Siriuspoint Ltd (SPNT) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance First Quarter 2017 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. Thank you, Mr. Coleman. You may begin.

Thank you, operator. Welcome to the Third Point Reinsurance Ltd. Earnings Call for the first quarter of 2017. Last night, we issued an earnings press release and financial supplement, which is available on our website, www.thirdpointre.bm. Leading today's call will be John Berger, Chairman of Third Point Re; and Rob Bredahl, President and CEO.

But before we begin, I would 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 first quarter 2017 earnings 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 those 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, 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 2017 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.

The management changes we announced in March have gone extremely well. Rob Bredahl taken over as CEO has been a comfortable transition for the company and has allowed me to increase my focus on originating deals with brokers and clients and are contributing to underwriting decisions.

Rob took over at a good time. The first quarter of 2017 was our most profitable one in our 5.25-year history. We produced $104 million of net income as a result of strong performance from our investment manager, Third Point LLC.

Now that I've taken away all the thunder, I will hand the call over to Rob.

Thanks, John. Here's the plan for the call. I'll provide a brief overview of our results, 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 your questions.

I will start by discussing our results for the first quarter. We reported net income of $104 million, as John has already previewed. This was $0.98 per diluted share. This compares to a net loss of $51 million or $0.49 per diluted share in last year's first quarter.

The record results were driven by strong investment returns delivered by our investment manager, Third Point LLC. The investment return for the quarter was 5.8%. We had a few quarters with higher quarterly investment returns in 2012 and 2013, but this is before we generated a meaningful amount of float and, therefore, we had very little investment leverage.

With an invested asset to equity ratio that is now at 1.5x, we can take full advantage of strong investment results. Our return on beginning equity for the quarter was 7.4%.

Now let's talk about our underwriting results. Our combined ratio for the first quarter was 106.3%, which is in line with our expectations, given the current market conditions and lines of business on which we focus.

With stable long-term float and investment leverage in our target range, we are well positioned to push for better terms and conditions.

In recent quarters, we have deemphasized lines of business, where market conditions are particularly bad. For example, we have significantly decreased our writings on non-standard auto and Florida homeowners.

At the same time, we've increased our focus on flow-generating deals and higher-margin transactions such as mortgage insurance.

Gross written premium in the quarter dropped by 26% from last year's first quarter to $146 million. This decrease was due primarily to the nonrenewal of one large global auto warranty and fiscal damage treaty that has not performed up to our expectations.

We believe that premium for the year could be lower than in 2016. We have shifted the overall portfolio towards higher margin business as we continue to work towards lowering our combined ratio.

Before I conclude, I'll provide you with an update on our share buyback program. As we have advised, we intend to buy back shares whenever our share price is 90% of diluted book value or lower.

During the first quarter, our shares traded below 90% of the book for most of the quarter, and, therefore, we actively bought back shares. We repurchased 1.53 million of our common shares for an aggregate cost of $18.9 million and a weighted average cost of $12.32. We effectively maxed out our buying availability with our open trading window, given daily volume restrictions.

As of March 31, 2017, we had $73.7 million of remaining capacity on our authorized buyback program, which we plan to use if our share price remains below 90% of book.

I'll 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 returned 5.8% in the first quarter of 2017, net of fees and expenses versus, returns for the S&P and CS event-driven indices of 6.1% and 2.7%, respectively, for the quarter.

The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC.

During the first 3 months of 2017, volatility declined as stronger global growth and expectations of reflation sparked a rise in most investment markets. Portfolio repositioning, following the U.S. election and successful security selection, combined to generate positive returns for our portfolio. We earned profits in every strategy and sector other than our hedges.

We increased net exposure throughout the quarter by adding primarily to equities, initiating several significant investments in the financials, industrials and energy sectors.

Third Point's equity portfolio returned 10.2% on average exposure during Q1. Healthcare and industrial investments were the primary drivers of profits. We also meaningfully increased exposure outside the U.S., especially to Europe, and uncovered several new constructivist initiatives.

Credit was Third Point's best-performing strategy in 2016. In 2017, our portfolio continues to generate profits, but we are finding fewer opportunities for new investments in corporate structured and sovereign credit and have reduced exposure in each area accordingly.

In Q1, corporate credit, including both distressed and performing credit positions, returned 2.8% on average exposure. Our ABS book was up slightly, returning 1.5% on average exposure.

Sovereign credit led by Argentine government debt, returned 4.1% during the quarter. We believe the current environment is favorable for Third Point's investment strategy. We expect increasing corporate activity in the U.S., more opportunities for activist and constructivist investing across sectors and continued tailwinds from global reflation to drive further portfolio gains this year.

