Siriuspoint Ltd (SPNT) 2014 Q2 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance second-quarter 2014 conference call.

(Operator Instructions)

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

Thank you, operator. Welcome to Third Point Reinsurance Limited's earnings call for the second 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 August 15, 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 the 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 second-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.

While reinsurance market conditions remain challenging through the second quarter, we maintained our focus on developing our total return platform and produced solid results. During the quarter we generated $31.3 million in net income or $0.29 per diluted share, compared to net income of $26.2 million, or $0.33 per diluted share in the prior-year period.

Gross premiums written for the quarter increased by $45.8 million,, or 48.4%, to $140.4 million. This increase was primarily due to strong new business production and increase premiums on business renewed, partially offset by business not renewed. The new business was spread across different brokers and lines of business.

I am very pleased with the flow of business that we are seeing, given the competitiveness of the market. But I need to stress that we are still a young company and focus on larger deals, and therefore quarter-over-quarter comparisons may not be meaningful.

Net premiums earned for the three months ended June 30, 2014 increased $16.1 million, or 26.1%, to $77.5 million compared to the prior-year period. This increase is a result of larger in-force underwriting portfolio compared to the same period last year.

We generated an underwriting loss of $2.1 million in our property and casually segment in the quarter compared to a loss of $3.4 million in the prior-year period, and our combined ratio decreased to 102.7% from 105.5%. Our reinsurance portfolio continues to performs as expected, and as we continue to gain scale we remain on track toward generating underwriting profits. It is important to note, however that our PC segment is already contributing to profitability once net investment income on float is taken into account. In the second quarter, net investment income on float was $6.3 million.

Turning to our investment portfolio, Third Point LLC, our investment manager, successfully navigated market volatility during the quarter. Our investment portfolio was up 2.3% in the second quarter and 5.5% on year-to-date basis. Daniel will discuss these results in more detail shortly.

Our Cat fund continues to perform well, but due to challenging market conditions we have limited the size of the fund to insure we target appropriate returns for our investors. Net income from the Cat segment during the second quarter was $0.2 million compared to a net loss of $0.3 million for the same period last year. Overall, our total return approach has generated solid growth with diluted book value per share increasing by 2.2% for the second quarter and 4.6% for the first six months of the year.

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

Thanks John, and good morning everyone. The Third Point reinsurance investment portfolio managed by Third Point LLC returned 2.3% in the second quarter of 2014, net of fees and expense, versus the S&P's 5.2% returns for the quarter. The Third Point Reinsurance account represents approximately 12% of assets managed by Third Point LLC.

Performance for the second quarter was driven by continued success in both corporate and structured credit and strength in US equities. Credit investments accounted for more than 50% of Q2 total returns, with roughly half the exposure of our equity portfolio. However, each of our strategies performed well, contributing positive results for the quarter.

In the second quarter, our equity portfolio returned 2.3% on average exposure, despite weak results from several of our largest positions. Performance in equities varied according to sector selection and we saw a skew in returns across geographies.

Our US equity portfolio has out-paced the S&P with significantly less exposure year to date, while our investments in Latin America have been standout performers, generating an ROA of nearly 30% in 2014. Japanese equity positions have caused our greatest losses for the year to date.

During the quarter, corporate credit returned 7% on average exposure, bringing the year-to-date ROA to 15.5% compared to 5% performance from the iBoxx high-yield index. We took profits in several key investments, and our net exposure decreased accordingly. In Q2 we saw strength across the strategy, as our performing in distress credit portfolios returned 8.1% and 8.9% respectively.

Sovereign credit has continued to contribute meaningfully and returned 17.1% in 2014. Strength in our government debt positions offset losses in our tail risk and currency portfolios, and our macro book was flat for the quarter. Overall, our net high-yield exposure is close to zero. Our duration is hedged, and we are looking for opportunities to reload the portfolio in the second half of the year.

Our mortgage portfolio continued to perform well in Q2, returning nearly 20% on average exposure in 2014 and contributing roughly one-third of overall profits during the second quarter. Our long-term investment approach coupled with a generally variant market perception has delivered strong returns for the last few years. We remain asset class agnostic as we search to uncover the most compelling opportunities, and have seen a significant shift in portfolio composition since the inception of the strategy in 2009.

