Greenlight Capital Re, Ltd.
Q4 2007 Earnings Call Transcript

Published: 19 Mar 2008

[Operator:]

Thank you for joining the Greenlight Re fourth quarter 2007 earnings call. Joining us on the call this morning is David Einhorn, Chairman, Len Goldberg, CEO, and Tim Courtis, CFO. 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 risks, uncertainties and assumptions that are enumerated in the company's Form 10-K dated March 18, 2008 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. 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 now like to turn the call over to Len Goldberg. Please go ahead.

[Len Goldberg:]

Thank you very much and 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 fourth quarter of 2007 was an interesting period in the reinsurance industry dominated by the impact of the credit crisis on both the liability and asset side of the balance sheet of many companies. However due to the net short credit position that David described in our last call and our limited exposure to credit related events on the liability side we earned $0.80 per share in the quarter. While our business model is built for the long-term, it is how we perform during these times of turbulent markets that will help define Greenlight Re. On the underwriting side, fourth quarter written premiums were down due to factors that Tim Courtis will explain in his remarks. We are excited about the January 1, renewals where we had success in an increasingly difficult market. During the IPO process we also discussed the importance of increasing our capital base from approximately $300 million to greater than $0.5 billion and the difference that would make in the opportunities we would see and be positioned to seize. This has happened as we expected, as we are now a lead market for an even wider range of claims. Before discussing some of these new opportunities I want to introduce our Chairman, David Einhorn who will discuss our overall progress and recent investment results. David?

[David Einhorn:]

Thanks, Lenny. The last 10 months bidding our way back to the IPO have been a difficult in investment environment than any that we can remember. The unwinding of the credit has had a large impact on the global markets and the economy. From the end of last April through February the S&P 500 declined about 10% and in local currency European markets have faired even worse. During this time DME Advisors generated a positive return in excess of 4%. While that sounds like a fixed income return, we believe that it is a reasonable result considering the environment. Indeed some conservative fixed income strategies have performed even worse. Last July we became concerned about the implications of the bursting of the credit bubble, and we shifted to a more conservative stance in our portfolio, which we have maintained. We are doing our best to preserve capital and to take advantage of the opportunities that we see. We encourage you to keep in mind that one of the inefficiencies we tried to take advantage of is having a longer time horizon than any other market participants. In order to do this, we have to be willing to have positions that have favorable risk/reward profiles, but may not achieve good results in the very short term. Our goal remains to drive long-term growth in book value per share by focusing on both sides of the balance sheet. Our performance in the fourth quarter demonstrated our ability to generate returns in a difficult environment. The net quarterly return in the investment account was 4.2% in the fourth quarter, even as the S&P fell 3.3%. We accomplished this by maintaining a conservative posture in our portfolio with an average net long exposure of 37%. We generated all of the returns from our short portfolio, which returned about 7% on a gross basis, as our average short fell approximately 12%. And we lost about 2% gross in our long portfolio; about half the short exposure was in credit sensitive financials. We entered 2008 with a fairly fresh portfolio. Approximately 40% of our long portfolio, and 70% of our shorts are comprised of positions initiated in 2007. I'd like to remind everyone about our website, where we post the results of the investment portfolio updated monthly, and that they come out before the first trading day of the month. Greenlight Re's investment account declined about 2.8% in January and February. As we move through this period of dislocation, we've been both patient and opportunistic. We were 41% net long at the end of February, which is just slightly higher than at the beginning of the year. We've maintained a healthy short portfolio and we were about 53% gross short at the end of February. It becomes more difficult to maintain short exposure and shorts contribute to performance and fall in value. They naturally become smaller positions and in a steadily falling market it is challenging to find replacement charges at high values with poor prospects. However, we remain cautiously positioned. We continue to pursue underwriting opportunities that we believe will generate superior risk adjusted returns on capital overtime. Our underwriting team is incentivized, through a profitable business not quantity business. So far this has served Greenlight Re well, as the insurance portfolio has contributed to our growth in book value. The market has been softening but we continue to work hard to find good opportunities that fit our business model. And we are pleased with the specific new opportunities we underwrote in the January renewal season, as Len will discuss them in a greater detail in a moment. 2008 will be our first full underwriting year with our team in place and our capital raise complete. Greenlight Re has differentiated underwriting and investment strategy will continue to result in unpredictable quarterly results. And I might add a likely loss in the current quarter. However, we continue to believe that over the long-term, this strategy is the best way to generate compelling returns for our shareholders. I'd like to thank everyone for their continued interest and support of Greenlight Re, and now I am going to turn the call back to Len to discuss the underwriting portfolio, and in particular the success we had during the January 1st renewal season.

