David Einhorn - Chairman
Len Goldberg - CEO
Bart Hedges - President and Chief Underwriting Officer
Tim Courtis - CFO
Mike Zuranski - Credit Suisse
Greenlight Capital Re, Ltd. (GLRE) Q2 2009 Earnings Call August 4, 2009 9:00 AM ET
Thank you for joining the Greenlight Re Second 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 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 and are subject to risks, uncertainties, assumptions, including risks, uncertainties and assumptions that are enumerated in the company's Form K-10 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.
(Operator Instructions). As a reminder, this conference is being recorded. At this time, we would like to turn the call over to Len Goldberg, Chief Executive Officer. Mr. Goldberg, please go ahead.
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.
The second quarter of 2009 showed what our differentiated business model is capable of producing. We increased our fully diluted book value per share by almost 18% in the quarter and by more than 23% for the year-to-date. We continued to make great strides on our underwriting portfolio and generated strong investment returns with conservative, defensively positioned asset portfolio.
Our underwriting portfolio performed better than expected. The small catastrophe loss that we booked during the first quarter was reversed as updated claim estimates have been lower than initially expected.
Our gross written premium increased 176% in the second quarter versus the same period a year ago and is up 48% for the first six months versus the comparable period in 2008. Our earned premium increased 100% in the quarter compared to the second quarter of 2008 and is up 83% for the first six months of 2009 over the same period in 2008.
The entire insurance market place seems to be waiting for significant turn in the market. We continued to see meaningful price increases in catastrophe retrocessional and employer staff loss business.
Across the rest of the portfolio, a number of our clients are seeing reduction in competition, resulting in better premium opportunities and what we believe is good economic pricing. This is a reversal of the trend we had seen in the second quarter of 2008, when we reported relatively small premium numbers as many of our clients were reducing their portfolios in difficult underwriting environments protecting both their capital and ours.
We are also seeing increased opportunity in the premium intensive frequency business that we find attractive for our portfolio. We believe this is happening for a number of reasons. First, we felt the reinsurance market was quite competitive in 2007 and 2008, so we were very selective as view our business and as a result, we believe we have more dry powder than a number of our competitors.
Second, many clients and potential clients are capital constraint and not obtained new capital in this marketplace and need more reinsurance coverage to transfer significant premiums in their balance sheets.
Finally, many of our competitors are finding it difficult to expand their premium base at the current time. Accordingly, while the pricing of the underlying insurance has not improved substantially, the terms and conditions we are able to negotiate on the select set of reinsurance transactions we pursue, are significantly better than they were in 2008. Bart will discuss the portfolio in more detail.
On the investment side, we performed well in the first half of 2009 with a net return of 19.1% plus an additional 3% return in July. The most significant part of this performance is that we have not accomplished this by taking big debts in the volatile marketplace.
We have performed with a portfolio that has been quite defensive with net loan equity position usually in the single-digit. At the same time, we have been able to use the market dislocation to diversify our portfolio and to add significantly to our debt portfolio both, which have reduced our volatility.
Now I would 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.
Thanks, Len and thanks everyone for joining us today. In the second quarter, Greenlight Re’s investment portfolio was up 13.9% bringing the year-to-date net returns to 19.1% in the investment portfolio. Coupled with our July result the 3%, I am pleased to report to our shareholders that we have fully recovered the 2008 investment portfolio loss.
In contrast to the first quarter return, where all the return came up from our short portfolio, all of the return in the second quarter came from the loan side of the portfolio, which was up 30% gross in the quarter. On the loan side about three quarters of the return came from equity loans and a quarter came from debt instruments.
In short, equity portfolio loss 14% in the quarter primarily from our short financial exposure. The largest winner in the quarter was the Ford Motor company debt position, we mentioned on our last call, is one of the positions we are adding to opportunistically in February at this year. Most of our losses in 2008 came from the loan side of our portfolio, where a number of holdings are more than the market.
Our next three equity loan winners after Ford debt in the second quarter were three of our four biggest losers in 2008. Essentially, the only decision we made regarding in securities was not to sell them at prices that we didn’t believe made sense. Hence we were able to recover some of our losses on these positions that we believed had over shocked to the down side.
One of the benefits in mark-to-market accounting is that we don’t get to make a subjective determination with the losses are well temporary. We simply recognize them on our books and if we are right and the market is wrong, sooner or later the loss is reversed.
Beside our position in the Ford debt, much of our positive returns so far this year, is based on having at the time to be patient with some of the investments we have owned for while. Although we strive to produce attractive risk adjusted returns over time, evaluating performance quarterly or even annually can be a misleading exercise.
We believe that the performance of our portfolio is better judged over somewhat longer periods. The current fair market started in the second half of 2007, during which time the Greenlight Re investment portfolio has made a small positive return as the S&P fell by more than one-third. We judged that to be a reasonable, but not exceptional result, all things considered.
We entered the quarter in a conservative posture, about 83% long and 50% short or 33% net long, including about 14% net long equities and the balance in debt. We ended the quarter with even a more conservative posture, 76% long and 55% short, only 21% net long and only 7% net long equities.
