Siriuspoint Ltd (SPNT) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance Second 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. You may begin.

Thank you, operator. Welcome to the Third Point Reinsurance Ltd. Earnings Call for the Second Quarter of 2017. Last night, we issued an earnings press release and a financial supplement, which is available on our website, www.thirdpointre.bm.

Leading today's call will be 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 second 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 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, 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 Rob Bredahl, Rob?

Thanks, Chris. Good morning, and thank you for taking the time to join our second quarter 2017 earnings call. In addition to Chris Coleman, Chief Financial Officer of Third Point Re, with me today is Daniel Loeb, CEO of Third Point LLC, our investment manager.

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, Chris will discuss our financial results in more detail, and then we'll open up the call for your questions.

The strong results in 2017 have continued with $75 million of net income in the second quarter, which brings our 6-month profits up to $179 million. This was our best 6-month period since our inception 5.5 years ago and compares to net income of $53 million in last year's second quarter and $2.2 million in last year's first half. Earnings per diluted share were $0.71 in the second quarter and $1.70 for the first 6 months of this year.

Our diluted book value per share is now up to $14.74. The good results were driven by strong investment returns delivered by our investment manager, Third Point LLC. The investment return for the quarter was 4.5% and 10.6% for the first half of the year. We had a few periods 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 leverage ratio that is now at 1.53x, we can take full advantage of strong investment results.

Our return on beginning equity for the quarter was 5.0% and 12.8% for the first half of the year. We believe the ideal range for our invested asset leverage ratio is 1.5% to 1.75%, and therefore, we have some room to increase it further.

Now let's talk about our underwriting results. Our combined ratio for the second quarter was 107.0%, which is one of our expectations given current market conditions. This compares to a combined ratio of 119.2% in last year's second quarter and 106.3% for the first quarter of this year. The combined ratio in the second quarter was a little higher than our combined ratio in the first quarter due to additional management incentive compensation and this added about 2 percentage points to our combined ratio.

The bonus full -- funding is based on return on shareholders' equity, and with another strong quarter of results, we added to the bonus accrual.

Turning to reinsurance market conditions. Well, they remain very challenging. The good news is that our total return business model can deliver strong results in any type of reinsurance market as it has in the first half of this year. With stable long-term float and investment leverage in our target range, we can push for better terms and conditions and tolerate decreases in premium without diminishing our earnings potential.

To combat the challenging market, we are pushing for improved pricing on treaty renewals and allowing underpriced deals to trade away. We are carefully and slowly repositioning our portfolio towards higher margin lines of business. And we're focusing on structured surplus relief transactions such as reserve covers. We've established ourselves as providers of innovative solutions for capital needs and are seeing a good flow of business, especially from the U.K. As we enter the heart of the hurricane season, there's another point I would like to make about our reinsurance portfolio. Hopefully, this is just a reminder. We do not rate any property cat excess of loss, and therefore, we have only a very small amount of residual cat exposure.

Now we have not benefited from the very lucky multiyear period of low cat activity, but the same time, we have not had to worry about and manage this type of volatile exposure.

Before I conclude, I will 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 second quarter, our shares traded below 90% of book for most of the quarter, and therefore, we actively bought back shares.

We repurchased 1.77 million of our common shares for an aggregate cost of $22.0 million and this is at an weighted average cost of $12.44 per share. On most days, we maxed out our buying availability within our trading window, given daily volume restrictions. As of June 30, 2017, we had $51.7 million of remaining capacity on our buyback program, which we plan to use if our share price again drops 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 4.5% in the second quarter of 2017, net of fees and expenses, versus returns for the S&P and CS Event Driven Indices of 3.1% and 1.1%, respectively, for the quarter. The account has returned 10.6% for the first half of 2017, net of fees and expenses. The Third Point Reinsurance account represents approximately 14% of assets managed by Third Point LLC.