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

Thanks, Daniel. For the 3 months ended March 31, 2017, diluted book value per share increased by $0.88 per share or 6.7% to $14.04 per share.

Gross written premium decreased by $51 million or 26% to $146 million from $197 million in the first quarter of 2016. The main driver of the decrease was the nonrenewal of a $95 million auto contract that was just discussed by Rob, but also a $15 million reduction in premium on renewals of other contracts, mostly due to the clients increasing their retention.

These decreases were partially offset by net increasing premium from new business and other timing differences.

Net premiums earned for the 3 months ended March 31, 2017, were consistent with the 3 months ended March 31, 2016.

For the 3 months ended March 31, 2017, we incurred $1.6 million of net favorable prior years' reserve development. The $1.6 million of net favorable prior years' reserve development was accompanied by net increases of $1.6 million in acquisition costs, resulting in minimal impact on our net underwriting results.

We generated an $8.7 million net underwriting loss for the 3 months ended March 31, 2017, versus an underwriting loss of $6.6 million in the prior year period, and our combined ratio was 106.3% compared to 104.9%.

For the 3 months ended March 31, 2017, Third Point Rerecorded net investment income of $129 million compared to a net investment loss of $40 million for the prior year period.

The changes in net investment income were primarily driven by the returns in the respective periods that Daniel discussed in detail.

General and administrative expenses in the first quarter of 2017 were $11 million, which was consistent with last year's first quarter. 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.

We had a $5.3 million tax expense for the quarter compared to an income tax benefit of $1.9 million in last year's first quarter. The change in tax expense relates primarily to Third Point Reinsurance U.S.A. moving from a loss to a profit in this year's first quarter.

I'll now hand the call back over to Rob.

Thank you, Chris. We generated record results this quarter due to strong investment returns. But unlike prior periods in which we generated similarly strong investment returns, we can now take full advantage of them.

Portfolio has grown to $612 million and our invested assets to equity ratio to slightly above 1.5x, and within our targeted range.

Reinsurance market conditions remain challenging, but our total return business model allows us to be patient. We are reshaping the portfolio gradually towards higher margin business but only where we believe we are being profitably compensated for the increased risk.

As a result, we might experience a decrease in gross written premium again this year, but we still expect a modest improvement in our combined ratio over the next several quarters.

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

(Operator Instructions)

Operator, I think I was cut off in the very end there, and just the last part of the last sentence. And so what I intended to say was that we might experience a decrease in gross written premium again this year, but we still expect a modest improvement in our combined ratio. And so that was the end of the prepared comments. And now we can move to questions.

Our first question comes from Kai Pan with Morgan Stanley.

This is Chai Gohil for Kai Pan. Dan, first, just going back to your comments on the investor letter, so you talk about late-stage economic cycle, and it's a favorable investing environment for you. Why do you think this late-cycle environment is not different than some previous cycles, especially with the upcoming election season in multiple countries and the geopolitical tensions we have?

Look, I mean, from my standpoint, we focus a lot more on our bottoms-up approach than top-down macro prognostications. I think the consensus has been largely wrong and on the sidelines at various points since the election. So we're comfortable with U.S. growth and European growth, and even though it does -- even though this recovery is long in the tooth, we see it continuing for the time being. Having said that, what we're most excited about isn't really the environment, so much as some of the investments that we've found, either current investments that are in later stages of consolidation and mergers and about to realize significant synergies and earnings growth, like Sherwin-Williams, our investment in Honeywell that we disclosed recently, where we're very excited about that company's prospects, with or without a spin-off of its aerospace division, although we think obviously that would be a big plus, not just in terms of creating value for shareholders but in terms of operations for the business, and other businesses that we haven't disclosed yet that we've invested in, where we see potential inflection points for companies that are under-earning, that have a real ability to drive earnings growth that isn't yet perceived by the general public, but we think that they will follow that kind of course.

Okay, and you talked about the activist and the constructivist approach. So I just want to get your thoughts on how do you distinguish between those 2? And then, how do you balance that as part of your investing process?

Yes, I don't really get caught up in kind of splitting hairs in what we label what we do. I think that we have demonstrated over a long time the ability to identify companies that might be underperforming or under-earning or can benefit from better capital allocation strategy or sometimes even management changes. So we'll continue to engage with shareholders -- I mean, sorry, we'll continue to engage with managements and, if necessary, with boards, to try to advance our ideas where we think it will be in the interest of shareholders and the long term benefit of the companies that we're invested in.

Okay, and moving to the underwriting side. Rob, just want to get an update on the demand for the ADC contracts, especially in this environment versus, let's say, 6 to 12 months ago. Are you seeing any big differences on how the demand is, especially that reserves are becoming a more prominent point for a lot of these companies?

