Siriuspoint Ltd (SPNT) 2015 Q3 法說會逐字稿

Greetings and welcome to the Third Point Reinsurance Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. Thank you, Mr. Coleman. You may begin.

Thank you, operator. Welcome to the Third Point Reinsurance Limited earnings call for the third 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 November 11, 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 in 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. John?

Thanks, Chris. Good morning and thank you for taking the time to join our third 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 up for your questions.

For the third quarter, we reported a net loss of $195.7 million or a $1.88 loss per diluted share compared to a net loss of $6 million or a $0.06 loss per diluted share in the prior-year quarter.

Our diluted book value per share decreased by 11.8% in the quarter to $12.45. The loss was due to difficult financial market conditions that resulted in a net investment loss of $193.2 million representing a negative 8.7% return on our investment portfolio. Our investment manager, Third Point LLC, has a fantastic track record over a more than 20-year history, but even they are not immune to broader market movements.

The S&P 500 Index suffered its worst quarter since our formation almost four years ago. As we posted on our website on Friday however, our investment portfolio recovered a large portion of these losses during the month of October with a net investment return of 4.6%, and our year-to-date investment return is now slightly positive at 0.1%. Daniel Loeb will discuss our investment returns in greater detail in just a few moments.

In our property and casualty reinsurance segment, we generated premiums of $206 million, an increase of 65% over the prior year's third quarter. Year-to-date, we have produced $603 million in premiums written, which is $2 million more than we wrote for all of last year in this segment. We completed a $92 million reserve cover in the quarter which was the main driver of premium growth and the largest contributor to float generation. Float grew by $69 million in the third quarter and now totals $602 million which positions us well to take advantage of improvements in investment performance in future periods.

From the beginning, we advised that we would have more volatile results than traditional reinsurance companies due to our investment strategy. We've also emphasized that our reinsurance business is lumpy. We write a small number of larger deals, some of which will not renew or in some cases renew in other quarters during the year. Quarter-over-quarter premium comparisons therefore are not as useful as they might be for traditional companies.

In fact, the fourth quarter of 2015 may well be a great example of this since premium written is likely to decrease relative to the previous year's fourth quarter. Last year, we produced $254 million of written premium in the fourth quarter of which less than half is up for renewal in this year's fourth quarter. Still, we will show strong year-over-year premium growth.

We produced an underwriting loss of $5.8 million in this quarter compared to an underwriting loss of $1.8 million in the third quarter of 2014, and our combined ratio increased slightly to 102.8% from 101.7%. The combined ratio was in line with our expectations and reflects the shift in business mix towards higher composite ratio lines of business and a slight deterioration in market conditions. The line of business in the reinsurance market under the greatest pricing pressure is property cat. Although we do not participate in the property cat excess of loss market, we are seeing some traditional reinsurers who are being displaced by capital market players in the cat space increase their focus on our (technical difficulty) lines of business. Still, we continue to find deals that meet our economic hurdles and have a strong new deal pipeline.

I will now turn the call over to Daniel to discuss our investment performance in more detail.

Thanks, John and good morning everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC was down 8.7% in the third quarter of 2015, net of fees and expenses versus returns for the S&P and CS-event driven indices of minus 6.4% and 6% respectively for the quarter. The Third Point Reinsurance account represents approximately 13% of assets managed by Third Point LLC.

Positive performance in July was offset by a difficult investment environment in August and September. The market decline was driven primarily by increased concerns about the slowdown in China, hedge fund deleveraging, the US presidential election, and weaker US economic data. The Third Point equity portfolio returned minus 14.1% on average exposure during the third quarter. Roughly a third of our losses for the quarter were due to several concentrated positions in the healthcare sector.

We decreased our net equity exposure before the sell-off in August and continued to reduce some exposure given the increased volatility. We remain bullish on our core high conviction ideas. Single name shorts have proved important to our strategy and we generated alpha from shorts in every sector during the quarter. We now have more single name equity short positions than long in the portfolio. Our net equity exposure is currently about 50% long and we believe this level is appropriate for the current market environment.

Sovereign credit was up 3.1% on average exposure during the quarter due to strength in Argentinean Government debt, the largest position in our credit portfolio. We're looking forward to the run of Argentinean Presidential election next month and we'll be pleased with the victory from either candidate.

In Q3, our corporate credit book lost 10.8% on average exposure, not including interest rate hedges. Losses were attributed to performance from several performing credit positions, particularly in the energy sector. Our corporate credit exposure remains in [Munich], as we wait for a shift in the credit markets.

