Greenlight Capital Re, Ltd., Q1 2009 Earnings Call Transcript

| About: Greenlight Capital (GLRE)

Greenlight Capital Re, Ltd. (NASDAQ:GLRE)

Q1 2009 Earnings Call

May 05, 2009 09:00 am ET


David Einhorn - Chairman

Len Goldberg - CEO

Bart Hedges - President and Chief Underwriting Officer

Tim Courtis - CFO


James Reed - Horsham Capital.

Mary Lomoco - UBS.

Thomas Kilgore - Houston Partner


Thank you for joining the Greenlight Re First Quarter 2009 Earnings Call. Joining us on the call this morning is 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 maybe 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 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.

I would now like to turn the call over to Len Goldberg, Chief Financial Officer. 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 today.

As we examined our first quarter 2009 performance and the significant opportunities that lie ahead, we continue to be excited about what we have build in the prospects for our company. 2008 tested our differentiated business model and we emerge with even greater confidence in our future.

In the first quarter, we increased our book value by 5.2% over the value at year end 2008. This was primarily due to an investment return of 4.6% achieved in the quarter which compared favorably to an 11.7% drop in the S&P 500 during the same period. We continue to find miss priced investment opportunities in both equities and debt instruments.

While investment markets are always volatile we are pleased with the results we achieve in the first quarter in a challenging investing environment. On the underwriting side, we recorded a loss in the quarter driven by a reported loss on the aggregate catastrophe contract written in 2008 which Bart will explain in greater detail.

Our underlying business continues to perform to our expectations. The business we wrote in 2007 and 2008 is now producing significant growth in our earned premium. This growth has in turn reduced our internal expense ratio. While we will continue to add staff as underlying opportunities increase we believe our internal expense ratio will continue decline.

While insurance market pricing has began to change, we have not yet experience broad improvements in overall profitability. During the first quarter we saw some significant price increases in the property cap retro market and we continue to see pricing improvements in employer staff loss business. We believe that more wide spread price increases will take hold during the second half of 2009 and into 2010. So, we continue to be patient in our approach as we await coming opportunities.

Overall in the first quarter we wrote an additional large severity cap retro account and we loss one frequency account due to price competition. While our gross premiums were flat, our net written premiums were up about 15%. Both Greenlight Re and our clients are well positioned for pricing upturn that we would expect to see in a coming quarters as balance sheets continue to shrink.

During the first quarter of 2009, we completed two strategic investments which will allow us to leverage our client expertise and utilize our financial strength to create long-term partnerships. Bart will discuss the details later in the call. We are pleased to have found good partners who will help us develop and maintain strong profitable reinsurance and other income streams.

A side benefits to this strategy is that we generated small amount of fee income in the quarter which offset our underwriting loss. We continue to build our staff to seize upcoming market opportunities. We are pleased to tell you that pending work permit approvals, two new senior underwriters with a wealth of reinsurance experience and the market contacts will shortly join our already strong underwriting team.

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 Einhorn

Thanks Len, and thanks everyone for joining us today. In the first quarter Greenlight Re’s investment portfolio had a better result than it did in the prior two quarters.

There are several factors that contributed to this. First, we enter 2009 with a very conservative posture, about 80% long and 40% short or about 40% net long. Although we are holding a good amount of cash, we became more concerned about the market as it sold off in January and became even more defensively positioned ending January at just 29% net long.

As things continue to dislocate through February, we used this as an opportunity to cover a number of short positions and entered the March slightly more a net long. We also added to our debt portfolio particularly in Ford Motor secured bank debt. At the beginning of the year our debt portfolio was about 12% of capital. We ended the quarter was about a 17% weighting in debt instruments.

Greenlight as always invested in debt instruments with that part of the corporate capital structures offered compelling unlevered returns. We started accumulating our debt portfolio in October of last year and have built our allocation in a patient fashion as markets begin further dislocated.


Hi Sheryl its Diane. We are checking with her now but I was going to tell you in a mean time, don’t let the garbage to get thrown out.

David Einhorn

Hi, I think you are on wrong call Diane. Okay, sorry about that. Our current debt portfolio is invested in US companies and we have been mindful of the liquidity in each of the issues of which we are invested.

