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Greenlight Capital Re, Ltd. (NASDAQ:GLRE)

Q3 2012 Earnings Call

November 1, 2012; 09:00 a.m. ET


David Einhorn - Chairman

Bart Hedges - Chief Executive Officer

Tim Courtis - Chief Financial Officer

Brendan Barry - Chief Underwriting Officer

Claude Wagner - Chief Actuary


Marie Lunackova - UBS


Thank you for joining the Greenlight Re third quarter earnings conference call. Joining us on this 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 Actuary.

After today’s presentation there will be an opportunity to ask questions. (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 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 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 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 would now like to turn the conference over to Bart Hedges. Please go ahead sir.

Bart Hedges

Thanks and good morning. The third quarter 2012 for Greenlight Re yielded solid results in our investment portfolio, partially offset by a large loss in our underwriting portfolio that was primarily caused by the commercial motor liability business.

Overall it was a positive quarter for Greenlight Re with our fully diluted adjusted book value per share increasing sequentially by 5.5% to $23.57 per share as of September 30, 2012. In terms of our underwriting portfolio, Greenlight Re’s combined ratio for the quarter ended September 30, 2012 was 143%, well above the combined ratio of 99.7% for the second quarter.

Lets spend a couple of minutes discussing the adverse developments. The large loss on the underwriting side was primarily the result of an increase to our loss reserves on our commercial and motor liability business line.

We entered this segment in 2008 through two contracts. The first contract was a long haul trucking specialist. That relationship ran for 27 months and we exited the business at the end of the first quarter of 2010. In total we wrote $122 million of premium. The business has not performed well, but the book is quite mature and we are down to a small number of open claims with over 98% of more than 7,000 claims already resolved. There is still some uncertainty associated with the plan of results, but at this stage we feel that the reserves we have booked had 122% loss ratio, accurately reflect the contract’s economics.

The other relationship began in 2008 and ended in the first quarter of 2012. There is less than $5 million of premium remaining to be earned over the next few quarters. This portfolio included a component of long haul trucking, but the majority of the portfolio was other commercial automobile business such as small dump trucks, small trucks and trash haulers, which generally have lower risk profiles.

In total we wrote approximately $90 million in net premium. This portfolio is less mature and therefore there is more uncertainty associated with the final result. It will take another 18 months before the portfolio is as mature as our first trucking contract I discussed.

While we believe the lower hazard mix of business should cause this portfolio to perform better than the first contracts, we have observed similar characteristics between the two portfolios as the claims data has emerged. Therefore we have booked it to the same ultimate loss ratio as the trucking contract.

We are working closely with the claims adjusters on these accounts to view the adequacy of case reserves and to quickly settle undisputed claims. Our in-house council manages and directs all large claim settlements and grants their agents fixed amounts of claim settlement authority on a claim-by-claim basis for those claims going to mediation.

We have also worked with the primary insurer to transition day to day claims handling responsibility on a major portion of the claims inventory from one outside adjuster to one of our preferred claims partners. We believe these are the appropriate steps to help minimize the losses being incurred.

I’m extremely disappointed by these results and I like to discuss why we entered the commercial motor liability business in 2008 in the first place. Our thesis was that the pricing would improve due to the recent exit of a large carrier and the belief that the economic slowdown would result in fewer accidents and lower frequency of loss from having less miles driven and more experienced drivers on the road to mitigate potential accidents. Unfortunately that thesis proved incorrect.

As it turned out, even with fewer trucks on the road the frequency of loss increased as did the average amount of a claim. We exited the long haul trucking business when we observed the continued competitive pricing environment and we exited the rest of the business when the emerging claims experience demonstrated that it was also likely to generate a loss.

While it does not replace the loss, we hope that the lessons learned in this process will help us a great deal in the future. For example, as a result of our experience we have strengthened our in-house claims and legal expertise, we have increased the frequency of our underwriting and claims audits on all of our business, so we can detect emerging trends in the data more quickly and we have reduced the number of relationships when managing general agencies.

As we look back at our performance on this business, we clearly under estimated the expected loss ratio due to our continued competitive pricing environment and the impact of the poor economy on frequency and severity trends. We also under estimated volatility, which in combination led us to price the business poorly. We will continue to monitor these contracts closely and will report any future material development.

Moving on, we performed well in our other core segments during the third quarter. Most notably we are seeing strong activity in our employers stock loss book and as such we are directing more of our energies towards generating business there. We are seeing pricing in excess of loss trends, as well as better than expected margins and we believe there is an opportunity for Greenlight Re to develop additional long term strategic relationships in this sector of the market.

In the Florida home owners market as we previously mentioned, we saw different premiums from the prior year, as we did not write any new business during the second quarter of 2012. Once again by the nature of the model we’ve established, we can afford to wait until terms and conditions are more amendable for writing policies in which the risk reward ratio is in our favor. We remain comfortable with the relationships we have and this business continues to perform in line with our expectations.

