Siriuspoint Ltd (SPNT) 2015 Q2 法說會逐字稿

Greetings and welcome to the Third Point Reinsurance Second Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Coleman, Chief Financial Officer for Third Point Reinsurance. Please go ahead, sir.

Thank you, operator. Welcome to Third Point Reinsurance Limited's earnings call for the second quarter of 2015. 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 13, 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 measure is presented in the Company's earnings press release.

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

Thanks, Chris. Good morning and thank you for taking the time to join our second quarter 2015 earnings call. In addition to Chris Coleman, Chief Financial Officer 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.

On today's call, I will provide an overview of our financial results. Daniel will discuss the performance of our investment portfolio. And then, Chris will discuss our financial results in more detail. We will then open the call to your questions.

For the second quarter, we reported net income of $15.7 million or $0.15 per diluted share compared to net income of $31.3 million or $0.29 per diluted share in the prior-year period. We grew diluted book value per share by 1.1% in the quarter to $14.12, up from $13.97 as of March 31, 2015. Our investment manager, Third Point LLC, generated investment returns of 1.7% for the quarter and 4.8% for the first six months of 2015, respectively, handily outperforming the broader market. Daniel Loeb will discuss our investment returns in greater detail in just a few moments.

Despite very competitive market conditions, we continue to make progress in building out the underwriting platform of the Company. Our gross written premium increased to $184 million this quarter from $146 million in the prior-year period, an increase of 27%. I'd like to note that we focus on large deals and therefore quarter-over-quarter comparisons are not always meaningful. The increase in gross written premium has been accompanied by a strong flow of opportunities, especially out of our recently established US office.

I've been very pleased with our new business production in the US, which demonstrates the value of strengthening relationships with clients and brokers in this challenging reinsurance market. In our property and casualty segment, we generated a segment loss of $1.9 million this quarter compared to a segment profit of $3.2 million in the prior-year period. Our combined ratio increased to 107.8% from 102.7%. Our combined ratio was elevated in the quarter due to $3.2 million of losses from weather activity in Texas and $2 million of adverse reserve development.

Although we do not write any excess of loss property [cat treaties], we are still exposed on several of our homeowners in [oil] quota share contracts to weather losses. We participate for our share of our clients small retentions before coverage from their property catastrophe programs kick in. There have been 6 PCS events in Texas this year, which is a high frequency of events.

Regarding the $2 million in reserve development, we reserve contract by contract and try to recognize any bad news very quickly. The $2 million of adverse development is a net number and relates to changes in reserve estimates on several contracts. When considering our results, it is important to keep in mind that our reinsurance operations generate [float] which is invested along with the assets that back our capital base by Third Point LLC. This is an important part of our total return model. Float generation for the first six months of 2015 was $167 million. Total investment float now stands at $584 million and our net invested assets to equity ratio was 1.4 times at the end of the second quarter.

In summary, while this quarter resulted in a higher-than-expected combined ratio, I'm pleased with the continued strength of the underlying drivers of our business model. The strong start for our US office is an encouraging sign for our business prospects in a difficult reinsurance environment and our significant float generation positions us well to take advantage of future investment performance.

With that, I would like to turn the call over to Daniel.

Thanks, John; and good morning, everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC returned 1.7% in the second quarter of 2015, net of fees and expenses, versus returns for the S&P and CS event-driven indices of 0.3% and 0.4% respectively for the quarter. The Third Point Reinsurance account represents approximately 12% of assets managed by Third Point LLC.

Strong performance in April and May outweighed a challenging June, allowing us to post positive results for the quarter. The Third Point equity portfolio returned 2.7% on average exposure during the second quarter, handily outpacing the S&P. Performance was led by strength in several core US-based positions, especially in the consumer sector. Increased short exposure in 2015 has helped the portfolio in periods of market volatility, including in June. And we continue to increase this exposure through both hedges and single-name equity positions.

Our top equity contributors for the second quarter were Nomad Holdings, Yum Brands, Dow Chemical, SunEdison, and Social Finance. Our portfolio includes many positions primed for events before year-end. Our corporate credit book lost 2.7% on average exposure in the second quarter. During the second quarter, strength in performing credit positions was offset by losses in distressed credit investments. Over the past few weeks, we've uncovered several attractive risk-adjusted opportunities in credit after a fallow first half.

