Greenlight Capital Re Ltd (GLRE) 2016 Q4 法說會逐字稿

Thank you for joining the Greenlight Re conference call for the fourth quarter and full-year 2016 earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Brendan Barry, Chief Underwriting 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, 2017 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 2016, Greenlight Re generated an underwriting profit before general and administrative expenses of $5.1 million and a $52.9 million gain on our investment portfolio. Overall, our fully diluted adjusted book value per share increased by 6.1% in the quarter and increased 5.5% for the year to $23.38. Our combined ratio for the fourth quarter of 2016 was 99% compared to 97.7% for the prior year period.

For the full-year 2016, the combined ratio was 103.6% compared to 110.3% for the prior year. Our premiums written and earned continue to increase due to a combination of growth in our renewal portfolio as well as business from new clients. This growth is encouraging as we faced headwinds during the year not only from the ongoing competitiveness of the reinsurance industry with continued pressure on both pricing and terms, but also from the ratings downgrade in the fourth quarter of 2016.

During the year, we experienced relatively small losses from property catastrophe events namely the Canadian wildfires in May and from Hurricane Matthew in October. Combined for both events, we have booked approximately $4.5 million in losses. With respect to our property catastrophe aggregates, our maximum exposure to a single event is currently $196.2 million and our maximum exposure to all events is $229.9 million. As we reported in previous quarters, we have continued to expand our client and broker network and entered additional lines of business such as mortgage insurance, which we believe provide attractive risk-adjusted returns.

We did not lose any of our existing clients despite the downgrade and we are very pleased with the results of our January 1 renewals demonstrating our strong client relationships and value-added. We are seeing certain signs that the pace of rate reductions and loosening of terms in general is slowing, and while the reinsurance market remains extremely competitive, we believe there may be the [overly] beginnings of more discipline in the market. Our underwriting team has performed well over a challenging period and we look forward to the rest of the year as we continue to grow and diversify our business relationships. 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 5% in the fourth quarter bringing the 2016 full-year return to 7.2%. Our long portfolio added 9.2% in the quarter while the short portfolio detracted 3.2%. General Motors was our biggest winner during the quarter, the company reported the third quarter in a row that exceeded investor earnings expectations and later raised guidance to over $6 of earnings per share for 2017. However, GM continues to get very little credit for its robust operating performance. The bears continue to believe that the peak in the auto cycle is upon us and that autonomous driving poses an existential threat to GM's business. We think the current cycle could go further especially as employment strengthens and translates into higher wages. We significantly increased our GM position during the quarter. GM is the second lowest multiple company in the S&P 500 index trading at about six times earnings with a very strong balance sheet. Last year, GM repurchased 5% of its outstanding shares.

Resona Holding, the largest Japanese regional bank was our second biggest contributor during the quarter. The stock rallied in the fourth quarter along with the entire financial sector after the US election and interest rates climbed globally and yield curves steepened. Management continues to make progress cleaning up its balance sheet and is poised to announce an improvement in capital return policies in the next year. Even with the strong recent performance, Resona currently earns a 10% ROE and trades at approximately 90% of book value and nine times earnings.

Chemours was a significant positive contributor for the second consecutive quarter as the company continued to make progress on cost reductions and adaptation of its next generation refrigerant Opteon outpaced expectations. In 2016, Chemours stock price more than quadrupled and was our second biggest winner. The company recently exceeded earnings expectations and guided to over $1 billion of EBITDA in 2017. We believe Chemours will exceed consensus earnings of about $2 in 2017 and $3 in 2018.

Gold was our largest attractor during the quarter as the price gave back two-thirds of the gains from the first three quarters of the year. While rising interest rates were most responsible for the decline, our long-term outlook remains bullish. The new administration comes with a high degree of uncertainty and its policy initiatives appear to be focused on stimulating growth and with it inflation. The investment portfolio declined 0.5% in January. At month-end, the portfolio was [approximately 103% long and 69% short, yielding a net exposure of 35%]. That's about 8% higher than where we began the year as we had gains on longs and are selectively added to our long portfolio.

Our underwriting results for the year improved from the prior year despite the difficult environment, but we're still not as good as we like. The entire underwriting loss related to the financial commutation of our legacy construction defect business. We are hopeful that our results will improve and the ongoing book is not showing signs of deterioration. This is the last conference call that Bart will lead. I want to thank him for his partnership during the last 11 years, helping build Greenlight Re and leaving a strong foundation for the future. We're in the process of recruiting our next leader and hope to conclude the process in the next few quarters. Now, I'd like to turn the call over to Tim to discuss the financial results.

Thanks, David. For the fourth quarter of 2016, Greenlight Re reported net income of $49.2 million or $1.31 per fully diluted share compared to a net loss of $43.1 million or a loss of $1.17 per share for the comparable period in 2015. For 2016, we reported net income of $44.9 million or $1.20 per fully diluted share compared to a net loss of $326.4 million or a loss of $8.90 per share in 2015.