Currently portfolio construction has been influenced by our view that the global economy is relatively healthy. We added exposure heading into the second quarter, and several of our new positions generated alpha during the period. Looking forward, we believe Q3 economic data will be decisive and likely drive action by the US Fed during the second half of the year.

The environment for event-driven investing continues to be attractive, and we have initiated several new investments recently. We expect market volatility will create compelling entry points across the capital structure during the second half of the year. If this materializes, we expect exposure levels to modestly increase, and are focused on increasing concentration within the portfolio.

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

Thanks, Daniel. As John mentioned, we generated $31.3 million in net income in the second quarter, which translates into earnings per diluted share of $0.29. Diluted book value per share as of June 30, 2014 was $13.72, an increase of 4.6% for the six months of the year and 13.7% increase over the past 12 months since June 30, 2013.

In our Property and Casualty Reinsurance segment, gross premiums written were $140.4 million for the three months ended June 30, 2014, a 48.4% increase from the $94.6 million reported during the previous year's second quarter. The increase in gross written premium was due to five new treaties written in the quarter and increased premium on renewals.

Increases from new business and renewals were partially offset by business not renewed, but this was primarily business that was not expected to renew. We wrote a multiyear deal and reserve cover in last year's second quarter that were not subject to or up for renewal in the latest quarter.

Net premiums earned in the P&C segment during the second quarter of 2014 increased 26.1% to $77.5 million, reflecting the fact that our in-force portfolio continues to grow. As a result of the increase in earned premium, our general and administrative expense ratio decreased 40 basis points to 7.3% compared to the second quarter of 2013.

G&A expenses allocated to the P&C segment were $5.7 million in the quarter, and should remain relatively stable in the near term. And therefore as earned premium continues to grow we expect to see additional improvements in our G&A expense ratio.

The combined ratio improved to 102.7% from 105.5% due to the G&A expense ratio decrease and a change in the mix of business from the second quarter of 2013. In the second quarter of 2013 we wrote a $22.3 million reserve cover, as both at a 100% composite ratio where all the premiums was earned at inception. In this year's second quarter there was no similar deal.

After attributing income to non-controlling interest, the net income from the Catastrophe Risk Management segment was $203,000 for the second quarter of 2014 compared to a net loss of $347,000 in the second quarter of 2013. Net assets under management for the catastrophe fund were $111.4 million as of June 30, 2014.

As Daniel mentioned, the return on investments management by Third Point LLC was 2.3% during the second quarter of 2014 compared to 3.2% for the same period in 2013. This solid performance lead to the investment income of $40.5 million in the latest quarter and $32.8 million in last year's second quarter.

I will now hand the call back to John Berger

Thanks, Rob. Our strategy is the same today as it was when we started the Company nearly three years ago and when we completed our IPO one year ago, to write reinsurance contracts with attractive risk-adjusted returns and invest the float generated from this activity in a separate investment account managed by Third Point LLC. I am pleased with our results for the second quarter, and optimistic for the remainder of 2014.

I will now open the call to questions. Operator?

Thank you.

(Operator Instructions)

Brett Shirreffs, KBW.

Good morning, and thanks for taking my questions. First one, John, I was wondering if you could expand a little bit on the five new treaties in the quarter? It sounds like they were diversified in terms of lines of business, but you could provide a little more detail?

Sure, Brett. We wrote -- it's one ENSGL quota share, and the other ones are new nonstandard auto and the Florida homeowner quota shares where the cat is limited, really, premium-relief deals.

Okay, great. And then, on the business that you did renew in the quarter, can you just comment on how pricing or terms and conditions changed from the prior year?

A lot of the nonstandard auto and the homeowner quota shares that we do are necessary for the companies because they're good companies, but they don't have the scale to keep as much business as they would like for their various rating ratios. So they buy quota shares. And since the cat part is very limited -- or, in the case of the nonstandard auto, there isn't a cat part, but there are other exposures there -- they're relatively small margin deals to begin with. So the margins on those type of deals have been very steady over time. They're anywhere between 3%, 4%, 5% underwriting margins, and there isn't a lot of erosion on those margins over time.