Our sovereign credit portfolio, which is largely comprised of Argentinean Government debt, was down 6.9% on average exposure for the quarter, bringing year-to-date returns to 2.3% for those investments. Third Point structured credit portfolio continued its winning streak and has contributed nearly half of the fund's total returns for the year. The year-to-date return on average exposure for the strategy is roughly 15% compared to the HFN, Hedge Fund Mortgage index return of 3.3%. During the quarter, volumes were noticeably reduced due to macroeconomic volatility, but structured credit market's weakness was muted as fundamentals remained stable.

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

Thank you, Daniel. As John mentioned, we generated $15.7 million of net income in the second quarter, which translates into earnings per diluted share of $0.15. This compares to net income of $31.3 million and earnings per share of $0.29 for the prior-year period.

Diluted book value per share as of June 30, 2015, was $14.12, an increase of $0.15 per share or 1.1% compared to diluted book value per share of $13.97 as of March 31, 2015.

In our property and casualty reinsurance segment, gross premiums written increased $44 million or approximately 31% to $184 million for the three months ended June 30, 2015. This compares to $140 million for the prior-year period. The increase in gross premiums for the quarter included $61 million of new business, consisting of $53 million of new casualty business and $8 million of new specialty business. We also generated $34 million in gross written premium that did not have a comparable renewal in the prior year and $14 million from net increases in premium estimates, which primarily relates to one contract that was canceled on a run-off basis. These increases in gross written premium were partially offset by $55 million of business that we did not renew due to worsening pricing and/or terms and condition and $7 million in net decreases in renewal premium.

As John discussed, our US operating platform had a very strong quarter, contributing $53 million of new business. Our US underwriters are performing very well and will continue to be significant contributors to our business in subsequent quarters given their new business pipeline. Net premiums earned in the property and casualty reinsurance segment during the second quarter of 2015 increased $43 million or 55% to $120 million, reflecting our larger in-force underwriting portfolio compared to the three months ended June 30, 2014.

For the three months ended June 30, 2015, we incurred $3.2 million or 2.7 percentage points on the loss ratio as a result of wind storms and other weather activity that took place in the state of Texas. Most of the $3.2 million related to one homeowner's quota share treaty.

In addition to the weather-related losses, we had a $2 million increase in our net underwriting loss or 1.7 percentage points on the combined ratio related to changes in reserve estimates. This is the net impact on underwriting income of reserve development after considering the impact of any offsetting impacts of acquisition costs and also the impact of premium estimates. Many of our contracts have sliding scale or profit commissions that vary inversely with loss experience. The increase in net underwriting loss in the three months ended June 30, 2015, was primarily a result of deterioration in attritional loss experience on certain workers' compensation, auto and property contracts that did not result in offsetting changes in acquisition costs.

Property and casualty segment G&A expenses in the second quarter were $6.2 million, which compares to $5.7 million in the prior-year period. A significant portion of the increase is attributed to a full quarter of operations of our US office.

Our general and administrative expense ratio decreased to 5.2% in the second quarter of 2015 compared to 7.3% in the same period of the previous year, due to proportionately higher net premiums earned during the current-year period. Corporate expenses, or general and administrative expenses not allocated to underwriting activities, was $7.8 million for the second quarter of 2015 compared to $3.2 million for the second quarter of 2014. Most of the increase was due to a $3.2 million separation cost expense related to the resignation of our General Counsel in the quarter and the remaining increase was due to increased share compensation expense and other professional advisor expenses.

Other items worth noting are interest expense and income tax expense. In February 2015, we issued $115 million of senior notes bearing an interest rate of 7% to partially capitalize our new US operation. Interest expense related to these notes was $2.1 million in the second quarter.

Our income tax expense or benefit is primarily driven by the taxable income or loss generated by our US-based subsidiaries as well as withholding taxes and uncertain tax provisions on our investment portfolio. The income tax expense for the quarter was $708,000 which included a $650,000 decrease in certain uncertain tax positions related to our investment portfolio.

