Greenlight Capital Re, Ltd (NASDAQ:GLRE)
Q2 2014 Earnings Conference Call
August 5, 2014 09:00 ET
Bart Hedges - CEO
David Einhorn - Chairman
Tim Courtis - CFO
Brian Meredith - UBS
Sachin Shah - Albert Fried & Company
Thank you for joining the Greenlight Re Conference Call for the Second Quarter of 2014 Earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; and Tim Courtis, Chief Financial Officer and Brendon Barry, Chief Underwriting 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 facts, 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 18, 2014, 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.
Please also note today’s conference is being recorded.
I would now like to turn the conference over to Bart Hedges. Please go ahead sir.
Good morning and thank you for taking the time to join us today. In the second quarter of 2014 Greenlight Re generated small net underwriting loss after all expenses and a gain in our investment portfolio. Overall our full diluted adjusted book value per share increased by 10.4% in the quarter and has increased 9.2% for the year-to-date. Our combined ratio for the second quarter of 2014 was 101.5% compared to our combined ratio for the first quarter of 2014 of 99.9%.
Our combined ratio for the first six months of 2014 was 100.7% as compared to 98.3% for the same period in 2013.
The modest deterioration in our underwriting results is driven by a higher G&A expense ratio which Tim will discuss in more detail later in the call. Our composite ratio which is the measure of the profitability of our underwriting portfolio without consideration of our G&A expenses was 93.9% for the year-to-date as compared to 94.3% for the same period in 2013.
Given our strategy of writing a small number of large accounts, we expect the premium flow to be somewhat lumpy and this was the case during the second quarter of 2014. Our written and earned premium for the quarter and year-to-date were significantly less than in the comparable period in 2013. The reduction is due to several factors, we’re writing less new business than we have been in previous periods due mainly to the soft market environment.
Additionally while our renewal business is performing well and we have been successful at continuing these relationships at terms and conditions that we believe are acceptable, some of these relationships shrunk during the quarter’s renewals due to our partner’s decision to purchase less reinsurance. This is particularly true for certain Florida Homeowners relationship which renewed during the second quarter of 2014.
We continue to be a lead or exclusive reinsurer on these accounts with the overall size of the transactions offered by these clients decreased over the previous year causing the written premium to decrease. Do the mechanics of quota share reinsurance transactions; the impact on the second quarter premium was significant. As an example imagine the quota share of the primary insurers numerous individual homeowner’s policies that we bind on June 1st for a one year term. Now let’s consider a single underlying insurance policy in that quota share contracts that is sold starting the following January 1 where we receive our share of the premium for the full year and earn it evenly over the year.
But if the quota share contract expires on May 31, and is not renewed then we return in this example the unearned seven months of the premium. Similarly if we renew a reinsurance contract for a smaller quota share than the expiring contracts we return more unearned premium than we received for the new contracts
This accounting for premium and the reduced participation affected our second quarter by reducing our premium written by approximately $51.2 million or about half of our reduction and gross premiums written but keep in mind this is only a one quarter event. We expect our premium written will be higher in the third quarter.
Outside the reduction of some Florida Homeowners renewals that took place in the second quarter we successfully renewed several of our larger relationships in non-standard automobile and employer stop loss phase, shares [ph] that were similar to our expiring share.
Our client centric underwriting strategy has allowed us to form deep relationships with our customers who value their reinsurance partners and has resulted in high client retention rate. This is important during the competitive market where some reinsurers are willing to write premium solely for top line growth. We continue to look for profitable areas of the market to deploy our capacity but the market is competitive in nearly all sectors.
We believe that disciplined underwriting during periods of heightened competitions will pay off in the long run. We continue to monitor the run-off of our commercial automobile and general liability books of business. These accounts are developing as expected based on our current estimates and ultimate losses. There is still uncertainty with respect to the final settlement of claims but with each quarter we continue to resolve risk in this portfolio. With respect to our property catastrophe aggregates our maximum exposure to a single event is currently $80.5 million and our maximum exposure to all events is $99.7 million.
Our maximum exposure to all events has decreased roughly 33% from the previous quarter end. The reduction exposure relates to us writing less cat retro business as it did not meet our return hurdles in the current very competitive market. Our current aggregate exposure is the smallest we have had going into hurricane season since 2011.
During the quarter we excited our strategic investment in our Florida Homeowners insurance carrier, we made a small positive return on this investment and we maintained our reinsurance relationship as we have the right of first refusal to continue providing quota share reinsurance capacity until June 2016. We continue to have several other strategic investments which have helped drive profitable ongoing reinsurance relationships.
