Siriuspoint Ltd (SPNT) 2013 Q4 法說會逐字稿

Greetings and welcome to the Third Point Reinsurance fourth quarter and year-end conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Rob Bredahl, Chief Financial Officer and Chief Operating Officer for Third Point Reinsurance. Thank you, Mr. Bredahl; you may begin.

Thank you, operator. Welcome to Third Point Reinsurance Limited's earnings call for the fourth quarter and full year of 2013. We hope, you had an opportunity to review our earnings press release, which we released after the markets closed yesterday afternoon. If not, a copy is available on our website, www.thirdpointre.bm, under Investors.

Leading today's call will be John Berger, Chairman, CEO, and Chief Underwriting Officer of Third Point Re. But before we begin, please note that 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, including those risks and factors listed under Risk Factors in the prospectus on Form 424 (b) dated as of August 14, 2013, and filed with the Securities and Exchange Commission on August 19, 2013. 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 offer a more complete understanding of the Company's financial results. A reconciliation of these measures to the most comparable GAAP measures is present in the Company's earnings press release, which is posted on our website under Investors.

With that, and at this time, I'll turn the call over to John Berger.

Thanks, Rob. Good morning and thank you for taking the time to join our fourth quarter and year-end 2013 earnings call. In addition to Rob Bredahl, CFO and COO of the Third Point Re, with us today is Daniel Loeb, CEO of Third Point LLC, our Investment Manager. I will provide an overview of our financial results and progress in developing Third Point Re. Daniel will discuss the performance of our investment portfolio and then Rob will discuss our results in more detail.

I'm very pleased with our financial performance in the fourth quarter and for the full year, and believe our results demonstrate the benefits of our total-return business model. It is also gratifying to produce strong results following our IPO.

In our second year of operation and before we've reached full scale, we increased our diluted book value per share by 20.5%. Our 2013 growth in book value per share was driven by outstanding investment returns produced by our Investment Manager of Third Point LLC and a reinsurance operation that is developing according to plan and already contributing to net income.

In the fourth quarter, we produced $80.1 million in net income or $0.75 per diluted share, which brought our net income for the full year up to $227.3 million or $2.54 per diluted share. In last year's fourth quarter and full year, we generated net income of $60.7 million and $99.4 million respectively. The return on our investment portfolio managed by Third Point LLC was 6% in the fourth quarter and 23.9% for the year.

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 catastrophe business on our rated balance sheet, but rather write cat reinsurance on behalf of a separate cat risk fund.

In our property and casualty segment, we generated an underwriting loss of $3.6 million for the quarter and $15.8 million for the year, but after including investment income generated by float of $11.8 million and $27 million for those periods, respectively, the property and casualty segment contributed to net income. Our reinsurance portfolio continued to perform as expected, as we had no meaningful reserve movements in the fourth quarter or for the full year.

Our combined ratio for the year was 107.5% versus 129.7% in 2012. The improvement was due to a drop in crop-related losses, while not good but better than last year and a drop in overhead expenses as a percentage of earned premium. As we continue to grow and assuming we maintain current underwriting margins, our underwriting results will continue to improve as the general and administrative expense ratio drops.

While the reinsurance market remains extremely competitive, we've seen a large flow of business from our reinsurance broker partners and continue to identify attractive opportunities. Given 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 clients are in need of capital in the form of reinsurance. We are seeing opportunities that meet our underwriting standards from smaller homeowner companies, nonstandard auto writers, mortgage insurers, and workers' compensation insurance companies in select states.

In addition, we are considering a number of transactions that combine a loss portfolio reserve with a reserve cover. These are transactions where we receive a transfer of reserves and investable cash that backs those reserves in exchange for providing protection against adverse reserve development. To maximize the amount of float these transactions generate, we focus on reserves with long payout patterns. Again, I'm thrilled with our strong results, pleased that we've already realized the benefits of our total-return model and grateful to our investment manager for their outstanding performance.

I will now hand the call over to Daniel Loeb, who will discuss the performance of our investment portfolio during the fourth quarter and year.

