Greenlight Capital Re Ltd (GLRE) 2017 Q4 法說會逐字稿

Thank you for joining us for the Greenlight Re Conference Call for the Fourth Quarter 2017 Earnings. Joining us today on the call are David Einhorn, Chairman; Simon Burton, Chief Executive Officer; Tim Courtis, Chief Financial Officer; Brendan Barry, Vice President of 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 are made on 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 20, 2018, and other documents filed by the company with the SEC. If one or more risks or uncertainties materialize, or if the company's underyielding assumptions prove to be incorrect, actual results may differ 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'd now like to turn the conference over to Simon Burton. Please go ahead, sir.

Good morning, and thank you for joining our call. Our results for the year were disappointing overall, measured by the reduction and fully diluted adjusted book value of 5%. What is worth reflecting on the 2 largest components of our results, reserve developments and natural catastrophe losses to give you a clearer picture of our year.

I will start by describing the adjustments to loss reserves. Mike joined us late in Q3, and has led a thorough review of reserves over the last 4 months of 2017. This resulted in reserve adjustments to a range of legacy contracts in classes that include professional indemnity, medical stock loss and other casualty.

For 2017, the prior year reserve development was $36.2 million, which produced a net income impact of $31.5 million, approximately half of these adjustments were made in Q4.

We estimate fourth quarter net natural catastrophe losses of $4.7 million from the California wildfires, and our previously reported third quarter net loss estimates of $37.9 million from the hurricanes and Mexican earthquakes, was largely unchanged at year-end. The industry was severely tested by the scale and unusual nature of these events that combined, produced more than $100 billion in industry losses. Our share of this industry loss was within expectations, and I continue to be pleased with the resilience of our business to CAT events. Our exposure to natural hazards is approximately flat from prior quarters, which reflects our view that CAT as a modestly sized block of exposure is reasonably priced, but is not sufficiently interesting for us to take an outsized position.

Our portfolio repositioning work continued during the quarter with an entry into several new classes of specialty business at January 1, notably, marine, energy and space.

Timing was fortunate as recent CAT losses appear to have reversed some of the capacity and price stagnation in many classes, allowing us, as a new entrant, to be fairly selective in our approach.

Rate changes varied significantly by class. Mortgage overall is trending down around 10% or more. Casualty renewals were mixed with some areas slightly down and some up, driven more by specific deal circumstances than macro pressure. As you would expect, rates in catastrophe-exposed classes improved across the board, but increases in excess of 10% were isolated. Other short tailed specialty classes not exposed to natural perils, were approximately flat at renewal.

As a general comment, we were not surprised by the muted rate changes we saw at January 1, as it seemed clear that the supply of capital could not support the pricing dislocation that was predicted by some. For too long, our industry has relied on post-loss price increases to offset underprice risk. It's been delusional behavior for some time, and I hope that's the end of it.

Finally, we completed a second retrocession transaction on our nonstandard auto portfolio, which explains the large increase in ceded premium during Q4. This deal also represents our first step in an insurance-linked asset management strategy where we seek to use our relationships and expertise to distribute underwriting risk to the capital markets. Unlike many of our peers, this effort is focused on classes of business other than CATs, where the need for product innovation is a good fit for our capabilities.

Since I joined in July, we have been hard at work transforming Greenlight Re for the future. Building on our base of long-term client relationships, we have expanded the portfolio pipeline and our appetite for diversifying classes. As part of this, we streamlined the underwriting teams and processes to efficiently deploy expertise in each area, which bore positive results for the January renewal business.

As we head into 2018, our traditional portfolio construction will be complemented by a focus on insurance-linked asset management and initiatives in technology and innovation. We will have more to say on this in the coming weeks and months.

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

Thanks, Simon, and good morning, everyone. The Greenlight Re investment portfolio declined 1.3% in the fourth quarter. Our longs contributed 5.3% and our shorts detracted 6.4%. Our biggest winners were long positions in Mylan and CONSOL Energy, and our largest detractors included shorts in Caterpillar and Continental Resources. Mylan advanced 35% after the FDA approved its generic versions of Copaxone. With this key approval and others, the company has recently received the value of the company's pipeline and management ability to achieve future earnings guidance are becoming more evident. Mylan trades at under 8x 2018 estimated earnings.