In addition to moving up the corporate capital structure, we have also constructed a less concentrated portfolio and we have to start it. Although we have found many compelling investments that appear to be at bargain prices, this is temporary by the worst economy most of us have seen. It is very difficult to develop a high degree of confidence in corporate revenues in earnings even in well established profitable companies with conservative balance sheets.

So we have offset some of this idiosyncratic risk by holding a more diversified portfolio. As of date of our last conference call at February 24th, the S&P was down 18%. Although it continue to descend another 7% before the recent rebound, the S&P is slightly positive so far in 2009.

As we follow companies and watch the economy, we have not seen much evidence that our economic “green shute” or the things that materially improving anywhere. It is true that companies saw such rapid decent in business last year, that they couldn’t estimate how bad things might get. They can now see about how far business has fallen. From where we sit, this hardly amounts to a sign of a recovery which we very much like to see.

One exception is that pricing seems to hardening in certain insurance and reinsurance lines of the business which is a good thing for Greenlight Re, and Bart will discuss this in greater detail.

The underwriting team continues to think outside of the box. And I am pleased with the strategic initiatives that we have implemented during the first quarter, which will hopefully be reflected in the increases for our book value per share as these opportunities mature.

We continue to be cautious about the environment, especially in light of the market latest rally, and aren’t as convinces as some others to the government response to the prices to date will actually fix the problems in the economy. We think this take some time to play out as the normal forces of supply and demand exert themselves. We continue to be worried about monitory actions and the fiscal situation and continue holding some of our cash involved for the time being.

Now I would like to turn the call over to Bart to discuss Greenlight Re’s underwriting and in particular the success we’ve had during the January 1st renewal season and the development of our strategic relationships.

Bart Hedges

Thanks David. I am pleased to report that we continue to progress in our underwriting business during the first quarter of 2009. We had a significant new retrocessional catastrophe account in the first quarter of 2009 and renewed our existing severity deals so an increase in the severity premium for the quarter.

Even after adding this new account, our maximum exposure to any one of them is $84.4 million and our aggregate maximum exposure for all catastrophic events is $106.9 million. While the demand for property retrocessional has slowed. We have additional capacity at these levels if we see good opportunities to deploy our capital.

Even though we escaped damage from hurricanes Ike and Gustav in 2008, we took a first quarter 2009 loss on an aggregate property catastrophe cover underwritten in 2008. We sold a cover to a client that protects them from multiple large events affecting their capital in a given year by protecting the deductibles they keep on their traditional catastrophe programs.

As the beginning of the first quarter, the seated losses under the contract which related primarily to hurricanes Ike and Gustav were below our retention. However, during the first quarter, the client reported a significant loss due to a snow storm in the UK which resulted in loss acceded to our layer. This event caused us $3.6 million net loss in quarter after additional premiums and reversal of accrued profit commission. Since the inception of this contract we are about breakeven.

We would like to report that we found a number of great new frequency opportunities, but the market has not yet co-operated. As we mentioned last quarter, we have seen a halt in massive price reductions due to the extraordinary difficulties of 2008, but we haven’t seen significant price increases. At 1-1 we lost one frequency renewal due to price competition. However, our net frequency premium was flat compared to the first quarter of 2008.

The good news on frequency business is that our pipeline is strong several important factors are contributing to the increased activity we’re seeing. First, companies are critically assessing the credit quality of their counter parties. Many companies want to diversify their exposure if they have accumulated significant credit risk to reinsurers that have been weakened by the financial crisis. Second, many insurers have taken painful hits to their balance sheets requiring them to buy more reinsurance or differently insurance structure to replace capital that was lost.

Lastly, some reinsurers have told their clients they need to reduce current commitments. We believe that all of these issues will in time serve to move prices upwards. We believe Greenlight Re is an attractive counter party, thanks to our solid balance sheet and our ability and willingness to tailor client specific solutions. Since we have to provide collateral to our US based clients, many companies are seeing the collateral plus our financial strength as desirable belts and suspenders in these turbulent times. They would prefer this double level of protection to taking the counterparty risk of a larger company without that secondary protection. When pricing improves as we expect it will, we should be right in the sweet spot for our core frequency business.

On our last call, we discussed some of the strategic partnerships we have established. In the first quarter of 2009 we successfully closed two additional transactions that we believe will add value to Greenlight Re in the future.

We are very excited about this developing area of our business model. Similar to our reinsurance transactions each strategic partnership is unique and structured to maximize the benefits to all parties.

