Siriuspoint Ltd (SPNT) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Please go ahead, sir.

Thank you, operator. Welcome to the Third Point Reinsurance Limited earnings call for the first quarter of 2016. Last night we issued an earnings press release and financial supplement, which is available on our website www.thirdpointre.bm. A replay of today's conference call will be available through May 13, 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.

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 first-quarter 2016 earnings call. In addition to Chris Coleman, Chief Financial Officer of Third Point Re, with me today are Daniel Loeb, CEO of Third Point LLC, our investment manager; and Rob Bredahl, President and Chief Operating Officer of Third Point Re.

On today's call, I will provide an overview of our financial results and an update on market conditions. Daniel will discuss the performance of our investment portfolio, Chris will discuss our financial results in more detail, and Rob will describe the details of the share buy-back plan that our Board approved earlier this week. We will then open the call up for your questions.

For the first quarter, we reported a net loss of $51.1 million, or a $0.49 loss per diluted share, compared to net income of $50.5 million, or $0.47 per diluted share, in the prior year's period. Our diluted book value per share decreased by 3.7% in the quarter, to $12.37. We generated a negative return of 2% on our investment portfolio in the latest quarter, compared to a positive return of 3% in last year's first quarter. Please note, however, that our investment manager, Third Point LLC, bounced back in April with a return of 1.8% on our investment return for the year through April is now slightly negative at 0.2%. With total net assets managed by Third Point LLC of $2.06 billion and a net invested assets-to-equity ratio of 1.53, investment returns are a key driver of our financial results. Daniel Loeb will discuss our investment returns in greater detail in just a few moments.

In our Property and Casualty Reinsurance segment, we generated an underwriting loss of $6.6 million in the quarter and produced a combined ratio of 104.9%. This compares to an underwriting loss of $3.9 million and a combined ratio of 102.8% in the first quarter of 2015. Our first-quarter underwriting results were in line with our expectations, given current market conditions, and aligned to business on which we focus. We target less volatile, quota share business and avoid higher-risk property cat and other event-driven lines of business which we believe do not combine well with our investment strategy. While lower margin, the quota share business that we write typically generates relatively higher levels of float.

Reinsurance market conditions are challenging because of the excess capital that has been building 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 on casualty business. I commented during our last earnings call that I was hopeful that we were nearing the bottom of this pricing cycle, given the number of companies that are now taking reserve increases. This trend has continued in the first quarter and I remain encouraged.

In our Property and Casualty Reinsurance segment, we generated premiums written of $197.2 million, a decrease of 7.6% versus the prior year's first quarter. 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 a little over four years ago. With more than $700 million in premiums written in 2015, and more than $2 billion of invested assets, we have critical mass and therefore in a position to increase our deal selectivity in 2016. Given the size of our average deal and normal completion timing uncertainties, it is always difficult to project our future writings. But we currently expect to generate a similar or possibly lower amount of premium in 2016 versus 2015 as we work to improve our composite ratio in a difficult market environment.

I will now turn the call over to Daniel Loeb 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 lost 2% in the first quarter of 2016, net of fees and expenses, versus returns for the S&P and Credit Suisse event-driven indices of 1.4% and minus 4.5%, respectively, for the quarter. The Third Point Reinsurance account represents approximately 14% of assets managed by Third Point LLC.

In the first quarter of 2016, we saw a significant reversal of trends that began last summer, including short bets on China, commodity prices, and commodity-linked cyclical names and long investments tied to the strong US dollar. Many investors were caught offsides by the shifting market dynamics. We moved quickly and decisively to reposition our portfolio by covering most of our shorts and shifting our credit exposure from net short to net long, with a specific focus on energy names. Unfortunately, we failed to reposition our long equity book quickly enough and thus missed some of the market rally.

The Third Point equity portfolio was down 1.4% on average exposure in Q1. Losses were primarily attributable to two concentrated positions in the healthcare sector. Aside from these positions, we saw strength in many of our core investments and initiated several new attractively valued companies during the sell-off that occurred early in the quarter. Our corporate credit portfolio is up 2% on weighted-average exposure in Q1, driven by performing credit investments in energy, financials, and TMT.