Our non-standard auto liability business continues to experience rate increases particularly in Florida. This book is growing at the percentage of our earned premium and it’s performing in line with our expectations. As a reminder the non-standard auto liability books has much lower policy limits than the commercial motor liability book and its much shorter tail in nature. We do not expect the same severity of claims in this segment that we experienced in the commercial auto liability business.

Our catastrophe retro business suffered a loss this quarter due to deterioration on the price charts of the New Zealand earthquake of 2010. We were recently notified of movement in the loss figures relating to one of our accounts and we established a full limit loss to our layer, which added $7 million of loss reserves this quarter. This claim is proving to be very complex and there have been ongoing changes to engineering requirements for the rebuilding as well as building term code changes in New Zealand, which will increase the cost of settlement of insured losses. We do not experience loss development from any other catastrophes in the quarter.

As in the slide, while it is much too early to accurately forecast losses from hurricane Sandy, we estimate that the total U.S. insured property losses incurred as a result of this storm would have to approach $20 billion before we would reasonably expect to incur a loss from this event. Given early loss forecasts, we do not expect to incur a loss in the quarter.

In Europe we believe there are several potential opportunities for the January 1 renewal season. We have received a lot of positive feedbacks from our recent trip to the Annual Reinsurance Conference in Monte-Carlo and remain consciously optimistic about increased opportunities for our Irish subsidiary.

Finally we were pleased to receive a re-affirmation from A.M. Best of our full A-rating for Greenlight Re and A-minus rating for the Greenlight Re Ireland as we believe they continue to recognize the strength of our capital position, our management team and our disciplined approach for business and risk management.

The insurance and re-insurance industry continues to be hampered by the low interest rate environment and impact on the ability of firms to generate adequate returns for their shareholders. We are observing a positive impact on the pricing of certain insured risks, but to turn it slow and faces significant headwinds due to the lack of economic growth.

We believe this will prove to be a period of strength for the Greenlight Re model and we continue to sharpen our underwriting process, while searching for opportunities with the best risk adjusted returns. When opportunities are not present, we will remain on the sidelines rather than lower our return hurdles.

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.

David Einhorn

Thanks Bart. The Greenlight Re investment portfolio was up 8.8% in the third quarter of 2012, bringing our 2012 returns for the first nine months to 12.1%. Our long portfolio led by Apple, Arkema, Gold, Seagate and Sprint gained over twice as much as the S&Ps 6.4% return.

Our short equity portfolio lost less than 1% and generated positive alpha as we had one undisclosed short equity position, which made a material continuation to the quarterly return. An undisclosed macro position was the only looser of consequence in the quarter.

In 2012 the prices of stocks have more closely reflected the fundamental results of the underlying businesses. We’ve been fortunate to have captured most of the market returns with an average net exposure of about 37% through the course of the year.

Despite rising markets, which have been supported by the various central bank monitory policies of continual printing, we are considered about several headwinds which conclude an economic slowdown in Europe, Japan and China, arising key commodity prices, including food and energy and a slight determination in corporate earnings growth.

During the quarter we cut our net exposure in half and we ended the September more conservatively positioned at 26% net long. Our gross short exposure increased from 53% to 70% and we had a modest decrease in our gross long exposure as we took some profit in the rising market.

I recently shared my thesis about long positions in both Cigna and General Motors at the Value Investing Congress on October 2. I also updated my thinking on our short position in Green Mountain Coffee Roasters and discussed the challenges facing Chipotle Mexican Grill.

Later on in the month I spoke about the challenges facing the iron ore market and the companies in the iron ore ecosystem. We continue to closely watch the actions of central bankers and maintain a sizable position in fiscal goal, as well as other asymmetric risk reward macro hedges, to help protect against potential negative ramifications of desperate monitory policies, the tenuous fiscal position of many countries and the risks associated with the coming U.S. election and fiscal cliff in early 2013.

I just returned from our quarterly board meeting in Cayman. The team is energized and the current portfolio is sensible given the continuing soft market. We did not grow our premiums much over the last year, which reflects the existing opportunity set. Our commercial auto liability contracts have been frustrating and I agree with Bart that we need to do better. I believe that we have learned much form this experience.

Now, I’d like to turn this call over to Tim to discuss our financial results.

Tim Courtis

Thanks David. For the third quarter of 2012, Greenlight Re reported net income of $46.1 million, compared to a net loss of $4.5 million for the comparable period in 2011. Fully diluted earnings per share were $1.23 for the third quarter of 2012 compared to a net loss per share of $0.12 for the same period in 2011.

For the nine months ended September 30, 2012, we reported net income of $75.2 million, compared to a net loss of $63.4 million for the nine months ended September 30, 2011. Fully diluted earnings per share were $2.01 for the nine months ended September 30, 2012 compared to a net loss of $1.75 per share for the same period in 2011.

Gross premiums written for the third quarter of 2012 were $67.6 million, a decrease of 27.4% from gross premiums written of $93.2 million during the prior year quarter. While net earned premiums for the third quarter 2012 were $116.6 million, an increase of 29% from the prior year periods.

