Greenlight Capital Re, Ltd. Q1 2008 Earnings Call Transcript

| About: Greenlight Capital (GLRE)

Greenlight Capital Re, Ltd. (NASDAQ:GLRE)

Q1 2008 Earnings Call Transcript

May 13, 2008 9:00 am ET


Len Goldberg – CEO

David Einhorn – Chairman

Bart Hedges – President and Chief Underwriting Officer

Tim Courtis – CFO


Eric Forcope [ph] – Cooper and McBain [ph]

Jim Bradshaw – Bayers Capital Management


Good morning, everyone, and welcome to the Greenlight Capital Re First Quarter 2008 Earnings Conference Call. Joining us today on this morning’s call is David Einhorn, Chairman, Len Goldberg, Chief Executive Officer, Bart Hedges, President and Chief Underwriting Officer, and Tim Curtis, Chief Financial 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 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 historical facts that rather reflects the Company's current expectations, estimates, predictions, about future results and events, and are subject to risks and uncertainties and assumptions including risks and uncertainties and assumptions that are enumerated in the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2007, and other documents filed by the Company with the SEC. If one or more risks and 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.

Today's call is being recorded. All lines are in a listen-only mode, and you will be given the opportunity to ask questions following the Company's remarks. I would like to turn the call over to Mr. Len Goldberg.

Len Goldberg

Thank you, Chadissa. Good morning, my name is Len Goldberg, Chief Executive Officer of Greenlight Re. Thank you for taking the time to join us this morning. The first quarter of 2008 brought fresh challenges to our business with the continuation of the credit crisis affecting the balance sheets of many in the industry and a softening reinsurance environment making market conditions more difficult.

We ended the quarter with a small underwriting gain and a small investment loss. In total, we had a net loss of $0.13 per share for the quarter. While we did not increase our book value per share in the quarter, we successfully added new business that we believe has adequate returns and we preserved capital in a turbulent investment environment.

Gross written premium for the first quarter increased about 86% to over $70 million, compared to the first quarter of 2007. The new business was mostly private or lead positions on frequency accounts with expert partners. As we head into the 2008 windstorm season, we have further reduced our catastrophe exposure as pricing continues to soften and we prefer to lose the exposure rather than under-price it.

On the asset side, we have a fairly fully invested portfolio of long and short ideas. In April, as reported on our website, we achieved a 2% return on our investment portfolio.

Before discussing our first quarter underwriting performance in greater detail, I want to introduce our Chairman, David Einhorn, who will discuss our overall progress and recent investment results. David?

David Einhorn

Thanks, Lenny. May 24 will mark the anniversary of our IPO. During the past year, the S&P declined about 8% and reinsurance pricing has softened. Nonetheless, we have weathered this tough environment. The Greenlight RE investment account has returned 8.2% during the 12 months ended April 30.

The first quarter of this year proved to be challenging as the S&P fell about 9.4% and European markets declined even more. This was particularly difficult for our investment portfolio as we have more net long exposure in Europe than in the United States. The Greenlight RE reinvestment portfolio fell about 0.9% in the first quarter. Overall, our shorts contributed 7.8% to our gross return. The gains were broad-based throughout the short portfolio headed by shorts of credit sensitive financials, particularly investment banks. Longs cost us about 8% on a gross basis

The losses were also broad based lead by Helix, Microsoft, URS, and most of the European holdings. In April, we generated a 2% return, so our investment account is now up 1.1% for the year. As we went through the first quarter, our net long exposure rose from 34% on January 1st to 56% on March 31 as we exited 13 short positions. When the shares fell to prices that made them no longer attractive shorts we covered them and did [ph] with greater net long exposure. As stocks went on sale in the first quarter, some for good reasons and others in sympathy, we took advantage of some select opportunities. We added a couple of new long positions and increased a few of our existing long positions.

