Siriuspoint Ltd (SPNT) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

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

Thank you, operator. Welcome to the Third Point Reinsurance Limited earnings call for the third quarter 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 November 11, 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 time to join our third-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 Rob will provide an update on business production and market conditions, Daniel will discuss performance of our investor portfolio and 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 net income of $72.1 million or $0.68 per diluted share. Compared to a net loss of $195.7 million or $1.88 loss per diluted share in the prior-years period. Our diluted book value per share increased by 5.2% in the quarter to $13.55.

Our underwriting operation continues to generate strong cash flow, which is invested by Third Point LLC. In the quarter, we generated $22 million of net investment income on float and total float stood at $582 million at the end of the quarter. Total net investments to equity stand at 1.5 times, which is the level that we are targeting given risk management considerations.

In the third quarter, our investment portfolio performed strongly with a return of 4%, which compares to a negative return of 8.7% in last year's third quarter. Overall our total return model performed well this quarter. I would now turn the call over to Rob to provide an update on our business production and market conditions.

Thank you, John. The performance of our property and casualty reinsurance segment in the third quarter was in line with expectations given current market conditions and the lines of business in which we focus. For the quarter, we produced a combined ratio of 106.5%. There was $40,000 of net favorable reserve development for the quarter as a result of small offsetting movements within several lines of business. As a reminder, we reserve by contract and review every contract each quarter.

Gross premiums written for the quarter decreased by $63 million to $143 million as compared to the third quarter 2015. Although the decrease was primarily due to one large reserve cover that was written in the third quarter 2015, it's important to remember that we focus on a small number of larger transactions, including reserve covers, and multiple year contracts that may not renew or may renew in a different comparable period.

This makes quarter to quarter comparisons difficult. We're more focused on increasing diluted book value per share and do not target any particular premium growth rate. While some see the bottom of the current soft market cycle we remain cautious, and expect market conditions to remain very difficult. In order to maintain our underwriting discipline therefore, our premium writings might continue to decrease in the short run.

We are deemphasizing certain lines of business, which we believe to be underpriced, such as nonstandard auto and homeowners and increasing our focus on higher margin areas such as mortgage insurance and types of transactions that produce significant float such as reserve coverage. I will now turn the call over to Daniel to discuss our investment portfolio.

Thanks Rob, and good morning. The Third Point Reinsurance investment portfolio managed by Third Point LLC, gained 4% in the third quarter 2016 net of fees and expenses versus returns for the S&P and CS Event Driven indices of 3.9% and 3%, respectively, for the quarter. The count was up 6% year to date through September net of fees and expenses.

The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC. Third Point has generated profits in 2016 through a combination of diversified portfolio construction, idiosyncratic securities selection, and proactive repositioning around macroeconomic events. In the third quarter, we took advantage of dips in the market to reload our portfolio, especially in equities.

We had positive performance in each of the sub strategy and geographic region in which we invest and generated alpha during each month of the quarter. The Third Point equity portfolio returned 5.5% on average exposure during the third quarter. Or nearly twice the return of the S&P 500 Index with approximately half of the equity market exposure. Each sector contributed to returns with consumer and TMT as our top performers.

We maintain high conviction in our US Centric portfolio, which is a mix of constructivist positions, event driven names, shorts, and value compounders. In Q3, our corporate credit portfolio returned 11.8% on average exposure, handily beating the iBoxx, high-yield index return of 5.1% for the same period. During the quarter, we were able to reload on performing energy credits, which we had entered and exited profitably earlier in the year. Year to date our corporate credit portfolio performance has been nearly triple that of the high-yield index.

The sovereign credit portfolio returned 5.6% on average exposure as we saw several positive developments in Argentina, including a more rapid inflation decrease than originally expected. Our structured credit book had an ROA of 4.4% in Q3. Finally, our macro and other strategy posted modest gains driven by strong performance from some positions in our private portfolio. Now I'd like to call over to Chris to discuss our financial results.