During the second quarter, our portfolio composition shifted in response to an evolving market environment. Prospects for significant near-term change in U.S. health care, trade and tax policies have dimmed, and reflation trade we expected to drive markets higher this year has not materialized. However, synchronized global economic growth has given us a continued reason to be positive on markets and to maintain significant long-term equity exposure to more defensive sectors in Europe and in constructive investments. We have found more opportunities to take short positions in single names and companies that we think are overvalued at this peak market and in sectors undergoing structural declines.

Third Point's equity portfolio returned 9.1% in Q2, which is 3x greater than returns for the S&P 500 during the same period. Year-to-date returns on average exposure are 19.2% in equities. Our most profitable sectors for both the year and the quarter have been health care and consumer and we generated positive results for each sector in the equity book.

In credit, we're patiently waiting for the next cycle and have reduced exposure across each vertical. In Q2, corporate credit, including both distressed and performing investments, detracted 3.2% on average exposure but is up slightly for the year.

ABS and sovereign credit returned 0.1% and 3.5%, respectively, on average exposure for the quarter. We will be carefully watching central bank activity as we approach year-end as we expect this will be the major driver of market sentiment. In the interim, we remain excited about our well-balanced equity portfolio and its mix of event-driven situations, higher multiple defensive companies and activist opportunities.

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

Thanks, Daniel. For the 3 months ended June 30, 2017, diluted book value per share increased by $0.70 per share or 5% to $14.74 per share. For the 6 months ended June 30, 2017, diluted book value per share increased by $1.58 per share or 12%.

Gross written premium decreased by $40 million or 21% to a $157 million from $197 million in the prior year's quarter. Gross written premiums decreased by $91 million or 23% to $303 million from $394 million in the prior year's 6 months. The decrease in the 3 and 6 months ended June 30, 2017, compared to the prior year periods was primarily due to contracts that we did not renew as a result of underlying terms and conditions, lower premium adjustments in the current year periods and other timing differences, partially offset by new premium.

The increase in net premiums earned was primarily due to the addition of $84 million of new retroactive exposures in reinsurance contracts, including the net premiums earned in the 3 and 6 months ended June 30, 2017, partially offset by a lower in-force underwriting portfolio. We did not write any retroactive reinsurance contracts in the prior year periods. We generated a $12.1 million net underwriting loss for the 3 months ended June 30, 2017, compared to an underwriting loss of $25.6 million in the prior year period. And our combined ratio was 107.0% compared to 119.2%.

We generated a $20.8 million net underwriting loss for the 6 months ended June 30, 2017, compared to an underwriting loss of $32.2 million in the prior year period. And our combined ratio was 106.6% compared to 111.9%. The net underwriting loss and combined ratio for the 3 and 6 months ended June 30, 2017, included an insignificant amount related to prior year loss development. The prior year periods included $12.9 million and $12.5 million, respectively, related to the net impact of adverse reserve development.

For the 3 months ended June 30, 2017, we recognized net investment income of $107 million compared to $86 million for the prior year period. For the 6 months ended June 30, 2017, we recognize net investment income of $236 million compared to $46 million for the prior year period. The changes in the net investment income were primarily driven by the returns in the respective periods that Daniel discussed in detail.

General and administrative expenses in the second quarter of 2017 were $15 million compared to $10 million for the prior year period. General and administrative expenses in the first half of 2017 were $26 million compared to $22 million for the prior year period. The increase was primarily due to an increase in accruals for our annual incentive compensation expense, driven by the higher returns in 2017 to date, partially offset by lower stock compensation expense. The increase in income tax expense for the 6 months ended June 30, 2017, compared to the 6 months ended June 30, 2016, was primarily due to higher taxable income generated by our U.S. subsidiaries.

The change in foreign exchange gains and losses was primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds, where the U.S. dollar weakened in the current year periods compared to prior year periods where the U.S. dollar strengthened.

