Siriuspoint Ltd (SPNT) 2014 Q3 法說會逐字稿

Hello, and thank you for standing by. Welcome to the Third Point Reinsurance third-quarter 2014 earnings conference call.

As a reminder, all participants are in a listen-only mode and the conference is being recorded.(Operator Instructions)

At this time, I would like to turn the conference over to Rob Bredahl, Chief Financial Officer and Chief Operating Officer for Third Point Reinsurance. Please go ahead.

Thank you, operator. Welcome to Third Point Reinsurance Limited's earning call for the third 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 November 14, 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.

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 or results to differ materially from expectations.

The 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 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 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 third-quarter 2014 earnings call. In addition to Rob Bredahl, CFO and COO of Third Point Re, with me 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.

We had a net loss of $6 million or $0.06 per diluted share compared to net income of $46.6 million or $0.51 per diluted share in last year's third quarter. While our investment manager, Third Point LLC, outperformed most of its peer hedge fund managers, investment returns on our investment portfolio managed by Third Point LLC were flat in the third quarter.

Given our strategy to balance our reinsurance risk with greater investment portfolio risk when compared to traditional reinsurance companies, variability in our investment returns is to be expected, including the occasional flat or even down quarter. Daniel Loeb will discuss these results in more detail in a couple of minutes.

The bright spots in our third-quarter result were the continued improvement in our combined ratio, and continued growth in gross written premiums. Our combined ratio for the PC segment improved to 101.7% in the latest quarter, from 107.9% in last year's third quarter. The combined ratio is steadily improving, due to growth in earned premium, and a resulting decrease in our G&A expense ratio. In our third year of operations, earned premium continues to grow rapidly, while our G&A expenses are growing at a much more moderate rate.

Gross premiums for the quarter increased by $81 million or 178.4% to $126.4 million versus $45.4 million for the same period of the previous year. This increase was primarily due to strong new business production, and one contract that was canceled and rewritten at a larger allocation and extended term. I am very pleased with the flow of opportunities that we are seeing in the quality of our deal pipeline, especially given the competitiveness of the market.

The reinsurance market is still one where relationships are important. I think this is due in part to the fact that reinsurance represents a large portion of many companies' capital base, and most contracts renew each year. Reinsurance buyers, therefore, are very sensitive about their counterparties. They also value creative solutions when they are working to solve complex capital or risk management problems.

Our senior management team, who in most cases have spent decades in the reinsurance market, are seeing a steady flow of opportunities from our former clients, former colleagues, and other market contacts. I need to stress however, as I have on every earnings call, that we are still a young company and focus on larger deals, and therefore quarter-over-quarter comparisons may not be meaningful.

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

Thanks, John, and good morning, everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC was flat for the third quarter of 2014, net of fees and expenses, versus returns for the S&P and Credit Suisse event-driven indices of 1.1% and minus 1.8% respectively for the quarter. The Third Point Reinsurance account represents about 10% of assets managed by Third Point LLC.

Profits in August offset losses in both July and September. Gains in the third quarter were driven by continued success in structured credit and several large equity positions. During the quarter, the equity portfolio returned 1.3% on average exposure, slightly outpacing the S&P, and bringing the 2014 return on average exposure to 4.8%.

Gains in equities were driven by strength in several core positions, some of which were added following our recent capital raise. Healthcare, industrials and energy have been our strongest performing sectors in 2014. Despite a rally in Q3, TMT remains the largest detractor.

Consistent with the first half of the year, performance varied significantly across geographies. Boosts from several key positions drove a return of 20% for investments in Asia during the quarter, though overall year-to-date performance in the region remains negative. The United States and Latin America have been our strongest-performing regions to date, returning 13% and 24% for the year respectively.

During the quarter, corporate credit was down 5% on average exposure, bringing the year-to-date return on average exposure to 11.7% versus 2.5% performance from the iBoxx high yield index in 2014. Our performing credit portfolio was down 22% in the third quarter, largely attributable to significant losses in a European subordinated credit position.

We continue to see strength in our distressed credit book, as strong contributions from several liquidations brought year-to-date returns to 20%. Our macro portfolio was slightly down for the quarter, led by volatility in our two largest government credit positions. These sovereign debt investments remain high-conviction positions with meaningful expected upside.