Though the drop in premium was significant in the second quarter our strategy is to be disciplined and avoid accepting risks that don’t have adequate compensation. We believe this discipline is the best means in growing our book value per share over the long term even so we have the pipeline of attractive opportunities that we hope to underwrite over the intermediate term.
Now I would like to turn the call over to our Chairman, David Einhorn to discuss our investment results and the progress in Greenlight Re’s overall strategy.
Thanks Bart. Good morning everybody. The Greenlight Re investment portfolio returned 8.1% in the second quarter bringing the 2014 net return to 7.3%. Our loan portfolio returned 13.9% as Apple and Micron led the way with strong operating results. Apple’s earnings per share grew 15% last quarter and the company forecast for more of the same. Apple also raised it's capital return plan by 50% to $90 billion. Micron’s earnings exceeded expectations as last year’s DRAM memory price increase held steady. These long positions we established in the first quarter (indiscernible) and SunEdison also contributed as company specific events made positive progress. Finally a position we have established last year in Oil States International appreciated as the company spun off at accommodation’s business which now trades publically as Civeo.
We continue to hold positions in these companies and believe that you just cheap on [ph] absolute basis and has further value to be unlocked through shareholder friendly management teams.
Our short portfolio detracted a bit less than the market gain this quarter as an unusual amount of takeover activity affected a number of our short positions. The last time we experienced take over season in our short portfolios back in 2006 and 2007 when a number of our shorts were taken out in succession. In the current environment acquirers are willing to overlook problems in companies because inexpensive debt financing makes deals EPS accretive in the near term.
Our macro position slightly detracted from quarterly results as our French sovereign bond short and our yen short cost us more than our gold position contributed. We had a difficult time finding new investments this quarter despite a 13.9% increase in the loan portfolio we ended the quarter at a 114% gross loan about 3% less gross loan than we were at the beginning of the quarter, this reflects trimming of a number of appreciated positions.
The investment portfolio ended the quarter 48% net loan which is down about 4% from the beginning of the quarter. As the market continues to rise from the face of conflicting economic data, global unrest and looming overdue Fed exit from quantitative easing we remain cautiously positioned. In the month of July our investment portfolio lost 2.6%. Despite a positive results from Apple we had a large number of small losses throughout the rest of the portfolio that summed up to a losing month. None of the losses were large and the real problem was a lack of other significant winners.
On the underwriting front, we clearly are facing challenges. As we have stated before it's better to reduce the amount of business we write than to accept mispriced risk. Our balanced approach between assets and liabilities gives us an opportunity to earn a good return on equity even in periods where underwriting volume shrink as they did this period. The team has done a good job of protecting capital and developing new ideas for the future while waiting for more opportune environment to increase our book of business.
Now I would like to turn the call over to Tim to discuss our financial results.
Thanks David. For the second quarter of 2014 Greenlight Re reported net income of a $109.6 million compared to net income of $28.5 million for the comparable period in 2013. The net income per share on a fully diluted basis was $2.89 for the second quarter of 2014 compared to net income of $0.76 per fully diluted share for the same period in 2013. For the six months ended June 30, 2014, we reported net income of a $100.7 million compared to $85.2 million for the six months ended June 30, 2013.
The net income per share on a fully diluted basis was $2.66 for the six months ended June 30, 2014 compared to $2.27 for the same period in 2013. Gross premiums written were a $152.6 million for the six months ended June 30, 2014, a decrease of 41.8% from gross premiums written of $262.2 million for the first six months of 2013. As Bart described this decrease was primarily a result of decreases in our participation on certain homeowner’s quota share contracts during the second quarter.
Our net earned premiums for the first six months of 2014 decreased by approximately 17.7% to $199.5 million when compared with premiums earned during the same period in 2013. The decrease in premiums earned is primarily due to the non-renewal of a private passenger automobile contracts which was terminated at the end of 2013.
The composite ratio for our frequency business for the first six months of 2014 was 98.0% compared to a composite ratio of a 100.6% during the same comparable period in 2013. For our severity business our composite ratio was 29.3%, it should be noted that the comparative period in 2013 showed positive developments as reserves on Super Storm Sandy were taken down in the first quarter of 2013.
Overall our composite ratio for the first half of 2014 was a 93.9% compared to 94.3% for the comparable period of 2013.