Thank you, Daniel. As Rob mentioned, we are reported net income of $72.1 million or $0.68 per diluted share in the third quarter 2016 compared to a net loss of $195.7 million or $1.88 loss per diluted share in the third quarter 2015.

For the nine months ended September 30, 2016, we reported net income of $74.3 million or $0.70 per diluted common share compared with a net loss of $129.6 million or $1.25 loss per diluted common share for the nine months ended September 30, 2015. For the quarter ended September 30, 2016, diluted book value per share increased by $0.67 per share or 5.2% to $13.55 per share from $12.88 per share as of June 30, 2016.

For the nine months ended September 30, 2016, diluted book value per share increased by $0.70 per share or 5.4% from $12.85 per share as of December 31, 2015. Gross premiums written decreased by $63 million or 31% to $143 million for the quarter ended September 30, 2016 from $206 million for the three months ended September 30, 2015. Gross premiums written decreased by $67 million or 11% to $537 million for the nine months ended September 30, 2016 from $603 million for the nine months ended September 30, 2015.

In the quarter, we wrote $48 million of new business, had an increase of $39 million from contracts that we renewed, and increased net premium estimates of $18 million on existing contracts. These increases in written premium were more than offset by a $92 million retroactive reinsurance contract that was completed in the prior-years third quarter, $12 million of contracts that we decided not to renew because of pricing and/or terms and conditions, and a net decrease of $75 million due to timing differences from contract extensions, cancellations, and contracts renewed with no comparable premium in the prior-years quarter.

Net premiums earned for the quarter ended September 30, 2016 decreased by $81 million or 39% to $128 million. Net premiums earned for the nine months ended September 30, 2016 decreased by $70 million or 15% to $398 million. The decrease in premiums earned was primarily due to retroactive reinsurance contracts of $92 million and $108 million that were written and earned in the three and nine months ended September 30, 2015, respectively.

We have not written any retroactive reinsurance contracts in the comparable 2016 periods. We generated an $8.3 million underwriting loss for the three months ended September 30, 2016, versus and underwriting loss of $5.8 million in the prior-year period and our combined ratio was 106.5% versus 102.8%.

The most recent quarter included $40,000 of net favorable development compared to net adverse development of $1.4 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, the underwriting loss was $40.5 million and the combined ratio was 110.2%.

For the nine months of 2015, we produced an underwriting loss of $19.1 million and a combined ratio of 104.1%. The increase in the underwriting loss in the current nine-month period was primarily due to $12.5 million of adverse loss development detailed on our last earnings call.

For the quarter ended September 30, 2016, Third Point Re recorded net investment income of $88.4 million compared to a net investment loss of $193.2 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, investment income was $134.6 million compared to a loss of $89.6 million in the nine months ended September 30, 2015.

The return on investments managed by the Company's investment manager, Third Point LLC, was 4.0% for the three months ended September 30, 2016 and 6% for the nine months ended September 30, 2016. This compares to negative returns of 8.7% and 4.3% for the three month and nine month periods ended September 30, 2015, respectively.

Corporate expenses or general and administrative expenses not allocated to underwriting activities were $6.0 million for the third quarter 2016 compared to $3.9 million for the third quarter of 2015. The increase was due to separation costs in the current quarter. Corporate expenses were $14.4 million for the first nine months of 2016 compared to $16.7 million for the first nine months of 2015. The decrease was primarily due to higher separation costs in the prior year periods and lower stock compensation expense in the current year periods.

Other expense for the third quarter of 2016 was $347,000 and for the third quarter of 2015 was $670,000. For the nine months periods ended September 30, 2016 and September 30, 2015, other expense was $6.2 million and $5.7 million, respectively. Other expense represents interest credits paid on deposit and certain reinsurance contracts.

The foreign exchange gains for the quarter and nine months ended September 30, 2016 were primarily related to revaluation of foreign currency loss reserves denominated in British pounds where the US dollar strengthened during the period. 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.

We recorded an income tax expense of $2.5 million for the three months ended September 30, 2016 compared to a tax benefit of $7.8 million for the three months ended September 30, 2015. We recorded a $5.9 million income tax expense in the nine months ended September 30, 2016 and $5.8 million of income tax benefit for the nine months ended September 30, 2015. I'll now hand the call back over to John.

