Siriuspoint Ltd (SPNT) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance fourth-quarter 2015 earnings call.

(Operator instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Coleman, Chief Financial Officer for Third Point Reinsurance. Please go ahead, sir.

Thank you, operator. Welcome to the Third Point Reinsurance Limited earnings call for the fourth 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 March 4, 2016 by dialing the phone numbers provided in the earnings press release and through our website following this call. Leading today's call will be John Berger, Chairman and CEO of Third Point Re.

But before we begin, please note that management believes certain statements in this teleconference might constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about expectations, estimates and assumptions concerning future events and financial performance of the Company and are subject to significant uncertainties and risks that could cause current plans, anticipated actions and the Company's future financial condition and results to differ materially from expectations. Those uncertainties and risks include those disclosed in the Company's filings with the US Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made, and the Company assumes no obligation to update or revise them in light of new information, future events or otherwise.

In addition, management will refer to certain non-GAAP measures such as diluted book value per share, which management believes allow for a more complete understanding of the Company's financial results. A reconciliation of these measures to the most comparable GAAP measure is presented in the Company's earnings press release.

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

Thanks, Chris. Good morning, and thank you for taking the time to join our fourth-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 fourth quarter we reported net income of $42.2 million, or $0.39 per diluted share, compared to a net loss of $14.7 million or a $0.14 loss per diluted share in the prior-year period. We generated a return of 2.8% on our investment portfolio in the latest quarter compared to a negative return of 0.4% in last year's fourth quarter.

Our investment manager, Third Point LLC, bounced back in the latest quarter from a difficult third quarter of 2015, in which the S&P 500 index had its largest decline since our formation more than four years ago. Daniel Loeb will discuss our investment returns in greater detail in just a few moments.

Our diluted book value per share increased by 3.2% in the quarter to $12.85 with an invested asset to equity ratio of 1.5 and investment portfolio that exceeded $2 billion at the end of the quarter, our return on equity exceeded our investment return, despite the fact that we generated an underwriting loss of $9.2 million in our Property and Casualty segment in the quarter and produced a combined ratio of 106.9%. For the full year our combined ratio was 104.7%. The underwriting loss and elevated combined ratio for the quarter were due to the continued difficult market conditions.

I also want to remind you that we do not write any excess of loss, catastrophe or other event-driven covers, which even though they may be poorly priced have very low loss ratios if, and I stress if, there are no events. We focus on less volatile quarter share business that generates more float, but which is also under significant pricing pressure. But unlike Cat on which risk-takers can be fortunate and have low or even no losses, our reinsurance portfolio has limited upside.

Overall the challenging market conditions are not a surprise, given the excess capital that has been building in the industry since 2008 as a result of the benign risk period that we have been experiencing. Cat activity has been significantly below average, and until recently companies were realizing significant reserve redundancy. I'm hopeful, however, that we are nearing the bottom of the pricing cycle, especially given the number of companies that are now taking reserve increases.

Contributing to our underwriting loss in the quarter was $3.3 million of adverse development. Although this is a small percentage on our overall reserves of $466 million, it's still disappointing especially since we took small increases in previous periods.

We reserve by contract and review the reserving on all contracts each quarter. The small increases we have experienced are from a small number of deals where underwriting factors such as the competitive environment, business growth, rate adequacy and risk selection differ from the assumptions we used to underwrite the account. We are constantly reviewing our pricing assumptions and always aim to minimize reserve movements.

In our Property and Casualty Reinsurance segment we generated premiums written of $99 million, a decrease of 61% versus the prior year's fourth quarter. As I mentioned on our third-quarter call, we expected Q4 premiums to decline given the number of contracts that did not have comparable renewal periods to the quarter -- to the year-ago quarter. For the full-year we produced $702 million of premiums written, an increase of 15% over 2014.

Since we focus on a limited number of large contracts, we are prone to have significant changes in premiums written from one quarter to the next. Rather than looking at quarterly results, annual results are a much better indication of our premium volume trends. Our rate of premium growth has decreased each year since our inception four years ago. With more than $700 million in premiums written and more than $2 billion invested assets, we are in a strong position to weather current market challenges and take advantage of any improving conditions.

