Siriuspoint Ltd (SPNT) 2016 Q4 法說會逐字稿

Greetings and welcome to the Third Point Reinsurance fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure introduce your host, Mr. Chris Coleman, Chief Financial Officer of Third Point Reinsurance. Thank you, sir, you may begin.

Thank you, operator. Welcome to the Third Point Reinsurance Limited earnings call for the fourth 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 March 3, 2017, 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, I would also like to remind you that many of the remarks today will contain forward-looking statements based on current expectations. Actual results may differ materially from those projected as a result of certain risks and uncertainties. Please refer to the fourth-quarter and full-year 2016 financial results press release and the Company's other public filings including the risk factors in the Company's 10-K where you will find factors that could cause actual results to differ materially from these forward-looking statements. 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 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.

Last we issued a press release announcing the promotion of Rob Bredahl to CEO of Third Point Re, effective March 1. Rob is an invaluable member of the Company's management and is well-placed to take over as CEO. I've always recommended him as my successor in discussions with the Board, and we decided that now is a good time to make this transition.

I will remain Chairman of the Board, Chairman of the Underwriting Committee of the Board and CEO of our US operation, Third Point Re USA. Rob and I enjoy a great relationship having worked together over the past five years to form and develop Third Point Re, and this is a natural progression of our respective roles. We expect a smooth transition. I look forward to continuing to work with Rob and to support him in his new role.

Another point I want to discuss before I turn the call over to Rob is our stock buyback plan. In our last earnings call we said we would buy back our shares if they traded at 90% of book value or below.

During our normal open trading window following our third-quarter earnings call, there were a handful of days that we traded below 90% of book value per share. However, during those days we were in a trading black out period because we were in possession of material, non-public information. Our intent remains to buy back shares should our shares trade below 90% of book value in the future, subject to market conditions and applicable securities law. I will now hand the call over to Rob.

Thanks, John, and thank you for your friendship and all of the support and guidance over the years. Here's the plan. I will provide a brief overview of our results, as well as an update on current market conditions. Daniel will discuss the performance of our investment portfolio and Chris will discuss our financial results in more detail. We will then open the call up for questions.

I will start by discussing our results. For the fourth quarter, we reported net loss of $47 million or $0.45 per diluted share. This compares to net income of $42 million or $0.39 per diluted share in last year's fourth quarter. for the full year of 2016 we earned $28 million, or $0.26 per diluted share versus a loss of $87 million or $0.84 per diluted share for 2015.

Now let's talk about our combined ratio. Our combined ratio for the fourth quarter was 105.0%, which is in line with our expectations given current market conditions and the lines of business on which we focus. There was a small amount of net favorable reserve development in the quarter. Also, the combined ratio benefited from a lower than typical expense ratio. This was due to lower incentive compensation accruals, which Chris will discuss in more detail.

Okay, now for gross premium. Gross premium written in the quarter dropped by 19% to $81 million compared to the fourth quarter of 2015. For the full year of 2016, it decreased by 12% to $617 million. We believe gross premium written could drop further in 2017 as we continue to work towards improving our combined ratio.

In several lines of business such as Florida homeowners and non-standard auto, we have pushed for improved terms at renewal to counter worse than expected underlying results where our competitors, in many cases, renewed reinsurance contracts at or very close to expiring terms and conditions. Although our premium decreased in 2016 and is likely to decrease further in 2017, we have continued to generate float.

Our invested assets to equity ratio was 1.55 times at year end, close to what we believe is an ideal level for us given risk management considerations, of course. It should remain close to this level throughout the year even if we reduced premium.

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

Thanks, Rob, and good morning. The Third Point Reinsurance investment portfolio managed by Third Point LLC was down 1.7% in the fourth quarter of 2016 net of fees and expenses, versus returns for the S&P and CS event driven indices of positive 3.8% and positive 2.3%, respectively for the quarter. The count was up 4.2% for the year net of fees and expenses, versus returns for the S&P and CS event driven indices of 12% and 2.7%, respectively for the year. The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC.

