Greenlight Capital Re, Ltd.
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Thank you for joining the Greenlight Re Conference Call for the Third Quarter 2013 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 Actuarial 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 the Private Securities Litigation Reform Act of 1995. The 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 19, 2013, 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. There will be an opportunity for questions later. Please note this call is being recorded. (Operator Instructions) I’d now like to turn the conference over to Bart Hedges. Please go ahead sir.

[Bart Hedges:]

Good morning and thank you taking the time to join us today. During the third quarter of 2013, we increased our fully diluted adjusted book value per share by 6.2% and $24.20 to $25.70 bringing our year-to-date increase to 16.8%. During the quarter we earned profits from both the underwriting and investing operations. Our underwriting operations produced a combined ratio of 94.6% for the quarter bringing our combined ratio for the year-to-date to 96.8%. Our investment portfolio managed by DME Advisors gained 4% for the quarter and is increased by 12.2% for the year-to-date. The return from our underwriting operations was driven by profitable performance in each of our four core areas of concentration specifically Florida homeowners, non-standard auto, employer stop-loss and catastrophe retro. The composite ratio for these four core areas for the quarter and year-to-date is 91% and 87.3% respectively. Our core areas represent approximately 92% of our net earned premium year-to-date. Gross written premiums for the quarter and year-to-date increased from the prior year although the environment for new business relationship remains quite competitive. Our growth in gross written premiums is mainly attributable to increasing our business with existing clients in particular several of our non-standard automobile clients are still experiencing favorable market conditions with increased rates and retentions of business resulting in higher premium sessions under our quota share contracts. The third quarter is typically the peak of the U.S. hurricane season. This year we have limited activity and overall, we do not believe there are any events during the quarter that impacted our contracts. The market for natural catastrophe reinsurance continues to be competitive with plenty of capacity being offered by both traditional and non-traditional sources of capital. The [ph] floor on pricing per contract exposed to natural catastrophe has not yet been reached. As a reminder, we write a small number of catastrophe retro session contracts which provide protection to primary writers of catastrophe reinsurance, while pricing for our products is competitive if the price drops below a level that we believe provides a sufficient risk adjusted return, we will cease underwriting in this area. As of September 30, 2013, our maximum exposure to a single property catastrophe event is $110.8 million and our maximum exposure to any series of events is $149.8 million. Please note these numbers are net of any additional premium collected after the event. During the quarter, loss reserve actions did not material effect in our earnings. We continue to closely monitor our run-off portfolio of commercial automobile and general liability reserve and we will report to you if there are any significant developments. Overall, the reinsurance market is competitive and it has plenty of capacity, we believe our client-centric approach to developing and maintaining our reinsurance relationship is a critical component of our good underwriting performance during the year. We continued to experience high contract renewal retention rates with our clients and we are growing these relationships. The underlying market conditions for our non-standard automobile, Florida homeowners and employer stop-loss clients are each stable or slightly improving. 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 and good morning and Happy Halloween everyone. The Greenlight Re investment portfolio returned 4% in the third quarter bringing the 2013 net return to 12.2%. In the third quarter, the Greenlight Re investment portfolio captured 77% of the markets gain with about 35% average net exposure. As the markets continued its relentless climb, we became more conversely positioned and we ended the quarter 35% net long, down from 42% at the end of the second quarter. Our long portfolio more than doubled the S&P 500 written especially every long position was profitable in the quarter. Apple was our biggest winner as its earnings guidance stabilized and the new iPhones released and had initial record sales. We believe that Apple’s brand product line, customer ecosystem, balance sheet strength and capital allocation strategy warrant a higher multiple than the current single-digit multiple net of the substantial cash on its balance sheet. During the quarter Verizon agreed to acquire Vodafone’s 45% stake in Verizon Wireless for $130 billion, a price that is a premium to the value we expected from a possible sale. We continued to have exposure to Vodafone’s core business which currently trades below its less exciting peers and it’s also an attractive acquisition target on its own. We also had contributions from two new positions we accumulated during the quarter, one is the U.S. based technology company and the other is Osram Light, a lighting solutions company based in Germany that spun-off from Siemens during the quarter. Our short portfolio detracted from performance in the third quarter, the losses in the short portfolio were broad based and we continued to be short most of the companies that contributed the loss. These include a variety of companies which tend to have conventional valuations rather than speculative story talks that have caused excessive pain for other short sellers. We continued to be short Green Mountain which trades at a premium to the market multiple on next year’s earnings estimates that we believe the company will not achieve. The company faces significant competitive challenges that we believe will impact its margins over the next 12 months. Our macro positions were slightly negative in the third quarter and then became less volatile which caused losses on our puts. The weakened yen remains one of our most profitable positions so far this year. We continued to have substantial exposure to further weakening, our macro positions are slightly positive for this year so far. We are pleased with the results of our underwriting operations so far this year as well. We continued to service our existing relationships while we look for other areas for our client-centric approach might yield future business opportunities. The team is working well together and has found a few new relationships despite a soft market. And now, I would like to turn the call over to Tim to discuss our financial results.