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 returned 2.8% in the fourth quarter of 2015, net of fees and expenses, versus returns for the S&P and CS event-driven indices of 7% and minus 2.3% respectively for the quarter. The Third Point Reinsurance account represents approximately 13% of assets managed by Third Point LLC.

The market volatility that began during the third quarter remained through year end and it has continued thus far in 2016. During the second half of 2015 we repositioned our equity portfolio by further concentrating our long investments and adding additional short positions, capturing alpha on both sides of the portfolio while reducing overall net exposure. Our five largest portfolio positions were our top winners for the fourth quarter.

The Third Point equity portfolio returned 7% on average exposure in Q4, roughly in line with the markets with significantly less exposure at risk. Healthcare and industrials and commodities were our strongest performing sectors.

Our sovereign credit book returned 16.3% on average exposure during the quarter. Performance was driven by returns from our largest credit position, Argentine government debt. Our corporate credit book lost 3.8% on weighted average exposure in Q4, primarily due to investments in energy-related debt. Slight gains in our distress portfolio were more than offset by losses in our performing credit positions. We've had only moderate exposure to corporate credit exposure for the past several years, but we expect this to increase in 2016.

The Third Point structured credit portfolio was down 80 basis points in Q4, the only negative quarter for the strategy last year. Our structured credit portfolio returned 16.4% on average exposure in 2015, handily outpacing the HS and Hedge Fund Mortgage index returns of 3.7% for the same period.

We have continued to diversify our portfolio beyond residential mortgages, which have driven returns since the financial crisis. Now I'd like to turn the call over to Chris to discuss our financial results.

Thank you, Daniel. As John mentioned, we reported net income of $42.2 million, or $0.39 per diluted share in the fourth quarter of 2015, compared to a net loss of $14.7 million, or a $0.14 loss per diluted share in the fourth quarter of 2014. Our diluted book value per share increased by 3.2% in the quarter to $12.85. For the year ended December 31, 2015 we recorded a net loss of $87.4 million compared to net income of $50.4 million in the year ended December 31, 2014.

In our Property and Casualty Reinsurance segment gross premiums written decreased by $154.6 million, or 61%, to $99.2 million for the quarter ended December 31, 2015 from $253.8 million for the quarter ended December 31, 2014. The decrease in premiums written was primarily due to contracts that did not have comparable renewal premium in the three months ended December 31, 2015, and one contract that was not renewed.

Gross premiums written increased by $101.2 million, or 17%, to $702.5 million for the full year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in premiums for the full year was due to new business written in Bermuda, including one new reserve cover, and new business written by our US office where we have seen additional opportunities as a result of our physical presence in the US. The increase in premiums in 2015 was partially offset by timing differences in contracts for which we made a decision not to renew due to changes in pricing and/or terms and conditions.

Net premiums earned for the fourth quarter decreased by $46.7 million, or 26%, to $134.4 million. Net premiums earned for the fourth quarter of 2014 included a $45 million reserve cover where we recorded the premiums as written and earned at inception. This was a one-time deal, and therefore it was not renewed in the current-year quarter. Net premiums earned for the full year of 2015 increased by $170.5 million, or 39%, to $602.8 million due to a larger in-force portfolio including new business written compared to the previous year.

We generated a $9.2 million underwriting loss in the three months ended December 31, 2015 versus an underwriting loss of $542,000 in the prior-year period. And our combined ratio was 106.9% versus 100.2%. For the full year of 2015 our underwriting loss was $28.3 million and our combined ratio was 104.7% compared to an underwriting loss of $9.6 million and combined ratio of 102.2% in 2014.

The movements in net underwriting loss and combined ratio were affected by changes in mix of business, and as discussed by John, a deterioration in market conditions and prior-year reserve increases. For the three months ended December 31, 2015 we recorded net investment income of $61.6 million compared to a net investment loss of $6.5 million for the three months ended December 31, 2014.

