Greenlight Capital Re, Ltd. Q1 2010 Earnings Call Transcript

| About: Greenlight Capital (GLRE)

Greenlight Capital Re, Ltd. (NASDAQ:GLRE)

Q1 2010 Earnings Call Transcript

May 4, 2010 9:00 am ET


David Einhorn – Chairman

Len Goldberg – CEO

Bart Hedges – President and Chief Underwriting Officer

Tim Courtis – CFO


Jim Bradshaw – Bares Capital Management

Rusty Deuss [ph] – JP Morgan


Thank you for joining the Greenlight Capital RE Limited conference call on first quarter 2010 earnings. Joining us on the call this morning 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 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 risks, uncertainties and assumptions that are enumerated in the company's Form 10-K dated February 24, 2010 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.

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Len Goldberg, Chief Executive Officer. Please go ahead.

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. In the first quarter of 2010, Greenlight Re produced a strong result in our underwriting portfolio and a small loss in our investment portfolio. Overall, our fully diluted, adjusted, book value per share decreased by 1.9% in the quarter.

We continue to build on our strong re-insurance franchise during the quarter. Though pricing is still difficult, we are pleased with the performance of our underwriting portfolio. We are especially pleased that although there are a number of significant catastrophe events in the first quarter, including the Chilean earthquake and Xynthia, the European winter storm, we were largely unaffected by these events.

After a 6.4% gain in the fourth quarter of 2009, we had a negative investment return in the first quarter of 2010. However, we achieved our goal of preserving capital. While the equity markets were up strongly in the first quarter, the economic environment ahead still seems quite unstable.

Our combined ratio was 92.6% in the first quarter of 2010. Our strategy of writing a small catastrophe retrocessional book generally focused on peak exposures continues to pay dividends. We believe the pricing of this business continues to hold up much better than traditional property catastrophe re-insurance.

At the same time, we tend to not be affected by events like the earthquake in Chile and the winter storm, Xynthia, just as we were not affected by hurricanes Ike and Gustav in 2008 as the insured losses from these events are not of significant magnitude to impact our contracts.

In the first quarter, we also recognize a gain from the commutation of a medical malpractice contract. For the rest of the book, our combined ratio was similar to 2009 and 2008. Our gross written premium decreased 7% compared to the first quarter of 2009. However, the frequency oriented business that we prefer rose 12% while severity business decreased 42%.

Even though overall market pricing continues to be depressed, we believe the areas of business we continue to focus on still provide acceptable returns and strong opportunities. Our areas of focus continue to be employer stop loss, Florida Homeowners, Small Account Workers' Compensation and General Liability and Property Catastrophe Retro.

As we mentioned last quarter, we saw an opportunity to add a small portfolio of credit and surety risks as of January 1st. We also canceled a commercial motor contract as of March 31st of this year. We continue to seek other pockets of profitable business, but they are hard to come by in the current market environment.

Bart will take you through this in more detail. Meanwhile, we remain focused on only writing accounts that we believe can generate an acceptable return on capital deployed. Our investment portfolio lost 1.9% in the first quarter of 2010 as we maintained a defensively positioned portfolio in what was a very strong quarter for the equity markets.

Our portfolio tends to be short, highly-leveraged companies. So, when markets like we saw in the first quarter, the drag from the short portfolio can overcome the gains in the long portfolio. In the month of April, we reported a 0.1% loss on our investment portfolio.

And 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 to everyone for joining us today. Last week, I went to the Cayman Islands for two days for Greenlight RE's Quarterly Board Meeting and Annual Shareholders' Meeting. This gave me an opportunity to spend some time with the team.

Over the past couple of years, Len has done a great job growing Greenlight RE's team which now stands at 15 strong. We're well positioned to capitalize on an expanded opportunity set in the re-insurance market when a more favorable pricing environment emerges.