Well, we're about to make a push with the hiring of David Govrin to market reserve covers in the U.S. And so that remains to be seen. We have seen the increased demand coming from Europe, especially U.K. The reserve cover structures that we're marketing, work very well within the Solvency II model. Also the Ogden rate change, which resulted in a GBP 6 billion hole in the industry's balance sheet, has created increased demand. And those auto companies we've already been marketing to. And so that fits in well. So I think it's been a good event for us.

With the hiring of David, do you think you would expand into any other lines that you have not been in, until now? And like, I think Rob mentioned that moving to a more lower combined ratio down the line.

Yes, we were focused mostly on nonstandard auto in the U.S. and other NJ-driven lines of business. We're pulling back from those, deemphasizing them, going after reserve covers, as I just mentioned. But we're also looking at some A&H deals and going after professional liability treaties.

Our next question comes from Jay Cohen with Bank of America.

I just want to, I guess, follow-up on that comment about the potential for a somewhat lower combined ratio. Rob, over the next couple of quarters. I guess this is a function of the change in business mix, but if you could expand on that a little bit?

Jay, we make those comments, because we've written a good amount of mortgage insurance, and we also added some exposure to the GSEs through the finance lines retro portion that we do. And so the premiums has been written, but most of it hasn't been earned yet. It earns in over a long period of time, 7 years. So we look out over the next year to 2 years in earned premium on lower composite ratio of business will increase. We're booking on average the mortgage insurance side, 83, Chris?

Little over 80, yes.

Yes, so about a 83 composite. So it's about our lowest composite ratio business.

And just for modeling purposes, the split between the loss ratio and expense ratio, are they both lower than your other business?

Yes, as we've said in the past, we don't focus too much on the component parts of the composite ratio. And then, as we've said over time, the overall composite ratio will be reducing as the mortgage business earns in. And overall, definitely, the expenses on the mortgage are lower.

Got it. That's helpful. And then, lastly, just you had mention as far as some new businesses, professional lines being one of them. We hear all kinds of things about professional lines, some people say it's increasingly competitive and claims are rising and others seem to find it still pretty attractive. What part of the professional lines business are you guys interested in at this point?

So right now, almost all of our exposure to professional lines is coming through a couple of retro contracts, and these are broad casualty retro contracts. Because now, we have a reasonable-sized portfolio, we want to go after some of the underlying business, and professional lines, it's a very big segment. I don't think we've quite targeted those areas where we expect to fund the best returns, but we are putting a plan together.

Our next question comes from Meyer Shields with KBW.

Chris, just to clarify something because I'm not sure I understood it. Was the increase in the acquisition costs a function of the favorable reserve development? Or are those just 2 things that coincided within the quarter?

Yes, the reference to the development in the quarter and these are tiny amounts, so we had $1.6 million of favorable reserve development. However, those were generally on contracts where there's an offsetting slide, so you would have noted in my remarks the related increase in acquisition costs of a similar amount to the net effect to our underwriting results of development on the reserves in the quarter was essentially close to 0.

Okay, well that's helpful. I just wanted to make sure I understood it. Probably speaking, I guess, is there any reason for us to relate the fact that you're focusing on longer-duration contracts like mortgage when you're expecting less premium? In other words, you have more sustainable float on much longer-duration contracts. I just can't tell if that's coincidence or an essential part of the strategy?

I think it's probably a coincidence. The focus in our earlier years was on generating long-term stable float, which we've done. So now we're in a position to focus on pushing them the combined ratio, knowing that our investment leverage is going to remain stable. And so whether that comes from -- or the drop is coming from a decrease in short-term or long-term tail of liabilities is not something we're really focused on.

Okay, and then finally, John, I don't know if you could characterize how you're anticipating liability-related loss trends? And maybe how potential cedents are looking at it? Is there a gap there?

I think people are -- you talk to people and they are -- I think they are just pleasantly pleased that they're not really seeing an uptick in trends that much. But rates are going down. Professional liability across the board rates continue to go down, but in many areas, we're not seeing an uptick in loss development. At the same time, you're aware as well as we are, you're starting to see leakage in a lot of places. So I think it's an interesting time. And then I think, we're seeing, as Rob said, we are seeing and we're going to continue to see an increase in reserve deals, which tells you that people are worried about the reserves. So it could be an inflection-point time right now. I just want to come back to the comments on gross written premium. We're definitely advising that premium might drop this year, but, as you know, our deals are relatively big on average. And we're working on a number of large deals, and so premium won't necessarily drop.

(Operator Instructions) Our next question comes from Greg Locraft at T. Rowe Price.