The return on investments managed by the Company's investment manager, Third Point LLC, was 2.8% for the fourth quarter of 2015 compared to a negative 0.4% in the fourth quarter of 2014. The net investment gains in the latest quarter were attributable to gains in our long/short equity portfolio, which included strong performance in several large investments in the healthcare and industrials and commodities sectors.

Within our credit portfolio, positive contributions from our position in Argentinian bonds was offset by moderate losses in our performing credit and asset-backed security portfolios. For the full-year of 2015 we had a negative return on our investment portfolio of 1.6% versus a positive investment return of 5.1% for the full year of 2014.

Corporate expenses, or general and administrative expenses not allocated to underwriting activities, were $4.1 million for the fourth quarter of 2015 compared to $3.9 million for the fourth quarter of 2014, and $20.8 million for the full year of 2015 compared to $14.4 million for the full year of 2014. The increase in G&A expenses for the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily due to separation costs, increased share compensation expense and increased legal and other professional advisor expenses.

Other expenses for the quarter and year ended December 31, 2015 were $2.9 million and $8.6 million respectively compared to $2.6 million and $7.4 million for the quarter and full year ended December 31, 2014 respectively. The increases were primarily due to an increase in the number of reinsurance contracts written in 2014 and 2015 with interest-crediting features.

In February, 2015 Third Point Re USA Holdings issued $115 million of senior notes bearing an interest rate of 7%. As a result, we had $2.1 million of interest expense for the fourth quarter of 2015 and $7.2 million for the full year of 2015.

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 in relation to our UK-based subsidiaries. There was an income tax expense of $2.9 million in the three months ended December 31, 2015 and an income tax benefit of $2.9 million for the full year 2015. For the 3 months and 12 months ended December 31, 2014 there was an income tax expense of $1.7 million and $5.6 million respectively.

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

Thank you, Chris. Despite challenging reinsurance and investment market conditions, we remain confident that our total return business model will generate superior returns over time. We have positioned the Company to withstand near-term market volatility and to be one of the leading beneficiaries of any market improvement. We have written almost $2 billion of lower risk premiums since inception, built our investment portfolio up to $2.1 billion at year-end 2015, and driven our G&A expense ratio down to one of the lowest in the industry.

We thank you for your time and will now open the call for questions. Operator?

(Operator instructions)

Our first question today is coming from Kai Pan from Morgan Stanley. Please proceed with your question.

Thank you and good morning. I have first a serious question for Dan. Dan, the market is volatile starting in 2016. Do you see a recession, and how do you position the portfolio?

Thanks for your question. Yes. Markets are volatile. We tried to balance respect for markets and volatility and short-term losses with something we've been doing for 20 years, which is taking advantage of these times of volatility to establish positions in situations that we think will be worth more over the long term. And so we're doing two things. One, we have hedges in place. But we've actually increased our net exposure over the course of the month as some of these sell-offs have created silly prices for securities. And we've either added to some existing positions or established a couple new positions.

So as to your question about a recession. Look, along with the other things like China, oil prices, Fed policy, et cetera, that's on the top of people's list as far as concerns go. We are looking at economic data. We are surveying companies that are economically sensitive. What we do see is weakness in companies with cyclical exposure. And we see the obvious things, companies with -- over-leveraged companies in cyclical businesses that are also in -- maybe in some peril.

As far as industrial companies, consumer companies, certainly healthcare companies, we're not seeing any sign of a recession. We see a lot of people that are on alert. But there haven't really been any signs of recession from either the economic data, the surveys, our individual conversations with companies.

Okay. In such an uncertain environment, do you see more or less opportunities for corporate activists?

It's an interesting question. We have not undertaken any new activist opportunities. But I think what's happening actually is a lot of companies have undertaken the sorts of operational improvements and more rational capital structure moves that is making it -- I think that's making it more difficult for activists because you don't have as many blatantly underperforming companies because boards are holding the management teams more accountable. They're getting a lot of pitches from bankers.

