Greenlight Capital Re, Ltd. (NASDAQ:GLRE)
Q2 2012 Earnings Conference Call
July 26, 2012 9:00 AM ET
Bart Hedges – Chief Executive Officer
David Einhorn – Chairman
Tim Courtis – Chief Financial Officer
Claude Wagner – Chief Actuary
Samira Tari – Capital Returns Management
Thank you for joining the Greenlight Re Conference Call on the Second Quarter 2012 Earnings. Joining us on the call this morning are David Einhorn, Chairman; Bart Hedges, Chief Executive Officer; Tim Courtis, Chief Financial Officer; and Claude Wagner, Chief Actuary.
The Company reminds you the 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 risks, uncertainties and assumptions that are enumerated in the Company's Form 10-K dated February 21, 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 publically or revise any forward-looking statements whether as a result of new information, future events or otherwise.
All participants will be in listen-only-mode. (Operator instructions). 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 Bart Hedges. Please go ahead sir.
Good morning. I'm Bart Hedges, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us today. During the second quarter of 2012, Greenlight Re generated a small gain in our underwriting portfolio after taking account of all general and administrative expenses and a loss in our investment portfolio. Overall, our fully diluted adjusted book value per share decreased by 4.1% to $22.34 per share during the quarter. Greenlight Re's combined ratio for the quarter ended June 30, 2012 was 99.7%, which was a marginal improvement over a combined ratio for the first quarter of 2012.
Reinsurance opportunities in the Florida’s homeowners market, generally renew at June 1 each year. As you know, for several years we’ve been supporting specialist writers of homeowners insurance in the State with limit wind quarter share arrangements. During the quarter we renewed our existing Florida homeowners’ accounts on terms and conditions similar to last year. However, there was substantial competition for new business, and in some cases we witnessed what we considered a rational behavior. For instance, we observed certain reinsurers doing transactions without contractual limitations, while losses due to sink holes, one of the most problematic causes of loss in the business. Historically, fraudulent sink hole claims have been a big driver of results for Florida homeowners business.
Although recent enacted legislation is designed to mitigate this fraudulent practice, we believe sink hole losses can still be quite volatile and contractual sub-limits are necessary. All of our contracts contain a sink hole sub-limit.
As a result of the competitive environment, we did not write any new business in Florida during the quarter and our existing book was reduced. We are comfortable with relationships we have and this business continues to perform in line with their expectations.
We did not make any material adjustments to our commercial automobile reserve this quarter. As discussed previously, we see striding this business during the fourth quarter of 2011. However, we continue to earn premium on several discontinued contracts and we’ll continue to do so through the first quarter of 2013. We are actively monitoring this business and we’ll report on any material reserve movements.
Our non-standard motor liability business continues to experience rate increases especially in Florida. This book is growing as a percentage of our earned premium is performing in line with our expectations.
Our catastrophe retro book was negatively impacted during the quarter by an increase by reported loss from one of our partners due to increased loss estimates on the first earthquake that struck Christchurch, New Zealand. The impact was approximately $2.5 million of additional loss reserves. This contract has an additional $7 million of exposure if losses were to deteriorate further. In order to exhaust the entire $7 million available limit, reported ground up losses would have to deteriorate on additional 13%, which we are not expecting. We did not experience any loss development from any other catastrophe events this quarter.
In general, the reinsurance market place remains competitive. The number of new business opportunities that we reviewed so far this year is up considerably over the same period last year. However, we are converting fewer of these opportunities to new business.
In addition to the competition for new homeowners business in Florida, we experienced intense competition new business in specialty insurance areas. In one instance, a competitor completed a large quota share with an expected profit margin that is roughly 25% of our offer terms with a potential downside that is 150% of our offered terms. These are risk reward characteristics fall well below our acceptable return threshold. We continue to remain disciplined during this period and we’ll keep on searching for underwriting opportunities with the best risk adjusted returns. When we don’t find them, we simply wait and keep our powder dry.
On May 21, we held our bi-annual investor meeting. During the meeting we provided detailed information about our underwriting portfolio and updated investors on our overall progress. A video of the presentation in the Q&A session is available on our website. I encourage you to check it out.
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.
Thanks, Bart, good morning everyone and thank you for joining us today. The Greenlight Re investment portfolio was down 3.3% in the second quarter of 2012, bringing our 2012 returns for the first six months to 3%. The short portfolio led by Green Mountain Coffee Roasters was up 6.3% in the quarter and generated positive output. However, while our shorts went down more than the market, our longs also went down more than the market, and gave back some of the first quarter gains. We believe that there’s no further embedded value in some of the longs that have underperformed in the quarter including General Motors and Marvell Technology. Both companies traded mid-single digit PEs of current earnings that have strong cash positions. GM is currently trading around gross cash and Marvell has around 35% of its market cap in cash.
During the quarter we added some of our existing positions and found a few new positions in the healthcare sector including Cigna and Coventry Healthcare, which increased our net exposure from 33% at the end of the first quarter to 51% at the end of the second quarter. We like the HMO positions as they have unlevered balance sheets and traded single digits PEs, having been battered in the anticipation of ObamaCare. They also have un-priced upside given the possibility of changes in the political landscape.
We also exited a few positions during the quarter including DELL and Best Buy as our investment PCs in both companies did not materialize. Although our net exposure has increased a bit as we found compelling bottom of long investment opportunities, we remain cautious about the macro headwinds which remain.