Markets were volatile in 2016 due to multiple macro surprises, culminating with Trump's election, and the Republican majorities in the Senate. Correct analysis of market moving events, corrective positioning and nimble portfolio management were vital to generate solid returns. The net investment results for the year were driven by contributions from most strategies and sectors in the portfolio.

Credit contributed the largest share of profits with modest losses in structured credit, greatly outweighed by gains in corporate and sovereign credit. Investments in the energy sector were the primary drivers of returns for the year in corporate credit. Within equity, strong performance from investments in financials and industrial sectors countered negative attribution from two large healthcare positions.

The Third Point equity portfolio was down 3.1% on average exposure during the fourth quarter. We shifted exposures meaningfully following the election, decreasing exposure to TMT and consumer and ramping up investment in financials, industrials, and other cyclicals. Despite these moves, gains in financials and industrials were offset by losses in consumer and healthcare investment.

The corporate credit portfolio returned 6.8% in Q4 and 33.3% for the year on average exposure. Our structured credit portfolio was down 1.9% on average exposure during the quarter, and detracted modestly from returns for the year amidst a challenging market.

Throughout the year, we decreased exposure to US RNBS and added exposure in other areas of structured credit, including marketplace lending. The sovereign credit book was down 16.4% in Q4 but returned 20.7% for the year, largely due to gains from our position in Argentine government bonds.

We're excited about the opportunity set presented by the current market environment. We expect a combination of accelerating growth in fiscal stimulus in US will create an reflationary market which is favorable for Third Point's investment strategies, including event driven and value investing risk arbitrage and activism.

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

Thanks, Daniel. For the three months ended December 31, 2016, diluted book value per share decreased by $0.39 per share or 2.9% to $13.16 per share from $13.55 per share as of September 30, 2016. For the 12 months ended December 31, 2016, diluted book value per share increased by $0.31 per share or 2.4%.

Gross premiums written decreased by $18 million or 19% to $81 million for the three months ended December 31, 2016, from $99 million for the three months ended December 31, 2015. For the full year of 2016, gross premiums written decreased by $85 million or 12% to $617 million from $702 million for 2015. The decrease in gross premiums written for the 3 and 12 months ended December 31, 2016, was primarily a result of contracts that were not subject to renewal, and contracts that we chose not to renew due to pricing and/or terms and conditions, partially offset by new contracts and positive changes in premium estimates.

Net premiums earned for the three months ended December 31, 2016, increased by $58 million or 43% to $192 million due to continued growth in our in-force underwriting portfolio. For the 12 months ended December 31, 2016, earned premium decreased by 2% to $590 million, as compared to the 12 months ended December 31, 2015. The decrease in net premiums earned for the full year of 2016 was primarily due to retroactive reinsurance contracts of $108 million written and earned in the prior year, compared to none in 2016, partially offset by an increase in net premiums earned as a result of a larger in-force underwriting portfolio.

As we have mentioned several times during previous calls, movements in earned premium can be significantly impacted by retroactive deals, which are fully earned when they are written. We generated a $9.5 million underwriting loss for the three months ended December 31, 2016, versus an underwriting loss of $9.2 million in the prior year period, and our combined ratio was 105.0%, compared to 106.9%.

The most recent quarter included a small amount of net favorable development compared to net adverse development of $3.3 million for the three months ended December 31, 2015. Also in the fourth quarter, we recorded a small loss of $1.8 million from Hurricane Matthew related to one Florida homeowners contract. For the three months ended December 31, 2016, Third Point Re recorded a net investment loss of $36 million compared to net investment income of $62 million for the three months ended December 31, 2015.

For the 12 months ended December 31, 2016, net investment income was $99 million compared to a net investment loss of $28 million in 2015. The changes in net investment income were primarily driven by the returns in the respective periods that Dan discussed in detail, as well as a larger investment portfolio during 2016 compared to 2015, as a result of net investment income and float generated during the year.

