Greenlight Capital Re's CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 1.12 | About: Greenlight Capital (GLRE)

Greenlight Capital Re (NASDAQ:GLRE)

Q1 2012 Earnings Call

May 1, 2012 09:00 AM ET


Bart Hedges – CEO

David Einhorn – Chairman

Tim Courtis – CFO


Marie Lunackova – UBS


Thank you for joining the Greenlight Re Conference Call on First Quarter 2012 Earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; Brendan Barry, Chief Underwriting Officer and Claude Wagner, Chief Actuarial Officers

After today’s presentation, there will be an opportunity to ask questions. Please note, 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 22st, 2012, 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 conference over to Mr. Bart Hedges, Chief Executive Officer. Mr. Hedges, the floor is your sir.

Bart Hedges

Good morning I am Bart Hedges, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us today. In the first quarter of 2012 Greenlight Re generated a small loss in our underwriting portfolio after all general and administrative expenses had a gain in our investment portfolio. Overall, our fully diluted adjusted book value per share increased by 7.8% in the quarter. Greenlight Re's combined ratio for the quarter ended March 31st, 2012 was 102.4%. Our combined ratio improved marginally over the fourth quarter of 2011. Our core businesses continued to produce acceptable results; however our combined ratio continues to be negatively impacted by higher than expected severity trends in our commercial, automobile, book of business. Our commercial automobile accounts have proved unprofitable over several years. In particular, transportation business were in by our partners in 2009, 2010 and to a lesser extent 2011 experienced unfavorable trends in the frequency of large losses compared to historical results. We are no longer writing commercial automobile business, but we continue to be responsible for the run-off of the claims for the business we did right. We monitored the run-off of this business closely and continue to reserve quarterly based upon on our best estimates.

Our gross written premium for the quarter was up 51% from the same quarter a year ago. The growth in written premium was mainly attributable to the relationships we entered into recently to write private passenger motor contracts. This business is quite different from the commercial automobile business discussed earlier. The coverage is non-standard motor liability for private passenger autos, not commercial vehicles used mostly in the long-haul trucking business. Additionally, the non-standard motor liability business covers very low limits of liability as compared to the commercial automobile business. For example, an average non-standard motor liability policy limit maybe $20,000 compared to an average commercial automobile policy limit of $1 million. The lower policy limit mitigates a potential negative impact of large losses. Additionally, the non-standard motor liability business we support is currently experiencing rate increase in excessive loss trends which we believe will result in expanded profit margins.

During the first quarter we did not experience any movement in our reserves for natural catastrophes experienced during 2010 or 2011. We renewed one significant catastrophe retro account at April 1st, 2012, with improved terms. Although 2011 was the year of historic international property catastrophe losses, new capacity from collateralized markets reduced the ability to significantly increase pricing and therefore limited our ability to find acceptable, new opportunities in this area. However, we are comfortable with our exposure in this part of our portfolio and continue to believe that we are achieving good risk adjusted returns on the business we support. Our maximum catastrophe exposure currently at 69.8 million for any one event and 102.7 million for our maximum aggregate exposure to all events. As a reminder, we always state our catastrophe aggregates as the absolute amount of limit we have at risk, less than any reinstatement premiums. We continue to signs of improved rate conditions on our private passenger automobile, Florida homeowners, employer stop loss and small accounts commercial liability and workers compensation businesses. This move towards higher rates is an encouraging sign for the future market conditions, particularly in combination with the low interest rate environment, and the slowdown in releases of prior period reverses being experienced by the broader industry. However the turn in the market is slow and we will stay patient and focused on writing business that fits our strategy and meets our return expectations.

During the quarter we added a new senior member to our underwriting team. Carl Trainer will join our Dublin Ireland operations as General Manager on June 1st 2012 with a mandate to drive implementation of our client focused underwriting strategy in Europe. Carl joins us from Conihout Ireland where he was responsible for underwriting reinsurance business in the UK and Europe. Additionally, we are pleased to welcome Matias Galker, the new Actuary to our team in Cayman.

Now, I'd 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.

David Einhorn

Thanks Bart and good morning everyone. Last week I was in the Cayman Islands for Greenlight Re's quarterly board meeting and annual shareholders meeting. This gave me a chance to spend some time with the team. I am pleased with the measured growth of the business and continue to be disciplined in the challenging market but we have found tons of underwriting opportunities in areas of the market that have shown favorable pricing terms. As a result, our gross written premiums are up this quarter and we remain positioned to capture future opportunities as they emerge.