Given our long portfolio return, the fact that we ended the quarter with less gross long exposure gets you an idea of what we have been up to during the most recent market rally, we have been sellers. In the same fashion, where we were buying a little bit everyday, when the market dislocated in the fourth quarter and earlier this year, over the past few months we have been selling just a little bit, just about everyday.
We continue to assess attractive equity and debt instruments and are adding to those areas opportunistically. It is stunning to think that one point this year the markets were roughly a third lower than they are today.
We have been selectively covering as well as finding new short ideas. They are gross short portfolio now stands back at a relatively robust waiting of almost 20% from the year low of 36%.
We continue to believe that this is a time for patience and prudence, not withstanding the media reported coverage of second quarter earnings, we aren't hearing very many positive things from any of the companies we are talking to on a regular basis. Given that we are in environment of rising unemployment in over levered consumer, decreasing real estate values and has natural deficit of over $1 trillion, we are simply too worry to have a large net equity exposures.
We do not believe that evaluations in general remain achieved. As a result, we may not do all that well if the rally continues for a while. We believe that we stand a good chance to preserve capital if the market reverses some of its recent gains. We continue to hold the few macro hedges to further protect the portfolio in the form of gold, (inaudible) CDS and options of higher interest rates in the US and Japan, should inflation become a problem longer term.
Our underwriting team continues to do a fantastic job of finding good deals. In environment that has not harden as much as we would have expected. Much of the business has been frequency business, which is well with our investment program as it generates high levels of longer duration premium.
The economic returns on some recently win contracts appears superior to prior deals. We have also continue to beat-up the Greenlight Re team with the addition of two Vice Presidents, Andrea Welsch and Tom Curnock, both very well respected seasoned reinsurance executives. Despite the tumultuous environment over the last 18 months, I am very pleased with our position today.
Now I'd like to turn the call over to Bart to discuss in more detail Greenlight Re’s underwriting progress.
Thanks, David. I am pleased to report that we continue to progress in our underwriting business during the quarter. In the last question, we reported a $3.6 million catastrophe loss on an aggregate catastrophe retrocessional contract underwritten in 2008.
We sold the cover to client that protects them from multiple large events affecting their capital in a given year by protecting the deductible they keep on the traditional catastrophe programs. As the beginning of the first quarter, the ceded losses under the contract related primarily to hurricanes Ike and Gustav were below our retention.
During the first quarter, the client reported a significant loss due to a snowstorm in the UK and now in the second quarter, the subsequent development of some of those losses is less than originally expected, essentially reversing the loss booked in the first quarter. This account did not renew with us in its current form and we are still discussing possible structures for the 2009-2010.
As a result, our maximum catastrophe exposure to anyone event has dropped from $84.4 million in the first quarter of 2009 to $60.4 million in the second quarter. While our aggregate maximum exposure for all catastrophic events has dropped from $106.9 million to $75.4 million.
As Lenny mentioned, our clients by and large have been able to find more profitable opportunities in their respected markets in 2009 than in 2008. We were very pleased in 2008, when our clients reduced their ratings to protect their capital and ours. We are more pleased that they are finding the right sort of opportunities in 2009.
These increasing opportunities with our current clients as well as the success the some of our strategic investments are the drivers behind a large premium growth we have experienced for the quarter and six months as compared to 2008.
We believe we have found partners that are experts and leaders in their respective businesses. We added two new frequency accounts in the quarter both of which we believe will add significant stable frequency premium to Greenlight Re over the next few years. The first is another employer staff loss account, where we continue to build our portfolio and believe that the current pricing continues to strengthen.
This account will begin running premium in the third quarter. The second significant account is the Florida homeowners account written on an X windstorm basis similar to an account we wrote in 2006 and 2007.
As Lenny mentioned, while the underlying business has not improved much the economics to us as a reinsurer on this deal are significantly better than similar transactions that we have analyzed or bound in the past couple of years. This account generated about $17 million of written premium for us in the quarter. We are pleased to add these two new business partners to our company.
Our pipeline particularly for frequency business continues to be strong. We still see the same factors as we mentioned last quarter. We believe that while underlying insurance rates have not yet increased, the economics for the type of frequency business we like has increased due to increase in demand and the decrease in supply.
Since many of our clients use their frequency structures for capital support, we are still benefitting from spotty capital markets. As always we will continue to be disciplined in adding new clients to Greenlight Re's portfolio.
To add to David's comments, we are very pleased to have added two senior members to our growing team; Andrea Welsch has joined as Vice President of Marketing. In her role, Andy will deepen our existing relationships with brokers and clients, develop new relationships in reinsurance marketplace, and help find creative ways to keep our pipeline filled with strong opportunities.
Tom Curnock has joined as Vice President of Underwriting. In addition to his underwriting responsibilities, Tom will help us manage our strategic investments and continue our development of internal risk and pricing models.
