Siriuspoint Ltd (SPNT) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance Limited fourth-quarter and full-year earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris Coleman, Chief Financial Officer for Third Point Reinsurance. Thank you, sir, you may begin.

Thank you, operator. Welcome to Third Point Reinsurance Limited's earnings call for the fourth 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 March 6, 2015, 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 measure is presented in the Company's earnings press release.

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

Thanks, Chris. Good morning, and thank you for taking the time to join our fourth-quarter 2014 earnings call. In addition to Chris Coleman, CFO of Third Point Re, with me today are Rob Bredahl, President and Chief Operating Officer of Third Point Re, and Daniel Loeb, CEO of Third Point LLC, our Investment Manager. I will provide an overview of our financial results; Rob will provide an update on recent events; Daniel will discuss the performance of our investment portfolio; and then Chris will discuss our financial results in more detail.

We had a net loss of $14.7 million, or $0.14 per diluted share, compared to net income of $80.1 million, or $0.75 per diluted share, in last year's fourth-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 down slightly in the fourth quarter.

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

Our reinsurance operations continue to develop at or better than planned and we are well positioned to benefit from future investment gains. In the fourth quarter, our combined ratio continued to improve. We registered strong growth in gross written premium and our float generation was solid.

Our combined ratio for the property and casualty segment improved to 100.2% in the latest quarter from 106.3% in last year's fourth-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 premiums continue to grow rapidly while our G&A expenses are growing at a much more moderate rate. Our G&A expense ratio was 3% in the fourth quarter of 2014, a decrease from 9.5% in the fourth quarter of 2013.

Gross premiums written for the quarter increased by $92 million, or 56%, to $254 million versus $162 million for the same period of the previous year. Float, which typically increases or decreases in line with gross written premium, albeit with a time lag, increased to $389 million at December 31, 2014. At year-end 2013, float was at $215 million.

The increase in gross written premium was primarily due to strong business production, especially out of the UK market. I am very pleased with the flow of opportunities that we are seeing and the quantity and quality of the deals in our pipeline. The market remains extremely competitive, but we have successfully combated this competitiveness by cultivating our relationships and expanding our marketing presence, first in London with the formation of our UK marketing office last year, and now to the US with the formation of Third Point Reinsurance USA.

Third Point Reinsurance USA is now fully staffed, has secured an A- rating from A.M. Best, and will begin writing business over the next several months. While our pipeline and prospects for future growth remain strong, I need to stress, 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.

Finally, I would like to take a moment to discuss the significant steps that we have taken to bolster our executive ranks. In the quarter, we promoted Rob Bredahl to President and Chief Operating Officer and Chris Coleman to Chief Financial Officer. We are very excited for Chris to take over Rob's duties as CFO and for Rob to increase his focus on Third Point's operations as well as business development.

We also made two significant hires in the quarter: we hired Tom Wafer as President of Third Point Re USA and Jonathan Norton as Chief Actuary of Third Point Re USA. Jonathan will also be Chief Preserving Actuary for the Third Point group. Tom, Jonathan, and I worked together at Chubb Re and its successor companies Harbor Point and Alterra.

Rob will discuss our plans for the US in more detail in a moment. I will now hand the call over to Rob Bredahl. Rob?

Thanks, John. To start, I'd like to take a moment to address the catastrophe reinsurance market and the decision we made in the fourth quarter to exit this line of business. In our view, the outlook for the cat market remains challenged, with little opportunity for improvement over the medium term. While we are pleased with our cap fund's investment performance, catastrophe reinsurance pricing and the fees available to manage cat risk have decreased significantly over the last two years.

In fact, we believe that the significant influx of capital directly into the cat market through fund structures has permanently lowered potential profits in this segment. As a result, we made the decision to wind down our remaining exposure and reallocate resources to more compelling business opportunities. Among these opportunities was the formation of a new Class 4 Bermuda reinsurance company that will focus on underwriting US business through an underwriting production office in New Jersey.

We believe that being closer to our clients and brokers will help us originate incremental business and, in some cases, help us make better underwriting decisions. While this new Bermuda base and regulated reinsurer will be a US taxpayer due to its onshore marketing and underwriting activities, it will be supported by our existing finance, legal, and compliance infrastructure located in Bermuda. The new reinsurer has been capitalized with a total of $265 million, has an A-minus rating from A.M. Best, and will be supported by a 75% quota share back to our existing Company.