Our total expense ratio being the combination of internal expenses and corporate expenses was 6.8% for the first six months of 2014 compared to 4.0% during the comparable period of 2013. Our internal expenses of $10.1 million for the first six months of 2014 were in-line with our expectation and compared to $9.8 million incurred in the comparable period in 2013. Our corporate expenses includes a foreign exchange loss of 1.6 million primarily from the revaluation of loss reserve denominated in British Pounds. This compares to a foreign exchange gain of $1.9 million for the same reason reported during the comparable period in 2013.
The resulting combined ratio of a 100.7% for the first six months of 2014 compared to combined ratio of 98.3% for the same period in 2013. We reported net investment income of a $113.9 million during the second quarter of 2014 reflecting a net gain of 8.1% on our investment portfolio.
For the first six months of 2014 we reported a net investment gain of a $103.8 million reflecting a net investment return of 7.3%. A fully diluted adjusted book value per share as of June 30, 2014 was $30.47, at 25.9% increase from $24.20 per share reported at June 30, 2013.
I would now like to turn the call back over to Bart to provide some concluding remarks.
Thanks Tim. Our goal is unchanged, we aim to build long term shareholder value by writing 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 value oriented long/short investment program. This investment approach has historically 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 fee yard stick, increased fully diluted book value per share and we appreciate your continued confidence in Greenlight Re. Thank you again for your time and now we would like to open up the call for questions.
(Operator Instructions). The first question comes from Brian Meredith with UBS. Please go ahead.
Brian Meredith - UBS
Yes. Couple of questions here, first, one I was wondering if you can give a little more kind of color on the PI or solicitors PI adverse development in the quarter, kind of what happened there and can we see some more development out of that book going forward?
Brian as we disclosed in the loss development numbers during the quarter for the solicitors we showed $3 million approximately of adverse development mainly due to a couple of large losses that were reported. That number what you see is loss development is offset by about 0.6 million of a slight change. So net around 2.5 million of adverse development.
And Brian this is business that we have been on beginning in 2010 and this is business that incepts later in the year October. Overall we’re pretty comfortable with the business, we recently made the decision to renew and continue the business into 2014 again renewing in October 2014 and even though there was a modest amount of adverse development in the quarter overall which hit the profitable business for us.
Brian Meredith - UBS
And then just second question, just from a big picture perspective Bart, as the reinsurance market continues to get more and more competitive here not only in the property side but we’re seeing obviously in the casualty side getting some more price competition with seating commissions et cetera. How much more challenging is it going for you guys to show growth in the reinsurance business, should we expect that perhaps there is this more contraction here to come as things continue to be competitive?
I think obviously there was a big movement in the premium this quarter so it's natural to look at the growth going forward. I want to try to give you a little bit more color on the way we think about the premium and our prospects in the market. First of off it is a competitive market. We said that for a while and it continues to be very competitive especially on the cat side and when it is like this we think that our model allows us the opportunity to be selective on the underwriting side and really try not to write things that we believe are mispriced risk. So last year at the end of the year we decided to not renew a very large non-standard automatable contract which we spoke about in the fourth quarter and that has an impact on our premium writings during 2014.
So it becomes an issue when you look at sort of a comparative of 2013 versus 2014. Overall non-standard automobiles we got a good business for us but in that particular account we didn’t think you were getting price of risk. So we walked away and we think it was a good decision. Secondly, historically Florida has been a pretty good market for us. We participated in the sort of limited wind homeowner’s quota shares for quite some time and we think that it is a good business this year. We were able to continue on a number of the renewals and we think we did a good job of maintaining our place in the lead market.
We got some good terms and conditions that were really roughly in-line with where they were a year before but the clients decided to seed less business and part of that decision was that the way they have been managing the risk on their own balance sheet. In the past they have been deciding to keep some of the cat risk on their own balance sheet or with their own capital and buy a lot of the non-wind or limited wind quota share protection that we provide. This year the cat market was cheap and they decided to purchase more of the cat which left a little bit of risk taking ability on their balance sheet and so at the end of the day they decided not to seed as much of the business to the quota share participants like Greenlight Re.
So there would be others as well but that had a major impact. We actually think it was probably a smart decision from their perspective but at the end of the day it impacts our premium volume going forward. And then we start thinking about the renewals and we have -- we have been executing this client centric strategy which we think is a real competitive advantage for the company especially in a very difficult and competitive environment like we’re in because we have been successful at renewing relationship, large relationships that are profitable and that’s the case when we look forward to say the third and fourth quarter where we have a number of both a large non-standard automobile and employer stop loss relationship that would come up for renewal.
