Siriuspoint Ltd (SPNT) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Chris Coleman, CFO. Please begin, sir.

Thank you, operator. Welcome to the Third Point Reinsurance Limited Earnings Call for the Third 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 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 third 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 third 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 and market conditions, Daniel will discuss the performance of our investment portfolio, Chris will discuss our financial results in more detail, and then we will open up the call for your questions.

Before we get into the results discussion, however, I'd like to make you aware of changes to our board of directors. John Berger, currently Chairman and, of course, one of our founders and the original CEO of Third Point Re, will be stepping down from the board at the end of the year. On behalf of the company, I would like to thank John for all he's contributed to our success. Without John, there would be no Third Point Re. And from a personal standpoint, I want to thank him for the opportunity to work for him and learn from him. John is truly one of the all-time great reinsurance executives and even a better human being.

Steve Fass, who has previously served as our lead independent director, will replace John as interim chairman, and I will fill the board seat left vacant by John's departure.

Now as for the quarter. The third quarter of 2017 was an extremely active quarter for natural disasters and will be remembered for the human tragedy that these catastrophe events caused. Our thoughts and prayers go out to everyone affected.

Including smaller cat events earlier in the year and the recent California wildfires, many forecasters expect insured losses for the insurance industry to exceed $100 billion, which would be only the third time in history that industry losses exceeded this level.

As we have repeated many times, we do not rate any property excess of loss treaties and, therefore, we had minimal exposure to these events. We booked only $5.3 million in net losses, which added 5 points to our combined ratio.

The small amount of exposure we had to these cat events was primarily from quota share contracts with auto companies, Lloyd's entities and homeowner insurers. The homeowner quota share contracts we grade all have inuring cat covers, but we still assume a small amount of net cat exposure. In some instances, we buy retro cat protection to further reduce our net exposure on homeowner treaties.

Our decision to avoid property cat proved to be a good one in this quarter. We generated $55 million of net income, which brings our 9 month's profits up to $233 million. This was our best 9-month period since our inception almost 6 years ago.

Earnings per diluted share was $0.52 in the third quarter and $2.22 for the first 9 months of this year. Our diluted book value per share is now out (sic) [at] $15.24.

The good results were driven by strong investment returns delivered by our investment manager, Third Point LLC. The investment return for the quarter was 3.6%, and was 14.6% for the first 9 months of the year.

The strong results have continued since the end of the third quarter with the year-to-date return through October at 17.6%. [With a] few periods with higher quarterly investment returns in 2012 and 2013, [now] this was before we generated a meaningful amount of float, and therefore already had very little investment leverage.

With an invested asset leverage ratio that is at 1.57x, we can now take full advantage of strong investment results.

Our return on beginning equity for the quarter was 3.5% and 16.8% for the first 9 months of the year.

Now let's talk about our underwriting results. Our combined ratio for the third quarter, excluding cat losses, was 106.9%. This was similar to the combined ratio in last year's third quarter, which was 106.5%.

So the million-dollar question is, how will the reinsurance market react to the recent losses, especially in the non-cat lines of business in which we focus? We believe the deterioration of pricing and terms and conditions has ended but the magnitude of any improvement is uncertain. Few deals have been priced since the cat events, but we're seeing an increase in inquiries for capital relief structures.

We are pushing for improved pricing and terms and conditions on all deals and plan to remain very patient. Historically, it has taken up to 2 years for pricing to peak after big events.

Before I conclude, I'll provide you with an update on our share buyback program. As we've advised, we intend to buy back shares whenever our share price is 90% of diluted book value or lower. During the third quarter, our shares traded well above 90% of book value, and therefore we did not buy back any shares. As of September 30, we had $51.7 million of remaining capacity on our authorized buyback program, which we plan to use if our share price drops below 90% of book.

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, returned 3.6% in the third quarter of 2017, net of fees and expenses versus returns for the S&P and CS Event Driven indices of 4.5% and 0.9%, respectively, for the quarter. The account has returned 14.6% year-to-date net of fees and expenses. The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC.

Deregulation, combined with a weaker U.S. dollar and slower-than-expected pace of Fed rate hikes in 2016 has fueled growth domestically this year. More importantly, synchronized global growth has created favorable equity market conditions in both developed and EM economies.

With this economic backdrop, we continued to see the best opportunities in equities in the third quarter. While we remain concentrated in the U.S., we've established meaningful investments in Europe this year and are finding more opportunities in emerging markets and in Japan. In Q3, Third Point's equity portfolio returned 5.2% on average exposure. Year-to-date returns of 24.3% handily out (technical difficulty) (inaudible) the performance of the S&P 500 and 4 to 5x the returns of the credits [in MT] were the best-performing sectors. We continue to focus on constructive engagement with large-portfolio companies. Constructive equity investments currently represent approximately 40% of Third Point's assets under management.

