Greenlight Capital Re Ltd (GLRE) 2017 Q2 法說會逐字稿

Thank you for joining the Greenlight Re Conference Call for Second Quarter 2017 Earnings. Joining us on the call this morning are David Einhorn, Chairman; Simon Burton, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Brendan Barry, Chief Underwriting Officer.

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 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.

Please note this event is being recorded.

I would now like to turn the conference over to Simon Burton. Please go ahead, sir.

Good morning. It's a pleasure to be joining you today on my first earnings call with Greenlight Re since I took over the position of CEO on July 1.

The past month has flown by as I've been meeting with and getting to know the entire team in both Cayman and Ireland. I'm impressed with the quality and dedication of the staff, and it's clear that management has taken a thoughtful and deliberate approach to recruitment. Not surprising perhaps is that we have an enviable combination of mature processes and a small-company culture that's a great fit for my vision of a dynamic and nimble company.

Over time, you will see some changes in our underwriting appetite and approach. Up until now, we have, in large part, relied on a small number of close client relationships where we take a dominant position on their programs with a deep analytical dive in the underwriting process. These relationships are important, and they will continue to form the backbone of our portfolio wherever margins are adequate.

However, I consider it as critical importance that we also answer the more transactional reinsurance subscription markets in London, Bermuda and the U.S., where there are pockets of opportunity despite the difficult overall market conditions. This is important for 2 reasons: first, the overall pipelines that contain reasonable underwriting margin for a sufficiently careful and nimble company; second, it will serve to rate our profile on these markets and ensure that we are positioned to see opportunities as they may arise, especially those that are short-lived.

By careful use of line sizes and thorough scrutiny of risk accumulations, we believe our entry into the subscription markets can be achieved without introducing non-key levels of volatility while improving our underwriting profitability. In the coming weeks, we will provide the broking community with a clear indication of our appetite by class of business and the commitment to rapid response and service.

Another theme I'd like to mention is the way I see the use of data emerging in our industry. The combination of relentless expense pressure and the march of technology is driving transformational change. The baseline competency in data analytics is steadily increasing, and those that ignore it or don't invest wisely will struggle to compete. Our ability to source data and generate entrances in ways that are not obvious will help us make better decisions. Our short- to medium-term strategy will be to innovate in high-impact and cost-effective ways.

Tim will go into more detail on the numbers, but here are the highlights. During the first half of 2017, Greenlight Re generated a $4.6 million profit from underwriting, which is a composite ratio of 95.9% and a year-to-date combined ratio of 98.5%. We reported an investment loss for the first 6 months of the year, which David will discuss further. Overall, our fully diluted adjusted book value per share increased by 3.2% from the prior year-end to $22.64.

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, Simon, and good morning, everyone. The Greenlight Re investment portfolio declined 3.4% in the second quarter. Our long book contributed 0.7%, but our shorts and macro detracted 2.5% and 1.3%, respectively.

Our short position in Continental Resources was our biggest winner during the quarter. The stocks climbed 29% in the quarter as oil fell 9%. Optimism for OPEC's ability to maintain balance in the oil markets faded, and the market questioned the profit potential of properties the company had promoted last year.

Bayer was our second biggest winner. The stock advanced 5% as the company beat first quarter estimates. The acquisition of Monsanto will enhance Bayer's crop science unit, and we believe the pro forma company stands to earn around EUR 11 in 2018. Given the strength of each of Bayer's business units, we believe a market multiple or better is appropriate for the company.

Tesla and our bubble basket shorts were the biggest attractors during the quarter, Tesla being at 30% despite posting a wider than expected loss and burning more than $600 million in the first quarter. The company is expected to burn over $2 billion this year as it begins production of its Model 3 that's currently only capitalized for the next 3 quarters. As Tesla attempts to achieve scale for the Model 3, it will depend on the capital market's willingness to fund it.

Athenahealth rose 25% in the quarter despite announcing disappointing first quarter results in April. After conceding in December that top line growth would slow in 2017, the company further reduced its revenue goal -- growth and forecast, and the stock fell almost 20% the next day. In May, an activist investor announced a large stake in the company and by the end of the quarter, the stock had rallied 43% off its lows in anticipation the company would ultimately be acquired. We think the high valuation, combined with minimal free cash flow and decelerating revenue growth, will deter any would-be buyers, and we remain short.

We added a small position in Toshiba during the quarter. Substantial write-downs in Toshiba's Westinghouse subsidiary caused the stock to collapse in late 2016. In March, Westinghouse filed for Chapter 11 in the United States, and Toshiba began a process to sell a majority stake in its memory business. We believe Toshiba's assets are valuable, and investors will refocus attention on the significant margin upside once the company has resolved these uncertainties.

We exited a number of positions in the second quarter, including long positions in LPs, Liberty Global and Time Warner, each had a gain. We also exited our short positions in credit rating agencies and Mallinckrodt. The investment portfolio returned 1.8% in July. At month-end, the investment portfolio is approximately 107% long and 78% short.