Actually, I had a question for Dan. Dan, you've got a large hedge fund business, with a lot of current and, I would assume, prospective clients and they are purchasing your returns directly. Can you kind of compare -- can you compare and contrast what TPRE is as vis-à-vis your directly purchasing the hedge fund from you guys? Just go to the pros and the cons, and why one would pick the other, one versus the other. And the reason I asked is because the security is trading at such a substantial discount of the book value. So I just wanted you to put your investor head on and compare the 2 return streams.

Sure. Well, for one thing, anyone that has a stockbroker can buy shares in TPRE and have access to our investment strategy. So the biggest distinguishing factor is the daily liquidity that you get in investing in a public security, where the underlying investment portfolio is virtually the same as our main hedge fund. So as you probably know, if you want to invest directly, you have to be a qualified investor, and you can -- there are liquidity restrictions around redemptions. So that's the biggest difference. Obviously, we are -- if you were investing at Third Point via TPRE, you own an equity security, which is also an insurance company. So you are getting whatever the advantages are or disadvantages of owning an insurance company, and we believe that over the long run, as John and team bring down the combined ratios, you'll have 2 opportunities to when you'll get some positive return from the insurance company, added to the investment returns. I think the reason for the discount is that it's been a very difficult environment for reinsurance, but as that reality and perception changes, I think, you'll see that discount shrink. John, do you guys have any more to add to that?

Dan, this is Rob. I would just say that investors also get some embedded investment leverage. And so for each share, we have about 150% of that share value in investment assets. So there's a leverage effect as well.

Dan, would you consider steering current or prospective clients into TPRE because it trades -- it's the same return stream, it's leverage, it's liquid, and it trades in a substantial discount to book value? Or is that not something from a business perspective that you consider?

No, we do it all the time. Look, we have -- obviously, our investors know about it. It's a way of getting in on a discount, when we're approached by people who don't meet the investment qualifications to invest in Third Point through that -- directly through the hedge fund. Of course, we refer it. But we also make our investors aware that it exists, and we're not really in the business of like steering people, one way or the other, but we certainly let people know about it and talk about it.

Our next question comes from Ken Billingsley with Compass Point.

As a follow-up to some comments you made a little bit earlier, I just wanted to qualify them. One on the reserve release and the associated increase in acquisition costs, is that a one for one? As you increase reserves or maybe even add to reserves that there's going to be an associated change equal to that in the acquisition costs?

It just depends on -- it's a contract by contract. I think, as you know, we reserve on a contract-by-contract basis. And some of our contracts have one-for-one slides. Some are not necessarily one-to-one and many others don't have any features where acquisition costs move in conjunction with the reserves. It just so happen that the contracts during this quarter that we had reserve -- loss reserve changes on, had structures where they were offsetting slides. So that's necessarily always going to be the case.

And so in those contracts, any reserve benefit is going to the primary insurer?

Yes. In the case of this quarter, that's how it worked out.

Now, are those, in the reciprocal as well, if the losses are higher that there's a recoup on the fees and the acquisition costs? Or is it generally...

It can be, depending on where you are relative to the slide and based on the structure. They can work both ways.

Okay. and then the other question I had, I know you talked about premiums and it sounds like we should expect that it could decrease this year, not necessarily a guarantee. But one comment that you made earlier was that the primary insurers, it seems like they're retaining more of the risk. Obviously, it's a competitive market for you. From a risk standpoint, are you seeing better terms, though they are retaining more risk? Or from an exposure standpoint, are you having to offer some better terms to get the piece of business that they are still willing to put out there?

Ken, I think we mentioned that one reason why premium dropped this quarter versus last quarter was because one of our clients increased their retention. I don't think we are seeing that across the board. In fact, I think there is more buying going on. I think it's just the opposite. The attractive reinsurance market conditions are bringing in new buyers, which we view as being a big positive. There's kind of one-off increases in retentions here and there, but that's not what's going on overall in the market.

And, Ken, on that one particular deal, we've had that contract for 4 years, and this year, the company decided to keep a piece of what they were ceding to us, and we took that as a very favorable indication on the terms and conditions that the deals worked well for 4 years and they are looking at it and basically said, let's keep part of this. So again, to reemphasized what Rob said, was isolated was one account, but in this particular example, we took it as very good news.

And maybe I misunderstood what was said earlier it was not a commentary in general that people are retaining more; it was either commentary from a prior quarter or just one account.

Yes. It was very specific to our decrease in premiums, quarter-over-quarter.

There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

Thanks, everybody, for your time. Look forward to talking to you next quarter. If you have any questions in the meantime, please give us a call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.