The Third Point structured credit portfolio has continued to act as our best performing strategy, returning 1.7% on average exposure in Q3. The year-to-date return on assets for the strategy is 16.4% compared to the HFN, Hedge Fund Mortgage index return of 2.9% for the same period. We are continuing to focus on further diversifying our portfolio, looking for improved buying opportunities across the market.

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

Thank you, Daniel. As John mentioned, we generated a net loss of $195.7 million in the third quarter, which translates into a loss per diluted share of $1.88. This compares to a net loss of $6 million and a loss per share of $0.06 for the prior-year quarter. Diluted book value per share as of September 30, 2015 was $12.45, a decrease of 11.8% from $14.12 as of June 30, 2015.

In our property and casualty reinsurance segment, gross premiums written increased by $81 million or 65% to $206 million for the three months ended September 30, 2015 from $125 million for the three months ended September 30, 2014. The increase in premiums for the quarter was due to one $92 million adverse development cover written by our Bermuda office, $50 million of new business written by our US office where we have seen additional opportunities as a result of our US presence, and $16 million from contracts that renewed in 2015 that did not have comparable premiums in the 2014 period. The increase in premiums was partially offset by contracts written or amended in 2014 that did not have comparable premiums in the current-year period and contracts for which we made a decision not to renew due to changes in pricing and/or terms and conditions.

Since Third Point Re focuses on large transactions, which in some cases may not renew, period-over-period comparisons of gross premiums written may not be meaningful. Net premiums earned for the third quarter increased by $108 million or 106% to $209 million. The significant increase in premiums earned is due primarily to the large reserve cover written in the third quarter and to a lesser extent, net premiums earned on a larger in-force underwriting portfolio, including new business written compared to the third quarter of 2014. As we have previously discussed, premiums written on reserve covers and other retroactive contracts are fully earned in a period in which they are written.

The net underwriting loss for the three months ended September 30 was $5.8 million producing a combined ratio of 102.8%. The combined ratio increased from 101.7% in the prior year's third quarter due to an increase in the composite ratio. This is the combined ratio before G&A expenses, partially offset by a decrease in the G&A expense ratio.

The composite ratio increased due to a change in the mix of business towards reserve covers, which is a higher composite ratio line of business, a slight deterioration in the margin available on traditional quota share contracts and $1.4 million of net underwriting loss as a result of development of reserves on prior years' contracts.

General and administrative expenses increased slightly to $5.9 million from $5.6 million in the third quarter of 2014. However, the G&A expense ratio dropped to 2.8% from 5.5% due to the significant growth in earned premium.

As we announced last December, our cat fund is not accepting new business and is in run-off. There was an insignificant impact on our overall results for the quarter from this segment and we expect that the remaining 700,000 of capital that remains in the cat fund will be redeemed by year-end.

Other expenses dropped to $670,000 in the third quarter of 2015 from $3 million in the third quarter of 2014 due to a decrease in the fair value of embedded derivatives related to our deposit liability contracts. This decrease was due to lower investment returns in the 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, and to a lesser extent taxes paid in relation to our UK based subsidiaries. The income tax benefit for the quarter was $7.8 million due primarily to losses incurred by our US operation. As Daniel mentioned, the return on investments managed by Third Point LLC was a negative 8.7% during the third quarter of 2015 compared to a negative 0.04% return for the same period in 2014.

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

Thank you, Chris. To conclude, it was a disappointing quarter due to investment market conditions. We have complete confidence in our investment managers' ability to generate strong results over time. We continued to make progress in expanding our reinsurance platform as demonstrated by the strong premium growth and float generation in the quarter and are well positioned to benefit from future improved investment returns.

At this point, we'll take questions. Operator?

(Operator Instructions) Kai Pan, Morgan Stanley.

Thank you and good morning. First question is for Dan on the short side. On the first-quarter call, you mentioned that short are becoming increasingly difficult to you, but now you find it's more attractive. In fact, you have more single short names than your long positions. So what has changed?

So I think what's changed since the first quarter is a few things. Just increase volatility since with the economic outlook being a little bit more tempered and the market levels where they are that the overall market is somewhat fairly valued, probably trading within a range. So in sort of range-bound market, I think we have -- it's a lot easier for us to find shorts and to not get overcome by a rising market tide that could lift all stocks.