Now I'd like to discuss the investment portfolio. In the first quarter Greenlight Re's investment portfolio had a 6.5% net return, driven by a 15.6% gross return on our long portfolio. The most significant contributors to our performance came from long positions in companies that have been delivering solid operating results over the past few quarters including Apple and Seagate. Although the stock prices of a number of our long portfolio investments lack the fundamental progress made by these companies in 2011, market participants recognize and priced some of the embedded value in each businesses during the first quarter of 2012.

Our short portfolio loss 7.2% or roughly the same amount as the market based upon 57% average growth short exposure. April was a challenging month and we lost 2% while the S&P 500 loss approximately 6/10ths of 1%. Over the past six months, equity markets have stabilized as a healthier economic outlook in the US has unfolded in fears of an impending collapse in Europe have subsided for the time being. As the markets fell in the later part of last year, we increased our net exposure given the enhanced opportunity set and we entered the year 37% net long. In the first quarter, our net exposure dropped to 2% and we ended the quarter 32% net long. Our growth short exposure increased about 9% as the market rallied and we added couple new short positions.

In April, we further increased our net long exposure which stands at 39%. Although, corporate earnings have been improving for four out of every five companies in the S&P 500, have exceeded their earnings expectations so far this year, this enthusiasm is tempered by our continued concern about the structural southern debt problems in Europe and Japan, the slowing Chinese economy and high oil prices, general inflation connection to the fed's continued insistence on maintaining an emergency 0% interest rate policy is we believe is no longer useful or effective. We continue to focus on identifying individual or compelling long and short investments while maintaining our positions in gold, gold miners as well as other macro hedges. We invite you all to attend Greenlight Re's investor meetings on May 21st at the Time Warner Center in New York City. We look forward to you joining us so we can share in more detail the Greenlight Re story.

Now I'd like to turn the call over to Tim to discuss our financial results.

Tim Courtis

Thanks David. For the first quarter 2012, Greenlight Re reported net income of $65.1 million compared to a net loss of $43.0 million for the comparable period in 2011. The net income per share on a fully diluted basis was $1.75 for the first quarter of 2012 compared to a net loss of $1.19 per share for the same period in 2011. Gross premiums written were $152.2 million during the first quarter of 2012, an increase from gross premiums written of a $100.7 million in the first quarter of 2011. As Bart mentioned earlier, this increase is primarily the result of premiums written related to private passenger automobile contracts entered into during recent quarters. Our net earned premiums were $101.6 million, a slight decrease from $105.2 million reported in the first quarter of last year. the decrease is attributable to a combination of factors including lower earned premium on personal lines business as a result of a Florida homeowners contract we commuted during the fourth quarter of 2011, an increase in premiums earned on our non-standard motor liability business and slight decreases in workers compensation and general liability lines resulting from decreases in the underlying premiums written by our insurers.

The composite ratio for our frequency business for the first quarter of 2011 was 101.5% compared to a composite ratio of 99.1% during a comparable period in 2011. For severity business our composite ratio for the first quarter of 2012 was 19.1% compared to a 151.5% during comparable period in 2011. Overall, our composite ratio for the first quarter of 2012 was 97.8% compared to a 102.6% for the comparable period of 2011. Internal expenses were 4.6% of net premiums earned for the first quarter of 2012 as compared to 4.8% for the same period in 2011.

The resulting combined ratio for the first quarter of 2012 was a 102.4% compared to a 107.4% for the same period in 2011. The reported net investment income of $71.6 million during the first quarter of 2012 reflecting a net return of 6.5% on our investment account, the fully diluted adjusted book value for share as of March 31, 2012 was $23.29, a 15.1% increase from $20.23 per share reported at March 31, 2011.

At a recently held Board of Directors meeting, the Board approved the extension of the Company’s share repurchase plan for an additional year. The plan now expires on June 30, 2013. There are no share repurchases during the first quarter of 2012; an approximately 1.8 million shares remained authorized for repurchase under the plan. You might read how with annual general meeting on the April 25, 2012, I am pleased to report that all of seven proposals contained in the proxies were approved by shareholders, including the reelection of all Directors for additional one year term.

I will now turn the call back to Bart to provide some concluding remarks.

Bart Hedges

Thank you Tim, our remains 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 float generated from these contracts to invest in our deep value, long, short investment program. We believe this strategy will produce superior returns over the long term while preserving capital. 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. As David noted on Monday, May 21, we will host an investor day in New York and hope you can all join us. Details of the event can be found at our website at

Thank you again for your time. And now I would like to open the call up to questions.