Our mortgage portfolio continued to perform well in Q3, returning 3% on average exposure, and adding to year-to-date returns of 22%. In 2014, mortgages have contributed 50% of profits, and roughly 20% of NAV exposure. We shifted the portfolio to capture gains across markets in the third quarter, opportunistically adding sub-prime exposure, and further decreasing our already-moderate CMBS exposure.

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

Thanks, Daniel. As John mentioned, we generated a $6 million net loss in the second quarter, which translates to a loss per diluted share of $0.06. Diluted book value per share as of September 30, 2014 was $13.68, a decrease of 0.3% for the quarter, and an increase of 4.3% for the first nine months of the year.

In our property and casualty reinsurance segment, gross premiums written were $124.9 million for the three months ended September 30, 2014, a 185.8% increase from the $43.7 million reported during the previous year's third quarter. The increase in gross premium written was due to $58 million in new business written in the quarter, and $76.5 million from a contract that was canceled and re-written in the quarter, at a larger allocation percentage, and for a longer term.

These increases in premium were partially offset by contracts that were written in the third quarter of 2013, and not subject to renewal in the current quarter, and to a lesser extent, downward premium estimate adjustments on existing contracts. Net premiums earned in the P&C segment during the third quarter of 2014 increased 64.3% to $101.5 million, reflecting the fact that our in-force portfolio continues to grow.

Our net loss and loss adjustment expense ratio dropped to 59.2% in the current quarter from 63.7% in last year's third quarter. It was offset by an increase in our acquisition cost ratio to 37.0% from 33.3%.

While the contracts that we write have similar composite ratios, this is a combined ratio before overhead expenses, the breakdown between loss and acquisition ratio estimates can vary significantly, depending on the line of business and type of deal. For example, reserve covers have high initial loss ratio estimates, often 100%, and very low or zero acquisition cost ratios. Movements in our relative loss and acquisition cost ratios therefore are usually due primarily to a change in business mix from one quarter to the next.

G&A expenses were $5.6 million in the quarter versus $6.7 million in the third quarter of 2013. The decrease is due primarily to lower stock compensation expense in the current quarter. Stock compensation expense was higher in the three months ended September 30, 2013, due to performance conditions being met, related to the completion of our IPO. As a result of the significant growth in earned premium and the small drop in our G&A expenses, our general and administrative expense ratio decreased to 5.5% in this year's third quarter, compared to 10.9% in last year's third quarter, and our combined ratio dropped to 101.7% from 107.9%.

Our cap fund continues to perform well, but due to challenging market conditions, we have limited the size of the fun, to ensure we target appropriate returns for our investors. After attributing income to non-controlling interest, the net income from the catastrophe risk management segment was $3.6 million for the third quarter of 2014, compared to net income of $2.7 million in the third quarter of 2013. Net assets under management for the catastrophe fund were $117.9 million as of September 30, 2014.

As Daniel mentioned, the return on investments managed by Third Point LLC was flat during the third quarter of 2014, compared to 4.3% for the same period in 2013, and the net loss for the quarter was $6 million, versus net income of $46.6 million in last year's third quarter. I will now hand the call back to John Berger.

Thanks, Rob. Investment returns were flat in the quarter due to challenging investment market conditions, but we continue to make progress in developing our reinsurance underwriting platform, and improved our combined ratio to 101.7%.

Our strategy remains constant; 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 remain optimistic for the remainder of 2014, and our continued long-term success.

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

(Operator Instructions)

Kai Pan, Morgan Stanley.

First, congratulations to Rob, Chris, and Nicholas for the promotion. And just wondering if you could talk a little bit more about your Chief Actuary, Chief Risk Officer's departure?

Yes. Mike McKnight, first of all, did a terrific job for us. He was on-board virtually from the beginning, built a terrific actuarial team, and our systems, our risk management systems and processes are in terrific shape, and great work. Did a fabulous job for us. I'm really sorry to see him leave. He left for personal reasons, and I'll just leave it at that.

Okay, that's great. Then, my second question, for Dan. Dan, you have reduced your portfolio exposure in both gross and net in October. In your letter, you signal that you're establishing some positions. So I just wonder, could you elaborate a little bit more about how do you position, in each of the strategy, in the current market environment, including the large cap opportunities?

Sorry, the question is how are we-- I don't understand what you mean by how are we positioned? I mean, we don't go beyond whatever disclosure we give you in our regular results, in terms of our net exposures and industry exposures. I just have to refer you to those.

Okay. But you did increase the exposure a little bit, right? In your third-quarter letter.