We're not seeing -- that's not really what we're focusing on. We're really focusing on securities that are undervalued where we can make investments and be constructive and not have to take any kind of confrontational role with management teams.

Okay. Looks like there's a shift, significant shift in terms of some of the strategy in your portfolio. For example, increase in a single name, Actavis shorts. I just wonder, does your investment team has experience? And also, are you adjusting the team's mindset as well as process according to this shift in strategies?

Yes. I wouldn't call this a shift in strategy at all. For people who've known me since the 1990s, we've been very active short-sellers for 20 years. I've personally been very active. In fact, if you look at our results in -- going back in history, we were profitable into the mid-teens in 2000 and 2001 based on a short positions that we had taken.

So, I wouldn't call this a new strategy. I quoted another legendary investor, Julian Robertson, who about a year or two said that short-selling used to be a license to steal. A couple years ago he said it had become a license to get hosed. I think that was -- it was an understandable sentiment. It was so expensive to short-sell. And I think as the conditions became better over the last year or so, we have gotten -- we've increased our single-name shorts.

We continue to hedge the portfolio. And it has been a very good source of alpha. But also importantly, it's reduced volatility in the portfolio. And as I've said before, the value of reducing volatility, aside from lowering the blood pressure of our team and our investors, is it really gives you the opportunity when you have these big sell-offs like we've had this year, and you're not doing as badly as the market or not as badly as your peers. It gives you the opportunity to, with a clear head, go in and make opportunistic acquisitions and purchases, which is exactly what we've been doing.

Okay, that's great. And then in your fourth-quarter letter you mentioned some of these value stock have been hard hit. Yet I noticed that you initiate some new positions in financials. Could you talk about it?

I didn't understand, we did what around financials?

You initiate some positions in financials? New positions.

The only -- we have one new position in an insurance company. Other than that, we think the banks will continue to be somewhat challenged, through no fault of their own or their management teams. It's just a very difficult -- it's just a difficult environment. We purchased shares in Chubb and we think that the merger that they just did with ACE -- or it was ACE acquiring Chubb and then taking on the name. As people come to understand the premium part of the business that they are in and the very attractive valuation, that's the kind of thing that we're doing. But we're really, as an asset class, we're not -- we have not -- other than that, I can't think of any offhand, any big positions that we've added, or if we added that we continue to hold.

Okay. That's great. Last question for Dan. Do you see any opportunity here in energy and in China?

We do. We're watching the energy markets very, very closely. We think that the better opportunities are on the credit side than on equities as far as discounting potential bad news ahead. We think equities reflect more optimism about the price. They've come in over the last week or two, but there's two things going on in equities at this point. Debt, low oil prices, and now the threat of equity offerings to shore up the balance sheets. We think a more interesting way to play energy is through fulcrum securities of E&T companies and in some of the distribution companies if we're going to get into equities. But I don't want to get into specifics.

Okay. And in China?

We aren't really investing in China. We're obviously tracking what's going in China in terms of the local economy, in terms of it being an end market for many of our companies, including Yum Brands. There is serious implications for materials and for luxury companies and other companies that have end markets there. But we aren't investing directly in China. It's hard for us not having local presence and local knowledge to invest in Chinese securities.

Okay. Thank you so much. And I do have a few questions for John, Rob, and Chris. First on the reserve charges this quarter. Could you tell us a little bit more detail on that? And because you had seen three quarters continuous reserve charges. I just wonder, are you -- any particular reasons for those? And also, are you adjusting your reserve practice going forward?

Yes, Kai. We are disappointed probably this quarter more than the other quarters. The big culprit this time, we have one worker's compensation contract that over the life of it for us is about $160 million of premium. We've been watching it very closely. And we've just noticed -- getting a handle on how the losses, the paid losses are coming in, the incurred losses, a bad trend. And so we did a really deep dive in the fourth quarter and came up with our reserve conclusions. And that's the big majority of the reserve increase this time. We think we have it under control at this point. We write, say, a few number of big deals. And so when you get something like that happening, it's very material to us.