One transaction that we completed during the quarter was the package of a loan and multi-year reinsurance transaction to a current insurance company client which directly led to them receiving an A minus rating from A.M. Best. This will greatly expand our clients’ ability to write business which will benefit them as well as Greenlight Re.

We believe this multi-year reinsurance commitment is at better than market terms and allows us to lock in desirable business without competing with the market in the years ahead. The other transaction is a strategic partnership with a newly formed managing general agency or MGA imparted together with the simultaneous funding of a mutual insurance Company that writes homeowners business in that state.

We expect this opportunity to produce significant streams of fee income in the coming years and may result in future reinsurance opportunities. These initiatives further differentiate us from our competition, provide capital and capacity to our clients and create value for our shareholders through investment returns, fee income streams and underwriting profits.

While we don’t expect to complete these types of transactions every quarter and we will not generally be announcing them. We think that they demonstrate the strength of our business model and our ability to think beyond the traditional underwriting box.

Now I would like to turn the call over to Tim to discuss our financial results for the first quarter.

Tim Courtis

Thanks Bart. Greenlight Re reported net income of $27.8 million for the first quarter compared to a loss of $4.8 million for the comparable period in 2008. On a fully diluted per share basis, the net income was $0.77 per share compared to loss of $0.13 per share for the first quarter of 2008.

As we have described on previous calls, our mix of business between frequency and severity can change dramatically from quarter-to-quarter given the nature of our opportunistic underwriting platform. During the first quarter of 2009 gross premiums written of $71.9 million were generally flat compared to gross premiums written of $70.8 million during the first quarter of 2008.

However, it is important to note that 65% of this quarters premiums were related to frequency business as compared to over 80% to the first quarter of 2008. Given our concentrated underwriting portfolio, not renewing a contract or writing a new contract can cause large fluctuations in the top line composition of our frequency severity book. However, frequency accounts generally recognize premium throughout the year, so we expect the percentage of frequency business to increase as we progress through to 2009.

The composite ratio for the first quarter of 2009 was 95.6% for our frequency business and 90.6% for our severity business, resulting in an overall composite ratio of 94.1%. The composite ratio for our frequency business reported in the first quarter is slightly higher than what we experienced during the first quarter of 2008. This was primarily due to increased losses reported on certain specialty health contracts partially offset by favorable experience on a personal lines contract.

The first quarter composite ratio of 90.6% for our severity business is high when compared to composite ratio of 59.4% reported during the first quarter of 2008. This increase reflects a loss reported on the natural catastrophe aggregate excess contract which Bart described.

In (inaudible) expenses were 9.5% of net premium earned as compared to 16.2% reported for the first quarter of 2008. The reduction in our internal expense ratio is an reflection of increased earned premiums reported during the quarter and the development of the earnings on our frequency business. We reported net investment income of $27.7 million during the first quarter of 2009 reflecting a net return 4.6% on our investment account.

During the first quarter we adopted financial accounting standard number 160 relating to non controlling interest in the consolidated financial statements. This standard mandates that non controlling interest for what we previously referred to as minority interest be shown on the balance sheet as a component of shareholders equity. Previously we had reported this balance sheet item as a liability. This change affected reported book value per share. Based upon this new require presentation the company fully diluted book value per share is $14.25 as of March 31, 2009 an increase of 5.2% from the companies revised December 31, 2008 fully diluted book value of $13.55, and a decrease of 14.1% from the revised fully diluted book value of $16.58 as of March 31, 2008.

This accounting revision as of December 31, 2008 added $0.16 to book value. Yesterday we filed with the Securities and Exchange Commission a shelf registration under a Form S-3. Under this registration which is yet to be declared effective by the SEC, we have the ability to raise up to $200 million in additional capital in a variety of forms including debt, preference shares and Class A ordinary shares. While we do not currently have any plans to raise additional capital, this shelf registration will provide us with additional flexibility to access the public capital markets on a timely basis, should we require capital for future business opportunity.

Finally, I am pleased to report that on April 28, we held our annual general meeting at which all of our incumbent directors were reelected for another one year term.

I’ll now turn the call back over to Lenny who will provide some concluding remarks.