Solvent credit returned 7% on average exposure during the quarter, led by our large bet on Argentine government debt. Following strong performance from most of 2015, our structured credit portfolio felt the impact of a liquidity squeeze in Q1, and was down 3.3%. Certain sub-sectors in the market were impacted more significantly than others, and our portfolio was relatively well protected from the more challenged asset classes.

We have since seen a return of liquidity to the space. Preserving capital during this volatile quarter left us well positioned to take advantage of interesting situations arising from continued market dislocation. We maintain a thoughtfully constructed portfolio of event-rich equity investments, continue to opportunistically invest in credit, and believe our structured-credit portfolio offers attractive risk-adjusted returns.

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

Thank you, Daniel. As John mentioned, we reported a net loss of $51.1 million, or a $0.49 loss per diluted share, in the first quarter of 2016. Compared to net income of $50.5 million, or $0.47 per diluted share, in the first quarter of 2015. Our diluted book value per share decreased by 3.7% in the quarter, to $12.37.

In our Property and Casualty Reinsurance segment, gross premiums written decreased by $16.2 million, or 7.6%, to $197.2 million for the quarter ended March 31, 2016, from $213.4 million for the quarter ended March 31, 2015. The decrease in premiums written was primarily due to $30 million for contracts that we made the decision not to renew in the quarter, and one $16 million contract that was not subject to renewal.

Although our premiums written was down slightly period over period, we added $36 million of new business in the quarter. Net premiums earned for the first quarter of 2016 decreased by $2.3 million, or 1.7%, to $136.8 million. The decrease in net premiums earned is primarily due to $16 million of net premiums earned related to retroactive exposures and reinsurance contracts for the three months ended March 31, 2015, compared to no such earned premium for the three months ended March 31, 2016. This decrease was partially offset by a larger in-force underwriting portfolio.

We generated a $6.6 million underwriting loss in the three months ended March 31, 2016, compared to an underwriting loss of $3.9 million in the prior-year period, and our combined ratio was 104.9%, compared to 102.8%. The movements in net underwriting loss and combined ratio were affected by the continued market pressure on underwriting margins. The net underwriting loss and combined ratio for the three months ended March 31, 2016, included a decrease in net underwriting loss of $0.2 million, or a favorable development for the three months ended March 31, 2016, related to changes in estimates of prior year's loss reserves and the related impact of acquisition cost, compared to a $1 million increase in net underwriting loss for the three months ended March 31, 2015.

For the three months ended March 31, 2016, Third Point Re recorded a net investment loss of $40.1 million, compared to net investment income of $64.9 million for the three months ended March 31, 2015. The return on investments managed by the Company's investment manager, Third Point LLC, was negative 2% for the three months ended March 31, 2016, compared to positive 3% for the three months ended March 31, 2015.

As Daniel just covered in greater detail, the net investment results for the three months ended March 31, 2016, were attributable to losses in our long-equity and structured-credit portfolios, which were partially offset by strong performance in performing credit and sovereign credit. Outperformance from several core portfolio positions within our long-equity portfolio was offset by negative returns in two significant equity investments in the healthcare sector.

Corporate expenses, or general and administrative expenses not allocated to underwriting activities, were $4.2 million for the first quarter of 2016, compared to $4.9 million for the first quarter of 2015. The decrease was primarily due to lower legal and other professional advisor expenses, and lower payroll and stock compensation expenses. Other expenses for the first quarter of 2016 and the first quarter of 2015 was constant, at $2.7 million. Other expenses represent interest credits paid on deposit and certain reinsurance contracts.

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 million of interest expense for the first quarter of 2016, and $1 million for the first quarter 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 certain -- uncertain tax provisions on our investment portfolio, and to a lesser extent, taxes in relation to our UK-based subsidiaries. We recorded an income tax benefit of $1.9 million for the three months ended March 31, 2016, and an income tax expense of $1.3 million for the three months ended March 31, 2015.

I'll now hand the call over to Rob Bredahl. Rob?