Our second biggest winner was CONSOL Energy, which completed the spinoff of its coal business from its natural gas business. Both companies have high-quality resource positions, favorable cost structures and strong management teams. We expect this bid will result in both companies having enhanced growth opportunities, reduced complexity and more analyst coverage.

The natural gas pure play, CNX resources trades at less than 6x 2018 EBITDA, and the coal and remaining assets traded less than 5x 2018 EBITDA under the company's original name, CONSOL Energy. As for losers, our short position in Caterpillar rose 26% during the quarter as the company exceeded margin expectations in its construction segment.

We believe this will be temporary as the company faces headwinds from raw materials. Our short position in Continental Resources advanced 37%, mostly because oil prices climbed 17%. We established a new position in Bright House Financial, which spun off from MetLife last summer. Bright House writes life insurance and annuities, which makes its overall business sensitive to both equity markets and interest rates. At the time of the spin, management's plan included no capital return for the next 3 years. In our opinion, the downside from a potential bear market in a prolonged low interest rate environment was reflected in the valuation. This sensitivity works both ways. Favorable equity markets and rising rates would put Bright House in a position to return capital much sooner than forecast. If this proves correct, the share should rerate as they traded only half of book value and 6x normalized earnings.

The investment portfolio declined 5.5% in January. As the market shifted from grind-up to straight-up in January, our long portfolio only rose about half of the S&P 500, while our short portfolio more than doubled the index. While we've never underperformed like this, our prior worst underperformance compared to the S&P, came in March of 2000, which was a similar environment. We are managing the gross exposure prudently, while maintaining exposure to the fundamentally challenged shorts that hurt us. The Greenlight Re investment portfolio is currently about 102% gross long, by 69% gross short. While the environment has remained difficult with growth stocks accelerating their outperformance against value stocks this year, including February, we think a reversion may be finally coming soon. Corporate tax cuts are a benefit to companies with profits, which are a hallmark of our long portfolio. Higher interest rates are beginning to offer investors an alternative they haven't had in many years, and should render uncertain future profits of levered businesses and story stocks less valuable. The valuation spread between our longs and our shorts is incredibly wide.

Turning to underwriting and operations, Simon, Mike, and the rest of the team have started to revamp every area of our business. It's satisfying to see the internal changes that they have managed to accomplish in less than 6 months in Cayman. Though many of the endeavors will take time to flow to operating results, I'm very constructive on their ability to guide Greenlight Re strategic growth in its second decade as a public company. While 2017 was a disappointing year overall, I'm excited about the company's prospects.

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 fourth quarter, where Greenlight Re reported a net loss of $37.7 million compared to net income of $49.2 million for the fourth quarter in 2016. A net loss per share was $1.02 for the fourth quarter 2017 compared to fully diluted net income per share of $1.31 in the prior year period.

Gross premiums written during the fourth quarter were $139 million, which is a reduction of 6.6% over premiums written in the fourth quarter 2016. Decrease was primarily due to the commutation and return of unearned premium on our Florida Homeowners contract during the quarter.

As Simon indicated, our gross premium ceded increased during the fourth quarter as we continued to retrocede a portion of our nonstandard automobile business.

Composite ratio for the fourth quarter of 2017 was 111.8%, included therein were $4.7 million of estimated catastrophe losses, net of reinstatement premiums from the California wildfires. Fourth quarter CAT losses added 3.5 points to the fourth quarter composite ratio. We reported a net investment loss of $16.2 million during the fourth quarter of 2017, reflecting a net loss of 1.3% on our investment portfolio.

Moving to the full year results, Greenlight Re reported a net loss of $45 million compared to net income of $44.9 million in 2016. The net loss per share for 2017 was $1.21.

Gross premiums written were $692.7 million for the year, an increase of approximately 29% over 2016. As reported in our prior quarterly numbers, the 2017 premiums have increased primarily due to increased premiums on our nonstandard automobile business, and to a lesser extent, to new Worker's Compensation contracts written during the year.

For 2017, our composite ratio was 106.1% with net catastrophe losses adding 6.9 points and net prior year loss develop -- development adding a further 5 points.

Our general and administrative expenses for the year totaled $26.4 million, which is approximately $0.5 million higher than the prior year. Underwriting expenses of $15.1 million were lower than the $16.6 million in 2016, primarily as a result of reduced accruals for quantitative bonuses due to the reduction in prior year underwriting profitability. The underwriting expense ratio for the year was 2.5%, resulting in a combined ratio for the year of 108.6%.