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

Thank you, Chris. Our strong results for 2017 continued through the second quarter as we produced our best 6 months of results since our inception. Reinsurance market conditions remain challenging and we are not benefiting from the current lucky period of historically low cat activity since we do not rate any property cat. Still, our earnings potential is strong due to our total return business model. We've done a good job of generating stable, long-term float. Our float has grown to $648 million and will grow further in coming quarters, and our invested asset leverage ratio is slightly above 1.5x and within our target range. We are reshaping the portfolio gradually towards higher-margin business, but only where we believe we are being properly compensated for the increased risk. As a result, we might experience a decrease from gross written premium again this year as we continue to work towards improving our combined ratio.

We thank you for your time and now we'll open the call for questions. Operator?

(Operator Instructions) Our first question is coming from Kai Pan of Morgan Stanley.

First, a few questions for Dan. Dan, in your quarterly letter, you mentioned that some of the expectation for the fiscal stimulus was that tax form hasn't come to fruition as well as the, in general, the U.S. economy had generally been disappointing versus expectation. But all the indices, actually near all-time high or at all-time highs. Do you worry about any downside risk to the market?

I think what I said, obviously, there's always downside risk to the market at any time for a number of reasons outside of our control and also outside of what's going on economically. So it's always something we think about. I think what I was saying was that we better -- I guess, a case of better lucky than right. We -- the market -- we expected the market to go up but for different reasons. We thought it would be based on generally positive growth-oriented policies enacted by the administration, lower taxes, infrastructure spending, health care reform, et cetera. None of these things transpired. But what has transpired has been global synchronized economic growth and a very accommodative global monetary structure. So I'm happy with the outcome. The reason for it was different from what we anticipated but we'll take it. And we expect -- while, valuations are getting a little more stretched, we're still finding lots of really good things to do in the areas of the market that we participate in, which is constructive investments where there is a lot of upside potential and the companies that we're invested in, some of the higher growth companies that are -- way outgrowing the economy and some of the special situations as well as the short -- our short book is performing very well.

Yes. On your short book, you mentioned that you're finding opportunities, even in the rising markets. Some single names, you believe, are overpriced. So are there certain areas you're focusing on in the short sight?

Yes, certainly. I mean, we've wrote about our [fracs and bets], which have gone very well for us. So really, what we're focusing on is structurally challenged companies that are just going to have a much more -- that are having a very difficult time in the current environment. So a lot of these are retailers, consumer brands. I mentioned energy-related companies and companies -- and just some companies we think are -- have very low quality earnings that we think might be playing accounting games through to achieve their results.

Last one for Dan. Your recent investment in Nestlé. So this is a big investment for you. And how differently is activism investing outside of U.S.? How do you compare with that from your experience? Or maybe you can draw some -- your past experience with some investments you made in Japan?

Yes, I think that's a good point that you just made. I think any time you go into a different geography with a different set of securities laws and rules and different shareholder base and other social conditions, you have to be really sensitive to the culture and society that you're investing in and the context. I mean, we -- I wouldn't necessarily call Nestle as an activist investment per se. I think we have a lot of respect for Mark Schneider, the CEO. We -- this is more a case of a company that we hope is going in the right direction, we think it is. But we've articulated we would like them to articulate margin targets and to explore better capital allocation plans along the lines of what we described in our letter. And we're -- we have very high hopes for their Investor Day on September 26. They just reported earnings, which were, I think -- had to be disappointing to them. They sounded disappointing. So -- but we're hopeful that in September, they will articulate more specific goals around margin improvement, portfolio optimization, and hopefully, address the L'Oreal stake.

If I may, just like a couple of questions on the underwriting side for Rob and Chris. So you mentioned the investment leverage. In the past, you've talked about a 1.4, then raised to 1.5. Now up to 1.75. I just wondered, how are rating agencies' comfort level with the rising investment leverage?

Yes. Kai, we're -- when we give those numbers, we're really backing into our BCAR score. And over time, A.M. Best has lowered the asset charge a little bit. And then there's other factors. There's growth charges that are certain to be reduced. And so the target range has gone up because we have more room with our BCAR score.