Thanks, John; and good morning, everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC returned 6% in the fourth quarter, resulting in 2013 total year's returns of 23.9% net of fees and expenses. The Third Point Reinsurance account represents approximately 11% of assets managed by Third Point LLC.

For both the fourth quarter and the year, we generated positive results in each of our investment strategies; long-short equities, corporate and structured credit, and macro investments. Consistent with the first three quarters of the year, the equity portfolio drove returns in the fourth quarter, contributing to 4.7% or roughly 80% of total gains. At year-end, our equity investments returned 41.1% on average exposure versus the S&P 500's 32.4%, with about half of the value at risk.

Performance for the quarter was led by several core equity positions, but smaller equity positions across sectors in both corporate and mortgage credit contributed meaningfully to our results. Equity returns were driven by positive performance in several of our largest positions, including newly announced investments in Ally Financial and Dow Chemical. [IDF] velocity in our equity book was strong in the fourth quarter and we increased both gross and net exposure heading into year-end.

We concentrated on identifying companies that have been underearning relative to normalized earnings power and as a result, added a few positions to our portfolio. Japan continued to be a high beta trade and our Sony position disappointed in the fourth quarter. Solid performance from our corporate credit strategy contributed another 0.7% to fourth quarter profits. Performing credit positions were responsible for approximately two-thirds of the gains in corporate credit, outpacing our distressed credit portfolio.

For the year, the Third Point corporate credit book returned 25.4% on average exposure and more than 3 times its CS High Yield Index. Positions in sovereign credit and other macro or tail-related investments also performed well in Q4, bringing contribution from our macro portfolio to 0.5% for the quarter. Our mortgage portfolio returned 0.1% in Q4, bringing total return on average exposure to 21.1% for 2013 versus the HSN Hedge Fund Mortgage Index return of 8.8% for the year. Portfolio composition shifted throughout the year and we ended 2013 with increased exposure in several areas, including CMBS and non-US RMBS.

In 2014, we will continue to focus on event-driven situations and expect the environment for activist and constructivist investing to remain positive. We believe the market will experience increased volatility this year. And so, we'll look for opportunities where market drawdowns create attractive entry points.

Now, I'd like to turn the call over to Rob to discuss the financial results.

Thanks, Daniel. As John mentioned, we generated $80.1 million in net income in the fourth quarter. This translates into earnings per diluted share of $0.75. For the 2013 full year, we reported net income of $227.3 million or $2.54 per diluted share compared with $99.4 million or $1.26 per diluted share in 2012, an increase of 128.7%.

Diluted book value per share increased by $0.77 or 6.2% for the fourth quarter and $2.23 or 20.5% for the 2013 full year. And our property and casualty reinsurance segment gross premiums written increased 482% to $162.4 million for the fourth quarter of 2013 from $27.9 million in the prior year's fourth quarter.

For the full-year 2013, gross premiums written increased 106.7% to $393.6 million from $190.4 million for the full-year 2012. We are pleased with the amount of attractive opportunities we are seeing in our premium growth, but we must actually stress again that we write a limited number of larger contracts and therefore, we can experience large swings in premium from one period to the next.

Net premiums earned during the fourth quarter of 2013 increased 69.5% to $56.8 million, reflecting our larger in-force underwriting portfolio compared to the three months and year ended December 31, 2012. For the full year, we saw net premiums earned increase $116.1 million or 120.4% to $212.6 million. The underwriting losses from the property and casualty reinsurance segment for the fourth quarter and full-year 2013 were at $3.6 million and $15.8 million respectively. These results compared to underwriting losses of $9.0 million and $28.7 million respectively in the three months and year ended December 31, 2012.

Our combined ratio for the year ended 2013 was 107.5% compared to 129.7% for the year ended 2012. The improvement was due to a decrease in general and administrative expenses as a percentage of our net earned premium and a decrease in losses from our crop reinsurance portfolio. In 2012, we recorded a $10.0 million underwriting loss on our crop insurance portfolio due to the severe drought in the US.