Thank you, Chris. Our total return model performed well in the third quarter. Our investment portfolio managed by Third Point LLC produced strong results and was up 6% after three quarters. After taking reserve increases in the second quarter to crack some overly optimistic booking of deals, we had a more typical underwriting quarter, at least in today's soft market, and produced a combined ratio of 106.5%. Our underwriting operation continues to generate strong cash flow, which is invested by Third Point LLC.

We have an active share buyback program with $92.6 million available under our $100 million plan, but did not buy back any shares this quarter. We target a share price to book value of 90% for share repurchases. Our shares traded above this level while our trading window was open. If our share price remains below 90% of book, we will buy back shares this quarter.

I will end with a quick comment on Hurricane Matthew that scraped Florida and South Carolina in early October. We do not write any property excess of loss treaties and therefore we have very limited exposure to hurricanes. Our only exposure is on three quarter share contracts where there is very low per occurrence limits or other features that limit our exposure. We expect total losses to be under $3 million. We thank you for your time and we'll now open the call for questions. Operator?

Thank you. The floor is now open for questions.

(Operator Instructions)

Kai Pan of Morgan Stanley.

Thank you and good morning. First a few questions for Dan. You mentioned your quarter letter that we might see surprises on election day. How you position the portfolio to surprises and do see potential opportunities such as post-Brexit?

It would not be a surprise if I predicted it here. But this is not just about election day. We have generally reduced both our gross and net exposure in part because of concerns about potential volatility. We do not -- we clearly didn't predict the outcome of Brexit but we definitely saw that as a point in time that would -- you had to ascribe some percentage to a scenario where there was a surprise.

We've done the same thing here. We have reduced our exposures. We've cut some positions and increased some hedges. That is basically where we stand. It is not just about the President. Obviously who wins is going to impact the market. I think equally important is what happens in the House and Senate. We will be looking at both Congress and the race for president to determine what kind of actions we take after the election.

Good. And then on your investment style, I noticed that we haven't heard a lot about event driven or corporate activist activities. Is that just because you see fewer opportunities in the current environment?

Let's take those apart. We have three positions where we have taken some role in the governance of the Company. Sotheby's, Dow, and Baxter and we continue to be engaged in all three of those companies and what we -- we don't really have any new ones. Clearly, if we saw opportunities we would take them but we haven't. We are very pleased with the performance of all three of those companies.

Baxter is a real standout in healthcare this year, performing very well. Dow is moving along with its merger with DuPont and beating numbers and doing well. And Sotheby's is doing extremely well under its new management team. We are pleased with that.

As far as event driven goes, it is a little bit of a two-sided story. On the one hand, spreads are wider and there are -- there is a lot of takeover activity. And there is less money able to pursue those opportunities.

On the other hand the regulatory environment has become more challenging than I can remember in my career. We are seeing more broken deals and more money lost so I can't say necessarily because spreads are wider that in risk arbitrage that an area that we are seeing a lot of -- we are seeing a lot of potential investments. I would not say it's really translated into making a lot of money yet.

I think it will be at some point in the future, we will find spots where we can do well. And as far as other types of event driven investments, spinoffs, corporate restructurings, privatization, things of that nature; we see -- we have positions in a few things that are the result of those but there's not a lot of new activity in that area.

Great. And then you mentioned [quantumental] techniques in investing. I wonder is that a new area of your focus and do you need to acquire different skill set for that?

We are currently using a number of data providers that help us evaluate companies, industries, even the economy using data and big data analytics. We will be bringing on a few people who are specifically focused on that area to help us bridge the gap between our traditional fundamental analytical process and what is going on in the world of data. But to be clear we aren't pursuing a quant -- this is not to support a quant strategy. This will be using data to support our existing fundamental strategy.

Okay. Lastly if you look at a return -- the year would close today, if look at the return for the past three years, the return had been in double-digits and turning the S&P 500. I wonder if there's any structural changes in the current environment that could prevent you from achieving the mid-teen returns and out performance of the market over the long period of time?

