Siriuspoint Ltd (SPNT) 2013 Q3 法說會逐字稿

Greetings and welcome to the Third Point Reinsurance Company Ltd third-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rob Bredahl, Chief Financial Officer and Chief Operating Officer. Thank you, Mr. Bredahl, you may begin.

Thank you, operator. Welcome to Third Point Reinsurance Ltd's earnings call for the third quarter of 2013. This morning we issued our earnings press release, which is available on our website www.thirdpointre.bm.

A replay of this call will be available until November 19, 2013 by dialing the phone numbers provided in the earnings press release and through our website following the call. Leading today's call will be John Berger, Chairman, Chairman and CEO of Third Point Re.

But before we begin, please note that the management believes certain statements in the teleconference may constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about expectations, estimates, and assumptions concerning future events and financial performance of the Company, and are subject to significant uncertainties and risks that could cause current plans, anticipated actions, and the Company's future financial condition and results to differ materially from expectations.

Those uncertainties and risks include those disclosed in the Company's filings with the US Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made, and the Company assumes no obligation to update or revise them in light of new information, future events, or otherwise.

In addition, management will refer to certain non-GAAP measures which management believes allow for more complete understanding of the Company's financial results. A reconciliation of these measures with the most comparable GAAP measures is presented in the Company's earnings press release. With that, and at this time I will turn the call over to John Berger.

Thanks, Rob. Good morning and thank you for taking time to join us for our third-quarter earnings call. In addition to Rob Bredahl, our CFO and COO, with me today is Daniel Loeb, CEO of Third Point LLC, our investment manager. I'll provide an overview of our financial results, Daniel will discuss the performance of our investment portfolio, and then Rob will discuss our results in more detail.

I'm pleased with our results in the third quarter, our first quarter as a public company. We generated $46.6 million in net income, or $0.46 per diluted share, which brings our net income for the first nine months of the year up to $147.2 million, or $1.59 per diluted share. In last year's third quarter and first nine months we generated net income of $39.6 million and $38.7 million respectively.

This quarter's results were driven by excellent investment results and a reinsurance operation that continues to grow according to plan, and is beginning to contribute to net income. The return on our investment portfolio managed by Third Point LLC was 4.3% in the third quarter and 16.9% in the first nine months of the year.

We generated an underwriting loss of $4.9 million in our property and casualty segment in the quarter, but our investment income on the float generated by reinsurance operation was $7.1 million. Our reinsurance portfolio continues to perform as expected, and we had no net reserve movement.

In last year's third quarter, our first year of operation, we produce an underwriting loss of $5.8 million, and investment income on float was less than $100,000. While the reinsurance market remains extremely competitive, margins in our targeted lines of business are stable.

Our combined ratio for the quarter was 107.9% versus 117% in last year's third quarter. As we continue to grow, and assuming we maintain current underwriting margins, our underwriting results will improve as general and administrative expenses drop as a percentage of premium.

As a reminder, our strategy is to write reinsurance contracts with attractive risk-adjusted returns and to invest the float generated from this activity in a separate investment account managed by Third Point LLC. We do not write excess of loss property Cat business on our rated balance sheet, but rather write Cat reinsurance on behalf of a separate Cat risk fund.

We made a $50 million investment in the Cat fund, and so we have some exposure to Cat risk and the Cat rate environment, but this exposure is limited and contained, especially relative to traditional reinsurers. In today's competitive market, we focus mostly on what we consider to be less volatile lines of business and types of transactions where the insurance company buyer is in need of capital in the form of reinsurance.

We are pleased with the large number of opportunities brought to us by brokers and our ability to originate deals through our strong relationships, because selectivity, of course, is the key to profitability in a competitive market. We are seeing opportunities that meet our underwriting standards from smaller homeowners companies, nonstandard auto writers, mortgage insurers, and workers compensation insurance companies that focus on states where we find market conditions attractive.

Also, we are seeing a growing number of opportunities from distressed companies when there is less competition and where we can structure surplus relief solutions while balancing the risk assumed against our expected profit. I will now hand the call over to Daniel Loeb, who will discuss the performance of our investments portfolio during the third quarter.

Thanks John, and good morning everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC returned 4.3% in the third quarter, bringing year-to-date returns to 16.9% net of season expenses. The Third Point Reinsurance account represents approximately 10.5% of the assets of funds managed by Third Point LLC.

We generated positive results across each of our strategies, long/short equities, corporate and structured credit, and macro investments during the third quarter. Returns were led by the equity portfolio, which contributed 3.5%, or 80% of total gains.

