Greenlight Capital Re, Ltd. (GLRE) Q3 2011 Earnings Conference Call November 1, 2011 10:00 AM ET
Thank you for joining the Greenlight Re Conference Call on third quarter 2011 earnings.
Many value investors have given up on their strategy over the last 15 years amid concerns that value investing no longer worked. However, some made small adjustments to their strategy but remained value investors to the core. Now all of the value investors who held fast to their investment philosophy are being rewarded as value Read More
Joining us on the 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.
Thanks Bart, and good morning, everyone. The Greenlight reinvestment portfolio was up 10 basis points in the third quarter of 2011, bringing the 2011 net returns to negative 5.1%. The conservative stance that we maintained throughout the first half of the year in a rising market was rewarded in the third quarter as we’re able to preserve capital in the Greenlight Re portfolio and generate a flat result in a quarter where the S&P fell approximately 14%.
As we went through the first half of the year, we became even less convinced that the markets we’re pricing in, the global economic challenges and we entered the third quarter about 23% net long, down about 10% from where we entered the second quarter. In the first half of the year, we consolidated our short positions into our highest conviction ideas and sold a number of our lower conviction long positions, including some of our more cyclical exposure in Europe.
Our long portfolio lost a bit more than the market in the third quarter. However, our short portfolio generated an absolute portfolio return of about 12% on an average short exposure of 60%, reversing more than all the loss in the short book during the first half of the year. Our macro hedges also helped in the quarter with slight positive returns coming from gold and our European sovereign and CDS positions, where we’ve taken some profits.
As the market retreated over the past few months, we added to a few of our existing long positions, found a few new investment opportunities primarily in the technology and auto sectors, and covered several shorts. We also exited a long-standing position in Pfizer profitability as better opportunities presented themselves.
During the third quarter, we shifted a portion of our gold investment from physical gold into GDX and ETF gold mining companies. Throughout the course of this year, a substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk adjusted returns even if gold does not advance further. Of course, since we believe gold will continue to rise, we expect gold stocks to do even better.
Late in the quarter, we increased our net long exposure to 35%. Although, we didn’t expect it, the strong market advance in October immediately rewarded us for a more positive view and the Greenlight reinvestment account reversed all year-to-date losses and generated a positive return of 6.9% in the month of October, with gains coming primarily from our long portfolio.
Despite the strong October, we believe that the environment remains challenging. Many equities, especially in large capitalization companies appear quite attractive. This is balanced by the continuing impact of dangerous macro policies. Most of our portfolio is assembled from the bottom up and we continue to see reasonable opportunities on both sides of the portfolio. As markets have quickly priced in a few positive recent data points in October, we have slightly reduced our net long portfolio exposure and ended October 33% net long.
As we discussed on our last call, Len Goldberg retired as the CEO of Greenlight Re in August, and completed the transition of his responsibilities to Bart Hedges. I spent several days in the Cayman last week with Bart, Len, and the rest of the Board, and was pleased with the smoothness of the transition and the energy of the team. Under Bart’s leadership the underwriting team at Greenlight Re continues to exercise patience and discretion, and is finding pockets of opportunity.
I’m also excited that after five years of building Greenlight Re, A.M. Best has upgraded our rating from “A-” to “A,” reflecting the hard work that the team has achieved to establish our unique reinsurance company. The rating increase should provide significant future benefits to Greenlight Re.
Now, I’d like to turn the call over to Tim, to discuss our financial results.