Siriuspoint Ltd (SPNT) 2015 Q1 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance Limited first quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Coleman, Chief Financial Officer. Thank you. You may begin

Thank you, operator. Welcome to Third Point Reinsurance Limited's earnings call for the first quarter of 2015. Last night, we issued an earnings press release and financial supplement, which is available on our website www.thirdpointre.bm. A replay of today's conference call will be available until May 15, 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, 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'll turn the call over to John Berger

Thank you, Chris. I'm pleased with our performance in the first quarter, which I believe highlights the power of our total return business model. As a reminder, we make money three ways. First, we invest our capital through an exclusive arrangement with Third Point LLC, an investment manager with a 20-year track record of generating more than 20% per annum net returns. The second way in which we aim to generate profits is through underwriting reinsurance business. We expect to generate an underwriting profit over time, despite not writing the highest margin but riskiest line of business, property catastrophe.

In today's soft reinsurance market, we expect to generate a combined ratio of around 100%. Still, our reinsurance segment is already profitable, which brings me to the third way we make money. Our reinsurance business generates float, which like our capital, is invested through Third Point LLC. In the first quarter, we generated $161.6 million in float, which increased our total float to $569 million at March 31, 2015. In the first quarter, we produced net income of $50.5 million, an increase of 26.9%, from $39.8 million in last year's first quarter. Generated a return on beginning shareholders' equity of 3.5%, and grew diluted book value per share by 3.1%.

Third Point LLC generated investment returns of 3% on our behalf in the quarter, which is strong relative to the broader indices. For example, the S&P total return index was up only 1%. Daniel Loeb will discuss our investment returns in greater detail in just a couple of minutes. In the first quarter of 2015, our gross written premiums in our PC segment was $213 million, a 160% increase from the first quarter of 2014. While our premium growth will be volatile from quarter to quarter, given that we focus on fewer, larger deals, we're very pleased with the deal flow we are seeing, especially given challenging market conditions.

Our team has very good longstanding relationships with brokers and cedents. We have experienced underwriters who are talented at tailoring solutions, and we respond quickly to underwriting requests, and otherwise provide good service. In addition, we're finding that the fact that we are a pure play reinsurance company, meaning we don't have a primary insurance operation, is proving to be a real advantage, especially given the recent M&A activity, which has further reduced the number of pure play reinsurers.

We have completed several large deals with larger insurers and reinsurers, who had unique problems that they wanted help managing. These companies specifically targeted us as a potential partner, because we do not have an insurance business with which they compete.

I will conclude with some comments on market conditions. The segment of the market that is under the greatest pressure is property catastrophe. Pricing in the property cat market has decreased by double digits in each of the past three years, and is now about half of where it was three years ago. This is a very significant issue for traditional reinsurance companies, because property cat has been their biggest, or one of their biggest, contributors to profitability. We do not write any excess of loss property cat, and therefore are not directly exposed.

But we do face some pricing pressure from traditional reinsurers that have been displaced in the cat market, and are more aggressively pursuing the lines of business that we target. Still, for the reason I just laid out, we're seeing a significant flow of business that meets our pricing thresholds, and are confident that we will continue to profitably manage through today's soft market.

I will now hand the call over to Rob Bredahl, who will discuss recent regulatory developments.

Thank you, John. On April 23, the Treasury Department issued proposed regulations to address the status of insurers and reinsurers as passive foreign investment companies, or PFICs. These proposed regulations were the result of various interactions between the treasury, the IRS and the US Senate over the course of 2014. Since a key component of our total return business model is to invest our capital with Third Point LLC, we have followed the development of these proposed regulations with great interest.

As we have stated consistently in the past, we believe that it is clear that Third Point Re is an active reinsurance company. Our gross written premium was over $600 million in 2014, only our third year of operation. At the end of this quarter, our float balance, which supports our estimated reinsurance liabilities, grew to approximately 40% of our capital base. We recently established a new reinsurance subsidiary, with an office in New Jersey, which will itself be subject to US federal income tax. Our underwriting portfolio has produced favorable results consistent with our expectations. Certain transactions have been unprofitable, and demonstrate the insurance risk that we assume in the regular course of our business operations.

We have two observations on the proposed regulations. First, the Treasury Department has proposed to exclude employees of related entities from the determination of whether a corporation engaged in the active conduct of an insurance business. We do not believe that this proposal impacts our business model, since our approach has always been to employ our own staff for all core reinsurance functions. Our approach has allowed us to develop in-house expertise and relationships that are a key source of differentiation for us in the reinsurance market.