As John mentioned, the new office will be led by Tom Wafer, President, and Jonathan Norton, Chief Actuary. Joining Tom and Jonathan in the US from our existing Bermuda Company will be Tony Urban, who will assume the role of Chief Underwriting Officer, and Shane Haverstick, who will assume the role of Chief Operating Officer. This team has a tremendous amount of reinsurance experience and outstanding relationships throughout the industry.

I'd now like to turn the call over to Daniel Loeb, who will discuss the performance of our investment portfolio during the fourth quarter. Daniel?

Thanks, Rob, and good morning, everyone. The Third Point Reinsurance investment portfolio, managed by Third Point LLC, lost 40 basis points in the fourth quarter of 2014 net of fees and expenses versus returns for the S&P and CS event-driven indices of plus 4.9% and minus 2.2%, respectively, for the quarter.

The Third Point Reinsurance account represents approximately 11% of assets managed by Third Point LLC. Profits in November were offset by losses in October and December in a volatile market environment. Gains in the fourth quarter were driven by strength in several core equity positions and were offset by weakness in our government, and corporate credit portfolios.

Our hedge book performed well amidst the volatility, but was not large enough to entirely offset losses. Third Point's equity portfolio returned 1.8% on average exposure during the fourth quarter, bringing total returns for the strategy to 6.6% for 2014. Strength in several large, core positions in the healthcare, consumer, and TMT sectors outweighed modest losses in energy and industrials and commodities.

For the year, healthcare was our strongest performing sector, contributing more than half of overall equity returns. Third Point's corporate credit portfolio lost 8.2% on average exposure during the fourth quarter, driven primarily by losses in our performing credit book. Corporate credit had a strong year overall, however, returning 6.1% on average exposure in 2014 compared to the Barclays high-yield index return of 90 basis points.

Our macro portfolio lost money during the quarter due to weakness in one of our government credit positions. We were able to capitalize on volatility throughout the year to build another large sovereign credit position at attractive levels, which we continue to own. Our mortgage portfolio was essentially flat for the fourth quarter, concluding a very strong year.

Overall return on average exposure for 2014 was 21.3%, nearly 4 times the HSN hedge fund mortgage index return of 5.4%. The AVS book contributed nearly half of the investment portfolio's 2014 returns, with an average exposure of roughly 20%.

Looking back at 2014, we believe our performance was diminished by poor trading and excessive exposure in an environment of increased market volatility. However, our solid stock selection, mixture of credit and equity strategies, and avoidance of major mistakes in certain industries and geographies helped generate modest gains. We believe we are well positioned for the current market and are increasingly seeing compelling opportunities across strategies around the world.

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

Thanks, Daniel. As John mentioned, we generated a net loss of $14.7 million, or $0.14 per diluted share, in the fourth quarter. For the full-year 2014, we reported net income of $50.4 million, or $0.47 per diluted share, compared with net income of $227.3 million, or $2.54 per diluted share, in 2013. Diluted book value per share decreased by $0.13, or 1%, in the quarter, to $13.55.

For the full-year 2014, diluted book value increased by $0.43 per share, or 3.3%, to $13.55 from $13.12 as of December 31, 2013. In our property and casualty reinsurance segment, gross premiums written increased 56% to $254 million for the fourth-quarter 2014, from $162 million for the fourth quarter of 2013. For the full-year 2014, gross premiums written increased 53%, to $601 million from $394 million for the full-year 2013.

The increase in gross premiums written for the quarter included $242 million of new business written, offset by $39 million of business that did not renew and $114 million of business that did not have a comparable renewal in the current quarter. The increase in gross premiums for the year included $370 million of new business, partially offset by $101 million of business that did not renew and $141 million of business that did not have a comparable renewal in the year.

Net premiums earned in the property and casualty reinsurance segment increased $124 million, or 219%, to $181 million during the fourth quarter of 2014 and increased $220 million, or 103%, to $432 million for the year ended December 31, 2014, reflecting the continued growth in our in-force portfolio. In addition, the three months and year ended December 31, 2014, included $80 million and $83 million, respectively, of premiums related to retroactive exposures and reinsurance contracts where we recorded the premiums as written and earned at inception of the contract.