As of September 30, our equity investments have gained 31.6% on average exposure year to date versus the S&P's 500 20% gains, with approximately half the value at risk.

Performance has been driven by profits in several key activist positions, as well as by many smaller investments across sectors and geographies. The quarter's equity returns were attributable to successful single-name stock selection resulting in significant alpha generation with modest volatility.

Long exposure decreased in July when several positions reached their price target's end result. The most notable of these was Yahoo's repurchase of two-thirds of our investment at the previous stated closing price of $29.11 per share in July. At the time of the sale, our Yahoo investment had an IRR of 53%, a total realized and unrealized gains of $1.1 billion since inception in aggregate across all of Third Point's funds.

Corporate credit added 0.4% to Q3 returns, as both performing and distressed credit positions delivered solid performance. As of September 30, our corporate credit portfolio has returned 15.5% on average exposure year to date, or more than 1000 basis points over the Barclays high-yield index.

Sovereign credit has also continued to be a key area of focus. Our sovereign portfolio was up 12.4% on average exposure in Q3, adding another 2/10% to returns in the macro portfolio for the quarter. Finally, mortgages have continued to perform well converting 0.2% to Q3 returns.

Through September 30, our but has returned 22.1% on average exposure, despite fairly consistent levels of exposure, the portfolio's contribution has shifted throughout the year. For example, we have been selectively adding seasoned sub-prime mezzanine bonds recently, after selling most of those holdings during the rally in those securities in the first quarter.

We are cautiously constructive about the investment environment in the near future, and expect exposures to remain relatively consistent with current levels. We will continue to focus on uncovering event-driven opportunities, especially in special situation equity positions. Now, I'd like to turn the call over to Rob to discuss our financial results.

Thanks, Daniel. As John mentioned, we generated $46.6 million in net income in the third quarter, which translates into earnings per diluted share of $0.46. Diluted book value per share increased by a lower amount, $0.28 or 2.3%, due to $24.6 million of one-time expenses related to our IPO. These were mostly bank underwriting fees. These expenses were netted against the capital raised, and not expensed through our income statement.

In our property and casualty reinsurance segment, gross premiums written increased 5% to $43.7 million for the three months ended September 30, 2013 from $41.7 million for the three months ended September 30, 2012. For the first nine months of 2013, gross premiums written increased 42% to $231.2 million from $162.5 million.

Third Point Re began underwriting on January 1, 2012. As John mentioned, increases in gross premiums in 2013 are the result of successful development of underwriting relationships with intermediaries and reinsurance buyers. We are very pleased with our acceptance in the market and the increasing deal flow we are seeing.

Still, it is worth noting that we focus on a limited number of larger transactions, and therefore there may be significant changes in premium from period to period. Net premiums earned for the three months ended September 30, 2013 increased 80% to $61.8 million. Net premiums earned for the nine months ended increased 47% (sic -- see press release "147.3%") to $155.8 million.

The three and nine months ended September 30, 2013 reflect net premiums earned on a larger in force underwriting portfolio competitive three and nine months ended September 30, 2012. In addition, the three and nine months ended September 30, 2013 include net premiums earned on $17.5 million and $39.8 million respectively related to retroactive reinsurance contracts. These were reserve covers where we record the gross premiums written and earned at the inception of the contract.

The underwriting loss of the property and casualty reinsurance segment for the third quarter was $4.9 million, and for the nine months ended September 30, 2013 it was $12.1 million. These results compare to underwriting losses of $5.8 million and $19.7 million in the three and nine months period ended September 30, 2012 respectively.

The combined ratio for the first nine months of 2013 was 107.7% compared to 131.3% in the previous year's first nine months. The improvement in underwriting results was due primarily to crop losses recorded in the 2012 period and a drop in general and administrative expenses as a percentage of earned premium. For the nine months ended September 30, 2012, Third Point Re recorded a $5.2 million underwriting loss from its crop reinsurance portfolio due to the severe drought suffered by most of US farm belt.

The catastrophe risk management segment, which includes the combined results of our Cat fund, our Cat fund manager, and our special purpose Cat reinsurer generated net income of $2.7 million in the third quarter and $2.6 million for the first nine months of the year. Since our Cat risk segment began operations in January 2013, there are no comparable results from 2012. Net assets under management in our Cat fund as of September 30, 2013 were $100.5 million.