Okay. So you're not seeing additional pressure on ceding commissions or anything like that?

We're seeing some, but, again, the purpose of these contracts are really premium relief. There's risk transfer in them, but it's really to take care of the attritional losses, or, in the case of the nonstandard auto, the relatively low limit -- again, almost attritional loss-type business. So it's not the case of professional liability that historically has carried a 15% or 20% return, and the ceding commission is going from 27.5% to 35%. It's a different -- it's a, really a different sector of the marketplace.

Hey, Brett. It's Rob Bredahl. We track the composite ratio on deals very closely at renewal. And, so far, the composite ratios have been very consistent. We haven't seen them deteriorate.

Okay. Thanks very much

Jay Cohen, BofA Merrill Lynch.

Thank you. I guess, just maybe a follow-up on that last one. I did notice that the acquisition expense ratio did go up over the past several quarters. That could be a business-mix thing. I'm wondering really what's driving that, and if you can, any sense of what we should think about going forward for that ratio.

Rob, why don't you handle that one?

Yes, sure. Jay, the breakdown between loss ratio and acquisition-cost ratio on deals completely relates to the mix of business. So, if you're seeing movement from one quarter to the next, it just means the mix of business has changed. We're writing mostly quota-share contracts, so we look at the overall composite ratio. And, where we have the lower expected loss ratio, we typically have a higher acquisition-cost ratio, and vice versa.

Yes, that makes sense. Second question. One of your closest comps, I guess, had a big drop in premiums. One of the issues was a return of unearned premium. I guess when they do quota-share deals they bring in these unearned premiums. When they, unfortunately, get rid of one, they go out the door, creating some volatility. My question to you, and I don't -- you don't have to comment on that company, but my question to you is, how do you guys account for unearned premium when you do a quota-share deal?

So, when we book a quota-share contract that has UEP premium coming into it, we book it net of that UEP premium. And so -- and we would do so because typically when the deal non-renews you have to send the UEP back. So, if you booked it on the way in, you have to book negative premium on the way out. And so, there's no potential for us to book negative premium related to UEP.

That's helpful. Thanks a lot.

(Operator Instructions)

Kai Pan, Morgan Stanley.

Good morning. Thank you for taking my calls. First question, for Dan, on the investment side. It looks like --

Hey, Kai. Kai, before you ask a question I just want to tell you, Dan Loeb had to step out. He was traveling. He left out -- he left, and, in his place, we have Munib Islam, who is a Partner at Third Point LLC and Head of Equities. So, just so you know that. When the answer comes, it won't be Dan, it will be Munib answering.

Okay. Great, great. Thanks for the heads-up on that. So, Munib, on the long/short side, equity side, it looks like the gross is picking up, but the net is probably lowest in the year. Just wonder, is that you finding more opportunities on both sides?

Thanks for the question. Actually, the gross is picking up exactly for the reason that you identified, that we found two new investments in particular that have the potential to be pretty large. And so, that was increasing the long exposure while we continue to hedge at a -- we continue to hedge via indices, and so the gross exposure went up as net probably trended down a little bit, and has continued to trend down since the end of the quarter.

So, the standing on the short side is a hedge -- index hedge?

Correct.

Okay. Then on the -- if you look at your second -- Dan's second quarter letter, it looks like is a different between Japan and Argentina. In Japan, you think that the macro backdrop is hurting your investment, you're waiting to pull back if it's not improving by year end. At Argentina, actually you're more optimistic about bond settlements, and you're trying to find more investment alternative there. Could you elaborate more on these two markets?

Certainly. So, in Japan, I think what we wanted to iterate in our letter was that, while Japan remains an interesting place to find individual securities, I think the more bullish macro scenario that's existed ever since Abenomics has started is really now getting to the point where it gets tested. And it gets tested both because of structural reform and the ability to implement structural reform, but also because we're nearing the point where there may be a requirement for the BOJ to do more. The BOJ was very aggressive last year, and since that time has been on hold. And I think with the more recent economic performance in Japan, we now are at the point where I think BOJ might require incremental QE. So that's sort of the Japan thesis.