Secondly, I think we've seen some real themes that favor the type of short selling that we do. I'm not going to get into too much detail about them. But there are certain industries that we see that are deteriorating where we have made some bets. There are -- more broadly, I think that there has been some real sloppiness in accounting and this move towards using adjusted EBITDA and adjusted earnings has produced some companies that I think are trading on valuations that are not supported by the real numbers.

I would refer you to an article that Gretchen Morgenson wrote in Sunday's New York Times, that I think is pretty illustrative of what's going on. And I think over the -- since we have refocused on shorts, the evidence is borne out. We've generated good alpha in the area and it has indeed gap in the volatility and the portfolio.

Okay. That's great. And if you look at your Asia exposure, it looks like you increased the short position there quite a bit. And in the past [you were] talking in your letters a lot of sort of like very positive, especially in Japan. I just wonder is that -- that position had changed or is it other part of Asia that you're more negative on.

I'll have to look at the data that you're looking at. Maybe we have some currency positions in Asia. I don't know if it's conflating that. We don't really have significant single name Asian company shorts or we do have some macro positions that will probably show up geographically in the short bucket.

I see, because in the fact sheet it shows like six points negative like 5% long, 11% short. (multiple speakers)

Yes, I think that's conflating macro position, it's little bit apples and oranges. I believe that's the case. We can get back to you after the call to drill down on that.

Sure. And then on your -- given the market volatility, this is probably like the biggest single drop, quarterly drop in S&P in quite a while. And could you talk a little bit more about your [re-cementing] process? In a volatile market like this, are there any particular metrics you are watching like -- and just want to make sure there is -- that you're not taking undue risk in this marketplace?

Yes, that's a great question, because I think we've seen a real divergence in hedge fund performance throughout the volatile period down and up. Look there is no better risk management tool than making really good investments in companies that provide a margin of safety and doing deep research in that area. We felt very confident about our health care portfolio. So throughout this process we did reduce our exposures overall, but we had very strong positions in Baxter, Amgen, and Allergan and I think just making the right security selection is important.

And I think not to name names, but there is one particular healthcare company that caught a number of hedge fund managers offside with large concentrated positions. So, we managed to avoid that pitfall.

So we are not as -- we take concentrated positions, but I think there are some limits to the levels of concentration and then we had confidence in what we were doing. And then aside from that, I think having proper diversification, there's a fine line in concentration because to get the sort of returns that we've had over the years, we do concentrate, but within limits. And then also having the sorts of hedges that we have, our single name shorts, our quantitative short basket and our macro hedges all, look it was still tough, it was a tough period. But there is two things to observe; one, I don't -- given our historical returns, the sort of drawdown that we had is not unexpected to happen from time to time. And secondly, if you look at the comeback that we have had off the lows, they are -- it's indicative of having been able to stay the course and staid in. In fact we added to some of the names that we mentioned during the market turmoil. And trust me, it wasn't easy but when one company in the healthcare industry was being singled out for questionable practices that it -- that were alleged, it took down the whole space. We really doubled -- I'd say tripled down on our research on our names. We didn't see any evidence of that kind of behavior. So it give us the confidence that we could actually increase our exposure and these names were really oversold.

Thanks so much for all the detail. My last question for Dan is on compensation. It looks like the return this year is not as high as your historical average is. And I just wonder in this environment, what your sort of philosophy of paying people and retain talents?

Sorry, the compensation within Third Point?

Yes.

It's the same as -- it really isn't any different. We all take a long-term view here. When the firm does well, people get paid well. When it does less well, I think the expectations are for less compensation. Having said that, there are very strong areas within the firm and some there that are not so strong. So we definitely reward people who make those contributions accordingly.

But it definitely -- I don't think it comes down to an issue of -- you mentioned retention. I don't think we have never had an issue with retention around -- people who contributed will get paid what they deserve and people who didn't have a good year will get paid less. But I don't think that comes down to -- I don't -- I can't imagine that that will lead to any kind of retention issue which was I think the point of your question.

Yes. That's great. Well, thank you so much for all the answers.

Sure.

And I'd now turn to John, Rob and Chris, I just want to keep this short because I don't want to dominate the call. First question is that given that your G&A expense ratio really down below 3%. In the past you have indicated that if we get into certain level of a premium, which you are right now, should be able to see a breakeven result? I just wonder is that a still achievable target in this market environment.

Kai, this is John Berger. Last quarter, we gave guidance of a combined ratio of between 100% and 105%. Given the state of the market, the competition we're seeing and then our emphasis on trying to source and we've been successful on the reserve deals that we book at 100% composite ratios, in this market, getting below 100% is going to be tough.

Okay. And that's not just for this year but also for foreseeable future?

