Greenlight Capital Re Ltd (GLRE) 2017 Q3 法說會逐字稿

Thank you for joining the Greenlight Re Conference Call for Third Quarter 2017 Earnings.

Joining us on the call this morning are David Einhorn, Chairman; Simon Burton, Chief Executive Officer; Tim Courtis, Chief Financial Officer; Brendan Barry, Chief Underwriting Officer; and Mike Belfatti, Chief Operating Officer.

(Operator Instructions)

Please note this event is being recorded.

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 Greenlight Re's CEO, Simon Burton. Please go ahead, sir.

Good morning, and thank you for joining us today. I'm joined by my colleagues, David, Tim, and Brendan, along with Mike Belfatti, who joined the team in August as Chief Operating Officer. Mike's responsibilities include oversights of our quantitative and data efforts as well as risk management and reserving. He brings deep expertise in these areas and has significantly strengthened our executive team.

The financial highlights for the quarter -- for the third quarter of 2017, include net income of $19.9 million or $0.53 per share, net investment income of $64 million, an underwriting loss before general and administrative expenses of $34.2 million, which includes net losses of $37.9 million or approximately 4% of fully diluted adjusted book value resulting from third quarter catastrophes, including hurricanes Harvey, Irma, and Maria and the Mexican earthquakes.

Our results were affected by an increase of ultimate losses related to prior accident years of $12.7 million. These increases were in response to reported claim experience on several contracts in our specialty health, auto and other casualty classes. We continue to analyze closely our reserves to understand emerging claim trends and improve the shape of the portfolio. Overall, our fully diluted adjusted book value per share increased by 2.4% during the quarter to $23.18.

During the third quarter, Greenlight reported strong premium growth, acceptable underwriting results, ex CAT, and favorable investment returns that led to a profitable quarterly result. The dominant third quarter theme for us and the industry was the natural catastrophe events and the impacts on our underwriting results. I believe these events have caused significant loss of life and hardship, and our thoughts go out to all those affected.

The total insured losses are as usual not borne evenly across our industry with a significant portion either unreported or under the shade of private risk-bearing mechanisms. There will be a market response as we approach renewals, but the degree may depend on the ability of CAT funds and sidecars to replace encumbered capital. We should be prepared for the scenario that rate improvements are muted by large capsule injections. And so far, we see no sign of improved pricing in other classes of business, but continue to monitor the changing market.

As we better understand the sources of price tension, we're positioned to deploy our capacity efficiently with regard first to our longstanding clients and an open mind to both inwards and outwards retrocessional opportunities. Our overall appetite for catastrophe risk as a proportion of surplus will not materially increase into 2018, based on our early views of the likely margin expansion. As we discussed last quarter, there is a critical balance of both leveraging our long-term client relationships with exploring opportunities in the subscription markets in London, Bermuda and the U.S.

Our portfolio is relatively diverse, but we are exploring options to reshape our exposure to the nonstandard auto market, which is an area of concentration for us. Our objective is to use retrocession as a tool to manage our net exposure while maintaining our close client relationships and prominent market role in the class. I'm pleased to report that we have concluded a transaction with one partner so far, and continue to look at others. As we move into the busy January 1 renewal season, we are continuing to build on the next phase of Greenlight Re's transformation, establishing broader market presence and constructing an increasingly balanced portfolio.

Now I'd like to turn the call over to our Chairman, David Einhorn, to discuss our investment results and the progress in our overall strategy.

Thanks, Simon, and good morning, everyone. Happy Halloween. The Greenlight Re investment portfolio was up 5.5% in the third quarter. Our longs contributed 9.1%, and our shorts detracted 2.9%. The biggest winners in the quarter were CONSOL Energy, General Motors and Uniper. Our largest detractors were a Caterpillar short position and Mylan. CONSOL recovered its loss from the prior quarter as the market focused on the upcoming separation between CONSOL's coal and natural gas businesses. Once the 2 businesses are separated, we believe the market will re-rate CONSOL as a natural gas pure-play with a focus on CONSOL's vast and valuable assets.

GM advanced 16% during the quarter, as the company continued to post strong operating results, closed the sale of its money-losing European business and showed progress in its Auto 2.0 position, which includes investments in electric vehicles, autonomous driving and Lyft. We are encouraged by the steps management took to improve its cost of capital as GM continued a significant stock buyback and completed a $1 billion perpetual preferred stock offering.

Uniper shares were up 41%, on rumors that Uniper was a buyout target. And at the end of the quarter, Finnish utility, Fortum, announced an agreement to purchase E.ON's 47% stake in Uniper at EUR 22 per share. Management rebuffed the bid as it was materially below its estimate of fair value. The company continues to execute. And in August, Uniper announced strong earnings, raised the low end of its earnings guidance for next year and raised the dividends guidance from 15% growth to 25% growth.