Investment income has been very strong in 2013. For the third quarter of 2013 Third Point Re recorded net investment income of $53.4 million compared to $47.7 million for the third quarter of 2012. As Daniel explained, the return on investments managed by Third Point LLC was 4.3% for the three months ended September 30, 2013 compared to 6.1% for the same period the previous year.

For the nine months -- first nine months of 2013, the Company recorded net investment income of $166.1 million compared to $63.9 million for the nine months ended September 30, 2012. The return on investments managed by Third Point LLC was 16.9% for the nine months ended September 30, 2013 compared to 8.4% for the first nine months of 2012.

In addition to the factors discussed by Daniel, net investment income for the three and nine months ended September 30, 2013 also benefited from higher average investments managed by Third Point LLC compared to the prior year periods, due to retained earnings, the net proceeds generated by Third Point Re's IPO, and float contributed by our reinsurance operations. I will now hand the call back to John Berger.

Thanks, Rob. We had a solid quarter and continue to develop according to plan and demonstrate the benefits of our business model. Third Point LLC's performance as our investment manager has been outstanding, and while the reinsurance market remains very competitive, we are pleased that we've been able to participate in enough opportunities that meet our underwriting standards to continue to grow according to plan. I will now open the call up for questions. Operator?

(Operator Instructions)

Michael [Zaremski], Credit Suisse.

First question is on the underwriting side. No major wind events in the US once again this year. How do you guys think pricing for many of the surplus relief deals you focus on will be impacted? And related, will Citizens, Florida depopulations, or the clearinghouse play into the upcoming year's growth strategy?

I think there are two factors going on with the surplus relief deals. One is with Cat prices going down makes but quarter shares potentially more attractive. That is a positive.

A negative is to the extent that traditional reinsurers are being pushed out of the traditional Cat market, they may seek to add more catastrophe protection to those surplus release deals.

So it is unknown right now, but a potential positive and a potential negative. The Florida Citizens deal, clearly I think that is a positive for the industry. Michael, did you ask about depops from Citizens?

Yes, depops and (inaudible) and/or the clearinghouse, (inaudible) start soon.

Yes, I think to the extent there are more companies, there are more reinsurance buyers, that is a positive for us.

And we are seeing a couple of deals, surplus relief deals, from companies that are doing depops.

Okay, got it. Switching gears to the investment portfolio, probably for Dan. Can you update us on how the investment portfolio is positioned going into year end? Obviously, US equity markets continue to have a strong run.

You used the words cautiously optimistic. Do you expect some of your long (inaudible) to take a breather? Thanks.

Well, it's always difficult to predict what our positions will do over a six-week period. So, I don't -- I wish my crystal ball were more accurate.

Obviously I still, I really like the position that we have, and that's why we've committed capital to them. Maybe I was a little too guarded in the term cautiously optimistic.

Particularly in the near term, which is I think what your question related to, given monetary policy here, the actions taken by Droge last week in Europe, and what is going on in the UK, Japan, and even China. We sort of have a global put to equities. So I feel like we are in a mode where economies around the world, developed economies, are trying to inflate, and that is usually a good thing for equities.

Okay, and I guess just a follow-up, Dan. You used the word target price. I guess said another way, is the gap between current prices and your target prices narrower than it was earlier in the year?

Some are, some aren't. We have added some -- the positions that have appreciated to our target prices are closer to our target prices, like Yahoo for example. We've reduced -- we've recently put on some new positions which have much higher target prices.

So it's something that we are continually turning to the portfolio and exiting positions that appreciate and reach our target prices and selling -- and adding to things where we see more upside and opportunity. One thing I want to say about target prices, is you have to be a little bit expansive about how you think about things.

You may have a stock that you think is worth X today, but because of the nature of the business they are in or the way that the management team compounds capital over a couple-year period, you might have a higher target price. So all these things have to be put into context, whether you're talking about a shorter-term target or a longer-term target, and there's no -- it is more art than science, determining what constitutes having reached or not reached a target price.

That's helpful, thank you.

Eric Bass, Citi.

I was hoping you could discuss a little bit more your expectations regarding the growth potential for the Cat fund. Do you still expect to have another closing in the fourth quarter? And if so, any indications about the amount you be able be able to raise?

We will have a closing in the fourth quarter, it will probably be quite modest. As I think anybody following the space knows, there is pretty good headwind from the competitiveness of the rate environment.

There is also a lot of other people out there trying to raise money, and clearly our game plan is a long-term game plan. Having a three- to five-year track record is critical in raising funds.