Our corporate expenses during 2017 of $11.2 million compares to $9.2 million for the prior year, and is higher due to approximately $2.2 million of nonrecurring expenses, primarily relating to consulting and professional fees. We reported net investment income of $20.2 million for the year, reflecting a net gain of 1.5% on our investment account.

Fully diluted adjusted book value per share, as of December 31, 2017, was $22.22, a 5% decrease from $23.38 per share reported at December 31, 2016.

As you can appreciate, we have spent considerable time analyzing the new tax law enacted in the U.S. In particular, we continue to consider the provisions relating to the Path of Foreign Investment Company Rules, often referred to as the PFIC rules, and their impact on our company and the way we conduct our business. New PFIC rules provide both a bright line test as well as a facts and circumstances test for qualifying insurance companies. While we wait for the interpretive regulatory guidance that is still to be issued, we are diligently looking at a range of options with respect to the bright line test and our goal is to meet this hurdle. We'll provide further details in due course as our work progresses.

I would like to turn the call back to the operator and open it up to questions.

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

A couple of questions on the auto transaction. I've always thought about that as one of your competitive strengths. By retaining less business, does it suggest that you thought you were a little bit overweighted in that segment? Or you had some concerns about the profitability of the business?

Bob, thanks for the question. So yes, we like the business. We've got great client relationships that we are looking to keep for sure. We were relatively overweight in the class. So you should consider this more than anything, a rebalancing of our portfolio, and also creation of some room to enter new classes.

I had to go through an 8-step process to calculate the expense ratio in the quarter. If my math is right, it looks like it came down. Is there some dynamics of the ceding commission working through expense loss ratio in play? Or did it not impact the expense ratio and was it incentive accruals?

Yes. So the actual dollar value, Bob, is less because of those accruals for less quantitative bonus. But obviously, with added premium, and this is more speaking to the year-to-date results, obviously, more net earned premium drives down the ratio as well given that the dollar value is somewhat fixed and has reduced a bit.

But there is no impact to the expense ratio in the quarter from the ceding transaction.

No. The expense ratio for the quarter was 2.7%.

Okay. We'll follow that more off-line. On the reserve review, did you use outside actuaries? Or was it internal -- was it based on outside review, or an internal review?

Bob, we said -- it's Mike. Thanks for the question. We set reserves based on internal review. However, we did multiple levels of external analysis as well. One of the things that I wanted to bring to the table in addition to sort of all the enhancements internally, is sort of maximum use of second set of eyes as well. So we did both.

Okay. David, one quick question on the -- you mentioned the February portfolio. Sounded like you lagged a little bit. How were you to-date -- how did you -- how did the portfolio perform in the downdraft to the market?

In January, we dramatically underperformed, as I discussed. I would say that in the month of February, throughout the month, the portfolio has performed relatively as one would expect given its net long exposure. It has not underperformed materially, but it has not outperformed either.

Okay. And last question. On the test that you said you're looking at options, are there scenarios where it would materially change how you operate? Or is it just a couple of side dances to comply?

So Bob, there are a range of things we can do to address the bright-line test that is finally imposed on us now. One thing I would say is, beyond any doubt, we're a real bona fide reinsurance company with every employee here spending their days working on the reinsurance business. So the facts and circumstances seems almost beyond any question. But the bright-line test is important. It's too early to indicate the steps we'd take, but the majority of this will fit subtly, if not all of it, will fit within our underwriting appetites and be steps that we'd otherwise be interested in anyway.

And the next question comes from Brian Meredith with UBS.

Just a couple here. First, I just want to dive into the reserve additions again, a little more detail here. Was it that you saw some acceleration in loss trend happening? Was it much to more conservative pick kind of in the range? What happened here with respect to the ground-up review?