As we invest from the bottoms up we do not let macro forecasts drive the portfolio composition. However, this happens naturally as we evaluate the long and short opportunity sets. When there are an abundance of cheap stocks we generally get more net longs, when things get more fully valued we are generally less net long. Given what we see as a difficult consumer and inflation issue, it is tough to be particularly optimistic at the moment. In the recent rally, we added several new short positions in April, which reduced our net long waiting [ph] to about 42% entering May.

We remain cautious about the current environment. In our long portfolio we primarily own unlevered companies that we believe will do well over the long run and are fundamentally positioned to withstand a tough economic environment. We are short companies which should have a difficult time given the current headwinds, investment banks, commercial banks, the rating agencies and several companies trading at high multiples of earnings guidance that assumes the second half economic rebound.

While it would have been great to start our first full underwriting year post-capital raise in a healthier pricing environment, we are confident that we can continue to find underwriting opportunities that we believe will generate superior risk adjusted returns on capital over time. There is little low-hanging fruit in the reinsurance markets currently but our underwriting team continues to develop interesting ways to attack the market. The team has reduced natural catastrophe exposure in the face of softening rates and is focusing on specialist frequency accounts.

While better pricing environment might have translated into a quicker ramp up, we are pleased with the current measured pace of premium growth and the associated increase in float for our investment programs. We plan to hold an investor meeting in New York on June 3rd. We will be providing logistical details at the end of the call. I hope to see everybody there. Thank you all for your continued interest and support of Greenlight RE.

Now, I'd like to turn the call over to Bart Hedges to discuss the Greenlight Re’s underwriting portfolio and in particular look at the natural catastrophe exposures as we head into the 2008 windstorm season.

Bart Hedges

Thanks, David. Last call we talked about the success of our January 1 portfolio, and how the frequency business we wrote could generates significant diversified premium throughout 2008. As you are undoubtedly aware, the reinsurance market conditions are difficult. Prices are dropping in many areas, interest rates are low, and the inflation level appears to be headed higher.

Although it is a difficult market, we believe our bottoms up deal-by-deal underwriting approach will allow us to continue to find opportunities in these areas supporting specialist underwriters. These opportunities are under less pressure than commodity products and continue to provide accessible risk adjusted returns.

When one looks at the break down of our portfolio by line of business it is evident that we are continuing to diversify and that now we have concentrations in motor and in health. While we think there are excellent opportunities in both lines we focus everything we do on the bottoms up deal-by-deal basis rather than line of business.

With windstorm season on our door step we thought it would be a good opportunity to review how we underwrite our natural catastrophe exposures. It is worth discussing as we tend to look at this differently than most reinsurers. We think it is of utmost importance to understand the entire range of outcomes in all the business that we undertake. This is true for how we price business, how we look at the aggregate risk (inaudible) and is also true for how we measure and report to you our natural catastrophe exposures.

Models are very useful in our business, but they are, at a minimum, estimates of reality. As well, interesting and often unexpected things happen beyond the 99 percentile for the modeled results. In some cases, the maximum amount of risk is equal to the 99th percentile and in others there can be multiples in the 99th percentile. An example from the current environment is the credit crisis. It seems like big chunks of the credit crisis have been the results of both over-reliance on models and under concerns about what happens in details beyond the 99th percentile.

So when we measure our exposures to natural peril we report the maximum amount we can lose under the sum of our exposures. We measure this for a single event loss by adding up all the exposed limits under all of our contracts and subtracting any reinstatement premiums that are–that we are entitled to receive. We calculate our potential aggregate loss simply by repeating the same calculations towards many reinstatements of limits that are in each of our contracts in all of the exposed loans. The aggregate loss is the maximum potential loss and not the outflow from the model. We prepare this information in four zones: the USA, including the Caribbean, Europe, Japan, and the rest of the world.

Currently, our property catastrophe portfolio has an aggregate loss exposure to natural perils of $70.5 million, compared to $75.7 million as of year-end 2007. Our maximum first loss event has been reduced to $50 million from $60 million as of year-end. You will note that in each of the last two quarters, the USA zone single event aggregate loss is equal to our total single event and aggregate loss. This means that each one of our contracts contain U.S. exposure, which, we believe, still generates the best risk return characteristics.