So, we will work on establishing that. And it's at $100 million, which is on the small side, but given the strategy we have for it, we think it is something that works and it's something of potential value, great value to us.

Okay. Thanks. If I could just ask one other. Maybe if you could talk about what lines you are seeing the most attractive opportunities to write business currently?

It is tough to generalize. Our strategy is to -- we have fewer deals and they tend to be larger deals. And so it could be any given line of business where the economics line up for us.

The homeowner quota shares, those are, we think are going to trend well. We have some nonstandard auto deals, but we are also, as Rob -- as I mentioned before, we are seeing -- we are just seeing a lot of one-off deals.

Despite the apparent health of the industry, there are problems out there. There are companies with issues out there, and we are well known as problem solvers. We are seeing a good flow of these one-off type deals.

Okay. Thank you for the comments.

Kai Pan, Morgan Stanley.

Good morning. This is Kai Pan calling in from [crack low-craft] and congratulations on good start as a public company. The first question actually for Daniel, Third Point fund is returning about 10% of capital to investors. Could you elaborate a little bit on that, and will this limit the Third Point Re's ability to invest or growing investment portfolio with Third Point LLC?

I don't really have any further comment on that. We will be sending out a letter to our investors shortly about it. We have said, however, that the return of capital is -- excludes the public funds TP Re and Third Point offshore investors, our publicly listed fund in the UK.

Okay. Thank you. Second question, probably for John, is on the combine ratio. The combine ratio improved significantly year over year on both loss ratio as well as expense ratio. When do you expect to achieve underwriting profitability?

We think if we can perform as we hope to, as we have in our plan, that the low 100 is achievable the latter half of next year or early part 2015.

That is clear is that is that is not assuming any significant underlying improvement on the pricing side, is that right?

That is correct. If we -- if the market pretty much stays where it is or deteriorates a little bit, we think that is achievable. There is no optimism baked in there.

Okay, great.

It is a function of scale, Kai. So we are booking deals at compositive ratios that have been very consistent from the start. That as we grow our G&A expenses become the lower percentage of our earned premium, and that is where we are going to -- that's why we're going to pierce the 100% combined ratio.

Great, thank you. Last question, actually for Rob. Do you have a number for the float at the quarter end?

Yes, at quarter end, it was -- let me grab it. $176 million, $176 million.

Okay. Thank you.

(Operator Instructions)

Jay Cohen, Bank of America Merrill Lynch.

I had a couple of questions. First on the loss ratio. Obviously your portfolio continues to evolve and change. That number's varied by 20 points over the past five quarters. As you look at the third quarter loss ratio, do you view this as a fairly normalized number, or should we expect that variability to continue to swing quarter to quarter?

Jay, I think the variability would be down. Last year we had those swings. We had $90 million-plus of earned premium. Almost half of it was from crop business, just the nature of that business. It earns over 12 months.

Other new business comes on. A lot of the business earns over 24 months. So almost half our earned premium was crop, and it was a terrible crop year you're because of the drought.

Now crop as a percentage of our earned premium is much lower. So even if you had the worst drought in 50 years again, it just would not have the same dramatic impact.

We don't have the property Cat X as a loss. So we really don't have that volatility on the books. So I think the swings will be more mitigated.

And this number is a reasonable number to consider a normalized number?

Yes, I probably would go that far, Jay. We are still relatively young and we are growing. Also, we've done a couple of reserve covers that had very high loss ratios.

Now high, high means 100%. It doesn't mean 150%. We are not writing discounted loss reserve deals.

Yes, so the mix of business, we will still, from quarter to quarter, we will still push that loss ratio around. And if you look at the deals we are writing, those with higher expected loss ratios have lower expenses built in and vice-a-versa. And so we are getting to a normalized level, but we're not quite there yet.

Got it. And I guess the other question, maybe I'll take this offline but I will throw it out there. The invested assets, even if you throw in cash, didn't seem to change too much from the second quarter, despite the IPO. I am wondering where some of these other assets are in the balance sheet right now?

Yes, I think if you are looking at the balance sheet, the balance sheet includes a number of asset categories from our separate account, as well as liability categories. If you netted all of that down, you would come up with an NAV number, a number that represents the money invested with Third Point, and that number has grown.

The proceeds for the IPO went into our separate account, and we also added some more money in the way of float. So it has grown. I can help you with those numbers, Jay, off-line.