Thank you, Chris. We've always told investors that if our shares persistently traded below book value that we would consider introducing a share buy-back program. Well, in recent months, our shares traded below book value at times -- a valuation that we believe is attractive -- and, therefore, earlier this week, our Board of Directors authorized a new common share repurchase program for up to an aggregate of $100 million of the Company's outstanding shares.

We expect the share repurchases to be made from time to time in the open market or in privately negotiated transactions in accordance with applicable security laws and regulations, including rule 10b-18. The timing, form, and amount of shares repurchased under the program will depend on a variety of factors including market conditions, our capital position relative to internal and rating agency targets, legal requirements, and other factors. The repurchase program may be modified, extended, or terminated by the Board of Directors at any time.

I will now hand the call back to John, who will conclude our prepared remarks. John?

Thank you, Rob. Despite challenging reinsurance and investment market conditions, we remain confident that our total return business model will generate superior returns over time. After significant financial market volatility to start the year that caused an investment loss in our first quarter, our investment manager, Third Point, rebounded strongly in March and April and our investment returns to April are now slightly negative at 0.02%.

We have positioned the Company to withstand near-term market volatility and to be one of the leading beneficiaries of any market improvement. We're at full scale, with a relatively low-risk reinsurance portfolio and more than $2 billion of invested assets.

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

Thank you.

(Operator Instructions)

Kai Pan, Morgan Stanley.

Thank you and good morning. So first few questions for Dan, you mentioned you are quarter ladder that the first quarter most catastrophic period for performance for hedge funds as well. You said the first things of washout as well as we know some large pension fund in short pulling back on allocation hedge funds. So do you feel pressure on the, for the LLC front, and what do see opportunity here?

Yes I think the point was it was a catastrophic period of underperformance relative to what the market did. Factor exposures, some concentrated positions in stocks that had big declines I think affected other hedge funds.

I want to make it clear, it was not a catastrophe for Third Point. I think we did a reasonable job protecting capital and I'm never delighted to be in the minus column, but given what happened to a number of other funds this quarter it puts us in good position to deploy capital into the kind of environment that we are in.

So we're seeing opportunities in distressed debt, so I want to stress we're not in a credit cycle where I think there's going to be massive opportunities due to a slowing economy and large defaults. But we are seeing a lot of dislocations in various credits and we have been scooping up some very attractive names in, we've talked about this in the past, some fulcrum securities in energy companies. On the sovereign debt front we've talked about Argentina, and there are a couple of distressed situations out there that we have been buying.

I think structured credit has also -- it was really off only for liquidity reasons, not for fundamental reasons, so we feel good about that portfolio. And I think the most interesting space right now is just in equities that are getting oversold or just under appreciated and under owned that are in the industrial sector.

And also we wrote about an out letter, companies going through transformative mergers where I think you really need to look out one to two years, and we are in a market where people have very itchy trigger fingers and they're selling or they're not taking positions until these sorts of deals are completed. Things like Time Warner Charter, Dow that we are involved in, Bud and a few other of these sort of, we call them the pro forma situations where companies are going through transformative transactions.

Okay that's great detail. And then on the, the two healthcare positions that you mentioned, have you make any portfolio changes on those positions?

Sorry, which two?

Those two that you mentioned that have dragged down first-quarter performance

Okay so we had three major healthcare positions. Baxter which is doing extremely well, and then the other two are Amgen and Allegan. So these are both great companies, I think Allegan has been kind of battered by the one-two punch. First the treasury changed the rules, and we -- the Pfizer, Allegan merger was basically broken up in a way that we really didn't expect that, we did a lot of research with public policy people and lawyers and this was an unusual situation.

We felt there was a good margin of safety in Allegan because the underlying business is very good, management in Brett Sanders is excellent. So we have confidence in Allegan to get through this.

The catalyst there are the sale of Teva, potential repurchase of shares with proceeds from that and I think when people are able to see Allegan kind of get back on track with clean quarters and a balance sheet that's cleaned up with the Teva transaction behind them, we expect that to continue doing well.

And similar way for Amgen, it's actually -- it's down a little bit this year, they have a great product line, growth is good, and these are companies that are trading at valuations that have not been seen in the last decade in pharmaceutical companies, so we're confident in both those companies going forward.