On Argentina, I think that we do remain bullish. Obviously, the more recent default has -- is, at least in our opinion, a roadblock in what otherwise is a 2015 story on two counts. The first one is the potential for government change there. And, secondly, on the default issue, we think this is more of a delay, and there is legal reasons why Argentina is unable to pay right now, but will happily pay post-new year to avoid an issue that would result in a big increase in their debt to GDP. So, Argentina, we remain optimistic. But I would say, on Argentina, that the ways for us to play Argentina are somewhat limited, just given the size of the equity markets. And so, the majority of our exposure in Argentina comes via bonds.

Great. Well, thank you, Munib, for the very thorough answer there. If I may turn back to John and Rob. So, if you look at your G&A ratio have improved quite a bit, and at same time your composite ratio improved 240 basis, year over year. I just wonder, in order to break even, if we keep the same comps ratio around the 95%, and then -- which means your G&A ratio need to lower to around 4% or 5%, which imply, given your current run rate, about $20 million,$22 million a year G&A expense, that imply a $500-million net earned premium. We're now at $300 million. Do you think we can reasonably growing over to the $500 million in [a] period of time that you can break even?

Kai, that's clearly our goal. We will get there, it's just a matter of when.

So, you have been talk about a breakeven -- target breakeven by end of 2014 and early 2015. Is that still valid in this current market?

Our business -- we write a small number of larger deals. We're very happy with the pipeline of deals we have in the third quarter. But we have to see how many of these we can bring home. But, we stay with our hopes and projections of the end of 2014, beginning of 2015.

Hey, Kai. It's Rob. I agree with your analysis of what happens as we gain scale. Remember, we wrote $400 million of gross premium last year. And that premium takes a little bit of time to earn in. And so, we're not all that far away from $500 million. But, as John says, we'll see what happens in the next several quarters.

Great. If we just step back -- last question for me is, John, for your 30-years career, if you step back and watch what happening in the reinsurance market right now, do you feel how changing is the current market, especially for a start-up company like yours?

I think for a start-up company or existing companies, I think the most extreme change has been in the property catastrophe space, which we're in a small way in our cat fund -- in a very small way -- what alternative capital has done to that market and its rate levels. Clearly, on our model, the Green Light model, Hamilton Re model where, with the advent of more aggressive investment strategies is going to have an impact. So I think the change over the last 12 months has been enormous. I like our position in the market. I like being -- clearly, being new has its challenges, but being new with a differentiated strategy and having Third Point LLC as our investment manager, I think puts us in a very advantageous position compared to other new companies and existing companies.

Great. Well, thanks so much for all the answers.

Thank you.

(Operator Instructions)

Jay Cohen, BofA Merrill Lynch.

I guess maybe just to follow up on the last question. You are seeing more companies -- John, to your point -- taking more of a total return approach to reinsurance. My sense is that some of these companies are certainly building in the expected return into the price, the premium rate that they are charging. Obviously, you take that too far and that can be kind of dangerous. My question to you is, are you seeing that from some of your competitors? And then, secondly, how much do you guys do that? My sense is you really don't all that much, but are you starting to, say, build in the expected returns into your pricing, and giving back some of that your clients?

Clearly, we are. Now, the question implied in your question is, are you writing business above 100% combined ratio, building it in, in that way? And, to date, we have not done that. We have seen instances of that happening. We'll see if that's a one-off kind of deals, or does that really become a trend. That's a tough game to play. Casualty business is volatile, although the experience over the last several years has been good, has been stable. Those of us who have been in the business for a while have seen what can happen in the casualty market. So we'll monitor that. I think more likely is to happen -- will happen is, if there's a class of business, and let's just say directors and officers liability for example, where maybe historically you think you need to write that at a -- somewhere between an 85% and a 90% combined ratio because of the potential volatility and the results. Now, with the increased investment returns, maybe you can write that business now at a 95% or 97%. So we'll see. We'll see how this all plays out.

Great. Thanks, John.

Mr. Berger, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

We thank everybody for calling in. As we've said in the call, we're very happy with the amount of business we've seen so far. We like the pipeline of deals in the works for the third quarter. Third Point LLC continues to do a good job for us. And we think our -- the combination of our underwriting skills, the relationships our senior staff people have in the marketplace, and our investment strategy bodes well for us for the future. Thank you very much.

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