Yes. That -- we increased our exposure in part, it wasn't due to the new capital that came in, but the new capital that came in, we took into invest in a couple new situations: Amgen, and we've talked about these -- Amgen, Ali Baba, and Ebay were three of those larger situations that we used the capital to invest in.

Okay, that's great. So those new capital you raised, is that still in the same fund, or were the Third Point Res also participating? Or separated?

Say that again.

The capital raise recently, are they in a separate fund, or the same fund?

No, no, no. That was new capital that came into Third Point's managed funds, but whatever positions we took, the TPRE portfolio participated in on a pro rata basis.

Okay, that's great. Good to hear. Lastly, the little things about -- it seems like the other strategy, I'll say, long shore credit marker, have a relative smaller exposure, but the P&L seems, from time to time, have some swings? Especially in October, so just wondered what's in the other strategy?

Sometimes, we'll have -- and these are things that TPRE does not participate in. Sometimes those are the private investments that we make. They're under a couple percent, but occasionally, they will -- there will be a company in our other bucket that goes public, or something that happens, so that accounts for the swings.

Okay, great. Well, thank you so much for that. Then for John, and just -- you have great top line growth there. Just wonder, where exactly do you see opportunities in that, and could you be more detailed in term of what line of business writing, and how big those contracts are? Are they in your typical $10 million to $20 million range?

We, Kai, one of them was a non-standard auto deal that we were already on, that canceled and rewrote, and we took a bigger percentage on that. And that was quite a big deal, about $70 million. We also did one new casualty deal, a US casualty deal, that was of substantial size, and then we did a smaller, about $17 million worker's comp quota share. So three contracts make up that total.

Okay, so how big is that new US casualty?

It's going to be somewhere between $30 million and $40 million.

Okay, that's great. And, do you think your Re's appetites will, do you think these are one-off issues or contracts, or do you think your appetite could be larger than this going forward?

We've said it all along, Kai, that we don't do that many deals, and the ones we do tend to be large. The old saying, a small deal takes as much time as a big deal, so let's put the effort into big deals. We have a small staff here.

So we're going to continue to see variability on size of deals, and one thing we always try to stress is that quarter-to-quarter comparisons will be tough, because we write a deal. We're actively looking for reserve deals, where we're optimistic about that flow, and those are easily $50 million-plus size. So it's hard to generalize about what we're going to see, except that we're shooting at relatively large premium items on most of the deals we're trying to execute.

Okay, that's great. And lastly, are you still, it looks like you're getting closer to breakeven, so are you still shooting for a breakeven by year end, or early into 2015?

Yes. I think sometime in 2015, and a lot of that is the makeup of the book of business. If we do more reserve deals, those we book immediately at 100% loss ratio, so that drives it a little bit above 100% combined. If we do more of the opportunistic-type things we're looking at.

So it really depends on the mix, but we're making great progress. The biggest variable there is just the -- our margins are remaining pretty constant on our deals, but as the earned premium grows, our G&A expense ratio comes down, and that's what's really driving the reduction in our combined ratio.

And maybe, Kai, just to make one point, if the mix moves towards more reserve covers, and therefore a higher combined ratio, that means we'll have more investment income, because quotes grow more rapidly in the future.

Yes, and which if that segment becomes big enough, we'll give more specifics on that.

Okay, great. Thank you so much, and good luck.

Jay Cohen, Bank of America Merrill Lynch.

Yes, thank you. A couple of questions. First, on the rewritten contract, I think you had said you had extended the duration of the contract. I assume that's a two or three year deal, now?

No, it's a 12-month deal, but it ended after 6, and then we extended it for 12, so it is not a multi-year deal.

Oh, that's a good clarification. Thank you. Secondly, on the earnings from the cat fund, should we expect some seasonality there? The earnings there were well above what they were in the first half, and I didn't know if it was seasonality or luck?

No, it's -- well, there were no cat events, but it's seasonality. We earn the premium based on the probability of an event happening, so in the third quarter, there's a lot of earned premium related to Atlantic hurricane, so that's what you see coming through in the portfolio this quarter.

Got it. That makes sense. Then I guess the last question, we're hearing about a number of other companies attempting to start up, call it hedge fund reinsurance companies. Could be a hedge fund starting it or an insurance company starting it. Do you expect to see a lot more players attacking the same market that you are at this point?

I don't -- I think our model, and you'd put -- Green Light was the first, ourselves, and Hamilton Re to a certain extent, although they seem to be concentrating more on the insurance side. But true independent reinsurance companies with assets managed by hedge funds, I don't believe we'll see that model again.

