David Einhorn - Chairman
Len Goldberg - CEO
Bart Hedges - President and Chief Underwriting Officer
Tim Courtis - CFO
Greenlight Capital Re, Ltd. (GLRE) Q2 2011 Earnings Call August 10, 2011 9:00 AM ET
Thank you for joining the Greenlight Re Conference Call on Second Quarter 2011 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.
All participants will be in listen-only mode. (Operator Instructions) 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 projections 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 22nd, 2011and other documents filed by the company with the SEC. If one or more risks or uncertainties materialize or if the company’s underlying assumptions proved 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 note this event is being recorded. I’d now like to turn the conference over to Mr. Len Goldberg. Please go ahead.
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 second quarter of 2011, in what remains a challenging market for reinsurers and investors alike, Greenlight Re produced a small gain in our underwriting portfolio and a small loss in our investment portfolio. Overall, our fully diluted adjusted book value per share decreased by 2% in the quarter and by 7.3% for the year-to-date.
Our year-to-date combined ratio of 102.1 has improved from our first quarter 2011 combined ratio of 107.4. This is mainly due to a small reduction in our ultimate losses for storms during this period offset by limited adverse development on a commercial auto program that is (inaudible) us. In addition, we had no additional storm related losses in the second quarter of 2011 as we continue to benefit from right into (inaudible) for peak exposures and high attachment points. Bart will give us more details when he discusses our underwriting results.
Our gross written premium increased by 27% in the quarter compared to the same period in the prior year and by 37% for the year-to-date. In addition, the frequency we are in a business we prefer grew by 44% on a year-to-date basis while severity business declined by 22% reflecting the execution of our strategy. Much of the increase in frequency premiums is a result of further success in our Florida home owner’s portfolio which continues to perform well as we have seen strong rate increases in the Florida insurance market.
Our investment portfolio lost 1.9% in the second quarter of 2011 as we maintained (inaudible) position portfolio. We believe our investment portfolio was well positioned for the uncertainty that is ahead of us, but we did have some things worked against us in the quarter which David will discuss further. In the month of July we reported a 1% gain on our investment portfolio.
In a week’s time I will officially step down as CEO of Greenlight Re and (inaudible) over to Bart while I continue to serve Greenlight Re as a Director. I’m proud of the team we have build and our ability to capitalize on opportunities in the market. It has been a great partnership for the last 5.5 years and I’m confident that Bart will continue his successful development of our company. Together we have developed a strong deep and talented organization that we believe will excel in both good times and difficult times.
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 of Greenlight Re’ overall strategy.
Thanks Len and thanks everyone for joining us today. The Greenlight Re investment portfolio was down 1.9% in the second quarter of 2011 brining our first half of 2011 net returns to negative 5.2%. In the volatile yet relatively flat second quarter for the S&P, our long portfolio was up slightly but our short portfolio was up a little bit more than the market in losses in our euro and yen positions more than offset a slight gain in goal.
In July we had a small loss on our longs and positive returns for our shorts and macro positions which added up to a gain for over 1% for the month. Although, we had a slight gain in our short portfolio in June and July, the loss in our investment portfolio for the first half of the year came from our shorts. As we saw at the end of the internet bubble, markets have performed when it simply becomes too expensive on the day-to-day basis to hold (inaudible) research in short positions.
In the first half of the year we witnessed the bifurcated market where a small number of momentum starts rose mostly because they were rising. These markets continue until they don’t and we have seen what can happen when the enthusiasm ends. It is also becoming increasingly clear that the (inaudible) economic stimulus through [QE2] was not only ineffective but has brought about inflation in items that consumers use on the daily basis such as food and energy. This has caused consumers to have to reduce other consumption which has caused a global economy to slow.
In the second quarter, we exited a number of long positions and covered eight short positions with a gain. Exposures on both sides of the portfolio came down in the month of July and growth exposure fell by about 15%. The Greenlight Re investment portfolio ended the month approximately 87% long and 62% short down from 93% long and 70% short at the end of the second quarter. We believe there are quite a few stocks and sectors such as REITs that are trading an all time high is an overvalued and we are short some of them. It is our belief that the global economic situation has deteriorated so far this year and is in work shape than we thought it would be at this point in the cycle.