Meanwhile, we've done a good job finding underwriting opportunities in select lines of business. Gross written premiums have grown at a measured pace over the past few years and the team has continued to underwrite in a profitable and disciplined manner. We invite you all to attend Greenlight RE's Investor Meeting in New York on May 18th for an in-depth presentation on Greenlight RE's strategy and opportunities from Len and the team.

In the first quarter, Greenlight RE's investment portfolio lost 1.9%. We remain conservatively positioned with a net long exposure of 26% in the first quarter as we did throughout the course of 2009. Even though the portfolio had a similar net exposure as it did a year ago, the portfolio is now more gross invested on both sides and now has almost twice the short exposure as it did at the 2009 bottom.

We still maintain a debt allocation of around 10% but have exited more than half of our debt positions as they have appreciated substantially. Just as we were surprised by the extent of the sell off that lasted until mid March 2009, we're also somewhat surprised by the exuberance which is now pricing into the market on a daily basis.

In the first quarter, we did not add any significant new long positions to the portfolio because it has been hard to find anything at a compelling value. We are not inclined to chase the market at these prices.

The economy and corporate earnings have improved since the market bottomed during the crisis, but no where near as much as financial markets have recovered. We're worried about the price at which this recover – pace, excuse me. I'm sorry, we're worried about the price at which this recovery has come and the future implications this might hold for the U.S. dollar and other reserve currencies.

We're still facing multiple challenges including a 10% unemployment rate, high consumer debt and challenging housing market as well as global sovereign debt problems. We continue to hold a significant position in gold and other portfolio insurance such as options on interest rates and currencies and a modest amount of sovereign credit default protection.

Although our net long position remains conservative relative to where we have been in the past, we're slightly net long and positioned to take advantage of opportunities that might arise in the future, hopefully, at cheaper prices. At present, we're not positioned to participate meaningfully in the current tail wind but believe we should preserve capital in a head wind and have constructed a portfolio where we're looking to capture alpha on both long and shorts over time, something that did not happen in the first quarter as our long portfolio slightly underperformed and our short portfolio slightly outperformed.

Now, I'd like to turn the call over to Bart to discuss in more detail Greenlight RE's underwriting progress.

Bart Hedges

Thanks, David. On our last call, we discussed in detail the four main areas where we have been seeing success. As Lenny mentioned, we believe these businesses have good potential. We see employer stop loss as a continued growth area for Greenlight RE. We have solid experience in this sector and we have partnered with very knowledgeable people.

The results thus far have been better than we initially expected. This is very short tailed, low volatility business and pricing is still in excess of loss trend. The recently passed healthcare reform legislation in the United States may impact the business either positively or negatively at some point in the future, but it is too soon to tell what those impacts could be.

We continue to monitor events closely. The Florida Homeowners' market remains in crisis as we mentioned last quarter. In fact, it has worsened. We believe there have been at least a half dozen small homeowners' companies that have been forced to stop writing business by Florida regulators due to capital concerns.

This has fueled additional concern in the market which, in turn, has resulted in rate increases. In addition, MDA fees paid by these companies are being scrutinized by the Florida Insurance Regulators resulting in a less attractive environment for hard capital investments.

With lower capital and higher premiums, more companies will be turning to Quota Share Covers as a form of capital support. This is an area where we have been successful in the past and we believe we will see a number of opportunities on this front in the coming months.

Our third area of emphasis, small accounts, continues to outperform large accounts in this environment. We have been focused on workers' comp and general liability lines with small average premiums. Competition in this market segment – competition is lower in this market segment as shopping happens less often and a portion of the business is written at minimum premiums, a base premium regardless of the amount of exposure covered which typically results in a better risk-adjusted price for the seller.

We have a select number of partners in this business who know their markets well and are carefully expanding their platforms to increase the flow of opportunities. Finally, we continue to write a profitable book of peak exposure property cat retro.

As Lenny mentioned, we were not affected by the events of the first quarter just as we were not affected by hurricanes Ike and Gustav in 2008. We may, at some point, experience a loss in this portfolio but we believe if that happens, the size of the losses the market will experience will be large enough to drive up market pricing.