[Len Goldberg:]

Thanks, David. The market continues to become more competitive, but we have been able to renew some good deals and add some new transactions to the portfolio. Some of this is a direct result of our increase to capital base. Since the IPO we have seen an improvement in the quality and quantity of opportunities we are evaluating. Our success was also the result of a significant amount of communication with the brokers we work with, who represent clients we believe would be good business partners for us. We spent a great deal of time in 2007 telling the Greenlight Re story and cultivating relationships that are now paying dividends in the form of attractive opportunities and down transactions. January 1, is an active renewal date in the reinsurance business, even for our book of non-commodity business we have a number of transactions which renew at that time. We also looked at quite a few new opportunities. All told, we estimate gross written premium of about $70 million for the first quarter of 2008. This is about double over the first quarter of 2007. Since the majority of the January business is quota share. This business will also generate significant premium for Greenlight Re throughout the year under GAAP accounting rules. I would like to describe some key decisions we made that will impact our underwriting portfolio for 2008. We signed a large commercial automobile quota share with a recognized specialist underwriter. This transaction is a good example of a contract with Greenlight Re features of specialist underwriter, a private transaction, good risk adjusted returns and financial success for our partner only when the business performs well. We successfully converted one January renewal for a Cayman captive ready medical malpractice, from a small share of a traditional reinsurance contract to a multi-year contract, with a structure not generally available in the market. Because of this restructuring which was beneficial to both the client and to us, we were able to take a 100% in this deal. We decided to redeploy some of our property catastrophe aggregate from non-US exposed business and the pricing is dropping precipitously. To US and peak zone exposures, we can continue to generate acceptable risk-adjusted returns. We signed several new frequency transactions, where we were the lead underwriters. We believe all of these deals meet or exceed our risk-adjusted returns hurdles even as margins continue to be compressed in an increasingly competitive market. The transactions covered workers' compensation, general liability and personal automobile, where our business partners are experts in their respected fields. These transactions require extensive due diligence including meetings with the brokers and clients at our officer, and on-site due diligence visits. Though early, we believe we are establishing excellent working relationships through direct communication and the creation of unique transaction structures. We are finding the clients generally appreciate our high-touch cradle-to-grave underwriting approach, which we expect to result in mutually beneficial long-term relationships. We also decided not to renew several transactions including the largest frequency transaction from our 2007 portfolio, a non-catastrophe quarter-share from the writer of Florida Homeowners Insurance. This decision is largely an economic decision as the Florida market is becoming increasingly competitive and our expected return at the renewal terms is not acceptable. We believe we might be in a position to partner with this company in the future should the need arise. The cumulative impact of these decisions will make our 2008 business more diversified than in 2007. Our efforts around January renewals have put us in a good position for the 2008 underwriting. We have been selective in choosing our partners and we continue to position the book more towards frequency accounts and contracts where we've the lead were privately insured. While general market conditions continue to worsen, we believe we are still finding good opportunities to review. We also expect to renew many of the transactions we bound throughout 2007 as they come up over the year. We will continue to be disciplined in our risk selection and expect the only right transactions that produce superior risk-adjusted returns on deployed capital. Our Property Catastrophe portfolio has an aggregate loss exposure to natural perils of $75.7 million compared to $77.8 million reported to the end of the third quarter. This is the absolute amount of our risk exposure from multiple events in multiple regions. Our maximum exposure to a single event is $60.2 million. These numbers include all January 1 renewal activities on a natural catastrophe exposed portfolio. And now, I'd like to hand it over to Tim to discuss our financial results for the fourth quarter and for yearend.

[Tim Courtis:]

