Siriuspoint Ltd (SPNT) 2014 Q1 法說會逐字稿

Greetings and welcome to the Third Point Reinsurance first-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Rob Bredahl, CFO and COO of Third Point Reinsurance. Thank you. You may begin.

Thank you, operator. Welcome to Third Point Reinsurance Ltd.'s earnings call for the first quarter of 2014. Last night we issued an earnings press release, which is available on our website, www.ThirdPointRe.bm. A replay of today's conference call will be available until May 16, 2014 by dialing the phone numbers provided in the earnings press release and through our website following this call. Leading today's call will be John Berger, chairman and CEO of Third Point Re.

But before we begin, please note that management believes certain statements in this teleconference might 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, such as diluted book value per share, which management believes allow for a more complete understanding of the Company's financial results. A reconciliation of these measures to the most comparable GAAP measures is presented in the Company's earnings press release.

At this time I will turn the call over to John Berger.

Thanks, Rob. Good morning and thank you for taking the time to join our first-quarter 2014 earnings call. In addition to Rob Bredahl, CFO and COO of Third Point Re, with me today is Daniel Loeb, CEO of Third Point, LLC, our investment manager. I will provide an overview of our financial results, Daniel will discuss the performance of our investment portfolio, and then Rob will discuss our financial results in more detail.

Despite challenging conditions in both the reinsurance and broader financial markets, we generated solid results in the first quarter of 2014 and continue to execute our business plan. During the quarter, we generated $39.8 million in net income, or $0.37 per diluted share, compared to net income of $74.4 million, or $0.93 per diluted share, in the prior-year period. The return on our investment portfolio managed by Third Point LLC was 3.1% in the first quarter compared to 8.7% for the first quarter of 2013. Daniel will touch on these results in more detail shortly.

Gross premiums written decreased $8.4 million or 8.8% year over year to $87.6 million. The decrease was largely due to the non-renewal of three contracts offset in part by new business. The largest contract nonrenewal was a crop reinsurance treaty. Due to poor results over the past two years and softening market conditions, we decided to stop assuming crop exposure for now.

In our property casualty segment, we generated an underwriting loss of $5.2 million if the first quarter, which compares to a loss of $3.8 million during the first quarter of 2013. The underwriting loss for the three months ended March 31, 2014 included net adverse development of $2 million, which related primarily to a $2.5 million reserve increase on our 2013 crop reinsurance portfolio, partially offset by small amounts of positive development on the other contracts. Our combined ratio improved to 107.1% in the first quarter of 2014, compared to 111.6% in the first quarter of the previous year, as our general and administrative expense ratio decreased due to a significant increase in earned premium.

Our cat fund continues to be a strategic component of our total return model, but due to rapidly deteriorating catastrophe market conditions in the segment, we will limit the size of the fund to insure we target appropriate returns for our investors. As we have stated in the past, 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 catastrophe risk fund. As of March 31, 2014 we had a $55 million investment in the cat fund and therefore have some direct exposure to cat risk and the cat rate environment, but this exposure is limited and contained, especially relative to traditional reinsurers.

Our results for the first quarter are a reflection of solid investment results and a reinsurance operation that continues to gain scale. Our strategy is to write reinsurance contracts with attractive risk returns and to invest the flow generated from this activity in a separate investment account managed by Third Point LLC. 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. I am pleased with our results and optimistic for the remainder of 2014.

I will now hand the call over to Daniel Loeb who will discuss the performance of our investment portfolio during the first quarter of 2014. Daniel.

Thanks, John. And good morning, everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC returned 3.1% in the first quarter of 2014, net of fees and expenses, versus the S&P's 1.8% returns for the quarter. The Third Point Reinsurance account represents approximately 11% of assets managed by Third Point.

During the first quarter, performance was driven by a successful single named stock selection and strong returns from the credit portfolio. In particular, our structured credit strategy delivered excellent performance, adding 1.8% or well over 50% of total returns. We saw strength in each of our strategies during the quarter, however, as investments in equities, corporate credit and sovereign debt all contributed positive results.

Our equity portfolio returned 1.6% on average exposure during the quarter, roughly in line with the S&P, with significantly less value at risk and exposure. Performance was supported by solid returns in several of our core equity positions, including Ally Financial, Dow Chemical and Sony Corp. After adding several large positions in Q4 2013, we entered 2014 with higher net equity exposures than we had for most of 2013.

Despite a volatile market, we have kept our high conviction positions intact. We will continue to keep a watchful eye on macro economic developments, and monitor our portfolio accordingly.

During the quarter, corporate credit returned 9% on average exposure compared to 3% performance from the Barclays high-yield index. And the strategy contributed another 0.8% to first-quarter profits. The credit market was not heavily impacted by the equity sell off, and instead saw strong mutual fund inflows and new market issuance.

Performance in our performing credit bucket was especially good. And we're continuing to focus on adding exposure to crossover improving credits and the subordinated debt of finance companies. Sovereign credit has also continued to add to returns, contributing return on average exposure of 11.8% for the first quarter.