This is our first conference call with Simon at the helm, and I'm very pleased to see the mark he's already made on our company in one month. I just returned from our board meeting, and the energy and level of collaboration within the team was palpable. We're excited for the many positive changes Simon and his staff will be making over the course of the next year.

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

Thanks, David. For the second quarter of 2017, Greenlight Re reported a net loss of $35.5 million compared to a net loss of $63 million for the comparable period in 2016. The net loss per share was $0.96 for the second quarter of 2017 compared to a net loss of $1.59 in the prior year period.

For the 6 months ended June 30, 2017, we reported a net loss of $27.1 million compared to a net loss of $34.3 million for the first 6 months of 2016. The net loss per share was $0.73 for the 6 months ended June 30, 2017, compared to a net loss of $0.92 per share for the same period in 2016.

Gross premiums written was $372.1 million for the first 6 months of 2017, an increase of approximately 44% from $259 million during the same period in 2016, primarily due to increased growth in premiums received on our existing nonstandard auto contracts.

Additionally, written premiums increased due to a new homeowner's property quota share contract that incepted during the fourth quarter of 2016 and a reduction on prior year comparative premiums written due to the return of unearned premiums on homeowner's property business that we exited in the second quarter of 2016.

Our net earned premiums for the first 6 months of 2017 increased by approximately 18% to $312.2 million from the prior year period, primarily due to our higher premium writings, which will earn in over the next several accounting periods.

The composite ratio for the first 6 months of 2017 was 95.9%, which, given our current exit business, is in line with our expectations.

Total general and administrative expenses incurred during the first half of 2017 increased to $13.1 million compared to $12 million incurred during the prior year period.

Underwriting expenses of $8.2 million for the first 6 months of 2017 were in line with our expectations and compared to $8 million incurred in 2016. This gives rise to an underwriting expense ratio for the first 6 months of 2017 of 2.6% and a combined ratio of 98.5%.

It is worth noting that for the past 4 quarters since we novated certain legacy contracts, our combined ratio over that 12-month period is 98.8%.

Our corporate expenses of $4.9 million for the first 6 months of 2017 compares to $4 million reported during the same period in 2016, with the increase attributed to slightly higher legal and professional fees incurred in the current period.

We reported a net investment loss of $39.1 million during the second quarter of 2017, reflecting a net loss of 3.4% on our investment portfolio. For the first 6 months of 2017, we reported a net loss of $27.5 million, reflecting a net investment loss of 2.5%.

During the second quarter of this year and continuing into July, the company repurchased just over 136,000 Class A ordinary shares of the company's stock at an average price of $20.66 per share. We continue to monitor our share price and may make further repurchases if we believe an attractive purchasing opportunity persists.

Fully diluted adjusted book value per share as of June 30, 2017, was $22.64, a 6.8% increase from $21.20 per share reported at June 30, 2016.

I'll now turn the call back to Simon for some concluding remarks.

Thanks, Tim. I'm delighted to report that our most recent Board of Directors meeting reelected Hope Schefler Taitz to join the Board. Hope's professional resume speaks for itself, and her extensive financial background and experience in leading teams and broad board experience is a welcome addition to our team.

Our goal at Greenlight Re remains unchanged. We will continue to execute our dual-engine strategy and firmly believe that both underwriting and investing activities can attractively drive our key yardstick, increase in 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 to questions.

(Operator Instructions) The first question comes from Bob Glasspiegel with Janney.

Simon, I've got a few questions for you. First of all, welcome back to the investment world and the reinsurance world. I look forward to working with you. You gave a very good quick outline of your plans. Does that going to involve an increase in the expense ratio to get the technology and the distribution relationships that you want? Or does the increased volumes sort of offset that?

Bob, thank you. So if I said the focus will be on the high-impact, cost-effective stock, you can -- there are pitfalls with technology, and there is a danger of falling into a morass of development hell, let's face it. And of course, there will be an incremental uptick as we invest in some tools and technology along the way, but I see that easily outweighed by the quality of business improvements and the broader pipeline of business that we expect to see as a result.

Are you going to need to hire people that have these relation -- these brokerage relationships to hit these markets? Or do you think you got the right sort of infrastructure in place?

Yes. So Greenlight Re is a relatively small company. We are about 40 employees. And I'm -- it's one of the elements of the firm that attracted me so much to the role, and we're deeply protective of that. Having said that, clearly, as we expand our pipeline, our interest into other areas, we've identified 1 or 2 spaces, skill gaps where we want to bring in some real differential expertise. I don't expect that will be that material. Potential increase, additional hires is low single digits, but that's my guess at this point, Bob.

Okay, appreciate that. Tim, if I could ask you a question. The auto tick up in the quarter. A little bit of color on the types of relationships, those are mainly existing relationships, it looks like, is that going to be a quarterly rate that continues? Or is there a sort of a one-time element in the written premium growth?