I'm not sure -- we are ahead of the S&P this year. I think we were slightly below the last two years. It is not meaningfully below. Looking at the returns alone are a little bit -- obviously it's important for us to generate the types of returns that you are talking about but keep in mind also that we're doing that with much less volatility and roughly half the exposure to the S&P.

And certainly relative to other hedge funds, we have outperformed. I don't think that there's anything structurally different about the world today. If you moved your time frame back to five years, we've actually performed very well since the financial crisis. We are up close to 16% net, since 2009 on an annualized basis with no down years. No significant down years, I think we were down 1%.

I think part of it is at the timeframe that you have picked up but I don't think there's anything structural. It has been a challenging period. I don't use that as an excuse but I don't think that there's been any fundamental change in the world that will prevent us from generating very good returns going forward.

Great, thank you so much for all the answers. For John, Rob, and Chris, first is on the underwriting side. What is your outlook for general renews and where do see opportunities that you can grow your business and in the current environment do expect the composite ratio to deteriorate further or there could potentially be some improvement there?

Kai this is John Berger. As we state, we don't write the property catastrophe book of business and that is really a big part of the one-one activity. So my comments on what happens at one-one on the cat book are not that useful. I expect though that there still a lot of capacity chasing business. I expect that to continue to trend down.

You hear a lot of talk about the bottom is in sight. Well, you don't know you are at the bottom until things start to pick up, so we will see.

In our outlook we still have a push on for loss reserve deals. We like those. We think as the market remains challenging and investment returns are low, people will focus a lot more on capital management. To date, our success has been in the UK with Solvency II, really helping us with selling losses or type deals. We're hoping to have bigger push in the US on those deals.

We are -- our mortgage portfolio -- we started writing that almost from day one, 5 years ago and that has grown nicely. That has the potential to have very attractive combined ratios. We have started, over year ago, deemphasizing the nonstandard auto in the Florida homeowners book that have been challenging, from a combined ratio standpoint.

I think as that segment reduces and earn premium comes in on the mortgage portfolio and if we're successful on the loss reserve front, I don't see deterioration in the composite ratio and hopefully there is improvement.

And Kai it is Rob. I would say the mortgage portfolio we have written and grown over the last few years, earns in over a long period of time, up to seven years. You will see the benefit of that earning in but it's going to be gradual.

Okay that is good. How big is the mortgage rate book now?

I think inception is date Kai, we have written about $225 million.

Okay. That's good. Lastly on your US operation, could you talk a little bit about that and also recent management change there?

Yes. The US operation we had a departure of two of our underwriters. They were very active in areas that we are deemphasizing. They resigned to move on to other opportunities.

It's a well staffed office and we have despite losing those two people, we have good personnel there, good marketing, good underwriting, very good actuarial; so we are optimistic that as we really start to push smaller US-based loss reserve deals, we can have success there. And some more of the, I call it the E and S approach, it's really what we do here in Bermuda. There's not a lot of run-of-the-mill new stuff we're looking at. We find that very competitive but we are -- in Bermuda seeing things like the loss reserve deals, residual value deals, some legal indemnity type deals. We're hoping to be able to generate those type of opportunities in the US.

The US is important. When we formed it, we said there is no magic, it's a very competitive market out but the purpose of the US office is access to business. We have are very good people on the ground, meeting with the brokers, meeting with potential clients on a daily, weekly basis. Where without that, we would be sitting nine-hundred miles off the coast of North Carolina trying to drum up opportunities. Despite two people leaving we are in very good shape there.

Great. I've taken enough of your time. Thank you so much for the answers.

Jay Cohen of Bank of America Merrill Lynch.

Thank you. A lot of my questions were answered. Chris you had mentioned one of the issues in the quarter from a revenue standpoint was some timing differences. I'm wondering is that going to aid the comparison going forward or was is already accounted for in the year to date?