Both Andy and Tom have deep industrial relationships as well as skill sets that are complementary to our existing team. We believe the timing of these two hires could not have been better as the economics for frequency business appear to be increasing. In the short time since their arrival, they have already proven to be valuable additions to our team.
And now, I'd like to hand the call over to Tim to discuss our financial results for the second quarter.
Thanks, Bart. Greenlight Re reported net income of $92.2 million for the second quarter compared to net income of $33.5 million for the comparable period in 2008. On a fully diluted per share basis, the net income was $2.51 per share for the three months ended June 30, 2009 compared to net income of $0.91 per share for the second quarter of 2008.
For the six months ended June 30, 2009, net income was a $120 million compared to $28.8 million for the six months ended June 30, 2008. On a fully diluted per share basis, net income was $3.29 per share compared to $0.78 for the comparable period in 2008.
Our second quarter 2009 results reflect the positive impact of the quarter share frequency business we have reported. Net premiums written and earned are substantially higher than in comparable periods in 2008. Net earned premiums for the six months ended June 30, 2009 were $95.5 million, an increase of 83% over the same period in 2008.
The composite ratio for our frequency business for the first six months of 2009 was 97.6% and it was 55.5% for severity business, resulting in an overall composite ratio of 86.5%. Internal expenses were 10.2% of net premiums earned for the first six months of 2009, as compared to 14.7% reported for the comparable period of 2008, resulting in a combined ratio of 96.7% for the first half of 2009.
We reported net investment income of $88.3 million during the second quarter of 2009 reflecting a net return of 13.9% on our investment account. We reported net investment income of $116 million during the first six months of 2009 reflecting a net investment return of 19.1%.
On July 22nd of this year, we reported that we have established a third letter of credit facility. This is a $50 million committed facility with Bank of America. Greenlight Re now has access to $475 million of collateral in the form of letters of credit, which will enable us to continue to execute the underwriting plan we have developed.
Fully diluted book value per share increased 17.4% in the second quarter. For the 12 months ended June 30, 2009 fully diluted book value per share decreased by 4.3% to $16.73 from $17.49 at June 30, 2008.
I will now turn the call back over to Lenny, who will provide some concluding remarks.
Thanks, Tim. The Greenlight Re strategy was created to enable our company to achieve sustainable advantage in all markets. However, we believe our results in the second quarter of 2009 have shown exactly how powerful our strategy can be.
We were judicious in keeping our powder dry in 2007 and 2008. As a result, we believe we are one of the only reinsurance companies with the flexibility to write the multiple of our current premium so that markets continue to improve. Our profitable growth in 2009 is proved positive of this strategy and our under leverage balance sheet continues to provide the financial strength that our clients require.
On the investment side, our strong performance and the absence of outsize risk on individual positions underlines the strength of our deep value investment strategy. 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.
(Operator Instructions). Our first question comes from [Mike Zuranski] of Credit Suisse. Please go ahead.
Mike Zuranski - Credit Suisse
On underwriting are the homeowner premiums from Florida coming from an MD agreements and I guess what we think about Florida exposure ramping up given Bart Hedges prepared remarks. I have a couple of other questions too.
The homeowners account is traditional contract with an insurance company and the State of Florida.
Mike Zuranski - Credit Suisse
Going forward, I guess you guys were thinking Florida is going to continue being a significant source of premiums?
Mike as Bart mentioned, we had done a similar transaction a few years back, which turned out to be quite successful for us and we think we’ve learned a bit about the Florida market. I think we were able to use our knowledge to create what was a very good deal. I think for the client and for us.
Mike Zuranski - Credit Suisse
On the investment portfolio, I know the big exposure is Ford debt, which I assume is yielding double-digit returns in terms of the interest payment. I guess all in, can you guys give us a sense for what the fixed income portfolio the lock in yields off?
Yes. This is David. I don't know that we've really ever calculated it that way. I think when we were buying debt portfolio between October and March and so forth. I don't know what the aggregate was, but I suspect that the average was really quite substantial.
Since then there has been substantial capital gain out of the portfolio on unrealized capital gain. I'm sure the yields are lot less to maturity than the prices that we paid. Although I would imagine that they would still be well in the double-digits, even with the appreciation.
Mike Zuranski - Credit Suisse
In duration wise, you guys look in to whole year the fixed income assets, most likely?
No, we look at each asset on its own and there are some that we'll sell and there are some that we'll keep. Some of them won't be even turn out to be either because some of the situations in the portfolio probably aren't going to repay at maturity. They weren't bought on that basis. They were bought some of them more as workouts and as existing our future bankruptcies, where we may windup receiving equity or other types of securities.
Mike Zuranski - Credit Suisse
Last question, could you comment on the shelf registration that's the [$200] million shelf, you guys filed with SEC.
Sure, Mike. We have no specific plans to use the shelf. What we think is prudent capital management should they need them rise over the next 36 months.
(Operator Instructions). At this time we have no more questions. Should you have any follow-up questions please direct them to Alex Stanton of 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 www.greenlightre.ky. This conference has concluded, and thank you for joining us.
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