As a result of the increase in earned premium, our general and administrative expense ratio decreased to 3% in the fourth quarter of 2014 compared to 9.5% in the same period of the previous year, and our combined ratio improved to 100.2% from 106.3%. After attributing income to noncontrolling interests, the net income from the catastrophe risk management segment was $840,000 for the fourth quarter of 2014, compared to net income of $797,000 in the fourth quarter of 2013. Net assets under management for the catastrophe fund were approximately $120 million as of December 31, 2014.

Corporate expenses, or general and administrative expenses not allocated to underwriting activities, was $3.9 million for the fourth quarter of 2014, compared to $2.4 million for the fourth quarter of 2013, and $14.4 million for the full year of 2014, compared to $7.3 million for the full year of 2013. The increase was due to increased headcount, and payroll and related expenses, and increased legal and other professional advisor expenses as a result of operating as a public company for a full year.

As Daniel mentioned, the return on investments managed by Third Point LLC was negative 0.4% during the fourth quarter of 2014, compared to 6% for the same period in 2013. For the full-year 2014, the return on investments managed by Third Point LLC was 5.1%, compared to 23.9% for the year ended December 31, 2013.

I will now hand the call back to John Berger.

Thank you, Chris. So, to conclude, investment returns were down slightly in the quarter due to challenging investment market conditions, but we continued to make progress in developing our reinsurance business and are well positioned to benefit from future investment gains. In the quarter, gross premium written grew by more than 50%, our combined ratio dropped to 100.2%, and float grew to $389 million. With the expansion of our underwriting platform into the United States and an already robust pipeline, I remain optimistic for the remainder of 2015 and our continued long-term success.

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

Thank you.

(Operator Instructions)

Jay Cohen, Bank of America Merrill Lynch.

Let me start with the new business. You were able to offset a fairly sizable headwind, given that you had a decent amount of business that didn't have a comparable renewal in the quarter. Can you talk about the kind of new business you write, the types of contracts that you were able to put on the books?

Sure, Jay. As we say, our strategy is to write a fewer number of large deals. And the good and bad with that, the bad is when you lose them, it's a big loss, but when you write them, it's a big win. We were able to write a multi-line opportunity out of the London market that was $125 million. And that we hope is a renewable deal.

We did a reserve deal, loss-reserve deal, $45 million, that's probably a one-time deal. We did a Florida homeowners contract that was $27 million. And then we did a multi-line, another Lloyd's multi-line casualty deal, for $27 million that, again, we think will renew.

And so I think it's a tribute to several things, why we're able to find these opportunities. One is it's as consolidation continues to happen in the marketplace, there are very few true independent reinsurance companies now. Most reinsurance companies are part of a bigger insurance group and we see opportunities where companies -- the one big deal, the $125 million deal we did out of London was a portfolio of business that was growing rapidly for the company. It was becoming too big of a percentage of their overall book and they wanted a partner on the business.

At the same time they didn't want to share the business with somebody who could potentially be a threat. And so I think where we may be uniquely positioned to be the counterparty in those types of situations.

Got it. That's helpful, John. Second question, a quick one, maybe for Chris, was there any prior-year reserve development in the quarter?

Sure, Jay. So for the quarter, we had $1.6 million of favorable reserve development, which took the full-year favorable reserve development to just under $1 million at $700,000, so relatively modest, favorable.

Got it. And then the last question, I guess if you look at the overhead or G&A expense within underwriting, it's been essentially flat now for about five quarters and I guess I would have expected that to continue to rise, just given the still newness of the Company. Is this a reasonable run rate to look at or should we assume that number does, in fact, go up?

Really, the headcount allocated to our underwriting activities has held steady and that's certainly the major driver of the G&A allocated to underwriting. Where you will see a little bit of an increase going into next year is in relation to the establishment of the US operation.

John mentioned a couple of the hires on the call and we are also adding a little bit of incremental headcount to support that operation. So you will see a little bit of an uptick, but relatively modest and also we'll be adding incremental earned premium at the same time from the US operations. So on a consolidated basis, we should still be able to maintain similar overall G&A expense ratios.