The timing differences I referred to, so in last years third-quarter we wrote two 18-month contracts and that accounted for about [$70] million worth of premium. So those two contracts will come up for renewal in the first quarter of 2017.

So all else being equal that should mean for a bit of a lift potentially in that quarter?

It should. Jay, we are pushing for better margins and so premiums is likely to remain the same or go down. We will benefit from that but overall our guidance is flat to down.

Got it. Thanks.

Ken Billingsley of Compass Point

Good morning. I want to do a follow-up on I think you might have answered this but I wanted to clarify it. The payroll expenses jumped up on page 15 of the supplement. Was this all related to the separation costs that you mentioned?

Yes that is right Ken. There's about a $1.8 million impact in the quarter, as a result of separation costs. If you adjust for that, our total G&A run rate has been about $10 million to $11 million for about three years now. We wouldn't really expect much change in that going forward.

Okay. And on the business mix, this is a two-part question, so I want to ask about the property mix that jumped. Can you talk about with the makeup of that business is and the tail and specifically how long is it there and going to be around from a float perspective for investing.

The same with the MI business. I believe you answered one question said it was six years but if you could talk about expectations the and what kind of tail it has and ability to maintain float?

The property is a mid-Atlantic homeowners and auto physical damage that has run quite well. Really a premium relief deal, very tight occurrence limits on it. And that was a two-year deal that's $60 million but that we felt a pretty big chunk there.

On the -- Ken you specifically had some on the mortgage business right?

Well specifically I want to get some color on the mid-Atlantic homeowners -- it was it -- being homeowners trying to get an idea of how much the float will be around because nonstandard business that you had before some of it had a short tail, so trying to get a color on the float perspective and what does down the road?

The total amount of premium actually is not a very good indicator of how much float we have, it is the type of premium. So when we write a reserve cover, for example and reserve covers we've written we'll have that money for around five years on average. And so we expect a higher portion of the premium to be float related.

So reserve covers and we also have some longer tail casualty business in there. And so although our premium is likely to come down, we expect our float balance to remain about constant.

Just to exaggerate this to make the point, if we stopped writing business, our float wouldn't go down for a few years because as Rob said the loss reserve deals, the duration of those reserves are at least five years.

Great I appreciate that thank you for taking my questions.

Meyer Shields with KBW.

Thanks, I want to follow-up on Ken's question if I can. As you move from what appear to be shorter tail lines to longer tail lines, does that allow for any increase in the ratio of vested assets to equity?

Right now our net investment assets leverage is about 1.5 and as we stated previously, that is around what our target level is. As we just explained from the last question, as we look forward and anticipate a changing mix of business with a target of a mix of reserve covers and higher-margin business, which may not have the same float benefits, but then also taking into account what we already have on the books from previous deals, we would expect our asset leverage to remain fairly constant around that 1.5 level.

Okay. That's helpful. Within the loss reserve covers, there wasn't much -- if I understand correctly there wasn't much activity in the quarter. Is that an issue of demand or pricing?

These take a long time from start to finish. They are relatively large as we said last year in the third quarter was a $92 million reserve deal. This quarter we didn't have a comparable size deal. We have several in the works but they just take a long time. A normal reinsurance deal has a renewal date, it's January 1, July 1, June 1.

A reserve deal can be done at any time so you don't have that deadline to get it done so these things tend to -- it's usually a pretty big decision for the company. You need buy-in from the CEO, the CFO, the Chief Investment Person and they just take time to bring home.

Okay. If there's an uptick in industry M&A, would that drive more demand?

You know I don't know. It's interesting. I think it depends where it happens. Demand for loss reserve deals or just demand for reinsurance?

I meant loss reserves but I would be interested in your thoughts either way.

The type of reserve cover that usually goes along with M&A deal is one where there is some big hole in the balance sheet that the buyer-seller wants to patch as part of the deal. Those are not deals we're looking for. We're looking for deals that are really capital management tools for the Company and with very limited risk.

Okay thank you very much for everything.

At this time of the turn the floor back over to Mr. Berger for any closing comments.

Thank you very much for your calling and we look forward to talking to everybody in three months.

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