Okay that's great. And lastly on Japan and there's a real victory in corporate activist in the 7-Eleven situation, do you think that will be a trend in the market and do you see more opportunity there?

Yes, it's actually not that rare for us. I think we've taken a different sort of approach in Japan which is to align ourselves really with government policy. So we're not really going against the companies or against the administration stated goal of [Dovettero evanomics] which is to improve corporate governance, improve return on invested capital.

And I think by being able to articulate a way forward for Seven & I, with better governance and a better succession plan, I think it became evident the Board that the course that they were taking was not the right one. And they pivoted and they promoted the person who -- Mr. Osaka who has done a fantastic job leading the 7-Eleven stores.

But keep in mind, I think we've had positive experiences with the nuke kind of helping them improve transparency and better capital allocation. We had very productive relationship with Sony and I think mutually respectful one.

One of the things we had asked for was a spinoff of the entertainment company, well they didn't do that. They really ran the company in a much better way. So I just disagree with that it's very rare, I just think our approach has been a little bit different and more cooperative with more modest ambitions as far of what we are looking to see.

Great, thanks for all the answers. Switch to on the buybacks, so how much cash you have on hand and with the buyback, the investment leverage currently already sort of like 1.5 already, upper end of rating agencies like [target] levels?

Yes Kai, we're basically fully invested. At the same time, most of the investments are very liquid, so it won't be a problem having the cash to buy the shares back. And I think one thing we really want to make clear with this, this is creating a nice option for us. We have no immediate plans to go out and buy $100 million of stock back.

I think with the way our valuation goes up and down at particular points in time, buying shares back when we are substantially below book is very attractive. We also have some limitations just on the amount of float we have, on how much we could actually buy back at any point in time. So there's no -- don't expect any immediate action. This is in no way is a reflection of we want to take money out of managed account and buy shares back, that's not the case at all. Rob?

Yes, so Kai, the money we use to buy back the shares will come out of our separate account. So there's no cash at Third Point, other than a few million dollars for operations. So if the shares trade substantially below book value we will take money out, buy back the shares because we view it just as a relatively good investment opportunity.

And was that just open market transaction or could involve in some of the sort of funding shelters

The plan allows for us to buy back shares in private transactions, but we haven't had any discussions with our private investors. So the intention is to buy back in the open market.

Great thank you so much

(Operator Instructions)

Jay Cohen, Bank of America.

Thank you, two questions. First is, with the new business that you did write in the quarter, can you characterize what kind of business it was?

And then the second question on the buyback, I guess I'd always assumed you probably wouldn't be buying back stock, only because you had the opportunity to deploy that capital through Third Point LLC. Is what you are saying that as your stock gets to a low level, the return you'd expect from buying back stock would exceed the return you would have from investing with Third Point?

Jay, it's a tougher question to answer because it's relative attractiveness. But when our shares trade below book value, we think they are cheap and when we buy them our book value per share increases, so it's immediately accretive. And so at below book value we believe it's attractive relative to investment opportunities in the separate account.

Yes, can I jump in on that one? It's sort of an apples and oranges question. It doesn't affect -- the Third Point returns will be the Third Point returns, and if you can create those returns at a 10% discount then it just accelerates the -- it will just amplify the returns from the portfolio, as opposed to investing in Third Point at book value.

Yes and Jay, just a point I want to think again, we have no great plans to go out and do a big amount immediately. I think this is a great option to have for us as our value goes, our stock price goes up and down, so it's just a great option. And given the float and the restrictions on how much we can buy anyway, we really can't do anything in a major way, but it's just really, we think a smart option to have.

Got it The new business?

Yes, new business was we did a, about $30 million mortgage, quarter share of a mortgage insurance company. And then we have a small Lloyds quota share of political risk were the two new items, and the rest of the business was renewals of business already on the books.

Got it, thanks a lot.

Ken Billingsley, Compass Point.

Good morning. Just want to follow-up on the new business, again you're saying of the $30 million net GPW new business, is the majority of that quota share MI and political risk, is that correct?

Yes and 90% of it is mortgage.