Great. Thanks, Chris. Appreciate it.

Kai Pan, Morgan Stanley.

First question for Dan. You mentioned about increasing volatility in the markets. Are you changing any of your risk-management practice in terms of like a net exposure or any limitation on the size of the positions?

We haven't changed any of our size guidelines. We have, over the course of this year, brought down both our gross and our net exposure to adjust for the increased market volatility.

Okay. And then could you give a little bit more about your credit exposure? Because it looks like you have a big swing in terms of your corporate credit performance through the year. And do you have any size constraint in that book? As well as could you talk a little bit more about your exposure to the Greek situation?

Yes. We've exited the Greek credit. We have a large exposure to Argentina. This is really in the category of sovereign debt, not corporate credit. But that's where you'll see some impact on our overall credit performance right now. And we tend to be very event driven.

So volatility is going to be higher, but so are the -- over time so will the returns. So we're not really playing a credit game. We are not really playing a spread game as much as we are playing special situations where there will be more significant moves. Overall, the opportunities on the straight up -- the corporate side, not sovereign side, have been pretty limited so you've seen those exposures go down over the course of the last year.

Okay. Lastly for Dan, you mentioned you're looking for some new opportunity in the energy sector. Could you give more comments on what's your view on the oil price and in terms of on both credit as well as equity side in the energy sector?

I think the most intelligent thing I can say about the oil price right now, to quote Bernard Baruch, is I know exactly what it's going to do. It will fluctuate. In the near term -- we've never seen moves like this. 5%, inter-day moves on the front end of the curve. And the volatility is pretty extreme, to say the least.

Our sense right now, though, is if you look at some of the big oil stocks, they really have not moved down commensurate with the price of oil. They discount quite a bit of recovery. I think that all of the funds that have been set up to, quote-unquote, capitalize on distress in the oil patch might be disappointed, kind of like the European funds that were set up to capitalize on European distressed debt situations. So we had very little exposure going into this.

Where we've tried to focus is on companies like Philips 66 where we think that the impact on oil prices is exaggerated on the stock price, but we don't really have any major E&P positions yet. When the equities themselves sold off hardest, we were expecting -- we were trying to be patient and wait for the inevitable next shoe to drop, but the equities have already moved up in anticipation of a recovery, so we're pretty much on the sidelines in energy.

Thank you so much for all the answers. Now switching to the underwriting side, so, John and Rob and Chris, we saw a tick-up in terms of the loss ratio for the quarter. Is that related to these retro contracts or is that a normal run rate going forward?

It's hard to focus in on our quarter-to-quarter, even year-to-year comparison on our loss ratio. It really depends on the mix of business.

For example, two extremes. One is when we write a loss reserve deal, and we had a sizable one in the fourth quarter, that comes in at 100% loss ratio and there's no ceding commission so that boosts the loss ratio up On the other side is when we write a Florida homeowners deal with very limited CAT exposure, we benefit from the CAT protection that the Company buys, but the cost of that's reflected in the ceding commission, so you end up with a very low loss ratio but a very high ceding commission. Could be as high as 50% plus.

And so what we recommend is looking at what we call the composite ratio, the combined ratio without our G&A, really get a good comparison on a quarter-to-quarter, year-to-year basis. It really depends on the mix of business and fluctuates.

So are you still looking for a breakeven in 2015 underwriting?

Yes. We're getting close. It's going to, again, depend on the mix of business. If we're successful on the loss-reserve front, and we hope to be, that's going to -- that business comes in, as I said, at 100% loss ratio, so that drives us to 100% or above if you add in some frictional costs on that.

What we said is that if that segment becomes big enough, we'll break that out separately and show the economics. So I think when I look at the progress we've made on our combined ratio over the three years, and that it's 100.2% for the fourth quarter, we're pretty happy with the progress we've made and where we are. If we're right around that plus or minus a percent, we call that success.

My last question is on the industry consolidation. You've seen a recent wave, in particular the Bermuda names. What would you think Third Point would play in the industry consolidation in terms, are you looking for acquisitions? Or how would that impact the competitiveness in your market?

We're not actively looking. We're aware of what's going on. Our model is with the emphasis on the more risk-taking on the investment side and then tailoring our underwriting to that, really limits the companies that would make sense for us to acquire. Also you look at valuations. Reasonably good companies are going to go for a pretty high price.