On the other hand, Caterpillar shares rose 16% in the third quarter as the company raised earnings guidance. This was the company's second straight beat and raise, which has led analysts to conclude that Caterpillar is entering a new upcycle. Caterpillar trades at 26x this year's earnings, implying investors believe it's still well below mid-cycle earnings. We believe the biggest drivers of Caterpillar's business are mining, which is plagued by overcapacity from the China-led steel super cycle, the energy sector where oversupply is leading to slower investment and construction where we're already at or near the cyclical peak. We see short-term inventory builds and double ordering influencing recent results, and we believe the company is poised for a significant disappointment next year.

Mylan fell 19% during the quarter, as delays in new drug approvals and accelerated price deflation for generic drugs weighed on the stock and led management to reduce guidance. This month, the FDA approved a few of Mylan's products including a generic form of Copaxone. Mylan landed the first approval with a potential exclusivity for generic Copaxone. And as a result, the stock has retraced its entire third quarter decline.

Last week, Greenlight Capital sent a letter to its hedge fund clients discussing its quarterly performance. While most people understood the rhetorical argument the letter made on value investing, some misconstrued the letter as an abandonment of value investing as a strategy. Nothing could be further from the truth. We have been challenged the last few years as value investing has faced headwinds. However, we believe this is simply a cyclical phenomenon and do not plan to change our strategy.

I just spent several days in the Cayman Islands for a board meeting, and the team is energized under its new leadership. In a very short time, Simon and Mike have made tremendous impact, and I'm excited to see the progress in the upcoming year. Despite the unfortunate headwinds from the natural catastrophe events during the quarter, we've shown the benefits of our dual-engine strategy.

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

Thanks, David. I'll briefly go through the financial results starting with the third quarter, where Greenlight Re reported net income of $19.9 million compared to net income of $30 million for the comparable 3-month period in 2016. Fully diluted net income per share was $0.53 for the third quarter of 2017 compared to net income per share of $0.80 in the prior year period.

Gross premiums written during the third quarter were only slightly higher than those written during the second quarter, both of which were significantly higher than prior year periods due to increased premium written on Non-Standard Automobile business and a new homeowners' property quota share contract that incepted during the fourth quarter of 2016. As Simon indicated, our gross premium ceded increased during the third quarter as we ceded off a portion of our Non-Standard Automobile business, which we expect will continue in subsequent quarters.

Composite ratio for the third quarter of 2017 was 119.8%, included therein were $37.9 million of estimated third quarter catastrophe losses, which included losses from hurricanes Harvey, Irma, and Maria and the Mexican earthquakes. These CAT losses added 21.9 points to the third quarter composite ratio. We reported net investment income of $64 million during the third quarter of 2017, reflecting a net gain of 5.5% on our investment portfolio.

Moving to the year-to-date results. For the 9 months ended September 30, 2017, we reported a net loss of $7.2 million compared to a net loss of $4.3 million for the first 9 months of 2016. Net loss per share was $0.20 for the 9 months ended September 30, 2017, compared to a net loss of $0.12 per share for the same period in 2016. Gross premiums written were $553.7 million for the 9 months ended September 30, 2017, an increase of approximately 43% from gross premiums written of $387.2 million during the first 9 months of 2016. Similar to our quarterly results, increase in premiums written is attributable to our Non-Standard Automobile and homeowners' property quota share contracts.

Our net earned premiums for the first 9 months of 2017 increased by approximately 29% to $484.9 million from the prior year period, primarily due to our higher premium writing. For the first 9 months of 2017, our composite ratio was 104.4% and catastrophe losses adding 7.9 points.

Total general and administrative expenses incurred during the first 9 months of 2017 increased to $21.3 million compared to $18.9 million incurred during the prior year period. Underwriting expenses of $12.3 million for the first 9 months of 2017 were in line with prior year underwriting expenses of $12.9 million. The underwriting expense ratio for the first 9 months of 2017 was 2.6% resulting in a combined ratio of 107% for the year-to-date. The combined ratio for the first 9 months of the year before the effects of the catastrophe losses was 99.2%.

Our corporate expenses of $9 million for the first 9 months of 2017 compared to $6 million reported during the same period in 2016. The increase in corporate expenses in the current year includes $2.2 million of nonreoccurring expenses, primarily relating to consulting and professional fees incurred. For the first 9 months of 2017, we reported net investment income of $36.4 million reflecting a net investment gain of 2.9%.

September 28, A.M. Best affirmed the Financial Strength Rating of A- (Excellent) for both Greenlight operating entities. The outlook for these credit ratings remain stable.

Fully diluted adjusted book value per share as of September 30, 2017, was $23.18, a 5.2% increase from $22.04 per share reported at September 30, 2016.

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

Thanks, Tim. As my tenure here at Greenlight is now 4 months along, I wanted to take the opportunity to update you on where we are headed in the coming months and years. As this quarter's results underscores, the 2 engines of potentially compelling earnings comprise a powerful business model. The company is able to seek returns from both sides of the balance sheet in a highly disciplined manner, and this will remain a core of our strategy.

In my observation over the past months, however, it is clear that we have only scratched the surface of the strategic potential, and we are now well underway in taking steps to realize that potential. The core strength we have and will vigorously protect is an operational footprint that does not contain the sprawl and overinvestment that many companies in our industry are dealing with.