Yes. And a point I'd like to make is where we have a very conservative underwriting approach we're not writing the property catastrophe excess a loss business which really generates the majority of profit in the industry, especially in years when there aren't any catastrophes. So you can write that business, if there are no losses you get a big underwriting gain on them. And you're taking a risk for that but when there aren't any losses, we don't have any of that business. We don't have any business that you can have a good surprise on by not having the fortuitous losses. I think that's a really important differentiator for us when you compare us to other companies.

So given the business that we're looking at and the state of the market, there is some margin compression going on. And as I said, we're looking at the reserve deals that have no underwriting profit on it. They come in at 100% composite. So, yes, this is barring any changes in industry. This is what we see for the future.

And Kai, maybe just a little bit more detail on the guidance for the combined ratio. We expect to generate composite ratio of between 97% and 100% and we expect the G&A expense ratio to come in at between 3% and 5% just based on the volume of earned premium and so that brings to the 100% to 105% that John mentioned.

Okay, that's great. My last question, your investment in average now is, I believe is above 1.5 times. In the past you talked about rating agency might have upper limits of 1.4 times. So I just wonder if you have any discussion with the rating agency with that leverage ratio and is that a potential that you need to raise capital to satisfy that or slowing down growth?

I guess a couple of points. We talk to A.M. Best all the time and the 1.4 is really an estimated guideline where we are backing into a BCAR score. So we did go above that. We factor in the recent recovery in investment portfolio. The investment leverage has already come down and also we have a couple of trades where cash is going out the door the next month. And so, we think the asset leverage is within the expectations of A.M. Best and in a reasonable range.

And you intend to keep that level?

Yes, we want to keep the investment leverage at around that 1.4 at all times to maximize the future expected profits.

Okay, that's great. Thank you so much for your time.

Thank you.

Jay Cohen, Bank of America.

I guess, first just a modeling point. Fourth quarter you mentioned a level of premiums that would not renew. That was more than I -- I had some in the model but if you can go over those numbers again, I didn't have that level?

Yes, I think John mentioned that there is about half of the -- a little less than half of the premiums that we wrote in the fourth quarter of last year that's up for renewal. Some of those deals that were bound in the fourth quarter of last year were already renewed into earlier quarters this year. So, obviously won't come up for renewal this fourth quarter.

Okay. And then, with the US office now, are you seeing the same types of business? You mentioned you had seen more risk [and you write some out of] the US. Is it the same type of business or is it somewhat different?

It's pretty much the same business, Jay, with some exceptions. We did write a professional liability, the D&O, E&O contract that is new to the Company. We didn't really have that exposure in the Company, and that was a direct result of the relationships with the people of the Company, but also having people on the ground. But I don't see us varying that much from the current game plan. We are happy with the effort being put in. We still are best rated A-. So there is many lines of business in the US, many casualty lines where an A- is not acceptable security. So I don't see a big change in that mix coming.

Got it. And then lastly, John if you could talk about your views on the state of the reinsurance market? I guess the question is that are you seeing any emerging stability in pricing or terms and conditions at this point?

Not really, Jay. There is a lot of capacity out there and we're seeing things -- what ACE did with ABR Re where they are retaining -- effectively retaining more business. The consolidation of the reinsurance with the ACE acquisition of Chubb will probably pull more business out of the market. So you have basically decreasing demand and increasing supply. And I think there's just going to be a relentless pressure now almost everywhere on margins.

Got it. Okay, thanks for the answers.

Jay, thank you.

Ken Billingsley, Compass Point.

This is kind of adding on to some of the rating question. So last quarter's investment performance like -- into like a cat event for reinsurers with your business model. So, how many quarters, and I mean more of the annual book value impact, can you absorb while maintaining the ratings and regulatory support given that there isn't a long track record of your business model out there?

Ken, it's a good question. And I cannot give you a precise answer. I'm not sure the regulators or A.M. Best have a precise way that they deal with companies with our business model. (inaudible) we have to improve our BCAR score, which is the acronym for the A.M. Best model, is that we can pull money out of our separate account, the money that's managed by Third Point and keep it in treasuries. And by doing so, we greatly increase our risk capital. And so we are nowhere near the point where we need to do that, but the fact that we have that lever that traditional companies do not have because A.M. Best and the BMA here allows the comfort.

Okay. And I guess -- that's helpful. One of the things that I am looking at is, how in your past experience versus the discussions you're having with them now, that was obviously one thing where you can turn the lever. Is there any other questions or things that they ask you as Third Point, and maybe they didn't ask when you were at some previous companies, just because they're getting used to the model and how to understand the different risks involved (multiple speakers)?