Strength in our government debt positions was offset by losses in our tail risk portfolio as our macro book detracted 0.3% for the quarter. Mortgages led performance in Q1 as the strategy returned an impressive 14.2% on average exposure. We've been evaluating each opportunity we uncover and remain generally agnostic on asset class.

Over the past six months, we've added significant exposure outside of the United States, primarily in European peripheral securities. During the quarter, realized profit was driven by sales in our Alt-A Re-REMIC book, and we continue to evaluate attractive bids in this space. We remain interested in discovering compelling opportunities to buy assets from banks as they conform to regulations, such as Basel III and Dodd-Frank.

Despite weather-related setbacks and equity market sell-offs driven by sentiment and macro economic concerns in Q1, we're positive regarding the growth trajectory in the United States and anticipate recovery in Europe. In Japan, we were disappointed by the government's efforts on reform, and surprised by recent announcements from the Bank of Japan.

In our portfolio, we remain cautiously constructive and expect a modest decrease in exposure levels. However, we anticipate 2014 to be a favorable environment for event-driven investing, and expect strong outperformance from value stocks. We will continue to focus on compelling opportunities, and we'll look for attractive entry points to initiate or add to positions as a result of short-term market volatility.

Now I'd like to turn the call over to Rob to discuss our financial results in more detail.

Thanks, Daniel. As John mentioned, we generated $39.8 million in net income in the first quarter, which translates into earnings per diluted share of $0.37. Diluted book value per share as of March 31, 2014 was $13.43, an increase of 2.4% compared to diluted book value per share as of December 31, 2013.

In our property and casualty reinsurance segment, gross premiums written were $82.1 million for the three months ended March 31, 2014, an 11.6% decrease from the $92.9 million reported during the previous year's first quarter. This reduction in gross premiums written was primarily based on our decision to discontinue writing, at least for now, crop reinsurance.

As a result, we also did not renew a related crop retro contract under which we seeded $10 million of premium, leaving us with an overall reduction to net premiums written of $800,000, or a decrease of 1% from the first quarter of 2013. Please note, however, 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 in the P&C segment during the first quarter of 2014 increased 121.5% to $72.3 million, reflecting our larger in-force underwriting portfolio compared to the three months ended March 31, 2013. As a result of this rapid increase in earned premium, our general and administrative expense ratio dropped to 8.0% in the first quarter of 2014 from 14.7% in the first quarter of 2013. And our combined ratio improved to 107.1% from 111.6%.

After attributing income to non-controlling interest, the net loss from the catastrophe risk management segment was $67,000 for the first quarter of 2014 compared to net income of $219,000 in the first quarter of 2013. Net assets under management for the catastrophe fund were $106.7 million as of March 31, 2014.

As Daniel mentioned, the return on investments managed by Third Point LLC was 3.1% during the first quarter of 2014 compared to 8.7% for the prior-year period. For the first quarter, Third Point Re recorded net investment income of $50.0 million compared to $81.4 million for the three months ended March 31, 2013.

I will now hand the call back to John Berger.

Thank you, Rob. Although the reinsurance market remains very competitive, we continue to find attractive opportunities that fit our risk appetite. We are pleased that we've been able to participate in enough opportunities that meet our underwriting standards and allow us to develop our reinsurance operation according to plan. The continued development of our reinsurance platform, combined with the solid performance of Third Point LLC as our investment manager, highlights the benefit of our total return model.

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

(Operator Instructions)

Kai Pan from Morgan Stanley.

Good morning. Thank you for taking my call. First question, probably for Dan, if you look at your net exposure in your long-short active book, and has a significant decline by the end of April. So, is that your position more cautiously in anticipating a probably more volatile active market?

Yes. It has gone down. It's more a function of certain securities reaching our target price. At Third Point we don't necessarily -- I mean, we generally target an exposure level, but the exposure level might move as much as 10% or 15% based on whether we're getting in or out of major positions.

Okay. Could you talk about the gains from the asset-backed securities? And do you think that that trend will continue?

It's gotten much more difficult to make money in mortgages and asset-backed securities generally. Fortunately, we have a very creative team. They're looking in different places.

I'm not going to give away the shop secrets as to the specific areas that we're investing in, but it's been an enormous contributor. And it's been hard -- it's involved a lot of hard work and moving around of the portfolio. It has not just been static. We have written about the fact, though, that we have largely taken profits in our Re-REMIC portfolio, and we've mostly deployed that capital elsewhere into more attractive opportunities.

Thank you so much. And then for John and Rob, it sounds like the top line growth, I understand that you mentioned that from quarter to quarter because of this large contract, depending on the timing of it, could be volatile. But overall growth trajectory for the top-line growth, do you find it's more difficult to grow your top line or premiums given the market condition? And just to follow on that is that do you still expect to achieve the underwriting breakeven probably by year end or in 2015?

When we started Third Point Re, we knew it was going to be a very competitive time. So, that hasn't changed. There's certainly more entrants coming in, but it's incremental to the level of competition, which was already intense. We're happy with the flow of business we're seeing. Although we did not renew some of the contracts in the first quarter, we almost made up the full amount in new business. So we're very optimistic on the deal flow.