Gross premiums written were $148.8 million for the fourth quarter of 2016, representing a 2.7% increase over premiums written in the fourth quarter of 2015. For the year ended December 31, 2016, gross written premiums increased by 6.8% over 2015 to $536.1 million. As Bart mentioned, this was driven by growing our renewal business from existing partners and the successful addition of new client relationships. During the fourth quarter of 2016, our composite ratio was 96.3% compared with a composite ratio of 94.4% reported during the previous year.

For the full-year, our frequency business reported a composite ratio of 102.3% compared to a composite ratio of 110.6% during 2015. Adverse development on our prior year construction defect reserves of 3.7 points for 2016 and 12.6 points for 2015 was the primary reason for the higher than expected frequency composite ratio in both years. As we discussed previously, during the year we novated our construction defect business and we believe that we will not experience further deterioration from this line of business.

For severity business, the composite ratio was 78.6% for 2016, which was higher than the previous year due to small losses experienced on Canadian wildfires and Hurricane Matthew. Our overall composite ratio was 100.4% for 2016 compared to 106.1% for the prior year. Our general and administrative expenses for the year totaled $25.8 million, which is approximately $2.4 million higher prior year.

Underwriting expenses of $16.6 million were higher than $14.7 million for 2015 primarily as a result of higher accruals for quantitative bonuses due to the positive performance of our 2013 underwriting year and to a lesser extent on increased IT costs. The underwriting expense ratio for the year was 3.2% resulting in a combined ratio for the year of 103.6%.

Our corporate expenses during 2016 of $9.2 million compared to $8.8 million for the prior year and is higher due to $1 million of severance expenses booked in the fourth quarter, offset somewhat by certain non-reincurring professional fees incurred in 2015. We reported net investment income of $52.9 million during the fourth quarter of 2016, reflecting a net gain of 5% on our investment account. For the full-year, we reported net investment income of $76.2 million, reflecting a gain of 7.2%. Fully diluted adjusted book value per share as of December 31, 2016 was $23.38, a 5.5% increase from $22.17 per share reported at December 31, 2015. I'll now turn the call back to Bart for some concluding remarks.

Thanks, Tim. We remain optimistic that our dual-engine strategy of profitable underwriting and a value oriented, long-short investment program will build shareholder value. As announced in December, I will be stepping down as CEO of Greenlight Re at the end of March. I have thoroughly enjoyed my 11 plus years with Greenlight, building its underwriting portfolio from inception and I'm confident that the platform and team we have built and developed is in a great position to continue our pursuit of attractive growth in fully diluted book value per share. I'd like to thank everyone, including our clients, brokers, employees and, of course, our shareholders who have supported me throughout. Thank you again for your time and now we'd like to open up the call to questions.

(Operator Instructions) Bob Glasspiegel, Janney.

Good morning, Greenlight, and Bart, good luck to you in your future endeavors. Quick question on auto, it looks like there was an increase -- modest increase in reserves for LAE in the quarter primarily in the [K versus the Qs] correctly, everyone's got some issue with auto. I think you mentioned increased litigation -- unmeritorious litigation. We think we got it all or is this a fluid scenario?

Bob, its Bart. Yes, auto is a big space for us obviously and we've had a fairly large concentration in the State of Florida where there is a lot of litigiousness as I think we all know and we have been monitoring this situation with the client for the last quarter and worked with them. I think we have it all. The data, it's always a struggle to get all the right data, but we've been working with these guys for a long time. We feel like we've got good data and I think we've got a good number up for it.

Good, I mean obviously, it's an industry -- it's an issue with certain -- most of the industry today. Second, I think there was announcement of a quota share of property deal with United Insurance or they mentioned it on their call, I think you were cutting back Florida property. Is this a sort of step back in or is it a financial transaction?

Right. So this is -- we did, you're right, we started to get out of Florida probably really two years ago, we started to reduce our lines on Florida homeowners quota shares and then as of June 1, we were effectively out of the Florida business. We have earned the remaining premium on those contracts and then in the quarter, we developed a new relationship with the company that you mentioned and they are more than just a Florida company, they are in a number of other states. So, yes, we will have some Florida exposure now, but in our underwriting of this company, we feel like they're doing all the right things with respect to the situation in Florida, the assignment of benefits and water damage claims et cetera, but they're also expanding the book, so we feel real comfortable with them. And we came on to it -- the contract in the fourth quarter, so the reserve increases and what not that they posted did not affect our contract.

Got you. David, one for you. Looking at the K for the year, you're equities went down, your commodities went up. Didn't know if that was just appreciation for gold for the year or an increased commitment to commodities?

The new commodity position we put on early last year was in natural gas. That's probably most or all of the jump in that exposure.

Okay, you had said the election was going to be important, I think your last call was during the election and that was a perceptive observation on your part. How have you weaved and bobbed post the election. You mentioned, there might be more stimulus. Did that change any of your macro bets?

Yes, we made several changes to the macro portfolio in response to the election. There were various long positions in sovereign fixed income that we eliminated. We added some additional shorts in sovereign fixed income and we added to our long equity exposure.

Okay. I will re-queue. Thank you.

Sure.

(Operator Instructions) Showing 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 concluded. Thank you for attending today's presentation. You may now disconnect.