Okay. Last one, could you talk a little bit more about retro deal and where do you find the opportunity? And do you think that will continue to be a growth area for you guys?

Sure. Yes, I think you mean the retroactive deal. So we did a large reserve cover in the quarter and it was for a Lloyd's Syndicate. And it was a structure and rewrite of a deal we had done previously. And so it's a Lloyd's entity and this particular entity suffered some losses from the Ogden rate change. And so their need for capital increased and I think the deal about doubled in size year-over-year. And it's one of several deals that we've completed in London, and in fact, the pipeline of deals coming out of the U.K. for reserve covers -- for capital relief reserve covers is very big right now.

Our next question is coming from Jay Cohen of Bank of America Merrill Lynch.

Some of my questions were answered. I guess, the other one, you talked about repositioning the portfolio over time, and I guess, part of that is doing some these retroactive deals. But what else are you talking about when you say that?

So over the past, really, 18 months, we've pulled away from nonstandard auto and Florida homeowners. In fact, I think we have 2 -- actually, 3 non-standard auto deals lapped and that's down from 8 or so. And in Florida, we have 2 remaining deals and so we're down from about 8 there. And so there's been a big shift away from that lower margin business and we're writing more reserve covers. We've written 2 larger retro casualty deals and I would say that's more traditional casualty is the underlying portfolio where we've added structure around it, and then mortgages. We went from having a very small portfolio to writing, I think, in total about $270 million of mortgage premium. And so that's -- those are the high points, on the shift in the portfolio.

Are there any new mortgage deals this quarter?

No, nothing written in this quarter, Jack.

And that's -- Jay, that's just a function of the renewal cycle on the mortgage deals.

(Operator Instructions) Our next question is coming from Christopher Campbell of KBW.

Just -- so you had mentioned non-standard auto and Florida homeowners. Are there any other lines of business that you're not renewing due to deteriorating terms and conditions?

In the quarter, we had a larger workers' compensation deal that we non-renewed. And that was a deal we were on for probably 4 years and it ran okay. We pushed for better pricing and the market just didn't support better pricing. So it traded away from us.

Got it. The second one, just any color behind the acquisition cost increase. It's up about $20 million year-over-year.

Yes. I mean, on the -- certainly, on a ratio basis relative to last quarter, it's actually exactly the same. Really, when you look at the components of our composite ratio, the main answer is always going to be a shift in mix of business that's going to drive the component parts. If you track our composite ratio over time, it's held relatively consistent and it really just becomes a function of mix. Extreme examples are when we do a reserve cover, those tend to have a much higher loss ratio. And where we have earnings from homeowners and other contracts similar to that, that have much higher acquisition costs, they can skew the ratios on a quarter-to-quarter basis. But overall, our composites have held relatively consistent.

And I guess, just to maybe put an exclamation point on that, we managed the all-in composite ratio. And the breakdown of the loss ratio versus acquisition cost just aren't numbers that we spend much time managing to.

All right. And just one final one. You had mentioned the increased reserve covers coming out of U.K. due to Ogden. But we're also seeing kind of weakening reserve positions in the U.S. Are you seeing any increased demand domestically?

Yes. And it's not only Ogden in the U.K. The capital models that have been introduced by regulators and by Lloyd's now are very specific on how reserve covers generate capital. And so there used to be uncertainty and that uncertainty has been removed. And because of that, reserve covers are being used in addition to quota shares and other traditional forms of reinsurance to generate capital. In the U.S., yes, we're seeing a flow of business from companies that reserve issues. Our -- the spot that we played in up until now are really well-reserved companies like these Lloyd's entities where we're providing a reserve cover with a small amount of adverse development cover limit and where that ADC limit fits in well to the capital models. The deals we're seeing out of the U.S. are companies looking for someone to put a patch on a reserving issue. And we'll look at them. We're less likely to do many of them. We're much more interested in the capital relief-type reserve cover.

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

Well, thank you, everybody, for your time. Look forward to talking to you next quarter. In the meantime, please give us a call if you have any additional questions. 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.