90% of it is mortgage. And can you talk about from a timing, obviously you're coming in from opportunity on the MI side. There's been a lot of demand for because of PMIERS requirement. Do you see increased demand for that going forward? Does this look like this might be one time in nature, or can you just talk about that? Do you see this also growing for you or is this just a one-off transaction?

We've written the private mortgage insurance business since our start. We started out with magic, almost day one, so this is steadily built. The numbers, kind of the amount of the mortgages out there and the mortgage insurance, they're really big numbers. So they kind of dwarf our property-casualty surplus, so we expect to -- the current deals we have in place, we expect them to grow.

I don't think we're going to see a lot of new contracts coming on the books, but the ones that are on the books I think what we're hoping is that the quota shares really become part of the capital structure of the mortgage insurance companies, given the restrictions on them. We haven't done any of the GSE business. And that clearly is a growing area for other companies, but to date we've done none of those.

And is there anything that's keeping you out of it? Of the GSE business?

I think one factor there is, we like -- the private mortgage insurance companies have a lot of expertise, right there, they're very good at it. We also have some contracts on other reinsurers that we think are very good at analyzing this business. So we like getting that second set of eyes on it.

And I think one of the concerns we have on the GSE business is you pick up a fair amount of potential earthquake exposure, particularly in California on that. I think people are aware of, I'm not sure they really take that into account as an exposure on that business.

And last question on this, you mentioned that obviously with some reserve increases even though we haven't had a lot of cat events, but reserve increases with some of the peers. Are you seeing any opportunities or some new markets that might be of interest to you that have not been available before?

I don't think so, Ken. We're watching it, we are seeing -- it's a very competitive market. We are seeing many companies be very aggressive now, but it's an unsettling time. With various companies or lines of business with reserve increases, we're still benefiting, the industry is still benefiting immensely from the dying cat experience. But the number of multiple single digit, but still multi-billion dollar losses, $1 billion here, $1 billion there, pretty soon you're talking about real money.

I mean, it's just $2 billion here, the hailstorms in Texas the earthquake in Japan, we are watching although we don't have any exposure, this fire in Canada. It's certainly not a market turning event but it's going to be very big insure. So we're starting to see that happening and then who knows what happens for the rest of the year on a more major scale.

I will just say that we're constantly examining new lines of business, merging growing lines of business like cyber. But we are very reluctant to jump into a line where we might think we will do better and where we just don't understand and can quantify all the risks.

Yes, I think every company probably this is an accurate statement, just about every company in the world is looking at the book of business going things are tough, what else can we be doing out there? And we just totally reemphasized to ourselves daily, there are very few pots of gold out there, there's no great vacuums of demand where demand for reinsurance is so great we could jump in and make a killing. Everybody in the market, it's a very challenging time.

And last question, mix of business in general. If I recall correctly you do have at least significant auto book, and then with MI, can talk about the mix of business between what might improve. More of a shorter float for you for investing versus a longer horizon.

I would imagine the MI business buys you a little more time, but the auto business has a shorter float cycle with it. So could talk about the mix is and what you guys are doing, if you see that changing or that's likely going to stay the same at least for the next year or two?

I think what you've seen in our brief four year history is out-of-the-box we wrote a fair amount of nonstandard auto and the Florida homeowner quota shares that either excluded or limiting the cat. We like that business, we thought it wasn't volatile, small but pretty stable margins, neither business generates much float. Those two areas have become very competitive and that has become a much smaller percentage of what we are doing.

So a mortgage business we like because of the duration. Also that we didn't write any in the first quarter, we like loss reserve deals. We've written a substantial number of larger loss reserve deals where the duration on those reserves were five plus years, so we really like that. We do have some professional liability now, quota shares of people writing that business. And that business at 100 or below 100 plus or minus, given the duration of the claims, is also very attractive to us.

So I think Ken, we can go offline I can give you specific percentages, I don't have the right here, but that short tail business for us has over the four years has become a smaller percentage of the total and I expect that to continue to shrink.

Great, thank you for taking my questions

Thank you, at this time I'd like to turn the floor back over to management for any additional or closing comments

We thank everybody for calling in. And we'll talk in three months.

Ladies and gentlemen thank you for your participation, this concludes today's teleconference, you may disconnect your lines at this time and have a wonderful day.