Okay. Probably for Rob and Chris, is that your investment leverage is now 1.5, probably. You talk about the comfort level probably around 1.4. What's your plan there? And are the rating agencies comfortable to see that leverage going even higher?

Sure, Kai. Chris here. You're right, at 1.5 asset leverage, that's really around the level that we expect to remain going forward. It's calibrated within a range that the rating agencies are very comfortable with our capital position around that asset leverage. And so we don't expect any material changes from that going forward.

I would just add, Kai, that we want to keep it at that level. Our expected future results are optimized at that level. So 1.5 is what we're shooting for.

Okay. Last question is, your stock is trading at below 90% of book. Any thought about share repurchases?

Sure. Kai. We've always said that should our stock trade over a period of time below book that we would consider it. It's not something that we are planning to do currently. And really just as a reminder, we don't have excess capital within our business model. All of the assets supporting our capital are fully invested in the investment strategy at all times. And so as we look -- evaluate the expected return on the capital we're holding, and yes, maybe we're trading a little bit below book value. But at this point in time we're happy to hold onto that capital.

Thank you so much for all the answers.

Thank you.

Thank you. Our next question today is coming from Jay Cohen from Bank of America. Please proceed with your question.

Yes. Just a quick one. First quarter 2016. The year-ago quarter you had a pretty sizable jump in premiums. And are we facing a similar situation where it's a pretty tough comp as we look at 2016 versus 2015 first quarter?

Jay, it's still early in the first quarter. The activity has been good. We don't expect anywhere near the drop-off we had in the fourth quarter. And the fourth quarter was no surprise to us. We said we had about $100 million of renewal business. Some of it renewed, some of it didn't. We got new business in to keep it at about that $100 million. So the fourth quarter was not a surprise. We do not expect anywhere near that kind of drop-off the remainder of the year.

Great. And then I guess it back to the fourth quarter. Obviously it was a tough comp. Outside of that, that obvious headwind you faced. What kind of new business were you able to put on the books?

There was, Jay, no new business in the fourth quarter of 2015. And really the drop-off, again as John said, it was really more timing differences where we had some deals which had bound in Q4 2014 which actually had January 1, 2014 effective dates but we didn't bind the deals until the fourth quarter. And as those deals then came up for renewal in 2015 they were bound in the first quarter of 2015. So you had that timing difference.

Got it. That's helpful. Thanks.

Thank you.

Thank you.

(Operator instructions)

Our next question is coming from Meyer Shields from KBW. Please proceed with your question.

Great, thanks. Big picture question for John, if I can. AIG has talked about running off some lines of business and buying more quota share reinsurance. I was wondering if you could talk about how you see that affecting both the reserve cover market and the overall supply of quota share reinsurance premiums?

Yes. I'm not sure if it has any effect on the reserve covers. I think as I understand their strategy, and we've yet to see anything come out of that, it's on quota shares going forward. It's going to be interesting to see how they execute that. Years ago they were big buyers of quota shares on profit centers and in prior companies at the right time. They were terrific deals for reinsurers. And a big part of that was because AIG's expense ratio was so low that you could pay them a reasonable override and still have a very attractive combined ratio. Again, at the right time, that would be AIG Aviation or in their energy book or various casualty lines.

Now it looks like it's a strategy of, reinsurers will write anything. Let's see if we can put some underperforming business out there and see if companies will bite on it. And possibly companies, such as ourselves, that have a different investment strategy. So I think it remains to be seen what impact that will have and how many reinsurance companies truly view that as an opportunity. But as I said before, we've yet to see anything, any opportunities come out of that statement.

Okay, fine. Thanks, that's helpful. Second question. As we look at 1/1 renewals, is there an overall -- are you still seeing an overall trend of rising fees and commissions on the quarter share side?

That has been relentless, yes.

Okay. So getting worse year over year compared to 1Q 2015.

Yes.

Okay. Thanks. That covers me.

Great. Thank you.

Thank you. That does conclude our question-and-answer session. I'd like to turn the floor back over to Mr. Berger for any further or closing comments.

Thank you for dialing in. And we'll talk to you in about three months. Thank you.

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