Len Goldberg

Thanks Tim. The Greenlight Re strategy was created to enable our company to achieve sustainable advantage in all markets. However, we believe our business is particularly well suited to the current environment. We have judiciously kept our powder dry in difficult reinsurance markets. We believe that we are one of the only reinsurance companies that can now write a multiple of our current premium, should the markets indeed improve in 2009 and 2010.

We continue to believe that deciding when to deploy reinsurance capital is one of the most important judgments we can make. On the investment side, although we are still experiencing significant market volatility and uncertainty, we are finding missed price securities, both long and short, which we believe will continue to contribute positively to our book value per share.

Our good investment result in difficult quarter, highlight our differentiated value proposition. We will continue to execute our strategy to earn above average risk adjusted returns by actively managing both sides of our balance sheet. 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.

Question-and-Answer Session


(Operator Instructions) Your first quarter comes from the line of James Reed with Horsham Capital.

James Reed - Horsham Capital

Hi, guys. I think this question is for Bart. Bart you talked about the formation of a number of entities that help align kind of your insurers with the agent and the insurers. Is that specifically verdant which is referenced in their Q? And if it is could you talk about, could you kind of expand on the idea behind that and how specifically the formation of that entity served to further align your interests with the insurers and agents?

Bart Hedges

Sure James. Think about the strategy for these types of investments as an extension of our underwriting philosophy, which we liked to align ourselves with some niche specialty underwriters. We like to compete in ways other than that in price. And we want to try to find ways to generate above the average risk adjust to returns for investors. So, by locking in these kinds of relationships over time, we think we do that by hopefully of winning competition in the future.

So, when I think about the philosophy it's really just an expansion of the same kinds of fundamentals that we apply in the underwriting. The types of opportunities that come from current clients as well as spotting opportunities in the market and this Florida opportunity was an opportunity that we sort of seized upon and saw and decided it was better to be in the seat of a producer than to be in the seat of a reinsurer currently. And verdant, the formation of verdant, it was simply a vehicle that help us achieve these types of transaction in the most effective ways for our shareholders.

James Reed - Horsham Capital

Okay, okay, thank you.


Your next question comes from the line of Mary Lomoco with UBS.

Mary Lomoco - UBS

Good morning and thank you for taking my question. It's about the strategic investments to, if you could tell us how do you earn the fees on these investments and how these fees are recurring?

Len Goldberg

Mary this is Len Goldberg. Some of the fees will be recurring on particularly on the NGA investment, that’s going to take a while for those fees to be, to start to generate. We don’t expect significant fees from that operation for maybe a year or two. And the fees that we earned in the first quarter of this year are not recurring.

Mary Lomoco - UBS

Okay. And is there any time limit to these strategic investments or is it just you mentioned some old tier 1 so there is a limit to it or it could be renewed?

Len Goldberg

Mary just like our underwriting strategy, every one of these is unique.

Mary Lomoco - UBS


Len Goldberg

Everyone is different now and everyone we do in the future is probably going to be slightly different.

Mary Lomoco - UBS

Okay, thank you.


The next question comes from the line of Thomas Kilgore with Houston Partner.

Thomas Kilgore - Houston Partner

Hi, I just wanted to ask, when you look at the combined ratio going forward, is there a certain level that you feel would be sort of steady today, as you project the business out? And then, when you talked about a multiple of premiums written in the future, I just wanted to understand how high that could be?

Len Goldberg

The answer to the first part is we really have no combined ratio targets. The business that we write is a function of what we think the economics of that business is compared to the capital that we have to, put up for that particular opportunity. So, we do expect our combined issue to vary overtime. I am sorry, can you repeat the second question.

Thomas Kilgore - Houston Partner

There is comment about premiums how in the future you can buy the multiple of your future premiums, so I was just trying to understand that, what the magnitude of that could be?

Len Goldberg

If you look at year end 2008, we wrote about $0.30 premium for every dollar of capital which is well under industry averages for reinsurers. So if you took a look at that where industries averages are, that’s the place where we could certainly get to at the peak of the underwriting cycle.

Thomas Kilgore - Houston Partner

Len, thank you.


(Operator Instructions) Should you have any follow-up questions please direct them to Alex Stanton Public Relations & Marketing at 212-780-0701 and he will be happy to assist you. We also remind you that a replay of this call and other prudent information about Greenlight Re is available on our website at

Thank you for participating in today’s conference call. You may now disconnect.

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