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 Cat fund were $26.5 million as of June 30, 2015, of which $13.2 million is our investment. Subsequent to June 30, we received a further distribution of $12.7 million and expect all funds will be returned to investors by the end of the year.

As Daniel mentioned, the return on investments managed by Third Point LLC was 1.7% during the second quarter of 2015 compared to 2.3% for the same period in 2014. Although our returns were lower than the prior-year period, our net investment income was only slightly lower due to the higher average investments managed by Third point LLC. Our investment account has grown rapidly due to the float from our reinsurance operations, proceeds from our debt offering and net investment income.

I'll now hand the call back to John Berger.

Thank you, Chris. To conclude, I'm pleased with the progress that we've made, expanding our reinsurance platform through the second quarter. Our US operations are ramping up production rapidly and were a meaningful contributor to our quarterly results. We now have experienced underwriting teams actively utilizing the relationships to write business in Bermuda and the United States and a marketing office in London that produces opportunities for our team.

This expanded underwriting platform positions us well for solid growth and future success despite a market that continues to prove challenging. While significant underwriting profits will be difficult to achieve in the short run, especially since we choose not to write property cat excess of loss treaties, our reinsurance operation has generated substantial float on which we are making significant investment returns.

I would now like to open the call to your questions. Operator.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator instructions) Kai Pan, Morgan Stanley.

Good morning. Thank you. First question is for Dan. First, congratulations on 20 years of great investments and great track records. I just wonder at this point, do you feel like the investment philosophy as well as the investment process has been institutionalized at Third Point for years to come?

Yes, that's a great question and it's certainly been an objective of ours to implement processes and a culture and an approach to investing in a framework that is embodied in the organization, not just in my head. I think we've been successful at doing that. A lot of the best ideas come from my team, not from me; I'm still very involved obviously in a lot of aspects of the investment process, but the transfer of that knowledge is an ongoing process, I am very happy with where the organization is.

That's great. Then, just follow on, just curious about your view on some like hotspots, including like China, Puerto Rico as well as in the energy sectors?

So let's go in reverse order. We don't have much exposure to energy, almost no equity exposure. We managed to sidestep the -- oil, as you know, is sort of double-dip this year. People thought it was about to recover; it was recovering, then it went down again, and I think a lot of people got suckered in by that second move. So we've been largely on the sidelines with the exception of some small credit positions.

Energy is presenting some very interesting opportunities in credit right now. So we are looking at that and we're looking for it to form a bottom and energy won't be permanently at this level. So we're looking for opportunities there again, but we don't have meaningful exposure right now.

Puerto Rico, we had invested there a few years ago, couple years ago. We got out and we haven't been back. We think they've got some issues to work through; it doesn't really have any macro implications.

As far as China goes, again, we don't have any direct exposure to China in those markets. We have indirect exposure through our investment in Yum Brands and we also spend a lot of time studying the Chinese economy and the Chinese market, more for the implications for the global economy and for other investments, but you referred to it as a hotspot. I think they've got a period of difficulty to go through for the next few months, but we're certainly not counting China out and we're not expecting any kind of major crisis there.

Great. Well, thanks so much for the answers. If I can turn to John, Rob and Chris on the underwriting side, if you look at the property cat loss is $3.2 million and then the $2 million of reserve charges, that's [come] probably about 4 points on your overall combined ratio. That still bring you to like above like 104, basically above the breakeven. So given the current market condition, if your G&A expense ratio stay around 5 points, or even a bit better to let's say 4 points, you need like 95 to 96 composite ratio to achieve a breakeven. Do you think that's achievable in the current market condition?

Yes, Kai. Again, a great question. The market is clearly getting tougher. We're seeing increased competition on our Florida homeowners' book. It shrunk substantially at renewal and the terms and conditions did worsen. So it's going to be tough. We're still driven to it and Chris is just going to give you some ranges where we think we can come in. A big part of it too is, our earned premium is still growing. So with more earned premium growth, as we've had up until this quarter, our G&A ratio has been coming down. So, Chris.