In the fourth quarter of 2013, we increased reserves on our crop reinsurance contract and recognized an underwriting loss from crop of $700,000. Our crop contract is now both at a combined ratio of 102%, that's up from 98%. The reserve increase was due to poor growing conditions in Iowa and Minnesota, cold weather that destroyed citrus crops in California, and low corn prices, which produced losses and certain underlying revenue protection policies. No other reinsurance contract produced a loss before G&A expenses in 2013.

The catastrophe risk management segment, which includes the combined results of our catastrophe fund or catastrophe fund manager and our special-purpose cat reinsurer, generated net income of $797,000 in the fourth quarter and $3.4 million for the year. Since our cat re segment began operations in January 2013, there are no comparable results from 2012. The cat fund generated 11.4% return for investors in 2013 and net assets under management as of December 31, 2013, were $104.0 million.

Overall, investment returns were very strong in 2013. As Daniel mentioned, the return on investments managed by Third Point LLC was 6.0% during the fourth quarter of 2013 compared to 8.3% for the prior-year period. For the 2013 full year, return on investments managed by Third Point LLC was 23.9% compared to 17.7% for the year ended December 31, 2012.

For the fourth quarter, Third Point Re recorded net investment income of $87.1 million compared to $72.5 million for three months ended December 31, 2012. During the fourth quarter and year, we also benefited from higher average investments managed by Third Point LLC compared to the prior-year periods due to the net proceeds generated by Third Point Re's IPO float contributed by its reinsurance operations and retained earnings. For the full year, the Company recorded net investment income of $253.2 million compared to $136.4 million the year ended December 31, 2012.

I'll 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're pleased that we've been able to source opportunities that meet our underwriting standards and continue to grow according to plan.

I will now open the call up to questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Erik Bass, Citi.

Hi, thank you. Can you talk a little bit more about the new business growth you saw this quarter and which lines it was concentrated in? And I think you still are describing I'd say market conditions as challenging, but has there been any incremental change in the environment, either positive or negative, over the course of the quarter?

For the types of business, we're looking at the homeowner quota shares with limited cat exposure and nonstandard auto. While they're competitive a lot, a lot of the dynamics in those deals are the relationships that we have with those companies, where we have a history in the past. So once the terms and conditions are set, what clearing price for the market, it becomes more of an exercise of access, can you get the business that you think is attractive; and because of the staff we have, the relationships we have, we're happy with the success we've had.

And remember what we say and we'll continue to say, we write a fewer number of large deals. So any given quarter, the volumes can go up and down, can swing in a pretty big way. We're not in the property cat market to speak of. We have a cat fund that's relatively small, that writes regional cat, not the retrocessional cat, and we thought the prices there were down about -- rates were down about 10% which is less than the overall market. But we're not out in the general market slugging it out with everybody.

Got it. Thank you. And then, maybe if you could just update us how you're thinking about the G&A leverage in the business as you add more premiums and is that what you would view as the key lever to begin generating an underwriting profit and I guess maybe when do you think is a reasonable time frame to target for starting to generate an underwriting profit?

So our G&A expenses in the fourth quarter were close to $9 million, which is a little bit higher than our run rate. There are some one-time legal expenses, but that's about the run rate it will grow gradually over time, whereas our earned premiums can grow rapidly in the next couple of years. And in fact, if you look at 2013, our gross premium grew by much more than our earned premium because [lot of] it was back-end loaded. So as their earned premium catches up, you'll see improvements in our underwriting results just from that relationship and that timing difference.

As far as breaking even, I think we have always said that we expect that to be probably in 2015. When I say breakeven, on an underwriting basis.

Right. Okay, thank you very much.

Thank you. (Operator Instructions) Kai Pan, Morgan Stanley.

Good morning. My first question for Daniel, and you have another banner year, 24% return on your investment fund, I just want to understand a little bit better about your incentive compensation structure for your employees and also talk about a little bit your employee retention.

I'm sorry, I don't understand, you want me to talk about the incentive compensation?

Yes.

We pay our employees relative to what they end up making and by employees, are you asking about all of my employees or the investment professionals?

More about the investment professionals.

Right. So we have a bonus pool that is composed of the fees generated by the fund and we don't differentiate between the TP Re fees, which is basically, as you know, managed in the same way as the other funds that we manage. And we have a bonus pool composed of those fees and we have a fixed and a discretionary portion of incentives that get paid out to our employees based on their performance.