A key aspect of the Third Point investment strategy is the ability to move across the capital structure opportunistically. In credit, we maintain discipline across allocations while we wait patiently for the next credit cycle. Currently, exposure to credit strategies is approximately 15%. In the third quarter, corporate credit, including both distressed and performing investments, returned 1.8% on average exposure. ABS and sovereign credit returned 3.8% and 12.5%, respectively, on average exposure for the quarter.

We believe we are well-positioned with an equity weighted portfolio balanced across sectors and geographies and both long and short exposure. We anticipate continued positive economic trends with strong global GDP growth combined with possible tax reform creating a favorable backdrop for earnings growth in the near term. Nevertheless, we are monitoring possible warning signs of recession and will adjust our portfolio as needed.

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

Thanks, Daniel. For the 3 months ended September 30, 2017, diluted book value per share increased by $0.50 per share or (technical difficulty) 3.4% to $15.24 per share.

For the 9 months ended September 30, 2017, diluted book value per share increased by $2.08 per share or 15.8%. Gross written premium increased by $32 million or 22% to $175 million from $143 million in the prior year's quarter. Gross written premium decreased by $59 million or 11% to $477 million from $537 million in the prior year's 9 months.

The increase for the 3 months ended September 30, 2017, compared to the prior year period was primarily due to new contracts, partially offset by timing differences.

The decrease for the 9 months ended September 30, 2017, compared to the prior year period 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 period and other timing differences, partially offset by new premium. The decrease in net premiums earned in the 3 months ended September 30, 2017, compared to the prior year quarter was primarily due to a lower in-force underwriting portfolio.

The increase in net premiums earned for the 9 months ended September 30, 2017, was primarily due to $86 million of new retroactive reinsurance contracts written in the second quarter, which were fully earned when written, 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 $12.6 million net underwriting loss for the 3 months ended September 30, 2017, compared to an underwriting loss of $8.3 million in the prior year period and our combined ratio was 111.9% compared to 106.5%.

For the 9-month period, we generated a $33.3 million net underwriting loss compared to an underwriting loss of $40.5 million in the prior year period and our combined ratio was 108% compared to 110.2%.

The net underwriting loss for the 3 and 9 months ended September 30, 2017 included $5.3 million related to third quarter catastrophes. This accounted for 5 percentage points on our quarterly combined ratio.

The net underwriting loss and combined ratio for the 3 and 9 months ended September 30, 2017 included an insignificant net impact for prior year reserve development.

The impact to the prior year quarterly period was also insignificant, while the prior year's 9-month period included $12.5 million related to the net impact of adverse reserve development.

For the 3 months ended September 30, 2017, we recognized net investment income of $89 million compared to $88 million for the prior year period.

For the 9 months ended September 30, 2017, we recognized net investment income of $325 million compared to $135 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, but also were impacted by higher net investments in the 2017 periods.

General and administrative expenses for the third quarter of 2017 were $13 million compared to $12 million for the prior year period. General and administrative expenses in the first 9 months of 2017 were $39 million compared to $34 million for the prior year period.

The increase was primarily due to an increase in our annual incentive plan compensation accruals, partially offset by lower stock compensation expense in the current year periods and separation costs in the prior year periods.

Our annual incentive plan is based on the company's return on average equity and we increased our accruals to reflect the performance of the company year-to-date.

The increase in income tax expense for the 9 months ended September 30, 2017, compared to the 9 months ended September 30, 2016, was primarily due to higher taxable income generated by our U.S. subsidiaries.

The change in foreign exchange gains and loss were 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. As a reminder, we have minimal net exposure to foreign currency movements from our foreign currency reinsurance contracts as we typically have collateral accounts with a similar amount of foreign currency assets as the net reinsurance liabilities. However, these offsetting FX gains and losses flow through net investment income.

I will now hand the call back over to Rob.

Thank you, Chris. Our strong results for 2017 continued through the third quarter as we produced our best 9 months results since our inception. We believe reinsurance market conditions and non-cat lines of business have stopped deteriorating, but the magnitude of any improvement is uncertain.

We focus primarily on capital relief reinsurance structures, such as quota share contracts and reserve covers, and therefore believe we are well-positioned given the significant losses suffered by the insurance industry. We're seeing an increase in the number of inquiries but it remains to be seen if pricing will improve. Even when market improvement is tepid, our earnings potential will remain 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 $731 million and will grow further in coming quarters, and our invested asset leverage is slightly above 1.5x and within our target range.