Question-and-Answer Session


(Operator Instructions). The first question we have comes from Marie Lunackova of UBS. Please go ahead.

Marie Lunackova – UBS

I have couple of questions; one of them is on the lost reserve strengthening under commercial auto reserves in the runoff, what is the duration what we could make sure that they would make sure?

Bart Hedges

The commercial automobile business I mean most of this is what we would think is sort of mid-tail type business, so think of a sort of 3 to 5 year maturity on these contracts and most of that will pay over the first 18 to 24 months of that exposure period but we will continue with us exposure for probably at least the next two years as the contracts run off.

Marie Lunackova – UBS

And you mentioned that you rode it all the way through; some of it was in 2011 right?

Bart Hedges

Yes we stopped riding the commercial automobile business at the end of 2011, so it will have some earnings on that business during 2012. But the vast majority of it was actually written in 2008, 2008 and 2010 that was by far the majority of the business was in those underwriting years.

Marie Lunackova – UBS

Okay and then in 10Q you mentioned general liability, was there some development on that plan of business as well?

Bart Hedges

There was a small amount of development and it misses I guess just to back-up a little bit to talk about our overall reserve in process, our overall reserving process is to reserve to the best estimate on every contract and you could think about as sort of the mark to market type concept. So as we see data emerge on difference contracts we react to that new data, and over the past couple of quarters we have seen some emergence of large losses particularly in commercial auto as we have discussed but additionally there was some during the quarter on general liability and there was a small amount on our health book. So and each of those areas we put up additional reserves to respond to the large losses and lot of these losses they are just, they are just coming up at rates that aren’t indicative of what we have seen in the past. So there is a responding to some of this information as it is reported to us.

Marie Lunackova – UBS

Could you tell if it's a part of a larger trend that it might be happening in the industry or is it something specific for those contracts?

Bart Hedges

I don’t know that it's specific to the contracts per say I would say some of it is probably bad luck because these large losses are fairly unpredictable. But some of it could certainly be tied to the downturn in the economy but we haven’t been able to find anything in our data that we can link directly to that and it's more of a feeling than a numerical exercise we have been able to perform but it certainly feels that way.

Marie Lunackova – UBS

Okay, and then my other question is on market conditions and I specifically it would be Florida and I know you were on a writing pad (ph) business there but what is your view of the market there and then the other question is on Europe what potential opportunities do you see there?

Bart Hedges

Right so Florida has been it's a pretty big safe for us because we do both limited wind, homeowners quota share contracts where we have a couple of partners that have been pretty successful. The market conditions there for the business that we support continues to be pretty good, the legislation that was passed in 2011 that address the sinkhole problem was very encouraging. I wouldn’t say that the problem is completely under control but it certainly is a lot better than when we originally enter the business so that’s a good sign, the rates continue to be on an upward trend although I would say the rate of increase is probably a bit slower than it had been in the prior 12 month period but still rates are going up.

We believe profit margins are expanding on the original business which is good for us since we are participating on quota shares, so overall we like that. In terms of the motor business, the non-standard business that we entered into recently one of our relationship is Florida only on the non-standard automobile and one of them has another concentration in terms of Florida.

So, again we monitor both the rate situation as well as the political situation there and recently there were some new legislation to address (inaudible) fraud which has been a big problem and they say – I don’t know comparing it to the solution that they came up with sinkholes on the homeowner side I would say there is probably not quite as strong as solution as what they achieved on the home owner side but still an encouraging sign that the legislature is addressing a fraud problem but like the home owners business we are getting good rate changes there and they are well in excess of what we think the loss trends are.

So overall we are encouraged by the Florida market, then in terms of Europe that’s a big green field for us. We have really not participated much in the European market, we have limited amounts of cat retro that have European exposure but we have not really done a lot of the more frequency oriented type business where we intended to concentrate our portfolio in the U.S.

Well as we grow the Irish platform especially with bringing on a new senior fellow like Carl and other people to support the team there, we are hoping that having the growth in that office combined with the solvency two regulations that are coming on well hopefully, we think they are coming on 2014, it's scheduled to come on in 2014 and that will produce some opportunities for us to do additional frequency oriented business in Europe.


Well it appears that we have no further questions at this time. Should you have any follow-up questions please direct it to our Alex Stanton of Stanton Public Relations & Marketing at area code 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 Re is available on our website at

The conference is now concluded. We thank you all for attending today’s presentation. Have a great day. At this time you may now disconnect your lines. Thank you.

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