As we continue to face rapidly shifting industry changes in the areas of distribution, technology, capital sources and many others, a small company like ours can respond to new opportunities, scale only judiciously and maintain an industry-leading expense ratio. We continue to expect that advances in the efficiency with which business is placed will play directly to our strength, and we have taken steps to be an adopter of those efforts. We are already seeing significant progress in the range and depth of our pipeline supported by clear indications to customers and brokers regarding our appetite for risk.

Our future success will be built upon differentiated expertise. As a smaller firm, we believe that attaining access to industry-leading knowledge via partnership, hiring or acquisition will be central to our success. Part of this will be leadership in analytics and data. But equally, we will access the best domain expertise to understand hazards fully and underwrite them wisely.

In my first 4 months, we have already embarked on numerous dialogues to discuss partnerships and the delivery of expertise, and we expect to have more to say on this in the coming quarters.

The industry structure for distribution, underwriting and risk bearing will remain in flux for the foreseeable future. And we will look to create value for our counterparties on numerous parts of the chain. As the auto example I discussed earlier illustrates, we plan to be able to use expertise to assess and acquire business, while managing net appetite in a flexible way. Combined with the asset return engine, becoming technologically advanced and remaining operationally lean should create a compelling strategic position and a bright future for the company.

With that, we will take questions.

(Operator Instructions) And your first question this morning will come from Bob Glasspiegel of Janney.

Simon, I've got a couple of questions for you and one for David. Starting with you. Your retro commentary seemed to suggest that you think there is going to be an impact, but not enough for you to commit much more capital. Was that a correct characterization? So you're just going to rise whatever rate increases happen and not write more business?

Yes, Bob, that's accurate. So our view is that rates will have to move significantly, considerably further than we are expecting to see to consider committing more capital to that class of business. We're not, at our heart, a CAT company. We do assume some CATs, it is fairly moderate compared to our peers. We have some concerns about the way the industry transacts CATs and some of the fundamental arithmetic that supports that. And we've seen many years of rate reductions now that I don't expect will be completely reversed at the coming renewals. So that's our assessment.

So sort of 5% to 10% rate increases, but you need 30%, 40%, 50% or -- is that a rough order of magnitude?

Well, we are not predicting a particular increase. There will, of course, be some movement. But I'm an old-fashioned guy, Bob. I believe in the fundamentals of demand and supply. And so far, there doesn't seem to be as much tension as perhaps the industry hopes on either demand or supply side of the equation. So I think we're a little bit more bearish than many of our peers. Let's leave it at that.

Got you there. Simon, now what is your general philosophy on reserving. I see in the quarter there was a pretty potpourri of a lot of lines that were touched with reserve increases, not huge, but more than the prior run rate. Was there a review in the quarter that triggered this? And more specifically, are you the type of CEO that likes to avoid negative surprises in reserving and wants to get out ahead of it, so that any future reserve increases would annoy you? Or are you more the type of, we look each quarter as it happens, and we'll let it -- we'll let the results drive quarterly reserving methodology?

It's a good question. So I'll have Mike jump in, in a moment. To the second part on what sort of personality I am, Bob. Look, we strive to get the right answer at all times on reserving and that's really the outcome that will satisfy me. From time-to-time, we'll see developments positive and negative. That's my view. But let me kick it over to Mike for a more detailed answer there.

Yes, Bob, so the -- our process this quarter was unchanged from prior quarters. We look at all our accounts every quarter and build it up very much in detail. So that's a little bit of a process note. In terms of the target, if you will, as Simon said, I mean, we're aiming to get the right estimate of the cost of our contracts. We're very focused on the fact that reserving feeds into pricing and pricing feeds into reserving. It's a -- it's both a requirement, obviously, under financial reporting to try to get the best estimate and to not overshoot and undershoot. And it's also a -- it's a business and a strategic imperative in terms of figuring out what you want to write and figuring out where to grow and shrink. So that's the philosophy. We'll probably want to have more balanced reserve errors than probably some of our peers, as you well know, but we are aiming for best estimate.

Okay, David, one for you. Any comment on how October's been, we'll get it tonight, I know, but market up a little bit able. Were you to keep up? And more significantly, how you have the portfolio positioned relative to tax rate cuts? Would you benefit, be hurt or take no position and have no idea how it works through?

Yes. October started off relatively strong for us, but the last few days have been very challenging. And I don't expect a result that is materially different from 0 for the month at this point. We'll see what happens today. Relating to taxes, we fundamentally believe that most of our longs are profitable companies that pay taxes, and a good number of our shorts do not. So we would imagine that a lower tax rate should have a disproportionate positive effect on the long side of our book.

So you -- but you haven't taken a tactical position on whether it'll happen or not?

My personal belief is that it's more likely to -- it's much -- my belief has been for a long time that tax reform is much more likely to happen than health care ever was.

(Operator Instructions) And in showing no additional questions, we will conclude the question-and-answer session. Should you have any follow-up questions, please direct them to Adam Prior of The Equity Group on 212-836-9606, 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.