But I think the Ace/BlackRock announcement, there's now news about Transatlantic doing something with Blackstone-- Providence, Axis doing something with Blackstone. Allied World and Pine River. I think those company-sponsored deals will happen, and then is it going to be the Arch Watford model, where Watford does reinsure Arch, but they're also out looking for new deals.

That clearly, that model does represent more competition for us, or is -- will they be more of the Ace/BlackRock, which apparently will -- that model will only reinsure Ace. In that case, that represents no competition for us. But I think, as I said, the single company, our model effectively, I don't think we'll see again. The company-sponsored model, there's certainly a lot of noise about that picking up, and I think once Ace did it, every company out there has to consider something like that.

I wonder if you think you'd see other hedge funds starting reinsurance companies. It seems like the reasons that Third Point decided to do it are pretty sound, and obviously, I would think others would find the same reasons to be appealing.

I think there are a bunch of factors, and this will sound a little bit self-serving but I'll say it anyway: You need a good management team, right? And they're hard to find, you need people with a track record.

The hedge fund has to have a good track record, and the rating agencies like to see how they did during 2008. And the market is competitive. You have to have a good management team with a credible business plan that has a chance to succeed. Being a brand new reinsurer today is -- it's tougher than it was three years ago, when we did it.

Yes. All fair points. Thanks, John.

(Operator Instructions)

Brett Shirreffs, KBW.

First, I just wanted to follow-up on a question Jay had there. Are you seeing a lot of opportunities to write multi-year deals in the market, and is that an area of particular interest? It seems like it would fit your investment strategy well.

Not -- the preponderance of our deals are one-year deals. We do see multi-year deals, but almost more by exception than -- I think it's hard for buyers to commit to three-year deals. Things are changing, and then, so, if they want a three-year deal, they want a lot of optionality in it, which makes it less attractive to us. So, looking for three-year deals is not a priority for us.

Brett, I think you're seeing a much higher percentage of multi-year deals in the cat space, versus the surplus relief closure space that we operate in.

Okay, that makes sense. On the composite ratio, it was down on a year-to-date basis a little bit year-over-year. Just wondering where you think you are relative to your longer-term targets?

We've said all along that -- first of all, two things. We don't have a cat book, and we have a small cat fund that contributed this quarter, but overall, we're not in the cat space. So in the loss per year, we don't have that big margin business helping our results.

And given that we're only three years old, we don't, and we haven't really written the long-tail casualty book of business, we don't have redundant reserves. So overall, if you strip those two out of the industry results, the industry on an accident-year basis is above 100%. So we really think, in that kind of market, if we can hover around 100%, no surprises, and create the asset leverage for our investments, that we will be in really good shape.

Okay, and then, just lastly, John, I was wondering if you had any update on the US physical presence initiative, and maybe you could just touch on that strategy again?

No, we're still looking at options. Clearly, the goal is to be just closer to sources of production. I think our people have done a terrific job accessing opportunities in the United States, and we have a very restrictive policy on travel, and the types of things we can do in the United States, because we're a Bermuda company. So having boots on the ground, we think, longer-term, will really help us. So we're still exploring the options there.

Okay. Thanks, and congrats on the quarter.

Jay Cohen, Bank of America Merrill Lynch.

Yes, thank you. As a new company, I would expect your G&A expense, the absolute level of expenses, to gradually rise. Throughout this year, it looks like it's been actually coming down just a tad, but fairly flat. I'm wondering, should we expect that number over time to rise, simply because of the newness of the company?

Yes, and Jay, I think it's flat or so from last year, and we had expenses related to the IPO, and there's a little bit of a blip, out of the ordinary last year. So we're about flat. I think you can expect our G&A expenses to grow at a moderate rate. We're about built out in terms of infrastructure, but we will be adding people and maybe another platform for the US. But the growth in the G&A expenses will be much lower than the near-term growth in earned premium.

Absolutely. Great, thanks Rob.

(Operator Instructions)

Kai Pan, Morgan Stanley.

Yes, just a quick number question. What was the quarter-end float number?

Kai, it's very close to $300 million.

$300 million. Okay, thanks so much.

There are no further questions at this time. I'll hand the call back over to John Berger for closing comments.

Thank you very much. We're in the midst of fourth-quarter activity, and we look forward to our next earnings call with you. Thank you.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.