In regard to the expense ratio, as our premiums earn, our G&A expense ratio will come down. So breaching that 100% combined ratio barrier is still our goal to achieve at some point this year or early 2015.

And I would just say two points, Kai. In the fourth quarter our premium, our gross premium, increased by 482%, I think was the number. This quarter it was down a little bit. But if we had chosen to renew that crop contract, it would have been up 30%. So, if you look over any reasonable period of time, the premium growth remains pretty good.

Okay. That's great. Lastly, do you have a number for the float at the end of the quarter?

At the end of March, the float was $242 million.

Okay. Great. Thank you so much.

Jay Cohen from Bank of America.

Yes, thank you. A couple of questions. Can you talk more about the crop business? We've been hearing about some competition, but I was a little surprised to see you guys get out of that business for the time being. What's happening in that business to change your appetite?

Jay, when we started as a new company, you're out there in a super competitive environment, and you wonder what opportunities you're going to see. Crop is a business that over time has been very good. We hired a terrific guy, Bill Fischer, and wrote a fair amount of that business.

It is a very competitive business. 90% of the business that comes to the broker market comes through one broker, so the broker has a lot of clout. We didn't feel we were going to get up to critical mass on our own. So we struck the deal with Validus where Bill went to work for Validus, and we did a quota-share of that business.

I still think long term it's an attractive business. It's just we're seeing enough other opportunities that we decided we just didn't, especially after losing money two years in a row, we just didn't want to have that potential volatility on our books.

That's great. Thank you. And then the second question regarding the opportunities you are seeing, are these similar deals to what you've been seeing? Or has the types of deals you're seeing changed at all?

Jay, I like to look at our business in three segments. One is the type of business that a lot of people want to write -- the Florida homeowner business on the net, either excluding or sub limiting the cat. A very competitive market, but we're well positioned there.

Non-standard auto -- a big market that's a tough market, but fortunately Tony Urban in our office has been in that business for a long time, so we think we know the good guys from the bad guys. So, more of a traditional reinsurance book of business.

The next area is more of an opportunistic where we made a play two years ago, starting to write some California workers' comp, which early days is looking good. We also did some private mortgage insurance business. Magic, in particular, was one of the larger ones. It was that on newly minted mortgages.

So, areas like that we like. The opportunistic area is tough to find.

And the third area is really the specialty one-off areas. And those are the loss reserves or truly distressed situations. That's the area we're most opportunistic about.

It's also the area that's the most hard to predict what the hit ratio is going to be because you can spend a lot of time on them and then they tend to fall apart. Although, when you hit, they tend to be large. In the first quarter we did not write any loss reserve deals, but we have several in the works.

Great. Thanks for that color, John.

(Operator Instructions)

Brett Shirreffs from Keefe, Bruyette & Woods.

Good morning. Thanks for taking my questions. First one for Rob, I was just wondering if you could quantify the size of the crop contract in the first quarter last year?

Yes. $35 million gross, but we seeded $10 million of that contract so it was $25 million net.

Okay. Great. And then just curious what kind of lines you were generating the new business from this quarter.

We have homeowners business, we have some mortgage business. We have one small political risk terrorism cover out of London, a small stop loss out of London. We did one whole account, a quota-share of a Lloyd's syndicate that generated about $17 million in premium. That was the new business.

Okay, thanks. And just lastly, John, do you feel the pipeline is still pretty strong for the rest of 2014?

We're in that situation where many are called, few are chosen. We're very happy with the amount of business we're seeing. I've said it a couple of times. It's very competitive out there. There are really no vacuums.

But I think with the reputation of the people in the Company, we are well positioned to see business. And then a lot of the business, especially in the traditional business, it gets to a clearing price. And then if it's an acceptable economics to us, then it becomes more of a game of access than anything else.

And, fortunately, with the people we have and the relationships, we think we win our fair share of those. Not always, because there are a lot of other good people out there with their relationships, but overall, we're very pleased with the amount of business we're seeing.

Okay. Great. Thank you for taking my questions.

(Operator Instructions)

Kai Pan from Morgan Stanley.

Yes, thank you. Just a small follow-up. Just on your G&A expense on the corporate line, looks like $2 million higher than the first quarter of last year. I just wonder, is that just one time off or is it a going forward run rate?

Kai, are you looking at total G&A?

Yes, G&A in the corporate, like $3.4 million. Last year was like $1.4 million.

We have a couple of more heads that have been allocated to the corporate function, now that we're a public company. And the rest is just allocation of some legal accounting, [dee-no] insurance, those sorts of things.

If you look at our total G&A expenses, in the fourth quarter they were $9.812 million, and this quarter they're $10.025 million. So we've increased slightly quarter over quarter. I think the $10 million or so an growing at about inflation is a good run rate for us now.

Okay, great. Thank you so much.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Berger for closing comments.

Thank you very much for calling in. Again, what I said in my remarks before, we're optimistic about this year. And we look forward to talking to you next quarter. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day. We thank you for your participation today.