The European crisis appears to have no simple solutions, while most large economies including China and the U.S. appears to be slowing down. We continue to hold sizable position in Physical Gold, Yen puts and protection against higher interest rates in Europe, the United States and Japan.
In the month of July, we are currently up over 2% with one day to go, which offsets the portion of the investment loss for the second quarter. The game was broad based with significant winners on both the long and short sides of the balance sheet. Our long position in sprint has been the most significant contributor for the month.
We continue to expand our staff in the Cayman and Ireland. Our team now totals 24 employees and is well positioned to take advantage of underwriting opportunities especially when the pricing environment improves. Caryl Traynor started in the second quarter as General Manager in our office in Dublin, with the goal of helping to tap European insurance opportunities. In addition, John Drake joined as head of business development to help us with our overall marketing activities. We expect several additional hires during the remainder of the year to enhance the team and to stay ahead of potential market opportunities over the next several years.
Now I’d like to turn the call over to Tim to discuss our financial results.
Thanks David. For the second quarter of 2012, Greenlight Re reported a net loss of $36.1 million, compared to a net loss of $16 million for the comparable period in 2011. The net loss per share was $0.98 for the second quarter of 2012 compared to a net loss of $0.44 per share for the same period in 2011.
For the six months ended June 30th 2012, we reported net income of $29.1 million, compared to a net loss of $59.0 million for the six months ended June 30th 2011. The net income per share on a fully diluted basis was $0.78 for the six months ended June 30th 2012 compared to a net loss of $1.63 per share for the same period in 2011.
Gross premiums written were $236.2 for the six months ended June 30th 2012, an increase of 10.4% from gross premiums written of $214 million during the first six months of 2011. This increase is primarily the result of premiums written related to private passenger automobile contracts and again to during the latter part of 2011 and 2012. In line with our 10% increase in premiums written, our net earned premiums also increased by almost 10% to $231.6 million for the first six months of 2012.
The composite for our frequency business for the first six months of 2012 was 100.1%, compared to a composite ratio of 98.7% during the comparable period in 2011. For severity business our composite ratio for the first six months of 2012 was 23.8% compared to 77.4% during the comparable period of 2011. Overall, our composite ratio for the first half of 2012 was 96.9% compared to 97.7% in the comparable period of 2011. Internal expenses were 3.9% of net premiums earned for the first six months of 2012 as compared to 4.4% for the same period in 2011.
The resulting combined ratio for the first half of 2012 was 100.8% compared to 102.1% for the same period in 2011. We reported a net investment loss of $36.9 million during the second quarter of 2012, reflecting a net loss of 3.3% on our investment portfolio. For the first six months of 2012, we reported a net investment gain of $34.7 million, reflecting net investment income of 3.0%.
Fully diluted adjusted book value per share as of June 30th 2012 was $22.34, a 12.7% increase from $19.82 per share reported at June 30th 2011. On June 22nd of this year, we filed a form F3 with the Securities and Exchange Commission which renewed our shelf registration. Under this registration, we have the ability to raise additional capital in a variety of forms, including debt, preference shares and class eight ordinary shares. While we do not currently have any plans to raise additional capital, the renewal of this shelf registration continues to provide us with the flexibility to access the public capital markets on a timely basis should we require capital for our future business opportunity.
I’ll now turn the call back to Bart who will provide some concluding remarks.
Thanks, Tim. Our goal remains unchanged. We aim to build long term shareholder value by writing concentrated underwriting portfolio with the best risk adjusted returns we can find and to use the float generated from these contracts to invest in our value oriented, long shore investment program. We believe this strategy will produce superior returns over the long term while preserving capital. We will continue to execute on the strategy and remain focused on driving our key yardstick, increase fully diluted book value per share. We appreciate your continued confidence in Greenlight Re.
Thank you again for your time and now we’d like to open up the call to questions.
(Operator instructions). And our first question is from Samira Tari [ph] of Capital Returns Management.
Samira Tari – Capital Returns Management
Good morning. I just wanted to ask about, some of these startups such as Third Point Re and SAC Re are ramping up. I’m wondering if they have a competitive impact on your underwriting opportunities that you guys look at?
Morning Samira. We did actually see a couple of times, especially in the Florida market we saw one or two of the newer companies, but in general I think the amount of capital that they’re bringing to the market is not going to be significant to change the overall marketplace. I do expect to run into them from time to time. But I don’t think it’s going, I don’t expect it to be a big problem for us going forward.
Samira Tari – Capital Returns Management
Okay. And just wanted to ask a couple of questions on the adverse development. You guys said some of this came from the 2010 New Zealand loss. Can you tell us how much unreserved limit you have left on associated contracts from 2010 New Zealand losses and then also if you can let us know how much you have un-reserve exposure you have in the 2011 New Zealand earthquakes in Christchurch.
I can answer the first part of that question for you. Basically we have one seeding company that has additional $7 million of unused limit on that contract and in order for the $7 million of limit to be utilized, the ground up losses need to increase by approximately 13%. We’ve looked at the underlying contracts that make up our exposure there. We feel pretty comfortable that that’s not going to happen, although certainly it is possible. And that’s with respect to 2010. On 2011, we’d actually have to get back to you on that one. I do not have all the figures on 2011 prepared at the moment.
Samira Tari – Capital Returns Management
Okay. Thank you.
(Operator instructions). And showing no further questions, we will conclude the call. 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 pertinent information about Greenlight Re is available on our website at www.greenlightre.ky.
he conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect.
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