Greenlight Capital Re Q4 2008 Earnings Call Transcript

Feb.24.09 | About: Greenlight Capital (GLRE)

Greenlight Capital Re, Ltd. (NASDAQ:GLRE)

Q4 2008 Earnings Call

February 24, 2009 09:00 AM ET


Len Goldberg - Chief Executive Officer

David Einhorn - Chairman

Bart Hedges - President and Chief Underwriting Officer

Tim Courtis - Chief Financial Officer


Thank you for joining the Greenlight Re Fourth Quarter 2008 Earnings Call. Joining us on the call are David Einhorn, Chairman; Len Goldberg, Chief Executive Officer; Bart Hedges, President and Chief Underwriting Officer and Tim Courtis, Chief Financial Officer.

The company reminds you that the forward-looking statements that are made in the 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 that are subject to risks, uncertainties and assumptions including risks, uncertainties, and assumptions that are enumerated in the company's Form 10-K dated February 23, 2009, 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.

Thank you. I would now like to turn the call over to Mr. Goldberg. Please go ahead, sir.

Len Goldberg

Thank you and good morning. My name is Len Goldberg, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us this morning.

2008 was certainly a year for the record books. And it was also a year that severely tested Greenlight Re and our differentiated business model. While we are not pleased with our performance and our capital reserve reduced by 19.8% for the year. We believe that we have taken some of the very worst that markets could offer and have proven the resilience of our business model.

Our underwriting team continues to perform very well. We have completed our second full year of underwriting with another sub-100 combined ratio.

We continue to diversify our portfolio, and orient our book towards frequency clients as per our strategy. In a year with significant catastrophe losses as well as re-estimates of those losses, we separate no natural catastrophe losses.

In an age of reinsurance broker consolidation, we are pleased that our customers are well diversified by broker source without significant concentrations with what is now the big tree. And as Bart will explain, we successfully renewed all but one small account in January 1.

We are doing a solid job of underwriting good business with the right counterparties, and also establishing deeper strategic relationships already in smaller number of significant contracts.

Perhaps most importantly as we migrate from an alter competitive underwriting environment to an increasingly hardening insurance market. We have the ability to significantly grow our underwriting portfolio. While our annual premium written grew by almost 28% in 2008, as compared to 2007.

At the end of 2008, we had $3 of capital to every dollar of written premium. While some of that is due to our controlled deliberate way of developing our portfolio, a bit of that is also due to our conscious effort to preserve our shareholders capital in the soft market in anticipation of a better pricing environment.

We're also optimistic about our investment portfolio, that we suffered a loss for the year. We have been able to utilize recent market turmoil to find a significant number of missed price securities and especially to develop a sizeable portfolio in distressed debt at attractive prices.

Until 2008, perhaps even we underappreciated the value of our strong strategic relationship with our investment advisor. We are enhancing communication throughout the year on various issues affecting the portfolio and we are able to consistently mark our portfolio to market in real-time. While this does not prevent us from experiencing additional losses should the portfolio perform poorly, we have the benefit of knowing that our assets do not suffer from evaluation overhang due to the difficulty or unwillingness to value troubled assets.

As a result, we believe there is little doubt as to the value of our investment portfolio and the size of our capital base.

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

David Einhorn

Thanks Len, and thank you everyone for joining us. In the fourth quarter of 2008, the S&P sell 22% at the economic crisis spread from the financial sector into the general economy.

2009 has not been immune to this trend and the S&P has declined another 18% already this year. Greenlight Re's fourth quarter investment portfolio result was negative 5.3% which included a very poor October result and positive returns for November and December.

The investment portfolio also returned a positive 50 basis points in January. But we're not happy that we did not manage a positive absolute return in the fourth quarter. We're pleased with the way the portfolios performed since the middle October.

But we were disappointed, we didn't do a better job preserving capital in 2008. But we believe that over the long-term, our investment strategy will produce positive risk adjusted returns without the use of leverage. Since, we really don't know what happened to the markets but believe that they trend up over the long-term.

Our strategy is to remain net long throughout. But to vary our exposure based upon our top down assessments and bottom of opportunity step. As we discussed on our last call we brought down overall growth exposure in the portfolio in the third quarter and exited a number of names.

Over the past few months, we invested in many new opportunities created by the market dislocations, we're all witnessing. We've been approaching opportunities that both opportunistically and patiently. We're investing with restraint in order to be in a position to take advantage of additional opportunities that may arise should the crisis deepened.

As always, we are focused on the long-term prospects to various companies but we realized that these long-term values may be materially impaired by sustained economic contraction. The Greenlight Re investment portfolio actually became less set long in January, down from 40% at December 31st to 28% at January of 31st.

It is evident that we're in the historically atrocious economic downturn, and the solutions offered by the government are imperfect and we'll likely be insufficient to fix the problems. The basic problem is the divested interests have so much influence of the decision makers that it is a challenge for leaders to take tough action to get ahead of the problem. Particularly when tough action will not be judged favorably by the stock markets on the day it is announced.