Second, the Treasury Department has not yet proposed any bright line test for determining passive assets. Instead, Treasury has asked for comments prior to the issuance of final regulations. We believe that our company is similar to many others industry participants, in terms of premiums to investment income and reserves to capital. This is largely due to our success in building a substantial reinsurance business, over the past three years, in a challenging reinsurance market. Nevertheless, we will not be able to determine the implications of any such test until the regulations are finalized.

I will now hand the call over to Daniel Loeb, who will discuss the performance of our investment portfolio.

Thanks, Rob, and good morning everyone. The Third Point Reinsurance investment portfolio, managed by Third Point, returned 3% in the first quarter of 2015, net of fees and expenses, versus returns for the S&P and CS event driven indices of 1% and 1%, respectively, for the quarter. The Third Point Reinsurance account represents approximately 12% of assets managed by Third Point LLC. Losses in January were more than offset by strong returns in both February and March, with gains in equities and structured credit accounting for the majority of profits.

Third Point's equity portfolio returned 3.7% on average exposure during the first quarter, outperforming the S&P meaningfully, with approximately half the exposure at risk. Performance was anchored by strength in several core positions in the industrials and commodities and healthcare sectors. Our top equity contributors for the quarter were Activist PLC, [The Newt] Corp, and Dow Chemical Company. We're excited about potential investment opportunities in Japan, and met with companies and government officials on our visit a few weeks ago. Our corporate and sovereign credit book was up 5.8% on average exposure in Q1, versus 2.3% performance from the iBoxx high-yield index during the same period.

Both are performing in distressed credit portfolios are down slightly for the year. However, our sovereign credit portfolio has continued to add meaningfully to returns, and was up 9.8% on average exposure during the quarter, led by our sizable position in Argentine government debt. Third Point's structured credit strategy contributed significantly to profits during the first quarter. The portfolio added 1.8% to Q1 returns, driven by strong demand for US-based mortgage-backed securities.

Now, I would like to the call over to Chris to discuss our financial results

Thanks, Daniel. As John mentioned, we generated $50.5 million of net income in the first quarter, which translates into earnings per diluted share of $0.47. This compares to net income of $39.8 million, and earnings per diluted share of $0.37, for the prior-year period. Diluted book value per share, as of March 31, 2015, was $13.97, an increase of $0.42 per share, or 3.1% from December 31, 2014. In our property and casualty reinsurance segment, gross premiums written increased $131 million, or approximately 160%, to $213 million for the three months ended March 31, 2015. This compares to $82 million for the prior-year period.

The increase in gross premiums for the quarter included $124 million from two multi-line deals with Lloyd's syndicates. These were renewals of contracts that were first written in Q4 2014. They had effectively dates of January 1, 2014, but took most of 2014 to negotiate and close, and therefore, there was not comparable premium in last year's first quarter. Also contributing to the increase in gross premium was $26 million of new business, and $14 million from increased premium on renewal contracts. These increases were partially offset by $47 million of business written in the first quarter of 2014, that did not renew in the current-year quarter, and $20 million from contracts that were canceled and rewritten.

Our new US operating platform began operations late in the first quarter, and contributed $10 million of new business. Our US-based underwriters are off to a good start, have a strong pipeline of new business, and will be significant contributors to new business production in future quarters. Net premiums earned in the property and casualty reinsurance segment during the first quarter of 2015 increased $67 million, or 92%, to $139 million, reflecting a larger in-force underwriting portfolio, compared to the three months ended March 31, 2014. G&A expenses in the property and casualty segment were $6.6 million for the current quarter, or $800,000 higher than the first quarter of 2014.

Most of this increase in our G&A run rate was due to expenses related to the formation of our US underwriting platform. Still, our general and administrative expense ratio decreased to 4.7% in the first quarter of 2015, compared to 8% in the same period of the previous year. And our combined ratio improved to 102.8%, from 107.1%, primarily due to the significant increase in earned premium. During the current quarter, we recognized a decrease in underwriting income of approximately $1 million, due to loss reserve development. Corporate expenses or general and administrative expenses not allocated to underwriting activities were $4.9 million for the first quarter of 2015, compared to $3.4 million for the first quarter of 2014.

The increase was due mostly to costs related to the formation of Third Point Re USA, our new US-focused reinsurance company. Total G&A expenses, therefore, were $11.7 million in the first quarter of 2015, versus $10 million in the first quarter of 2014. There are three other expense categories that I want to highlight. Other expenses were $2.7 million in the quarter, versus $787,000 in last year's first quarter. Other expenses relate to interest crediting features in deposit and reinsurance contracts. We issued debt during the quarter to help capitalize our US operations. It was $115 million of 10-year debt, at a 7% coupon. As a result, we recognized interest expense of $1 million for the quarter.