General and administrative expenses for the fourth quarter and the full year of 2016 were $5.5 million and $39.4 million, respectively, down from $10.2 million, and $46 million in the previous year period. The decrease was primarily due to the reversal of bonus pool accruals in the fourth quarter of 2016. Our bonus pool is based on the Company's return on average equity, and we did not meet the minimum funding hurdle return of 5%.

Other than incentive compensation expenses that will vary based on our results, our G&A expenses have remained steady for several quarters, and we do not anticipate any significant changes. We expect a run rate of approximately $11 million per quarter of total G&A, subject to the impact of our performance on bonus accruals and performance-based share awards.

The foreign exchange gains for the quarter and year were primarily related to the revaluation of foreign currency insurance liabilities denominated in British pounds where the US dollar strengthened during the period. We hedge most of our foreign currency insurance liabilities by posting collateral in the same currency. The foreign currency collateral accounts are held within our investments, and therefore, the foreign exchange gains from the insurance liabilities were generally offset by losses on the collateral assets, which flow through net investment income. I will now hand the call back over to John.

Thank you, Chris. We continue to navigate difficult reinsurance market conditions by maintaining our underwriting discipline and targeting the few pockets of better priced business such as mortgage insurance. Our premium volume is likely to decrease further in 2017, as we push for improved composite ratios on the deals we underwrite. Regardless, we expect our invested assets to equity ratio to remain stable at approximately 1.5 times. We still have $93 million available under $100 million buyback program, and intend to buy back shares this coming quarter if our share price remains below 90% of book value.

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

(Operator Instructions)

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

Thank you, and good morning. First, congratulations to both John and Rob for the CEO succession. If you guys reflect back over the last five years, what you have accomplished and to show investor, expecting any changes going forward?

So, Kai, this is Rob. John and I founded the Company, worked together for the last five years. And my input was definitely heard. And so, I would not expect any major changes in strategy, and we will continue to focus on bringing down the combined ratio and generating float.

Yes, Kia, I think a great point to emphasize is that my commitment to the Company doesn't change. The time I spend on the Company doesn't change. There's certain functions that I'm very happy that Rob and Chris Coleman will be doing more of, and those are really relating to the regulatory and compliance. We often say, we're a publicly-traded New York Stock Exchange company with 25 people.

And just all of the various things you have to do because of that are big, so I am on one respect, I am moving a step away from that. And that allows me to step into, I think, a better role in business development, the underwriting stuff, and really focusing more on developing our US operation. We lost two people earlier this year. We're getting close to augmenting that staff with something pretty exciting. So, there's still plenty to do.

Great. My second question, some of your competitor comments on the emerging trends, I'm just wondering have you seen similar things? As well as how do you price that into your reserving, as well as pricing?

You know, that's really -- the area we see it the most in is the auto book. And we along with many people saw that a couple of years ago. And in Rob's comments, he said two years ago we tried to take that into account in the reinsurance terms and conditions and weren't successful -- unsuccessful. So, that book is getting smaller. We're watching that.

We think the market will wake up and rate levels will adjust, and there will be opportunities. But right now, we're not seeing that. So, really, the best thing we can do is when we think we see trends, we think things that are deteriorating and making the potential gains smaller or even negative, we step away from the business which is the reason why our volume 2016 over 2015 is down.

Kia, on the non-standard auto portfolio, we're down to only three clients now. And so, we've greatly deemphasized it. And as John said, we see the severity trends, the lost trends moving against us and try to improve the terms on the reinsurance contracts, and the market just isn't following us. So we backed away.

Okay. Then I have a few questions for Dan. Dan, the general results was a good start for the year, and also in your letter, you expressed you expect Third Point fund doing well this year. And also you have high expectation for your own performance this year. What gave you confidence of that?

Thank you for the question. And before get started, I just want to thank John for helping found the Company, and we're delighted that he's staying on as Chairman in this transition period as well.

What gives me confidence about the future is, I just think we've had a paradigm shift with the new administration in terms of having a backdrop that is supportive of business and pro-growth, as opposed to the prior administration which was pro- regulation and was not supportive of business. I think the result of this will be higher earnings, more growth as we referred to, more investment, and just a better climate for the stock market in general.