Brian, it's Mike. I think it's mostly reacting to what we're seeing in the claim experience. And obviously, I was a new set of eyes over the last few months here. So my experience in managing large, complex reserve portfolios with sort of global insurance and reinsurance classes is something that I bring directly to bare when looking at the individual deals, number one. And number two, looking at the class of business trends more at a macro level. So in that analysis process, we looked very closely at what we're seeing in the claim reporting. Of course, industry trends more generally, and did to reprojections as we always do of every single account. There isn't one thing I'd point to in that process. Industry reserve levels are at an interesting point, clearly. The longer-term abatement of frequency and severity trends, frankly, that has occurred over 15 years, certainly showed signs of bottoming and even turning. So there is some of that coming through in the claim reporting clearly. But most of it is just following where the data leaves us and our understanding of where things seem to be going at a macro level.

Great. And Simon, you talked about entering into marine, energy and couple of other classes of business. Can you talk a little bit about your one-one renewals and how they played out? Some of the additional maybe color on the portfolio repositioning going on.

Sure, Brian. The backdrop in the market is -- it's still challenging. We did have some fortunate timing with the caps last year, so it created an uptick in rates. But more importantly, it created a bit of room as some of our peers rebalanced a bit and revisited their appetites. So where I would describe a lot of these specialty classes as being somewhat stagnant for the last few years, there was a bit of jostling and that played well for us. So having said all that, our entry was pretty modest in dollar terms, but it was a definitive change in Greenlight strategy where we are acting as a follower with relatively smaller shares in syndicated business and primarily along the market classes. And this is really new ground for us where we've never been active before. So raising our profile in those markets was as much an objective as the business itself. On to the specific business, yes. So the classes that we're interested in, marine, energy and space were deliberately selected. There are a few other classes that we considered. Classes like aviation, for example, where we are considerably less interested given the terms and conditions today. So we were quite selective on the classes and we like counterparties, several of whom are a continuation of long-standing relationships I've had from the past.

Got you. And then I'm just curious given the business now you're doing at Lloyd's on some of this actings of power in some of these treaties. Does it make sense maybe strategically to think about having a Lloyd syndicate at some point?

It's only been discussed, Brian. It is one of the long list of strategic directions that we may consider in the future.

(Operator Instructions) And the next question comes from Mike (inaudible) with Cello Capital Management.

This one is for -- I know that last year in -- I believe it was in the second quarter or third quarter, the company took advantage of low share price to buy back some stock. I know that Greenlight Re didn't -- wasn't born to buy back out of existence. But given the spread between the stock price and the book value even after the January loss, is this something that you're contemplating? Or that you can think of going forward?

The goal of the company is to maximize the book value per share over a long period of time. And buybacks are certainly one tool that we have used in the past and we prospectively could use in the future. The purpose of the buyback, when we have an authorization to do that, is to add value to the book value per share over a long period of time. It has to be balanced against other considerations, which include the opportunity to make sure that we have enough capital to run the insurance operations, maintain our A and best rating, and any other factors that may come in to compete for that use of capital. So while this is something that we have done before and we may do in the future, it's fact and circumstance dependent. It depends upon also how deep into the discount, if there is a discount, the shares trade toward from book value. So we look at all those things and then we decide what to do from time to time.

Okay. And the 15% discount is juicy for you? Or is it something that you're happy to pass on?

I don't think it's a question of juicy or happy to pass on. I think it's a question of looking at all of the different factors which are not static. The company's needs for capital for other purposes varies from time to time. And so as we look at the different choices for capital, there is no particular magic price relative to book value where the stock becomes something that we would do versus not do. Obviously, the deeper the discount, the more attractive a buyback becomes as you think about the different uses of capital.

And the next question comes from Justin Fitzgerald, a private investor.

David, I'm thinking about what are we going to do about improving the basic business. Most of this conference call has dealt with the past results. And what steps can we take to simply strengthen the business and get our loss ratio back into a better zone?

Yes. I think the answer to that in a sense is sort of stay tuned. Last year, we went through a management change. The new management who you've heard from on the call today has taken significant efforts to reposition the portfolio, to reposition the underwriting philosophy, actually to talking through pricing in risk and different kinds of ways that we've been able to do before. I think we're very early days in the results and I think the results that we're seeing today don't particularly reflect the underwriting decisions of the present senior management team. And I think that we've hired now, absolutely first-rate leaders and I'm optimistic that as they have an opportunity to implement the business plan, which they've already begun doing, that those results will flow through over time in the form of improved underwriting results.

And as there is nothing else at the present time, I would like to have -- if you have any follow-up questions, please direct them to Adam Prior at the Equity Group at (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. Thank you so much for attending today's call and you may now disconnect.