And finally, the new reinsurer we formed in the quarter, which markets and underwrites reinsurance out of the office in New Jersey, will be a US taxpayer. Total income tax expense for the quarter was $1.3 million. As we announced in December, our cat fund is not accepting new business, and is in runoff. There was an insignificant impact on our overall results for the quarter from this segment. Net assets under management for the cap fund were approximately $77 million as of March 31, 2015. As Daniel mentioned, the return on investments managed by Third Point LLC was 3% during the first quarter of 2015, compared to 3.1% for the same period in 2014.

I'll now hand the call back to John Berger

Thank you, Chris. To conclude, I'm pleased by our performance this quarter. Premium growth was solid despite a challenging reinsurance market, and our investment returns out-paced the broader hedge fund industry, leading to strong book value growth of 3.1% in the first quarter. Our UK marketing office, which has only been open for one year, is performing very well. And I'm optimistic for the prospects of our US marketing office, which has just begun operations. Our deal flow remains healthy, and our pipeline continues to build, pointing to further good results over the balance of 2015.

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

Thank you.

(Operator Instructions)

Kai Pan, Morgan Stanley.

Good morning, thank you. So first few questions for Dan. First one for you, Dan, is your credit portfolio actually contributed about half of the first-quarter gains. So given the sharp rise in some of -- like bond yield, recently, has any impact on that portfolio? And how do you like manage the risk, in a more likely and more volatile bond market?

Yes, so most of that appreciation was from structured credit and Argentine credit. So these are not securities that are really subjected to -- or haven't been subjected to the movements in the credit market. So we haven't had any negative reaction as a result of that

Okay. And then, following up on that, in your letter, you said that most likely, [that] property will -- first, will raise the rates for the first time in a while, probably in October. So how do you think the market will react to that? And how do you position your portfolio?

This is the thing everything is focused, and looking at, and ready for. Rates will go up if the economy is growing. And we think that equities are going to trade on the prospect of earnings appreciations. So we're not concerned about a rate hike

Okay. Lastly, on your [short] portfolio, it looks like in April, you results, the market was actually up modestly 1%. Yet the short portfolio actually contributed negatively over 60 basis points. A relatively short -- like a smaller exposure, about 20%.

So could you talk a little bit more about your short portfolio? And in terms of the velocity of these hedging the long risk? Or like pursuing absolute return on the short side, as well?

In the old days, we used to hope to make money on the long book and the short book. I think that's very difficult to do. Obviously, there will be months, here and there, where we get lucky, and we do manage to do that. Two things happen in April.

First of all -- and you asked about our philosophy on this. Some funds just leave -- maintain static short positions, and they leave it alone.

We very actively trade our short book, whether it's indices or options that we have on a declining market. So the appreciation that you see there, on the short side, is a combination of single name shorts that were just idiosyncratic names that paid off for us, and taking advantage of market moves and trading our short book. And taking advantage, mostly, of trading vol, and taking advantage of opportunities that we see in the premium, some of the options that we have on the short side.

Okay, that's great. Then switch to John, Rob and Chris. Just on premium side, looks like you had two big deals in the quarter. First question on that is, what was the sustainability of these large deals coming, going forward? And then follow on that is that, what is the impact on your composite ratio, basically your loss ratio, and acquisition ratio, from these larger deals?

Yes, the larger deals are potentially sustainable. They are not one-time deals. They will come up for renewal next year. And we're hopeful with the relationship, and the fundamentals of those deals, that we will continue on them. We'll see, as we go through the negotiations. Two of the larger deals were adverse development coverage that we basically write at 100% composite. So that will drive the composite up. The other large one has a composite combined ratio of below 100%.

Okay. Then if you look back, you have an expectation to basically breakeven, or probably slightly profitable, in the underwriting for 2015. If you look at your composite ratio for these quarter, it's improved year over year, but it still needs a lot of improvement, in order to get to the breakeven point. So at this point, do you think you are still going to -- shooting for breakeven in underwriting for 2015? Or that's, given the nature of the business, writing right now, that basically is less likely?

It remains our goal. We're really not that far, $102.7 million to $100 million, is a couple of million dollars. In this quarter, we had the expense from the US operation, which was about 0.7%. We had one contract that had a reserve increase of $1 million, was another 0.7%.