As a result, the official response today has been limited to short-term supported measures, such as lower interest rates, bailouts loan programs in fiscal stimulus. As Greenlight Re is a dollar based company and the government response thus far worthy to us.

We have done a good job thus far hedging our currency exposures over the past few years. In the fourth quarter when it became clear that the federal reserve wishes to address the crisis to a program of currency basement, we bought, sold and some foreign currency to hedge our dollar exposures.

On the long side of the portfolio, we are primarily investing in companies that we believe have the balance sheet to sustain downturn. If you share more than adequately discount the near-term headwinds.

We believe that we have a very broad investing mandate. We have the flexibility to invest globally from the cost of capital structure has opportunities emerge. We have always been cyclical investors and stressed and distressed debt with an offers attractive un-levered returns. We found a number of new debt opportunities in the fourth quarter, including corporate bonds, bank loans and convertible debts.

All of our investments and debt to date have been in U.S. and we're focused on liquid issues with ready and servable market prices. We continue to stay diligent and focus on the short side of our portfolio, and the recently initiated the number of into our positions in companies that we feel has been granted immunity from the global economic collapse. That has been the challenge nevertheless to keep our short exposure given the collapse of multi-financial companies globally.

We are currently approximately 66% growth long and 33% short. The back half of our net loan exposure in equities and has been debt. We exclude the goal position from these numbers as we view it more as a currency against the U.S. dollar.

To reinforce some of my comments, we are very pleased as to how the underwriting thought process is developing in Greenlight Re. We believe that perhaps the single most important decision an underwriting team can make is when to deploy underwriting capital. Here such we expect reinsurance pricing begins to strengthen in 2009 into 2010. Greenlight Re is uniquely positioned to significantly grow our reinsurance portfolio. At the same time, we have good relationships with our existing clients and have established ourselves in the marketplace.

Now, I'd like to turn the call over to Bart to discuss Greenlight Re's underwriting in a particular to success we've had during the January 1st renewal season and development apart strategic relationships.

Bart Hedges

Thanks David. 2008 was a very good year for Greenlight Re on the underwriting front. We've been busy establishing new and differentiated ways of adding value to client relationships, turning them into long-term partnerships rather than price sensitive renewals. We continue to expand our frequency portfolio. In 2008, over 80% of our gross premium written was frequency business compared to around 60% in 2007.

Frequency business is the more stable relationship oriented part of our portfolio. As Len mentioned, our written premium grew by 28% from 2007 to 2008. Even though our frequency partners wrote less business than we originally expected as prices soften for most of the year, and they did an excellent job reducing volume to preserve profitability.

Even as hurricanes Ike and Gustav estimates continue to climb, we've had no natural catastrophe losses in 2008. As we mentioned last quarter while this was somewhat lucky, it's also due to our strategy to generally write cap retro covers (ph) and high enough layers, so that if we suffer a big loss, industry pricing would generally rise significantly in the following year.

We do not think Ike and Gustav in the absence of asset related issues plugging the industry would have been enough to move market pricing.

In addition we aborted lines to business including director's and officers, surety, fidelity and credit, which we believe will see significant upper development as losses emerged caused by the current economic turmoil.

As Len mentioned, our January renewals have been concluded successfully. We spend quite a bit of time selecting partners, so retain these partners is important to our business. At 11, we renewed all accounts but one, which moved for competitive reasons. We have kept all of our key relationships intact.

As capital has been significantly reduced in the reinsurance industry, we are seeing prices starting to harden. We are seeing prices for property catastrophe, retro session rise approximately 25% in the U.S. and 10% in the rest of the world.

The medical staff loss business that we entered into beginning in mid 2007 is experiencing significant price increases in the 20% range. We entered this business as what we thought was the trough of the business cycle and we've seen prices come back strongly as we expected. Even casualty business pricing is holding up or slightly increasing for the first time in many years.

Our outlook is that pricing for all lines will continue to strengthen as asset issues continue to play the industry and availability to new capital is restricted. What this means for us is that generally we expect our existing portfolio to continue to improve both from a profitability and growth standpoint. We also expect to see a number of very good opportunities with experts that have great businesses but diminished capital basis. We also expect that our Property Catastrophe, rental (ph) portfolio will grow in 2009 after shrinking for the last two years as this capacity constrained line of business is the first to show real signs of improvement. We have significant underwriting capacity to take advantage of all these opportunities.

Finally, we've been working on a number of strategic partnerships in 2008, which should bear fruit in 2009 and beyond. We have finalized a strategic partnership with an insurance manager here and the Cayman Islands to establish a segregated portfolio company. This company will allow our clients to efficiently startup captive insurance companies to take risks alongside us furthering our risk sharing strategy and creating new relationships, which should make our business more sticky.

In addition, we have made a small investment in an insurance company which will allow our client to expand its business opportunities and lead to a more profitable reinsurance relationship.