Sure. So Kai, just to give you a sense of where we expect to be, so depending on the mix of business, our composite ratio should be somewhere between 97 and 100, and it can get as high as 100 because if you recall, in periods where we do reserve covers, we booked those at 100. So that could potentially bring our composite ratio up a little bit higher. And then, our G&A ratio should be between three and five, again largely a function of earned premium. So that gets you to sort of an expected range of somewhere between 100 and 105. So we could get close to 100. But as John mentioned, pretty difficult market conditions.

Hey, Kai, it's Rob Bredahl, also keep in mind that given our total return model, we focus on deals that generate a lot of cash, a lot of float, especially when we book deals at higher combined ratios. They tend to be deals that generate a significant amount of float. And in fact, we generated $585 million in inception to date of float and most of that has been in the last three quarters. So we expect the investment income on float to accelerate going forward.

Okay. Is that 100 to 105 is sort of for 2015 or you think is for the foreseeable future?

Yes, I think it's probably for the foreseeable future. The market clearly is getting more competitive and I think we repeat this every time. We are not in the property excess of loss business, we are not in any short-tail volatile classes of business where you go cat-free, event-free for a quarter, you have a very big underwriting profit. We have none of that business on the books. And so we're shooting at a pretty narrow margin. And then, you get a quarter like this, where although the dollar amounts aren't that large, when you have a growing earned premium, it translates into points of combined ratio. So yes, the market is a challenge, getting more challenging. At the same time, we continue to see good opportunities, several on the reserve front, where there is less competition. So the pipeline remains good.

My last question, just follow on the Rob's comments on the float, now your leverage investment to capital is reaching the upper end of 1.4 times that some rating agency would like you to have. Just wonder what's the -- so what's next? Can you continue to grow your float and do you need to raise capital to support that growth?

So unless we write new business, that leverage comes down, both the deals -- the cash is paid out in claims and also we're retaining earnings. So just to stay at a 1.4, we have to continue to work pretty hard originating business. We are back optimizing to that 1.4 level. And since we're at it, it allows us to be more selective in picking up deals. On new capital, yes, it's something that we have considered and we'll continue to consider and it's just a function of the pipeline, the attractiveness of opportunities and how we want to optimize results.

Great. Well, thank you so much for all the answers.

Thank you.

Thank you.(Operator instructions) Jay Cohen, Bank of America Merrill Lynch.

Yes, thank you. Wanted to ask about some of the new business. You had mentioned a fair amount of new casualty business. I assume that's coming out of the US. But casualty is obviously a broad term, what kind of deals are you guys looking at in that side?

Jay, we have workers' comp, auto which is liability and physical damage. We have a small general liability account, but we've increased in the professional liability lines, the D&O, E&O, miscellaneous E&O, we've hit on some contracts in that area.

Is that business that you might not have seen, if you were just staying in Bermuda exclusively?

One deal in particular, really came about because of overall relationships with the Company, but having people like Tom Wafer and Tony Urban, Shane Haverstick, on the ground where they can in-person solicit these opportunities and due diligence them, really brought the one new professional liability home.

Got it. And then, on M&A, gentlemen, I guess couple of things. One, your perspective industry-wide and reinsurance, how much more M&A we will see? And then, your interest -- I did notice you mentioned there was some professional advisory fees in there this quarter, I don't know what it related to, but your own interest in M&A, if you could talk about that too?

In our 3.5-year history, we have looked at a couple of things and there is a couple of hurdles we have. One is obviously, anything that's good is you pay a premium for and that's a dilution. If we look at something at large, if we look at something onshore, we tie capital up in areas that really limit our ability to invest the money the way we want to. So while we're out looking, we're always talking to people. I think the likelihood of finding something that really fits for us would be tough.

Now, we are happy with the growth we're seeing in the pipeline. So for now, we're going to stick to our game plan. Now, who knows what the future brings? I think overall in the marketplace, I think the market is tough and it's getting tougher and I think many of these acquisitions, mergers going on, a lot of it is expense driven and that's tough for the industry. When you see the hundreds of millions of synergies announced with every deal, that translation to people. We think what happens, one and one never equals two, there will be spinouts, there will be teams of people, there are going to be other opportunities that the M&A activity will generate for us.