Our maximum catastrophe exposure to any one event in the first quarter of 2010 is $58.5 million which is unchanged from the fourth quarter of 2009. Our aggregate maximum exposure to all catastrophic events is $97.5 million, also unchanged from the fourth quarter.

As a reminder, we always state our catastrophe aggregates as the absolute amount of limit we have at risk less any reinstatement premiums. As we mentioned last month, we have entered into the trade credit maturity markets consistent with the Greenlight RE approach, we are being very selective about our participation in this market and are partnering with companies that we feel are experts in this business.

The biggest part of the book is traditional European based trade credit where pricing is increased by 40% or so over the last two years and our portfolio is benefiting from considerable re-underwriting efforts by the original insurers. The assurity business is written on both the re-insurance and retrocessional basis and is currently comprised of small U.S. risks and large international risks.

In keeping with our focus on accounts where we can make an acceptable return on capital, we canceled a large commercial motor account as of March 31st of this year. The client is a good partner of ours who we believe outperformed the market.

The issue was the pricing of the market place, especially in a large account area that was the focus of this client. Prices per power unit continue to fall and we believe it will be difficult to make a reasonable profit in this business until pricing moves up substantially.

We ended this relation – relationship on positive terms and believe we have an opportunity to work with this client again when market conditions warrant. We believe we still have a significant untapped underwriting capacity that we are reserving for a time when the pricing turn eventually comes.

But for now, we believe we have a well positioned underwriting portfolio in the event prices fall further and are poised for growth should pricing begin increase towards the end of 2010 or into 2011. Now, I'd like to hand the call over to Tim to discuss our financial results.

Tim Courtis

Thanks, Bart. Greenlight RE reported a net loss of $12.4 million for the first quarter of 2010 compared to a net profit of $27.8 million for the comparable period in 2009. On a per-share basis, the net loss was $0.34 per share for the three months ended March 31st, 2010 compared to net income of $0.77 per share on a fully diluted basis for the same period in 2009.

Gross written premiums declined slightly during the first quarter of 2010 compared to 2009. While our frequency based premium increased by approximately 12%, the decrease in total premiums written for the quarter was primarily the result of our decision to reduce our participation on a property catastrophe contract and also the termination of a medical malpractice contract.

Net earned premiums for the three months ended March 31, 2010 were $55.3 million, an increase of 19.7% when compared to the net earned premiums of $46.2 million reported in the first quarter of 2009. This increase in earned premiums is a reflection of the earnings on our frequency business which has grown during the first quarter of 2010.

We reported a net investment loss of $16.8 million during the first quarter of 2010, reflecting a net loss of 1.9% on our investment accounts. The composite ratio for our frequency business for the three months ended March 31, 2010 was 97.5% and it was 14.1% for severity business, resulting in an overall composite ratio of 83.3%. Internal expenses were 9.3% of net earned premiums for the first quarter of 2010 compared to 9.5% reported for the comparable period in 2009.

Our combined ratio for the first quarter of 2010 was 92.6% compared to a combined ratio of 103.6% for the same period in 2009. The reduction in the first quarter combined ratio is primarily the result of reduced losses being reported on our severity business.

As discussed in previous calls, we expect the loss ratio on our severity business could be volatile from period to period. For the three months ended March 31, 2010, the losses reported on our property excess of loss contracts was very low and the overall severity loss ratio was further reduced due to the reversal of loss reserves previously accrued on a medical malpractice contract that was commuted during the quarter.

Fully diluted, adjusted book value per share decreased by 1.9% in the first quarter. For the 12 months ended March 31, 2010, fully diluted, adjusted book value per share increased by 32.1% to $18.60 from $14.08 at March 31, 2009. I am pleased to report that on April 28, 2010, we held our Annual General Meeting. All five proposals were approved by shareholders, including the re-election of all our incumbent directors for additional one-year term and also the increase to the number of shares available under our stock incentive plan.