Thanks, Lenny. Good morning everyone. As you analyze our results, once again we ask you to keep in mind that our mix of business is changing continuously. Since we did not begin underwriting until April 2006, and did not receive our A-minus rating from A.M. Best until later in that year, we were somewhat limited in the lines of business we could offer during 2006. This is clearly evident in any comparative analysis you might do amongst reporting period. From an overall financial perspective, our fourth quarter 2007 results are a reflection of the successful implementation of our underwriting and investment strategies, as both sides of the balance sheet contributed to our fourth quarter result. In total, Greenlight re-report fourth quarter 2007 net income of $29.2 million compared to a net income of $17.4 million for the comparable period in 2006. On a fully diluted per share basis, the net income was $0.80 per share compared to net income of $0.81 per share for the fourth quarter of 2006. For the year ended December 31, 2007, net income was $35.3 million compared to $57 million for the year ended December 31, 2006. On a fully diluted per share basis, net income was $1.15 per share compared to $2.66 per share for the 2006 calendar year. For the full year 2007, frequency business accounted for just over 60% of our gross written premium. While this is consistent with the overall emphasis we place on frequency business, the percentage of measurement is affected by the fact that frequency based quota share transactions report premium writings on a quarterly basis. As a result, it takes longer for the total amount of frequency premiums to be reported as written premiums. However, if you look at net earned premiums for 2007, the frequency business accounted for 37% of total net earned premium. For the year ending December 31st, 2007, the composite ratio for our frequency business was 94.2%, and for our severity business, it was 41.7%, resulting in an overall composite ratio of 80%. When we add internal expenses of 12.2%, our total combined ration was 92.2%. In addition to underwriting profit of approximately $8 million in 2007, which is net of all of operating expenses, we generated incremental investable float of $34 million. It's always great when our business generates float for our investment strategy, but it's even better when we make underwriting profits at the same time. This certainly illustrates dual engine strategy. Gross and net premiums written for the fourth quarter were lower than the comparable period in 2006 due to several factors. In the fourth quarter 2006, we wrote a large homeowners contract that covered a 15-month period and had a sizable incepting unearned premium reserve session, which increased premiums roll off in the fourth quarter of 2006. Secondly, during the fourth quarter of 2007, we commuted a calendar year contract which resulted in a reversal of certain of the premium estimates previously written. Additionally, the premium estimates on two other contracts were revised based upon updated information received from the insured. Finally, during the fourth quarter 2007, the balance two quota share accounts which would generate written premiums and increasing float for us in future periods. Net loss and loss adjusting expenses incurred for the year ended December 31, 2007 was $39.5 million. Of this total, we had only $8.8 million of net paid losses. This will be pay to incurred ratio once again reflects the startup nature of our underwriting portfolio. We reported investment income of 426.9 million during the fourth quarter, reflecting a return of 4.2% on the investment account managed by DME Advisors. In closing, we want to stress our belief that long-term growth and fully diluted book value per share is our most important metric. When we look at the full 12 months of 2007, fully diluted book value per share increased to $16.57 at December 31, 2007. This is up from $14 and 27% at December 31, 2006. This represents an increase of 16.1% which also includes the increase in book value associated with the IPO. I will now turn you back over to Lenny who will provide some concluding remarks.

[Len Goldberg:]

Thanks, Tim. A quick correction, I believe Tim said that 37% of the net earned premium was frequency business, I believe the correct number is 73% of our net earned premium is frequency business. You must really have read that number backwards. During the fourth quarter of 2007, Greenlight Re made important progress in the execution of our business plan as a company that operates a differentiated reinsurance strategy. It is our long-term objective to develop a profitable liability portfolio and to earn above-average, risk-adjusted returns and actively managing both sides of the balance sheet. With a strong capital base, our team in place, and our infrastructure fully built, we are looking forward to a successful 2008 and beyond. We appreciate your confidence in our company. Thank you again for your time. And now, we would like to open the call up to questions.

[Operator:]

(Operator Instructions) Your first question is from Jim Bradshaw from [Bayers Capital Management].

[Jim Bradshaw:]

I wondered if you could just speak briefly about when you miss out or lose out on a deal underwriting. What do you think the reasons are? Is it mostly pricing, or what other factors kind of seem to be involved?

[David Einhorn:]

Jim, I would say pricing at this point in the cycle is generally the number one reason. But often before we get to that point, we will have worked long enough with the client to know whether they want to really be a partner with us over the long-term. So those deals that do leave us for pricing reasons we usually don't get to the point where we are actually quoting the deal.

[Jim Bradshaw:]

Okay. I see. So when you say long-term you mean so in future renewals you feel pretty confident that that's the company would want to renew with your or?

[David Einhorn:]

That's the intent. We put a lot of work into every renewal and we would like to think that our partners would be long-term partners with us.

[Jim Bradshaw:]

And then for the renewals that you end up losing out on that not including the ones that are like the voluntary losses. Is that kind of a similar thing, you think it maybe pricing at that point?

[David Einhorn:]

I think some of that is definitely pricing, absolutely.

[Jim Bradshaw:]

Okay. I think most of my other questions were answered in your opening comments. I appreciate it.

[Operator:]

(Operator Instructions) Your next question is from Dean Choksi from Lehman Brothers.

[Dean Choksi:]

Good morning gentlemen. Len, can you talk about areas of the market where you see opportunities for better economic returns and kind of where you are focusing your marketing efforts?

[Len Goldberg:]

Yes. Sure. I think as we described on the call today, what we are looking for are rather than a particularly line of business, is we are looking for a couple of things. Number one, we are looking for market dislocations and they can come in all shapes and sizes. They are more difficult to find when there is access capital in the industry than when there is not enough capital in the industry, but they are still out there. But the other important thing about our model is we are looking for real long-term partners that will protect our downside in difficult markets and share our upside in good markets.

[Dean Choksi:]

Okay, thanks. And then for the first quarter, you mentioned that there is a large commercial auto share contract. Was that the largest contract for the quarter and kind of how large was it?

[Len Goldberg:]

That is the largest single contract for the quarter. We expect that contract although it's early days, to generate over its life time about $70 million of premium annually.

[Dean Choksi:]

Thanks.

[Operator:]

At this time, there are no further questions. Are there any closing remark?

[Len Goldberg:]

Just thank you again for your time. And if you have any follow-up 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 on our website at www.greenlightre.ky. Thank you very much.

[Operator:]

Thank you. This concludes today's call. You may now disconnect.