Last quarter, we had a contract that had favorable development by $1 million, so we benefited from that. So we expect to hover around $100 million. One thing we say, we're trying to grow our loss reserve book. And we're getting very good traction on that. It's -- the economics of those deals are good.

But almost by definition, those deals come in at 100% composite. So if we're successful there, that's clearly going to push our composite ratio up. And what we said is, if that segment becomes big, we will break out separately, and we'll explain the economics. Clearly, the market's competitive, but we remain hopeful that we can achieve our goals.

That's great. I'll stop here, and thank you so much

Seth Canetto, KBW.

Good morning. Thanks for taking my question. Just focusing on G&A expenses this quarter, I believe you guys reported roughly $6.6 million of expenses, versus $5.8 million last year. And I'm assuming underwriting headcount from the US operation is a driver of this metric this quarter.

Is there any additional headcount growth that will likely be stemming from the US operation, as it develops? And I believe you said roughly 40% of the new business growth came from the US operation? Do you guys see that climbing to 50% or higher? Or how are you thinking about that?

Let's see, a few parts your question there. So just on the G&A, certainly the year-over-year G&A expense variation on the segment results was driven by headcount. We did add staff, as we're staffing up the US operation late in 2014, and into the early part of 2015.

So you're correct, that's a big driver of the year-over-year variance. But I think the -- what you see coming through for the first quarter of 2015 is pretty representative of a fully staffed up US operations. So not likely to see a lot of increased headcount there, in the upcoming quarters.

And then you mentioned a comment on growth rate from the US operation, which I don't think was quite right. I think we mentioned that the US operation generated $10 million of new business in the first quarter. But at this point, still a somewhat modest contributor to the overall growth of the Company. But that will, over time, be a likely source of growth in the future.

Yes, sorry. I just meant the new business. I thought you guys said $10 million came from US, and $26 million new business overall. I could've had that wrong. And then, just on the next question, was there any prior-year reserve development in the quarter?

Yes, we mentioned, in the opening remarks, there was $1 million of net unfavorable development in the current quarter. And John just touched on it a moment ago, as well. And that contributed about 0.7 points to the combined ratio in the first quarter.

Yes. And just a point of clarification. The way we go about setting reserves, we do it on a contract-by-contract basis. And one contract, the composite ratio still is below 100, but it looks it ticked up a little bit on it. So it's not a general across-the-board increase; it's one contract, and for $1 million

Okay, great, thanks. And just on the larger deals that were discussed earlier. Is that representative of most of the loss ratio improvement? It looked pretty good this quarter. What's really driving, I guess, that loss ratio improvement?

Yes, the components of the composite ratio -- and we have said this in the past -- that depending on the mix of business, you can see movements from one period to the next, in terms of the component. And the example we like to give is, some of the reserve deals that we write, we put on the books at 100% loss ratio. Versus, as in the other example, the property quota share type contract, where maybe it's a 30% loss ratio and a 60% expense ratio. So really, the movements in the loss ratio component of the composite ratio is usually just a mix-driven item.

Yes, we say -- I think a good way to look at it is the composite combined ratio, for the reasons Chris outlined. Just one or two big deals in a particular segment can really skew the loss ratio, but really not have that big of a change on the overall composite combined ratio.

Okay, great, thanks.

(Operator Instructions)

Michael Weinz, JPMorgan.

Hi, good morning. Thanks for taking my question. I was just wondering how much leverage you're ultimately looking to take on from insurance float? And how you think about what amount is appropriate? Thanks.

Yes, we think, obviously, leverage -- asset leverage is a characteristic of the insurance/reinsurance business. We think, if we can get to a 1.4 asset leverage, that's very good. And an important component of that is, A.M. Best is the rating agency, and we get capital charges for various things.

With the typical company, probably, their biggest capital charge is their property catastrophe exposure. For us, it's -- because of our investment strategy, we get a relatively large capital charge for that. And so I think, when you look at the full equation today, a 1.35 or 1.4 asset leverage would be very good for us

I see, thanks. And I guess, are you already at those levels now? Or when do you expect to get there, if you're not?

We're at those levels today, and we plan to manage our float business so we stay at those levels.

I see, thank you. That's all.

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

Thank you very much for dialing in. As we've said several times, we -- despite a very challenging, competitive market, we see many deals. Our pipeline of deals is good. And a point that we highlighted before, that we think the M&A in our sector will help us.

As companies combine, there will be fallout of business, of personnel. And we are one of the few pure reinsurance companies left standing. And we think that will be a very good advantage to us. So we look forward for the remainder of 2015. Thank you.

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.