Given these concerns in addition to consolidating our long and short positions and our highest conviction investments in maintaining a modest debt long position we continue to hold a significant position and goal, some sovereign CDS, options on higher interest rates and a few currency positions and hedges. We reduced exposures because we believe the opportunity set had become less attractive. Though we don’t usually comment on (inaudible) performance given the recent market volatility, we believe it's important to provide some additional commentary.
In recent days, the market has suffered a very large decline. Our conservatively positioned portfolios held up reasonably low with gains in the short portfolio and goals almost offsetting losses in long portfolio. We have taken the opportunity of forming prices to cover some shorts and make modest long investments. As of now our quarter-to-date performance is approximately flat. We are approximately 86% long and 53% short.
As this is Lenny’ last official call as the CEO of Greenlight Re, I want to thank him for his many years of service to the company. Lenny joined us soon after inception of Greenlight Re, while it was still private. And helped us to shape its business and strategy to where it has become today. Though we will miss Lenny, he will continue to add value at the Board level and we are confident in Bart’s leadership and the seamless transition to his management team. Now I’d like to turn the call over to Bart to discuss in more detail Greenlight Re’ underwriting progress.
Thanks David. I’m looking forward to working with our shareholders, the Board and our team to continue to build Greenlight Re. This is a company with its own approach to the market, one that I firmly believe in and I’m excited about helping to realize the opportunities that we see in a market.
During the second quarter of 2011 we took several steps to continue to develop our four core areas of business. We expanded our presence, renewed key business and high growth areas, added some significant accounts and began to leverage our new Dublin operation.
The quarter was particularly active due to our concentration of business and the Florida home owners market. The traditional date for finalizing reinsurance placements for this market is June 1st, just prior to the start of hurricane season. We continue to support several of the Florida home owner’s specialist underwriters with quota shares. Under these contracts we have limited catastrophe exposure as we are only exposed to our proportional share of the wind losses before the catastrophe reinsurance kicked in. We renewed these relationships to June 1, and in each case we believe our reinsurance terms and conditions remained attractive while the underlying fundamentals of the business improved due to rate increases as well as improved legislative environment.
We believe the end result of the higher level of profitability than in the expiring transactions. Our premium volume in this portion f\of our portfolio is growing substantially and for the first six months of 2011, it represents nearly half of the premium volume. While this appears to be a significant exposure, we write this business with tight combined ratio caps, so if we are wrong about any piece of the business, our downside is controlled. This measured downside risk also reduces the capital needed to write these transactions.
Our small account workers compensation and general liability business continues to perform well and has shown some small signs of an improved rate environment. While the market is still quite difficult and competitive in workers compensation and general liability, we continue to believe that the small account business is less price sensitive and our partners in this area have established good distribution channels and are producing good underwriting margins despite the challenging market conditions.
During the quarter, we renewed our largest account in the employer stop loss market, the relationship that is now in its 5th year. This particular partner has continued to outperform the market and has demonstrated disciplined underwriting. We also made a decision to non-renew one relationship in this area. We continue to support several accounts in employer stop loss market and are actively searching for several other accounts that meet overturn hurdles with underwriters who exhibit the characteristics that we value in long-term partners.
We wrote one new property cat retro account during the quarter and a second new retro account since quarter end. Each of these opportunities benefits from improved pricing conditions in the cap retro market following the series of international losses earlier this year. Although, we believe these opportunities are compelling, absent of further significant catastrophe event, we believe the market for property cat retro will not harden significant and may begin to erode due to increased capacity in this area.
Our maximum catastrophe exposure is 66 million for any one event, and 94 million for our maximum aggregate exposure to all events. These figures increased compared to 60 million for any one event and 83 million for all events in the aggregate as of first quarter of 2011.