Well, I think certainly -- yes, I'll pass that one to Brendan so he can talk about the underwriting relationships there.

Yes. Bob, obviously, we've talked about the auto space before. And most of this is being driven predominately by timing conditions in the U.S. auto space. And the majority of the pickup for us has been through existing client base. That's not to say that we'd rule out continued opportunities with new clients in the near term. But most has come through existing client bases and should be seen in predominantly one-off benefits for underlying reinsurance contracts.

So will that quarterly...

Bob, just to clarify on the accounting -- sorry, Bob, but just to clarify on the accounting, right, obviously, these are quota share contracts, so we are writing and accruing what is being reported to us by the clients. As they grow or contract or enter new markets, our premiums will react to that. But what we're seeing in the current quarter, there will be an element of that being -- continuing throughout the rest of the year.

Okay, that's helpful. And David, just one for you. On your sort of value bet that you're making, do you think you needed a rise in interest rates to make the value versus growth correction that you're looking forward to take place? Or historically, when value does outperform growth, there is a rise in interest rates perhaps associated with it, is that necessary?

Yes, the answer is I don't really know. Historically, over long periods of time, value outperforms growth. For the last number of years, that mostly has not been the case. And the result has -- or the headwind from growth outperforming value has clearly had an impact on our results over the last few years. I like the composition of the portfolio, and I would like to see a little bit of a -- some of this headwind go away, but I have no control over when that might be. And I'm hopeful that we can achieve a decent result even if the environment is difficult.

Are you agnostic on interest rates? Or do you have a view?

I don't think I have a strong view, no, not at the moment.

(Operator Instructions) Our next question comes from Brian Meredith with UBS.

A couple of questions here for you, Simon, and welcome. The first one, just curious, Simon, what are your thoughts about the current domicile Greenlight in Cayman versus, let's call it, in Bermuda? Do you think there's any competitive edge or are you disadvantaged at being in Cayman versus Bermuda?

Brian, it's a good question. Obviously, I spent most of my career in Bermuda, as you know. I like it, there's a marketplace there, that's quite vibrant. And let's face it, Bermuda is not as low cost an environment of operating as it once was. In many ways, Cayman is a much cheaper place to the business. And expenses and value in the chain are an increasing theme in everything we do. So that is no longer immaterial. Having said that, Brian, I think Bermuda will continue to be a very important marketplace for us. We have been and we'll continue to be very active there, and we'll be looking carefully about how we best leverage our Bermuda relationships.

Great. And then I'm just curious, Simon, entering the subscription market right now, just kind of curious why your thoughts -- or particularly given that it's an incredibly competitive reinsurance market right now, lots of excess capital, what does Greenlight bring to the table where you can get on attractive programs right now, given the competition in the marketplace right now?

Again, good question. It is very competitive. We've seen some consolidation. We've seen an increase in average line sizes and participational programs. I think the margins that can create some opportunity for a firm like ours, it doesn't aspire to be dominant or controlling of programs. We also have a large number of relationships internally, not only my own, but across the entire staff here that are probably somewhat under-leveraged. So I feel confident that we can generate a pipeline of opportunity that's relatively high quality compared to the market. Now you're right, margins are compressed. It's a tough environment. But at the same time, we are quite small. We're very nimble. We're agile. We don't have to be in every class at all times, which is somewhat differential to many of our peers who have established large teams of underwriting, underwriters in most classes of business and candidly need to keep that pipeline ticking over just to feed their engine. We don't have that rod for our back, and I think that's one of our advantages, Brian. In terms of client-facing value proposition, we're nimble. We can make decisions quickly. We're a flat structure. Both myself, Brendan, the entire underwriting team are deeply focused on the underwriting pipeline and decision-making day-to-day. And we can deliver a high level of service to clients, I'm very confident with that.

Great. And then just one last question here. Just curious, with the personal property on quota share, if that's got float exposure and just your thoughts right now on the whole assignment of benefits situation down in Florida.

Sure. I'll ask Brendan to chime in on that.

Yes. Brian, as you know, we were -- we reduced our -- certainly reduced our position in Florida over the last number of years. We saw early signs of the AOB issue starting to materialize. And our view on Florida as a whole has not changed. We reentered with one single client, does have Florida exposure due to their more broad-based exposure base across the U.S., and how they recognized and dealt with the AOB issues very early in the process, and we were very impressed with that and decided to reenter with them alone. Overall, we're still very concerned about the AOB issue, not just the issue itself and how some people have handled it, but more specifically, I would say, how the political situation has dealt with that in Florida and what -- that may lead to as whatever the next AOB issue might be or AOB-like issue. So for now, we're very cautious on Florida. One client with Florida exposure that we think has done a very good job and has grown its exposure base away from its Florida starting point.

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 conference has now concluded. Thank you for attending today's presentation. You may now disconnect.