I've settled along. The Best people over time have done just a terrific job monitoring the business and understanding all the different aspects of it. And with green light forming many years ago in us and other models, they really understand our model and the potential volatility. In the way we're looked at, we get a very hefty charge for the investment strategy. So that's a built-in buffer for that, much in the way that a cat company has to have a capital support, the cap writing.

So, we're not seeing any changes in their approach with their questions to us. They were up to speed on our model, when we started and they continue to improve.

Through October, please keep in mind that we're flat, the investment portfolio is flat. And so we run in all sorts of very severe downside scenarios from A.M. Best and this isn't one of them.

You said, I would say, (inaudible) this is or is not one of them?

This is not, being down 8.7% for the quarter and flat now through October for the year, it's not among the most severe scenarios that we run and that we make sure we have enough capital to support.

Sure. Okay. And given the, I know it was a small amount, but a little adverse development and some of the windstorm losses that you announced, what was your target combined ratio given that your commentary with the current results were in line with expectation?

Yes, I think just a couple of points on that. So the windstorm losses, just to clarify, those were incurred in the second quarter. So there was no windstorm activity in the third quarter and I think as we stated earlier that we continue to reiterate the combined ratio guidance that we provided last quarter which is that we expected a combined ratio for the -- really the foreseeable future [rather than a] changing market condition of somewhere between 100% and 105% so the 102.8% for the current quarter was really right in the midpoint of that range, which is within expectations.

And I remember you gave the numbers earlier were the 100% to 105% then you were talking about 97% to 100%, plus the G&A, so just the 100% to 105%, does that include 3% to 5% G&A?

Yes, just to reiterate that, our combined -- our composite ratio guidance, which is the combined before G&A, we expect to be within a range of 97% to 100% and that our G&A ratio will be between 3% and 5% and then some of those get to that 100% to 105%. And really that's just a function of mix of business that in a quarter like this where we had a large reserve to cover the G&A ratio does drop down closer to that 3% G&A ratio.

And that's because it gets earned right away.

Correct. But the composite is higher because we booked the reserve cover at 100%.

Right.

So, we're ending up at the targeted combined ratio or the expected combined ratio with that trade-off.

Got it. Okay. Excellent. And then the G&A expense as a dollar amount, not a ratio, there seems to be some variability in that line item. Is there anything in particular that we can look to from a modeling standpoint to maybe anticipate some of the variability on that?

Yes I think we are really at a pretty steady state in terms of G&A. It did drop down this quarter, just a little bit and some of that was just dialing back, some of the incentive comp accruals to reflect the loss in the period. And if you adjust for that the sort of nine-month run rate is about what to expect, which is roughly $11 million or so per quarter of G&A.

$11 million for quarter, okay. Last question I have is, I know you have a large -- illustrated large book of personal lines business. I would imagine that doesn't contribute much to float. So is that a book that you see shrinking going forward as you replace it or is this core business that you just have a good relationship and it's generating decent results? Can you talk about the thought process given that it doesn't throw off, I would imagine, a lot of float?

There are two segments there. One is homeowner quota shares that either limited or exclude the win, the catastrophic exposure and there we -- that book shrunk, and will probably shrink again. That's becoming more and more competitive. As we talked earlier about some traditional cat covers being displaced, we're seeing them pop up in this quota share space.

Our other areas is non-standard auto, and it's tough to generalize there because that really varies region by region. And it's not a -- it's significant but not a huge part of our business, and we think we can maintain most of that business. We think there are some more opportunities for us out there, but there too, there is competition. Relationships are important, but you're still -- you still have to operate in the marketplace.

And just on the float, those lines of business generate float equal to about 25% of the gross premium written and that assumes if we renew the portfolio and keep it at a steady state. And so, it is not the biggest float generator, but there is some float.

Excellent. Thank you for taking my questions.

Thank you.

Meyer Shields, KBW.

A couple of brief, I guess, accounting questions probably for Rob. If there is no adverse development at all on the reserve cover, are there any income statement impact in future quarters?

If there is no adverse development or any change in the reserves on the reserve covers, no, you wouldn't see anything other than in some cases we have interest credits associated with these deals where we'd be accruing the interest credit associated with the reserve cover, and that's recognized through the other expense line. So you wouldn't see any impact on underwriting income in the future.