As a reminder we always stated catastrophe aggregates as absolute amount of limit we have at risk less any reinstatement premiums. In addition to the four core areas of our underwriting portfolio, we have added a few new accounts. One of the new accounts represents a first piece of new business for Greenlight Re, Ireland the subsidiary that we established in late last year. We wrote a UK solicitor's professional indemnity cover, an area of the market that we entered right last year following severe market dislocation. This developing relationship includes a well rated insurance carrier and a large UK broker with retail, wholesale and MGA operations.
Additionally, we have taken a small position in a new non-standard automobile opportunity. This is an area that we have been and out of the couple of times over the past several years and that we feel is currently attractive to us as we believe we can successfully grow our relationship with our new partner.
We continue to be disciplined in our risk selection and we are pleased with our short tail frequency oriented underwriting portfolio. We believe we have a well positioned underwriting portfolio in the event conditions continue to soften and are poised for additional growth should pricing begin to increase.
This quarter we added two new members to the underwriting team, [Bruno Landry] is Vice President and Actuary. Bruno has 13 years of experience mainly in reinsurance pricing with Allianz and Excel. [Rena Strucker] has joined us as an underwriting assistant. Rena is the Chartered Accounted and worked previously for Chartis and Goldman Sachs in the areas of capital management and reinsurance purchasing strategy. We continue to look for strong professionals to help us develop our franchise.
Now I’d like to turn the call over to Tim, to discuss our financial results.
Thanks Bart. For the second quarter of 2011 Greenlight Re reported a net loss of $16.0 million compared to net income of $17.7 million for the comparable period in 2010. The net loss per share was $0.44 for the second quarter of 2011 compared to net income of $0.47 per share on a fully diluted basis for the same period in 2010. For the six month ended June 30, 2011, we reported a net loss of $59.0 million compared to a net income of $5.3 million for the six month ended June 30, 2010.
The net loss per share was $1.53 for the six months ended June 30, 2011 compared to net income of $0.14 per share on a fully diluted basis for the same period in 2010. Net premiums earned for the six month ended June 30, 2011 were $212.3 million, an increase of 102.7% compared to the net earned premium of $104.7 million reported for the first half of 2010. This large increase is primarily a reflection of the increased premium earnings on our frequency business and in particular increased premium earnings on our Florida home owner’s quota share business.
The composite ratio for our frequency business during the first six months of 2011 was 98.7%, and it was 77.4% for severity business resulting in an overall composite ratio of 97.7%. Internal expenses were 4.4% of net earned premiums for the first six months of 2011 as compared to 7.9% reported for comparable period in 2010. This resulted in a combined ratio of 102.1% for the first half of 2011. We reported a net investment loss of $19.5 million during the second quarter of 2011 reflecting a net loss of 1.9% on our investment portfolio. We reported a net investment loss of $55.6 million for the first six months of 2011 reflecting a net investment loss of 5.2%. The fully diluted adjusted book value per share as of June 30, 2011 was $19.82 a 3.9% increase from $19.07 per share reported at June 30, 2010.
And now I’d like to turn the call over to Lenny, to provide some concluding remarks.
Thanks Tim. The second quarter of 2011 has continued the successful expansion of our underwriting franchise both in Cayman and now in the European Union. In addition, our investment portfolio was well positioned in what our still uncertain financial markets. We believe we are positioned to generate above average risk adjusted returns over the long-term without making huge bets on unpredictable and unmeasureable weather and quake events. We executed this differentiated strategy consistently since we started operations in 2005 and we will continue to do so in the future. 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.
Under Bart’s leadership we will continue to execute on this strategy and remain focused on driving our key yardstick, increased fully diluted book value per share. We appreciate your continued confidence in Greenlight Re. Thank you again for your time, and we would like to open the call up to questions.
(Operator Instructions) I’m showing no questions in the queue. I’ll conclude our question-and-answer session. The conference has now concluded. 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 important information about Greenlight Re is available on our website at www. GreenlightRe.ky.