But in particular, I think as an event driven investor, we will have the benefit of a rising market and rising valuations. And don't get me wrong, there will be winners and losers in this. This isn't just an across-the-board statement about how this does apply to every company, so you'll have to be selective. But there will also be an increase. We're already seeing it in corporate activity which is something where we typically thrive.

So, I'm very optimistic. We've had good performance. We expect that to continue into the medium term, for sure.

Thanks for that. And then a follow-up question, you said that you mentioned basis but some argue the market validation is rich, a lot like good news probably already discounted in the market. What's your view on that? And how do you position the portfolio?

Yes, I mean, look, we -- market levels are important. I'm not sure that, given the increase in S&P earnings that we expect, due to changes in policy as well as tax reform, that it's as over-valued as people think. But we don't invest in markets. We invest in individual companies and we're seeing plenty of good valuation situations, particularly those in which companies are involved in some sorts of corporate transaction.

And the complexity is obscuring the earnings power of the company or companies that are going through financial or operational restructuring. So, we're not really fazed by that. And don't forget, we're a long short firm to the extent certain companies get ahead of themselves, that provides a good hedging opportunity. Or short-selling opportunity for us as well. So, we're not really fazed by that way of thinking.

Great. Thank you so much for all of the answers.

(Operator Instructions)

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

I want to echo Kai's congratulations to John and Rob on the transition. Basic question, I think I've asked this in the past, but Dan alluded to lower US corporate tax rates. How big of a factor is that in terms of client's decisions to buy quota share from Bermuda-based companies? Is the arbitrage, the tax arbitrage a relevant factor that could decrease demand for reinsurance?

Theoretically, it could. I guess the other impact is that, our US competitors, and there's only a couple, if their tax does down, again theoretically their cost of goods drops. But there's so much distance between where we are today in tax reform, it's really hard to speculate. I'm reluctant to speculate.

Yes, I think -- Meyer, that's a very insightful question. Companies will make more money. Their surplus positions will be stronger, and they'll have less need for the quota shares. Certainly there's a group of companies that quota share reinsurance is part of their capital structure. These tend to be the smaller, medium-sized companies that really need it.

A lot of the other quota share buying right now is purely discretionary. It's being done because the terms and conditions are very attractive. Very opportunistic buying, and I think that will continue regardless of tax position.

If when the buying company runs the deal through their analytics, and if it makes sense for them to buy, they'll continue to buy. But I think there's really two groups of quota share buyers. Those that really need it, and those that are taking advantage of market opportunities to buy.

Okay, that's very helpful. And a separate question on the nonstandard auto side. I understand that you're down client count. I guess my superficial expectation would have been that we've kind of recalibrated, at least, frequency to the extent that gas prices matter, maybe they matter more for nonstandard drivers, in which case in 2017 increased rates and increased earned premiums should outpace the frequency increases that were so high over the past couple of years. It sounds like you're not thinking of it that way, and I was wondering what I missing?

I think, it's a little bit of a moving target. I think, clearly, cheaper prices, people drive more. That's a fact. The distraction of the smartphones and all of the things you can do with them while you're driving, I think that's still on the rise. And last year, 2016, there were 40,000 highway deaths, it's the first time it's been over 40,000 in many years. In two years deaths are up 16%, fatalities from traffic accidents.

And as we all know, it seems like, weekly, there are more things, there are more distractions on your smartphone. Until that gets under control, I think we're going to continue to see, potentially see increases in accidents and frequency. We're also seeing, especially on the nonstandard side, we were talking about the other day, collision losses are up.

So, you get a nonstandard insured who maybe has an older car, hits a new car with the sensors and everything. A fender bender becomes very expensive. A lot more expensive that it has in the past. There's a lot more going on than just gasoline prices.

No, that makes perfect sense. Thanks so much and good luck, guys.

Thanks.

At this time I'd like to turn the floor back over to Mr. Berger for any additional or closing comments.

Thank you very much for dialing in, and we look forward to talking to you next quarter. Thank you.

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.