Okay. That's perfect. (inaudible) Can we get the loss ratio versus expense ratio breakdown of that 100% impact or 100% book combined ratio?

Sorry, can you repeat that question?

I'm sorry. Yes, I am just trying to break out the reserve coverage, make sure that I am modeling future quarters appropriate enough. I mean, if we could get the break down between the losses and expenses associated or within that 100% book combined ratio?

Sure. So, there is the roughly $92 million of reserve cover which was written and earned in the quarter and virtually all of that is booked to loss expense. So effectively an equal $92 million of loss expense in the quarter. So will skew your -- if you're looking at just the split of the composite ratio within the period, it will skew the mix of your composite ratio since that particular contract is booked at basically 100% loss ratio.

Okay, that's tremendously helpful. I appreciate it. And then, John, bigger picture, as you focus more on reserve covers anything interesting in asbestos?

We're not opposed to asbestos, we don't have any -- that's a tough one just because there's still a lot of uncertainty around that. We have seen some reserve deals that have an asbestos component and we were not successful in underwriting them.

And I think just one point I want to make on this reserve deals, each one -- they are tailor-made for each client, a lot of them are capital reasons. We're starting to see some activity because of Solvency II. We've waited for that impact for years. It looks like it's finally having an impact. So people are into capital management and our product works well with that.

But two things are important when we take on the loss ratio deal. First, we take a certain amount of reserves and then there's usually a company retention above the amount that we take in. So if there is some adverse development the company pays that before we do. So we don't pay $1 on most of our reserve deals.

And then very importantly, we have a finite limit that we provide on these. They're not open-ended. So if we did write a deal that went upside down, it can't go upside down to the tune of 200% loss ratio, it might be a 120% or 125% which is not good. But the point I really want to make is that it's a finite limit. We can't have a runaway bad news deal.

That's very helpful. Thanks so much.

Mike Zaremski, BAM Financial.

To follow up on the reserve covers. So, I was going to ask for color on the insurance liabilities underlying the reserve covers. I'm not sure if you answered that when Jay -- with Jay's question about D&O and E&O, I missed that part.

Yes, the D&O and E&O, that was just a regular deal, that was not in reference to a reserve deal. The commentary about reserve deals is that they are longer duration claims. So it might be a workers' comp, it might be automobile -- motor, European motor is a relatively short tail line of business, but there is a component that is longer tail. And so, all the deals are liability driven. And so if a company, for example, has $100 million of liability reserves and we take the top $25 million, that's the slowest to pay, right. So it could be US general liability, excess liability, there could be a professional liability component in it. Although today we don't have any. Workers' comp is a good line of business for this as is as I mentioned auto reliability. But any liability line of business where there is a delay before claims are paid and then if we're at the upper end of the reserve stack, it's even longer to pay.

Okay. I got it. That's helpful. And just curious how large of a market is the adverse reserve cover market, is Berkshire the one that dominates this market or are there a lot of players?

That's actually a terrific question because there are hundreds and hundreds of billions of loss reserves out there. So we look out and say wow, it's a huge market. Now most companies or many companies are happy with the reserves. They are not looking for particular -- to lay them off. Berkshire Hathaway is in a class by themselves. I mean the deal they did with Liberty Mutual where I think they gave Liberty Mutual a $5 billion limit and took $3 billion in cash. There are a few companies that have the risk appetite and the size to do that. And that really becomes a discounting exercise because in all likelihood the losses are going to be greater than $3 billion. But Berkshire Hathaway takes that $3 billion and they buy catch-up companies and railroads. I mean they are extraordinary with what they can do with that money.

We are at the other end of the spectrum where we're looking at companies that are well reserved and are really looking for the reserve deals as a capital management tool. So we're not knowingly writing deals with the full expectation that our limit will grow.

There is a chance that it will grow and that's why it's reinsurance accounting versus deposit accounting. But there's a whole spectrum of types of reserve deals that get done. I think Berkshire Hathaway is at one end, we are at the other. We're starting to hear of other companies looking at these deals, but today, we have not seen a lot of companies entering this area.

Okay. Got it. That's helpful. And lastly, was there any prior-year reserve development this quarter?

Yes, there was a net impact of about $1.4 million in the current quarter. So very insignificant impact on our combined ratio this period.

A $1.4 million plus addition or --?

[That is] negative. $1.4 million additional underwriting loss.

Okay. Thank you.

There are no further questions at this time, I'd like to turn the floor back over to management for closing comments.

We thank everybody for dialing in. We look forward to talking to you next quarter. Thank you very much.

It concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.