That is great. And maybe the last question, if you don't mind, the -- clearly you guys are always working on deals, there is stuff in the pipeline. The year-over-year growth in this quarter was not as big, but we know that is going to jump around a lot. Do you see the pipeline in such a way that you have any clarity into the fourth quarter or first quarter where you see some big deals that may be coming on board?

Yes, we are -- that's tough to predict, Jay. We are really concentrating on larger deals. So if we hit on those, the numbers will swing up. If we don't, they won't.

I think one thing, too, over time, you will see probably more premium volume volatility than with other companies because of the nature of our underwriting approach, of looking for larger deals. So they are just really hard to predict.

We have a very good pipeline. We are optimistic, but we will see what the next few months bring us.

I would also throw in that I wouldn't read much into the third quarter, at least third quarter over third quarter. It is always the (technical difficulties) Hello?

I'm here. I couldn't hear you guys for a bit, though.

What we were saying is that don't put too much curiosity on the third quarter premium. That is historically a very light quarter. The mix of the business we wrote this year over last year changed dramatically. We have -- we are looking at larger deals, a lot of one-off deals. So any quarter can be bigger or smaller, just based on whether we hit on these deals or not.

Right. No, that make sense. Thanks, guys.

(Operator Instructions)

Amit Kumar, Macquarie Research.

A quick follow-up on the last question. Based on investment performance, how are you thinking about your premium to equity leverage for 2014?

We don't give guidance on gross premium, but I think we are pleased with our growth path right now and expect that to continue. And given that we have more capital, we've upped what we expect to write next year.

I think, too, everybody talks about the market, current market conditions. It is a very competitive time. We are no hurry to deploy our capital on the underwriting side.

We are lucky to be associated with Third Point LLC. All our capital is fully deployed on the investment side. So we think we have a nice growth pattern for the next few years.

But we are in no hurry to fully deploy the capital on the underwriting side. When and if there are changes in the market, we want to be prepared to take advantage of those. So we like what we're seeing.

We like the number of deals we are hitting. We like the growth rate we have. But again, we do not feel great pressure to accelerate growth just for growth's sake.

Got it, The next question is on the Cat fund assets. I think you mentioned $100 million number. Do you think you are still on track for getting to $300 million or $400 million, or has the thought process changed, based on the landscape?

I think several things. One is clearly the market is more competitive than when we started. And our game plan is not to write the big, retrosecessional high-octane stuff. We are going after regional business.

Access to that business is harder, but we think we have a good way to go about it. Fundraising has been slow, and I think a big part of that is just the negative news about where the rate levels are, and then we are new. We are going to have one-year track record.

It is hard coming out in this environment new and raising a lot of money. So, I think for the short/medium term, it is going to be tough to show great growth on the asset side, and that is fine.

We will -- the idea is quality not quantity, and if we can -- we think we are at a good critical minimum size. We can be a factor in the markets we've chosen, and we will grow.

A lot of the growth potential is really determined more by the market than by us. So we are out there swinging at pitches with the various investors, and over time, we will line up more capacity.

Got it, and does the relationship -- how does the relationship with Hiscox evolve over time?

Hiscox is clearly, they're the best company in London and one of the best companies, best run companies in the world. It's a very good relationship.

How long it will last, we don't know. We have a two-year commitment with them. Things are good. The cooperation is good.

We continue to cooperate on the underwriting side where we do get regional from Hiscox that would be tough to access on our own. So overall, the relationship is very good.

Got it. And one final question. Based on the market opportunities you are seeing, and maybe I might take this offline, has your view changed on the basket between property, casualty, and specialty versus the time of the IPO?

Yes, at the risk of sounding cavalier, we don't spend a lot of time on what the optimal -- if I understand your question correctly. If I'm answering it incorrectly, jump right in. We don't spend a lot of time on saying we want a third property, a third casualty, a third specialty.

We will take whatever make sense. Again subject to the constraint of -- on the property side, how much property Cat exposure do we want to have on our balance sheet? And especially given our approach of looking for fewer, larger deals, our mix can change dramatically from quarter to quarter, just by adding one or two deals, but we spend no time thinking about the optimal mix of our business.

Okay, that's all I have. Thank you for the answers.

Thank you.

And seeing as we have no further questions at this time, I would like to turn that floor back over for any closing comments.

Thank you very much. We're, as we said in the beginning, we are pleased with our progress. We are not yet two years old, but we like the progress we have made. This is our first quarter as a public company, and that in itself was a good achievement. So, we thank everybody for dialing in today.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.