-date severity composite ratio. It is worth noting that for our property catastrophe aggregates, our maximum exposure to a single event is currently $156.7 million and our maximum exposure to all events is $217 million. These cat aggregate exposures are down just under 10% from last quarter, primarily due to us not renewing our Florida homeowners' contracts.

Overall, our composite ratio for the first half of 2016 was 104.8% compared to 102.2% for the comparable period in 2015. Total general and administrative expenses incurred during the first half of 2016 increased slightly to $12 million compared to $13.1 million incurred during the prior year period.

Underwriting expenses of $8 million for the first six months of 2016 were in line with our expectations when compared to $7.8 million incurred in 2015. This gives rise to an underwriting expense ratio for the first six months of 2016 of 3% and a combined ratio of 107.8%. Our corporate expenses of $4 million for the first six months of 2016 compares to $5.3 million reported during the same period in 2015 with the reduction being attributable to certain non-recurring professional fees incurred in 2015.

We reported a net investment loss of $38.1 million during the second quarter of 2016, reflecting a net loss of 3.4% on our investment portfolio. For the first six months of 2015, we reported a net investment loss of $9.6 million reflecting a net investment loss of 1%. Fully diluted adjusted book value per share as of June 30, 2016, was $21.20, a 27.1% decrease from $29.07 per share reported at June 30, 2015.

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

Thanks Tim. On the personal front, our Chief Actuarial Officer, Jim McNichols has decided to leave the Company at the end of August and return to his consulting practice. During his time with us, Jim provided leadership to our talented actuarial staff and he was instrumental in helping us integrate our actuarial pricing team into the underwriting groups. I thank Jim for his service and wish him well with his future endeavors. We'll be reevaluating the role of Chief Actuarial Officer and we'll report back to you in the next quarter with our plans.

In the interim period, I will assume the role of Chief Actuarial Officer in addition to my current role. We are fortunate to have a deep bench of actuaries in the Company, which makes me comfortable during this transition period. Our goal at Greenlight Re is 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'll continue to execute on this 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.

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

(Operator instructions) Bob Glasspiegel, Janney.

Question on how the rating agencies, particularly A.M. Best view the actions you've taken -- I mean sometimes, they like these sort of things because you're putting the problem behind you, in other terms, they are sort of just catching up to the news flow. I assume, they've been up to speed on the issues to date and any sense on their reaction would be appreciated?

Yeah, hi Bob, it's Tim Courtis. Certainly, we keep an open dialog with the A.M. Best as we do with regulators in any other of our constituents. We've had continued conversations with them. Certainly, this transaction will not be a surprise to them. They recognize and certainly understand that, we've had these three problem contracts. This should put the problems behind us and we demonstrate to them continually how our current book is performing well and we believe that keeping that dialog open should not surprise them and therefore we don't expect any adverse reaction from them.

Could you tell me the nature of the three clients? Do you have a lot of other relationships with them, were they regional or smaller names?

Bob, this is Bart. These contracts go back to as far back as 2007 and the one that finished most recently, we terminated in 2011. Two of the relationships or actually all three of the relationships included MGA produced business, two of them were included GL and one of them was both GL and commercial automobile.

The oldest one of the three was the commercial automobile exclusive MGA and we were partnering with these producers mainly on fronting carrier paper and the relationships -- they started off in sort of the -- in our wheelhouse in terms of the kinds of business that we wanted. But for various reasons, they got off track, as we spotted them getting off track, we got off the business.

The business that's caused us the most problem has been this construction defect business and that started to emerge about two to two-and-half years ago and we've been spending a lot of time trying to get our hands around it and that's what really caused us to have to increase reserves materially, a few times, there in 2014 and into early 2015.

So we're happy to get this loss portfolio transaction behind us because the commercial automobile business is down to just a handful of claims. The construction defect still has close to five years to have newly reported claims. We felt like with that amount of uncertainty and our track record with the business it just made sense to try to get this deal done and put it behind us.

I agree with that. And last year, you mentioned that casualty clash sub-prime event, little more color on that from the [Q] disclosure?

That was the deal that we did back in 2007. We have had some reports and notifications of claims to be covered was an excessive loss contract and were aware of some claims below the attachment point as well as some claims that were into the attachment point and we had it reserved partially through the layer. And then during the quarter, we were notified of claims being paid through the layer. We verified that those payments were made and then we had to put up the additional $3 million of reserves. But that contract is done. It hit the limit, there's no other exposure at this point. I think that closes our experience on sub-prime as far as I know.

Brian Meredith, UBS.

Couple of questions here. One, Bart, could you tell us what is the total limits you have left exposed on the construction defect business?

(Multiple Speakers). These were quota shares of the MGAs and then of the fronting carrier paper, those contracts did not have a limit on them. So, that was part of the reason we were thinking about, that we wanted to get this coverage in place, to be able to buy out what we thought was the reasonable amount -- or the reasonable amount of exposure left on the contract.

So, it means the point being is -- is it, you do have exposure over and above the $56 million of coverage -- whatever that you have?

Yes, it is $58.5 million of coverage above where we are. The range of estimates that we saw both from our internal analysis, from some external help that we had as well as the respondents from the market, obviously we went to multiple companies -- are all well contained within the limit that we have. We feel pretty comfortable that it would be very remote for it to come back to us. It is theoretically possible, but we really feel like we've gotten it all with the amount of limit that we purchased.

And then you talked about getting off the Florida homeowners' business because of the assignment of benefits exposure, how much kind of residual exposure do you have to assignment of benefits going forward here, potentially have adverse development on?

So, in playing, I'll call it playing Florida over the last couple of years, the assignment of benefits issue started to emerge as much as two years ago. We started to decrease our exposure to counterparties at that point. So the run-off of the contracts that are still -- they're still working their way through the reserving system, has been decreasing in the more recent years.

I can't give you an exact figure on those. I know that those contracts are capped. We've been on top of it each quarter and I don't think there is anything hugely material there, but those contracts will run-off over the next, probably three to four quarters would be the vast majority of it.

And then lastly just a quick numbers question, you mentioned with the mortgage insurance quota share that you entered into, you had a UEP coming in. What was that dollar figure?

Tim here, Brian. I don't have that number in front of me, I can certainly give it to you.

(Operator Instructions). 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. This concludes today's call.