And we have been able to negotiate terms and conditions that we think are acceptable and we have been able to renew those in advance of the third quarter or early in the third quarter. That will be business that will be coming out of the books in the fourth quarter and into the first couple of quarters of 2015. So we feel pretty good about that part of the book of business and it feels pretty stable right now and then lastly getting more to your point about the competitive environment. It's tough; fortunately our guys have been working on a number of initiatives. Some of them are very targeted approaches where we’re working with brokers to identify (indiscernible) carriers who are buyers of the types of reinsurance products that we sell and I got a number of those in the pipeline that we’re looking at, we think the prospects are good but as you said it's a competitive market. We will have to be price sensitive there but we have shown that we can be disciplined and we won't write in unless we think we’re getting a reasonable risk adjusted return on that business.
Then the last thing that we’re doing is we’re working on some new products that we have been working on for the last couple of months. We have targeted a few brokers; we have targeted a few accounts. This is a kind of stuff that really these large types of relationships on new products, they take a little while to manifest themselves in terms of an actual contract. Fortunately that work has been underway for a while but I expect some of that to be successful and hopefully will result in some new premium coming into the beginning of next year. Of course again we got to underwrite the business and we got to compete in the marketplace. We have got a lot of things going, I think our prospects are good but it is a competitive and difficult market and I think our model allows us the opportunity to be selective here but overall I feel comfortable with our position. I think our strategy is working and I think our disciplined approach will pay off overtime.
Our next question comes from (indiscernible) from KBW. Please go ahead.
Part of you answered most of them there but just a couple of quick number ones, I was wondering if you could quantify the non-standard auto contract that you non-renewed at the end of last year?
So we have disclosed in the Q that for the first six months and this is in aggregate so it would include not just the ones that we non-renewed but kind of any changes in amount of premiums that would be going forward but for the first six months of this year our private passenger --automobile business was down $71.5 million and that’s for the first six months and that’s compared to the previous 2013.
The contract that we decided not to continue had an annual amount of sessions to us in the neighborhood of about a $125 million.
Okay so that would be kind of the full year impact to think about?
But if you were -- either a comparison of ‘13 to ‘14 that would have about what we would have expected if we had continued in 2014, yes.
And then just lastly so if I back out on premium adjustment for the Florida Homeowners, non-renewal it looks like premiums were down about 35% in the frequency segment is that correct?
The $51.2 million that we described was kind of the quarter-on-quarter reduction due to the return of the EPR [ph] in the lower share. The kind of the number to think about to get to normalized number if you want to use those words.
(Operator Instructions). The next question comes from Sachin Shah of Albert Fried. Please go ahead.
Sachin Shah - Albert Fried & Company
I’m not sure if you could provide some more transparent or clarity on your comments earlier, I think it was mentioned maybe in your quarterly letter as well about the acquirers being overlooked the problems that they had in the context that they did make some acquisitions a few of them are kind of nearing completion. So just want to see if there was any kind of transparency or clarity or that was before the deal was announced or you still feel the same way?
I’m not sure which deals you’re talking about.
Sachin Shah - Albert Fried & Company
Safeway, Questcor, MNK, Lorillard, Reynolds.
Well Safeway is going to be taken private by Albertsons and, this discussion of this narrative was generally speaking more backward looking in terms of things that have affected performance of the short portfolio over the last few quarters and when it sort of compounded into sort of a number of transaction so we just kind of laid them all out. Safeway assuming these deals got closed which I’m not really opining one way or the other at the moment. Safeway would be brought private and that would presumably be the end of that investment. Lorillard is being acquired by Reynolds which has a lot of the same risks that Lorillard had in terms of Menthol, just Menthol is a much bigger percentage of Lorillard. So that’s something that we will evaluate whether or not we wish to carry it forward post-merger if it happens.
The same is certainly true of Mallinckrodt and Questcor where in fact Mallinckrodt is going to become extremely exposed to the single product risk at Questcor which could turn out to be an issue because the product appears vulnerable on a number of possible fronts. The next one was there was one more you mentioned?
Sachin Shah - Albert Fried & Company
I think those of are three but I think the one more that you may have mentioned is that MLM with the TXI -- that deal closed?
That deal closed and it's an acquirer and so we have taken a sort of negative view about their ability to achieve the forecast that they have put into their proxy and we have a different view as to where we’re in the cycle compared to maybe where the rest of consensus is so we think that the mid-cycle earnings there are much lower than people are seem to be pricing into the shares and so we maintain that as a short position.
This concludes our question and answer session. Should you have any follow-up questions please direct them to Garrett Edson of ICR at 203-682-8331 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.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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