So I really don't see us being active in that area. At the same time, we are always interested, we get approached. Whenever anybody is in play, we're certainly aware of it, but I don't see us being active in that area.

I would just add, we looked at various ways to enter the US market, including a couple of possible acquisition targets and determined that it was more efficient, better economics for us to start our own Company.

That's great. Thank you so much for all the answers.

(Operator Instructions)

Brett Shirreffs, Keefe, Bruyette & Woods.

Congrats on the quarter. Thanks for taking my questions. First I want to touch on the US platform. Will that establishment change or expand your risk appetite at all on the underwriting side?

No. Pretty much it will be the business we've been writing. And we really like the progression of growth we've had on the underwriting side, to go from $200 million to $400 million to $600 million in our third year. The purpose of forming the US Company is just greater access to business. The United States is the biggest market, so we think having people on the ground actively looking for the types of deals that we want will be beneficial, but we are still looking for the same types of business that we've been writing, so no change at all in our risk appetite.

Okay. Maybe just a little bit technical, but how will you decide where the business is written, in the US or on the Bermuda balance sheet?

Well, we have established very black-and-white guidelines, so it's not an arbitrary thing. And so the US operation will be like the regular business that we write, the nonstandard auto, the non-Florida homeowners, the Texas homeowners.

And then any business that is regular reinsurance of ceding companies where we want our people visiting the companies, being able to do the claims audits, the underwriting audits, visiting with senior management, that's going to be the US business. In Bermuda, we will be doing the reserve deals, anything out of the Bermuda market, obviously anything out of London, international business will come through the Bermuda office. But we have very, very clear guidelines on what is done where.

Okay. That's helpful. And then on the homeowners side, we heard of a public company eliminating their homeowners quota share just recently. Just wonder if you could provide some outlook on the Florida demand-side?

We don't at this point -- we think it's going to be similar. The Florida homeowner companies now are, they're making money. They're growing surplus. They certainly have more financial wherewithal than before. Many of them do. At the same time, many of them are still dependent on the quota shares as part of their capital structure, so we'll see a lot of them renew at the end of the second quarter, so we'll see. I think it's safe to say we don't expect major changes, but we'll see.

Okay. Lastly, wonder if you could provide any more information on the reserve deal. The nature of the exposure there.

It's longer tail US casualty business. There's a segment of excess casualty. There's some professional liability business in there. We like deals where we think we're going to have a duration holding onto the money for five-plus years. So almost all our reserve deals will be US-casualty dominated.

Also, anytime we do a reserve deal, there's a limit and the limits tend to be small relative to the reserves we take onto our balance sheet.

Yes, that's a good point. We're not taking big limits. There are limits. There are risks in these deals but they're not unlimited reserve deals.

Got it. Thank you. Good luck in the future.

Jay Cohen, Bank of America Merrill Lynch.

Given that the debt that was issued in the US, should we pretty much expect your overall tax rate to remain around zero?

No, Jay. The capitalization of the new US Company, which is about $265 million, that invested capital will be subject to tax. Certainly the reason why we issued the debt out of the US-intermediate holding company was to take advantage of the tax deductibility of that interest as part of the US group.

I don't have the effective tax rate to hand, but it's basically going to be the tax on the investment income generated on the capital of the new US operation with some benefit from the interest expense. And then just the taxation on the underwriting profits generated out of the US operation, we do have the 75% quota-share arrangement in place. So that will certainly result in at least a portion of those profits being ceded to the Bermuda Company.

Would you expect the underwriting margin in the US to essentially equal what you're doing in Bermuda or could it be different, given somewhat of a different expense structure?

I think it's going to be very similar, Jay. With Tony Urban and Shane Haverstick now, Tom Wafer joining us, these are very well-established guys. I don't think there are magic pots of profits out there, but there's a chance that we do find some business that has a bigger profit margin than we are anticipating. But I would expect it's going to remain pretty similar to what we've done.

Very good. Thanks a lot.

It appears there are no further questions at this time. I would like to turn the floor back over to Mr. Berger for any additional concluding comments.

We thank everybody for dialing in. We look forward to our earnings call next quarter. Thank you.

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