[Tim Courtis:]

Thanks David. For the third quarter of 2013, Greenlight Re reported net income of $56.5 million compared to net income of $46.1 million for the comparable period in 2012. The net income per share on a fully diluted basis was $1.50 to the third quarter 2013 compared to net income of $1.23 per share for the same period in 2012. For the nine months ended September 30, 2013, we reported net income of $141.8 million compared to $75.2 million for the comparable prior year period. The net income per share on a fully diluted basis was $3.78 for the nine months ended September 30, 2013 compared to $2.01 for the same period in 2012. Gross premiums written were $410.9 million for the nine months ended September 30, 2013, an increase of 35.2% from the gross premiums written of $303.9 million during the first nine months of 2012. As Bart described this increase is primarily the result of increased business relating to non-standard automobile business. A new relationship this year in our Florida homeowner’s business also accounted for some of the overall premium increase. For the first nine months of 2013, our net earned premiums increased by approximately 16.7% to $406.4 million when compared to the same period in 2012. The increase in premiums earned correspondence to the additional premiums written particularly from non-standard automobile business and we will continue to earn over the next several quarters. The composite ratio for our frequency business for the first nine months of 2013 was 97.5% compared to a composite ratio of 112.4% through the comparable period in 2012. For our severity business, the composite ratio showed positive developments for the first nine months of 2013 as the lost reserves on Super Storm Sandy were taken down in the first quarter. Overall, our composite ratio for the first nine months of 2013 was 92.7% compared to 110.5% for the comparable period of 2012. Out total expense ratio which comprises both internal expenses and corporate expenses was 4.1% for the first nine months of 2013 compared to 3.9% during the comparable period in 2012. The resulting combined ratio of 96.8% for the first nine months of 2013 compared to a combined ratio of 114.4% for the same period in 2012. We reported net investment income of $49.4 million during the third quarter of 2013 reflecting a gain of 4% on our investment portfolio. The first nine months of 2013, we reported a net investment gain of $134.8 million reflecting a net investment return of 12.2%. The fully diluted adjusted book value per share as of September 30, 2013 was $25.70, a 9% increase from $23.57 per share reported at September 30, 2012. AM Best recently completed its review and as affirmed its rating of A excellent for Greenlight Re Cayman and A minus excellent for Greenlight Re Ireland. Both ratings have a stable outlook. Finally, in accordance with the terms of our investment management agreement with BME Advisors, the agreement has been extended for an additional three years and as a revised expiry date of December 31, 2016. I will now turn the call back over to Bart, who will provide some concluding remarks.

[Bart Hedges:]

Thanks Tim. Overall, we had a good third quarter increasing fully diluted book value per share by 6.2%. Our underwriting performance was in line with our expectations and our book of business is growing mainly through the expansion of existing relationship. While reinsurance market conditions remain competitive, our client-centric approach to underwriting is a differentiator in the marketplace and as contributed to high client retention in our core areas. Our overall goal is to build long-term shareholder value by writing a concentrated underwriting portfolio with the best risk adjusted returns we can find and then utilize the funds generated from these contracts to invest in our fundamental value long, short investment program. This investment approach is historically generated superior returns with less volatility than the overall equity market. We will continue to execute on this strategy and remain focused on driving our [indiscernible] increase in 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.

[Operator:]

We will now begin the question-and-answer session. (Operator Instructions) Seeing that there are no questions, 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 pertinent information of our Greenlight Re is available on our website at www.greenlightre.ky. You may now disconnect your line.