Got it. Thanks, John.

Ken Billingsley, Compass Point.

Good morning. I wanted to ask about the US business and this is maybe a little bit forward-looking here, but what kind of percentage contribution to premiums do you think the US business will be or do you envision? And then, what will that do to the tax rate?

Let me answer the first part. A substantial amount of the business that is being written in the US taxable entity is renewal business, stuff we had on the Bermuda balance sheet that we were now handling by the US team. Really the rational there -- rationale is we want to be closer to the business, we want our people in, participating on the orders, getting closer to the risk of the clients versus how we were doing it before. They will generate new business. We've been actively out there. We have good people with good reputations, good contacts. So that will continue. On the tax front, Chris.

Yes. I mean, Ken, the effective tax rate, the US operation related to the Group is relatively insignificant, probably 1% to 2% effective tax rate and really that's a function of the internal quota share that we have in place and as well, we have the debt that was issued out of the US holding company and so we are able to take advantage of the deduction for the interest. So for the foreseeable future, effective tax rate is pretty low.

Now, a big component of the potential tax that we pay is on the investment return on the capital we've dedicated to the US operation. So to the extent our colleagues and our investment manager, Third Point LLC, have years where they hit it out of the park as they've had in the past, clearly, that's going to increase our taxable income. And we look forward to that debt.

Assuming that then given where you are with your premium levels, there is a business that you feel that you need to writing onshore, that you're missing, most of it can be written in [and passed to] quota share?

Clearly, we will find business that we would not have accessed sitting here in Bermuda. We have very clear guidelines on what business the US operation underwrites and what business the Bermuda operation underwrites. So there is no overlapping, very, very clear. As far as any restrictions or anything on that business coming into the quota share, there is not -- we take [what] percentage of the US business onto the Bermuda balance sheet.

Thank you. The next question I have is just on the net premiums earned pattern. Obviously, a significant amount of growth on your gross premium written side and as that growth continues, earned pattern may be off from maybe some mature companies, but during the quarter or recently, were there any cancellations or are you writing a lot of business on a quota share basis that may be extending the earned pattern in the future periods?

Yes, Ken, just a couple of points on that. So our net premiums earned can be impacted by several factors related to business mix. So on a trended basis, our net premiums earned was lower than the last two quarters, and a couple of things there. So we didn't have any retroactive premiums written in the current quarter. And if you recall, we booked any retroactive premiums is written in earned at inception of the contract; and in Q1 2015, we had $16 million; and in Q4, 2014, we had $80 million. So if you're looking on a trended basis, those will impact that.

In addition, the business that we write has a wide range of earnings patterns and we develop a custom earnings pattern for each of our contracts based on the underlying policy exposures and a number of our contracts have underlying policy exposures that extend over several years. For example, we have multi-line contracts that have exposure to auto extended warranty and that coverage can earn out over five years to six years, and we also reinsure mortgage guarantee and those contracts can actually earn out up to 10 years. So, you made the point about what, it's just a function of the earnings extending out and that's correct due to basically business mix driven by a few of those factors that I outlined.

And you said the five-year to six-year [one], was that one?

Yes, we have some auto extended warranty that's within certain large multi-line contracts that we wrote at the end of the fourth quarter last year and the first quarter of this year.

Great. And the last two questions I have are just numbers from what was mentioned earlier in the prepared comments. The contribution to float, you said $167 million, was that for this quarter?

That was a year-to-date figure.

That was year-to-date?

And actually, most of that was in the first quarter.

And then, the last question I had was you talked about $61 million of new business in the quarter. About $8 million was specialty. How much of that was casualty?

The balance. So whatever the difference there is, $53 million of new casualty business [with respect] to guidance that John mentioned previously.

Excellent, thank you for taking my questions.

Thank you. We've reached the end of our question-and-answer session. Would like to turn the floor back over to Mr. Berger for any further closing comments.

We thank everybody for dialing in and we look forward to talking to you next quarter. Thank you.

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