We have significantly concluded -- successfully concluded a reinsurance structure for one of our clients that will allow them to significantly improve the rating -- financial rating of their insurance company. This will give them the ability to capture a significant share of the business in their market and once again should drive profitable premium to Greenlight Re. This is a natural development of our non-commoditized approach to the reinsurance marketplace. It is our expectation that a growing percentage of our frequency portfolio will come from such strategic partnerships.

And now, I'd like to hand it over to Tim to discuss our financial results for the fourth quarter and year-end.

Tim Courtis

Thanks Bart. From an overall financial perspective, 2008 was a challenging year for the company and the reinsurance industry in general. We have always stressed the importance in book value per share and therefore we cannot be pleased with the 19.2% reduction in book value per share experienced during 2008, resulting in a fully diluted book value of $13.39 per share as of December 31, 2008. While the company was severely tested as a result of global financial crisis, we believe we are uniquely positioned to capitalize on a hardening reinsurance market.

Greenlight Re reported the fourth quarter 2008 net loss of $31.3 million compared to net income of 29.2 million for the comparable period in 2007. On a per share basis, the net loss was $0.87 per share compared to fully diluted net income of $0.80 per share for the fourth quarter of 2007.

For the year ended December 31, 2008, the net loss was a $120.9 million compared to net income of $35.3 million for the year ended December 31, 2007. On a per share basis, the net loss was $3.36 per share compared to fully diluted net income of $1.15 per share for the year ended December 31, 2007.

For the full year 2008, free currency business accounted for just over 82.5% our gross written premiums compared to just over 60% for 2007. Once again this is indicative of our ongoing preference for frequency business.

Premiums written for the fourth quarter of 2008 of 28.6 million was higher than the 3.9 million of premium written during the fourth quarter of 2007. For the full year ended December 31, 2008, premium written was a $162.4 million compared to a $127.1 million for the 2007 fiscal year.

Both of these increases are the result of the continuing development of our underwriting activities and several new frequency based contracts written during 2008.

The composite ratio for our frequency business for the year ended December 31, 2008, was 91.2% compared to 94.2% for the year ended 2007. The improved composite ratio for our frequency business is primarily due to favorable development uncertain 2007 and 2006 frequency contracts.

The composite ratio of 68.5% for our severity business for the 2008 fiscal year is higher than the composite ratio of 41.7% recorded for 2007. This increase in severity loss ratio is due to a combination of writing a more diverse line of business mix during 2008, which has inherently higher loss ratios. As well as increased estimate of certain 2007 severity clash contracts affected by the sub-prime melt down during the 2008 tax in year.

Net loss and loss adjustment expenses incurred for the year ended December 31, 2008 or 55.5 million. Out of this total, 38.5% related to paid losses. This compares to net incurred losses of 39.5 million for 2007 of which only 22.3% related to paid losses. This increase in the pay to incurred ratio is expected as of 2006 and 2007 underwriting years went off.

We reported in an investment results of a net loss of 33.3 million during the fourth quarter of 2008, reflecting a net loss of 5.3% on the investment account managed by DME Advisors. For the full year 2008, we reported an investment loss of $126.1 million reflecting a net loss of 17.6% on our investment portfolio.

I'd like to point out that the percentage loss in book value per share was higher than this investment loss due to the gearing effects resulting from flow generated from our profitable underwriting operations. We will be paying reduced incentive composition of 10% to our investment advisor until we make up 2 and 1.5 times as the investment loss offered in 2008.

As part of our 10-K filed yesterday, we have reported for the first time as required by SEC regulations in the Sarbanes-Oxley Act, on our evaluation of the effectiveness of the company's disclosure controls and procedures. We are pleased to report that we have concluded that our Sarbanes-Oxley's related control and are effective and our auditors also provided their affirmation as to the effectiveness of our controls and procedures.

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

Len Goldberg

Thanks, Tim. 2008 was a severe test of our business model, one which we came through very well. Our underwriting strategy has worked as well or better than expected. We have preserved underwriting capacity for what looks to be better reinsurance markets in 2009 and into 2010 while establishing ourselves with clients and brokers.

We took the opportunity in 2008 to develop a number of strategic tools and relationships that should bear fruit in the upcoming years, and we have positioned ourselves as one of the few reinsurers that have significant capacity for growth so the opportunity to merge is expected.

Although invested markets are still violent, our investment portfolio is well positioned with the addition of a number of new position and significant exposure to attractive distressed debt opportunity.

Tim will continue with our strategy to earn above average, risk adjusted returns by actively managing both sides of the balance sheet. Given the events of the last year, we believe we are uniquely positioned to take advantage of both a hardening reinsurance market and a more rational investment environment. We appreciate your continued confidence in our company.

Thank you again for your time. And now, I would like to open the call up to questions.

Question-and-Answer Session


(Operator Instructions). At this time there are no questions. If you have any follow-up questions please direct them to Alex Stanton of Stanton Crenshaw Communications at 212-780-0701, and he will be happy to assist you.

We also remind you that a replay of the call and other information about Greenlight Re is available on the company's website at Thank you. This does conclude today's conference call. You may now disconnect.

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