Okay. So, basically, sort of like the great performance in [2000], like you had a few years of good performance, that will translate into sort of higher bonus pool and compensation for the employees?

Yes.

Okay. Any [thought] about employee retention, has any sort of turnovers?

We definitely haven't had any employees resign in the last -- we really haven't had any resignations. We didn't have any year-end resignations as a result of compensation, if that's your question, or for any other reason.

Okay, that's great. And the bonus pool, is there any sort of like a how to say the vesting period?

We did previously and we actually did away with vesting periods. We just pay people -- we feel like we have very strong loyalty from our partners and employees, and we didn't feel like it was necessary for us to have any kind of artifice to tie them to us financially. So it hasn't -- at least thus far, it hasn't been an issue.

Okay. That's great. Just follow-up. As we close to the end of February, do you have any update on the sort of your return from the fund, [for the market]?

I don't disclose any fees outside of what we disclose normally, normal course at month end. So, I can't say anything about our February to month date that isn't already out there.

Great. Thank you so much.

And we'll be posting the February month-end results Friday night.

Okay, great. Then, my next question is for John or Rob is that it looks like in the press release, you mentioned about a miscalculation about the share counts in the past quarters. So could you elaborate a little bit more on that? It looks like a differential is like about 9 million shares.

So from the inception of the Company, we were using an incorrect methodology for calculating diluted earnings per share, it was overly conservative; and on average, the difference was around 10% between the numbers we were using and the correct numbers; and in the 10-K, which we expect to file in the next 24 hours, we have a table that corrects them and shows you the differences.

Yes. And I guess the key point there is we understated earnings per share, we did not overstate them.

Yes. I mean the book value that growth is probably sort of much better after sort of like they say after you reduced the share counts for diluted shares?

No, no. It's only an earnings issue. It's only earnings per share where the incorrect calculation was made. Diluted book value per share has always been correct.

Okay. Then, the last question on float, do you have the like balance for the float at year-end?

I don't have a precise number. It's very close to $200 million.

Okay, thank you so much.

Thank you. (Operator Instructions) Brett Shirreffs, Keefe, Bruyette & Woods.

Yes. Good morning. John, I was wondering if you could just touch on the submissions a little bit at Jan. 1 and just wondering if you're seeing a lot more business this year versus last year.

Yes. The submission flow is up substantially, as we were established and we're out and people understand what we're trying to do, so the flow has increased nicely. We expect that to level off as people -- it's a two-way sword, people understanding what we want to do and then not sending us things that they know we're not going to do. So the first year, we saw a lot of things that we just weren't going to entertain. So I think, we're getting our message out well and we're seeing a good flow of business of the types of things we want to write.

Okay. And then, on the premium number in 4Q, was there anything -- I mean, I know the large deals can be lumpy. Was there anything that was pulled forward that might have been normally in 1Q?

No, no.

No. Okay, thank you very much.

Thank you. Jay Cohen, Bank of America Merrill Lynch.

Yes. Thank you. I guess another question about the premiums. Maybe two questions. One, are you doing any multi-year deals?

Yes, we do have some multi-year deals, Jay.

Did that contribute to the very significant premium growth in the quarter?

It did, not to a large extent.

Okay.

Jay, we're conservative in how we book the premiums. So, we're only booking a premium that we're certain to receive. And as our confidence increases, we take additional premium into our P&L over time and depending on the terms and conditions of the contracts.

Got it, got it. And I guess also related to the premium, was a meaningful amount of the growth coming from some of these loss portfolio transfer deals that you've talked about in past?

We had none. No losses of deals in the fourth quarter. And Rob, I think the number for the year was $37 million -- about $30 million and we're seeing increasing flow of these opportunities, Jay, we're hopeful that we hit on some of them in 2014. But we didn't have any in the fourth quarter.

Got it. That's helpful. Thank you.

Thank you. We have no further questions in the queue at this time. I'd like to turn the floor back over to management for any closing remarks.

Just want to thank everybody for dialing in today and we look forward to our next call. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.