In addition to the reduction in first event and aggregate exposure, we have concentrated our portfolio behind a small number of underwriters that have proven to be responding to the market conditions (inaudible). We believe these clients are not chasing price and are repositioning their business to find the best risk adjusted returns.

And now, I'd like to hand it over to Tim Courtis to discuss our first quarter financial results.

Tim Courtis

Thanks, Bart. Greenlight Re reported first quarter 2008 loss of $4.8 million, compared to a loss of $13.1 million for the comparable period in 2007. On a fully diluted per-share basis, the loss was $0.13 per share, compared to a loss of $0.61 per share for the first quarter of 2007.

For the first quarter of 2008 frequency business accounted for just over 80% of our gross written premium, which is consistent with the overall emphasis we place on this business. As mentioned in previous quarters, for quarter share frequency business, it takes longer for the ultimate premium on these contracts to be reported. Due to our preference to write a small number of larger transactions, we expect that our mix of business between frequency and severity will fluctuate.

The composite ratio for our frequency business for the first quarter of 2008 was 91.2% and 59.4% for severity business, resulting in an overall composite ratio of 80.2%. Although we are not currently a direct writer of public company or financial institution directors and officers' liability coverage, which we believe will suffer the greatest exposure to losses from the current credit crisis, we do have some exposure to loss through our casualty clash exposure.

Our loss ratio of 44.1% during the quarter included reserving to our maximum limit for a potential casualty cash claim. First quarter 2008 loss and loss adjustment expenses incurred were $12.1 million. Of this total, we only had $3.6 million of paid losses. This low pay to incurred ratio once again reflects the startup nature of our underwriting portfolio.

Internal expenses were 16.2% of net premiums earned, so our combined ratio for the quarter was 96.4%. Approximately 1.5 million of internal expenses booked in the first quarter of 2008 related to additional accruals of 2007 bonuses which the board awarded due to good underwriting results. However, since a significant portion of the bonus for the 2007 year is deferred until 2010, this bonus accrual will be adjusted up or down depending on any favorable or unfavorable loss developments that we experience on that book. Apart from this additional bonus accrual, the total internal expenses planned for 2008 remained similar to those experienced in 2007. We reported an investment loss of $5.8 million during the first quarter reflecting a net return of negative 0.9% on our investment account.

It is worth noting that the first quarter of 2008 results reflect the establishment of an investment joint venture with DME Advisors. As such both our investments on the balance sheet and net investment income on the income statements reflect 100% of the venture’s investment position and the investment result. The minority interest held by DME Advisors is reported separately in both the balance sheet and the income statement.

We have provided additional disclosures this quarter as regard by SFAS 157 and 159 with respect to fair value measures and the fair value option. It should be noted over 98% of our assets are level 1 with only approximately $12 million representing less than 2% of our investment portfolio being invested in what is considered to be level 3 assets.

Please also note that there is a different presentation on the statement of cash flows in the first quarter of 2008 with respect to investing activities. Cash flow movements with respect to our investments and securities and derivatives are now classified as investing activities, whereas previously these were reported as operating activities. This change is in accordance with the new GAAP guidance.

As you are aware, we postponed our annual general meeting because of the failure of our transfer agent to deliver proxy statements to all our shareholders. New proxy statements will be sent out shortly after the revised record date of June 2 and our annual general meeting will be rescheduled to July 10. In the new proxy statement, in addition to proposals to appoint a slate of directors, and ratify auditors, we anticipate that we will ask shareholders to approve a resolution removing restrictions in our articles of association requiring shareholder approval for share buybacks. This change, if approved, should provide the Company with additional flexibility to manage capital.

In closing, we want to once again stress our belief that long-term growth and fully diluted book value per share is our most important metric. When we look at the 12 months ended March 31, 2008, fully diluted book value per share increased to $16.40, up from $13.67 at March 31, 2007. This represents an increase of 20%, which also includes the increase in book value associated with the May 2007 IPO.