The significant decrease in both gross and net premiums written was primary due to the restructuring and novation of certain Florida’s homeowners contracts, which resulted in a $32.5 million reversal of written premiums, as well as a corresponding reversal of seated premiums related to the retro seated portion of these contracts.

Gross premiums written for the nine months ended September 30, 2012 were $303.9 million, a decrease of 1.1% from gross premiums written of $307.2 million during the prior year period. Net earned premiums for the nine months ended September 30, 2012 was $348.2 million, an increase of 15% from the prior year period.

The composite ratio for our frequency business for the first nine months of 2012 was a 112.4% compared to the composite ratio of 101.8% to the same period in 2011. For severity business our composite ratio for the first nine months of 2012 was 68.9% compared to 57.5% during the comparable period of 2011.

Overall, our composite ratio for the first nine months of 2012 was 110.5% compared to 99.7% in the comparable period of 2011. As mentioned previously the primary reason for the sharp increase in combined ration is the $40.7 million of additional reserves from our commercial motor liability business.

Internal expenses were 3.9% of net premiums earned for the first nine months of 2012 as compared to 3.6% for the same period in 2011. As a result, the combined ratio for the first nine months of 2012 was 114.4% compared to 103.3% for the same period in 2011.

We reported net investment income of $96.5 million during the third quarter of 2012, reflecting a net gain of 8.8% on our investment portfolio. For the first nine months of 2012, we reported a net investment gain of $131.2 million, reflecting a net investment gain of 12.1%. Fully diluted adjusted book value per share as of September 30, 2012 was $23.57, a 19.4% increase from $19.74 per share reported as of September 30, 2011.

Finally in the third quarter, we hired ICR as our new Public Relations Firm. We are looking forward to working with their team and leveraging their expertise and relationships.

I’ll now turn the call back to Bart for some concluding remarks.

Barton Hedges

Thanks Tim. To summarize, while we were disappointed of having to add significantly to our reserves in the quarter, we were pleased with our investment portfolio results and our ongoing book of business.

Our overall long-term strategy remains unchanged. We believe we can continue to create long term shareholder value by writing a concentrated underwriting portfolio, with the best risk adjusted returns we can find, and to use the flow generated from these contracts to invest in our differentiated investment program. We believe this strategy will produce superior returns over the long term while preserving capital.

We will continue to executive on this strategy and remain focused on our key measurement of increasing fully diluted book value per share. 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.

Question-and-Answer Session


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

Marie Lunackova – UBS

Hi, good morning everybody. I have a question on homeowners in Florida. If you could help me understand the book of business, I’ve noticed that the premiums are quite lumpy over the last few quarters and I guess my question would be around what is your current enforced book for the business. Is there any seasonality in the renewal period and kind of how is it booked? Is it booked when the contractor is written or is booked over the life of the contract, the premiums?

Bart Hedges

Marie, this is Bart Hedges. I’ll start with that and give you a sense of the type of business that we are writing and then may be Tim will talk a little bit more about how its booked and some of the accounting ramification.

Typically we are providing quota share reinsurance with a limited amount of catastrophe reinsurance imbedded in the quota share to the small homeowners company, what we call the specialist, the Florida homeowners companies. Our quota shares are generally fairly large and they typically incept on June 1 of each year and they typically will run for 12 months.

The coverage that we are providing is for what we call all other parallels, which are generally non-catastrophe related claims, so there would be things like fires, theft, potentially burglary, things like dog bite claims on the liability side, the non-cap type of claims. So it’s a much more frequency oriented business than the typical Florida property catastrophe portfolio that many reinsures have.

And then I’m going to turn it over to Tim to talk a little about how we book the business.

Tim Courtis

Yes, hi Marie. As Bart mentioned, all the contracts that we have in Florida state are quota share contracts and so we use quota share accounting, which basically the clients would report to us each month what their premiums written were and then following the contract terms, what percentage of those are seated to us, and so those get booked in monthly as the insured’s are. I think there is some level of seasonality in terms of premium writings in Florida, but those are not the major factor in any volatility.

Marie Lunackova – UBS

Okay, and then the innovation of those contracts, if I look at the book of business that you have right now, this obviously coming out of it, could you give me an idea how much enforce you have in homeowners in Florida in the book, in premium. If I look at the annual premiums right now, as you look at it from kind of that perspective, how big is that there.

Tim Courtis

Yes, I don’t have that number off the top of my head Marie; I can certainly get it for you. The issue was on the restructuring of the renewal and the structure was revised and therefore the quota share contact that we had enforced for the previous year was returned and therefore its kind of reducing your gross premiums in and your premiums out, which effects the top line but not the net earned premium line.

Marie Lunackova – UBS

Okay, thank you. That was very helpful.

Bart Hedges

Okay thanks.


There are no further questions at this time. 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 partner information of our Greenlight Re is available on our website at

The conference is now concluded. Thank you for attending today’s presentation. You may disconnect your lines.

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