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

Len Goldberg

Thanks, Tim. The first quarter of 2010 presented us with a challenging underwriting environment along with a number of major industry loss events. Our underwriting portfolio performed well in the face of these challenges. In addition, our investment portfolio preserved capital in what are still somewhat stressed and uncertain financial markets.

We have executed this differentiated strategy consistently since we started operations in 2005. Our objective is to write a concentrated underwriting portfolio with the best risk-adjusted returns we can find and to utilize the flow generated from these contracts to invest in our deep value, long-short investment program which has generated superior returns with less volatility than the overall equity markets.

We will continue to execute on this strategy and remain focused on driving our key yard stick, increased book value per share. We appreciate your continued confidence in Greenlight RE.

As David mentioned, Greenlight RE will hold an investor meeting on Tuesday, May 18, 2010 in New York City. Presentations will be given by the members of the executive management team and David and the meeting will include a question-and-answer session. You can find more information on this event under the news section of our website. Thank you again for your time and now, we would like to open the call up to questions.

Question-and-Answer Session


We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Jim Bradshaw of Bares Capital Management. Please go ahead.

Jim Bradshaw – Bares Capital Management

Thank you. Good morning, guys. In the Q, you guys mentioned a number of large frequency opportunities that can fit your strategy. I wonder, if you could give a little bit more color on what you were talking about there?

Len Goldberg

Sure, Jim. This is Lenny. I think we're looking at the same areas that Bart has highlighted. We're – they're as far as the opportunities that we would complete. I mean, we're seeing opportunities in all lines but the ones that are most palatable to us are still in the small account area, employer stop loss area and Florida Homeowners.

Jim Bradshaw – Bares Capital Management

Okay. All right, appreciate it. Thank you.


(Operator Instructions) We have a question from Rusty Deuss [ph] of JP Morgan. Please go ahead.

Rusty Deuss – JP Morgan

Morning, fellas. You want to comment at all on any of the investment portfolio you highlighted in your annual letters, specifically maybe BSX and/or Vodafone, please?

David Einhorn

I'm sorry, what was the first one, Rusty?

Rusty Deuss – JP Morgan


David Einhorn

BSX or Vodafone. Okay.

Rusty Deuss – JP Morgan


David Einhorn

Sure. The Boston Scientific was an investment that we made in the fourth quarter of 2009. It was made on the expectation that a new management team had been brought in, they'd been in there for a while. They were going to announce a turnaround plan with some metrics and some metrics and so forth. And we thought that they were set up to do rather nicely and we were surprised when they announced their quarterly result. And they announced they had completed the plan but they wouldn't tell anybody much about the metrics. And it sure sounded like it was going to take an awful long time for them to turn their business around. So, we promptly exited and incurred a very modest loss on the position considering that our thesis did not materialize. Vodafone remains at a large position in the portfolio.

The basic thinking there is that the share price does not reflect a full valuation or even maybe even any valuation for Vodafone's 45% interest in Verizon Wireless. Because right now, Vodafone doesn't get any cash from Verizon Wireless, so it doesn't show up in any of their cash flow metrics or in their dividend yield which tend to be some of the kinds of things that some of the sell side and buy side analysts look at. What's interesting about it is as most of the cash from Verizon Wireless has been going to repay inter-company debt to Verizon. And that debt has been a substantial amount over the last couple of years which is now almost complete. Within the next month or two, all of that inter-company debt be repaid and then it will be interesting to see how Verizon and Vodafone work out what to do about the Verizon Wireless cash flows at that time. So, we're hopeful that that – however that is resolved, it will be in a way that will more fully reflect Vodafone's substantial ownership in Verizon Wireless and we hope that that will reflect in Vodafone's share price.

Rusty Deuss – JP Morgan

Thank you.


(Operator Instructions) This concludes our question-and-answer session. Should you have any follow-up questions, please direct them to Alex Stanton of Stanton Public Relations and 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 pertinent information about Greenlight Capital RE Limited is available on our website at The conference has concluded. You may now disconnect your line.

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