I'll now turn the call back over to Len who will provide some concluding remarks.

Len Goldberg

Thanks, Tim. The first quarter of 2008 continues the progress of Greenlight RE in a few important ways. We are increasing our frequency orientation and reducing natural catastrophe exposure in the run up to windstorm season. In all markets, but especially in the current environment of softening pricing and low interest rates, we believe we are uniquely positioned to grow our book value, our single most important metric.

We are also pleased to announce our first investor meeting on Tuesday, June 3rd, 2008, beginning at 4:00 p.m., at the Scandinavia House at 58 Park Avenue, in New York City. A press release will be issued shortly. David, Bart, Tim and I look forward to seeing you all there for an in-depth interactive update.

Finally, we would like to thank Jerome Simon for his dedication and service to our Board. As per our prior announcement, Jerome resigned on May 1, and we wish him the very best in all his endeavors. At the May 1st Board meeting we increased the number of Board members to seven and appointed Bryan Murphy and Ian Isaacs to serve on the Board. We will ask our shareholders to ratify all our Board members during the annual meeting.

Thank you again for your time, and now we would like to open the call up to questions.

Question-and-Answer Session


(Operator instructions) Your first question comes from Eric Forcope [ph] with Cooper and McBain [ph]. Your line is open.

Eric Forcope – Cooper and McBain

Hi, it is Eric, good morning. Given your relatively negative view of the world as expressed by your loan and exposure in the equity markets as well as your very cautious stance in the underwriting markets it’s a bit of a surprise to me that you haven't taken any positions in the precious metals markets either directly in gold or in gold mining companies. David, could you kind of give us some explanation as to your either aversion of the sector or why it doesn't fit within your thesis of a negative financial outcome? Thanks.

David Einhorn

Yes, certainly. Metals are interesting in the sense that a lot of people view them as stores of value so as to replace – they fight the weaknesses in things like paper currencies, and view these things as stores of value and own them for diversification or because they think that they will do well as a result. My own personal bias on the matter is that gold, like anything else, does not have an intrinsic value that is any different really from paper money other than the sense that you could use it in jewelry or electronics, and so forth. And as a result of that, it’s like the paper currencies, is also worth whatever everybody agrees that it is worth. So it’s very hard to understand sort of a non-speculative case for why somebody needs to invest in gold or precious metals as a diversification away from currency that has its own issues and problems. I know that’s probably not a popular majority opinion. I don't think it particularly harms us in the sense that on the worst day it’s a missed opportunity for us, and it does not play particularly well into our basic skill set. As it also turns out though, incidentally, we did happen to have a short position in a precious metals company in Ecuador that had some unfortunate developments that actually helped out our results in April based upon some of the nationalization efforts that are going on in that country.


(Operator instructions) Your next question comes from Jim Bradshaw with Bayers Capital Management.

Jim Bradshaw – Bayers Capital Management

Good morning.

David Einhorn

Good morning.

Jim Bradshaw – Bayers Capital Management

I wonder if you could just speak briefly about what you think the Cayman Islands captive market opportunity is for you long term, either relative to your other opportunities or just kind of stand-alone, how ever you want to–

Bart Hedges

Sure, Jim, I will take that one part. (inaudible) Jim, there's about 750 captives here in the Cayman Islands with invested assets in excess of $33 billion. Roughly half of those are in the medical malpractice markets, and the other half are all lines of business. We've had a number of successful meetings with folks here and I think currently our portfolio is probably in the neighborhood of 15% to 20% in and around Cayman-based captives. I do think it’s early days, and as people do change their buying habits, our penetration could increase even more.

Jim Bradshaw – Bayers Capital Management

Okay. Great. I appreciate your time.

David Einhorn



Yes, thank you. Ladies and gentlemen, if you have any following questions please direct them to Alex Stanton of Stanton Crenshaw Communications at 212-780-1900 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 at our website at Thank you. You may now disconnect.

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