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

(Operator Instructions) Our first question comes from Kai Pan with Morgan Stanley.

First, congratulations to John to his full retirement this time. And I have a few question for Daniel first. First one is on the tax reform. So what do you think of the proposed deal, and what's the potential impact on the market?

Kai, look, it's -- I don't think anyone can predict this, so I'm just not going to contact -- comment on tax reform right now. I mean, it's in flux. Obviously, the corporate tax reforms that are being discussed are favorable, but I don't have any special crystal ball that you don't have about what's going on in Congress right now.

Okay, that's fair. Then on your gross exposure in long/short active funds have increased quite a bit from about [70] % at the beginning of the year, now it's 120%. Are you feeling more confident about the market or you saw the opportunity presented here?

I mean, I think that includes -- that isn't just -- that's not just equity exposure, but -- look, we like our positions. We're very confident in them and we are actually firing on all cylinders. We're making money on our longs and our shorts, so our net hasn't -- I don't think our net's moved that much, but we have taken up some gross exposure that's a reflection part of -- in the quality of the shorts that we're finding and the success we're having there.

Okay, great. Then in your letter, you mentioned that mapping out through the course of year-end, you see more of the same conditions. So in your mind, what could be the surprises, either to the positive or negative side to this market?

Sorry, what's -- I didn't -- my line went a little fuzzy...

Yes, I'm sorry. It's that -- you mentioned in your letter that you see more of the same condition -- basically stable condition in the marketplace. What could be surprises in your mind, either a positive surprise or a negative surprise to the market?

Well, if I said something, it wouldn't be a surprise. But there are certainly risks to the market. Obviously, tax reform not going through would be a negative, any signs of the economy slowing down. And I think beyond just market moves, I think, what we have to be more cognizant of is disruption across different industries, whether it's retail and related and consumer staple companies that are being disrupted by technology or what's going on in energy or other things that are being disrupted. There's a lot of -- there's a lot more dispersion going on under the surface than the relatively friendly high-level market index moves would suggest.

Okay. Last one and maybe for Dan is that you have been hiring sort of data science in the macro teams. And so how -- could you discuss a little bit more how exactly that help your investment process?

Yes. So, look, I think hedge funds are no different than any other business. We need to continually think about how we improve our processes. Part of that involves expanding our use of technology, staying relevant and cutting-edge in the technological tools that we use. So we've been building out our data science team. We've been looking at additional data sets. We've been infusing our process with different types of technology and so far, it's been very helpful, not just on looking at individual industries and companies, but also helping us think about the economy and markets more broadly, particularly when you combine our data effort with our new stand-alone macro strategy that we have going on in-house. On the macro strategy front, I just want to point out, this is also, again, just to enhance our positioning and our -- both long/short in terms of -- and in terms of concentrations in geography. We're not going to emphasize macro trades as an expression of that.

Okay. Switching to the underwriting side for Rob and Chris, I have 2 questions there. One is on the pricing front. It looks like the pricing outlook is getting better. Would that change your outlook on the combined ratio going forward? Because you have been talking about 107%, like a 105-ish for the next few years, but would that getting better?

Yes. Kai, recent events have -- is more optimistic. We do expect the combined ratio to come down. I think we've priced 2 deals since the events and terms, conditions and pricing were better. On one deal, actually, we were surprised at how much lower the ceding commission turned out to be. And so we're hopeful, but that's 2 data points. We don't expect any dramatic improvement, but a slow [grind] better through 2018. I think [we'll see].

Okay. Last one if I may. On the new PFIC rule in the proposed house deal, how do you sort of like -- how do you stand against that test?

We think we're a reinsurance company using any reasonable set of metrics. There's some language out there that we don't think is all that reasonable. There is a PFIC test in some of the draft legislation where a company would be deemed to PFIC if their total reserves to assets falls below 25%. But the definition of reserves in that language excludes UPR, which we don't think is reasonable. And so if you include UPR and you include total reserves, the number comes out to be about 30%, Chris?

That's right.

And so then we would fall under if the current draft legislation -- current language is used. We have a number of contingency plans and regardless of where it ends up, we'll be okay.

(Operator Instructions) Our next question comes from Christopher Campbell with KBW.

So just going on Kai's question on the tax reform, just going a little bit deeper. Like, I know one of the proposals that's out there is about a higher excise tax coming from the -- from U.S.-based businesses. How are you thinking about the impact for potential (inaudible)...

Yes. I should stress that this bill is moving through a very, very messy legislative process. And so the actual wording of the bill and also the interpretation of the bill is all over the place. But our current understanding of the excise tax is that it applies to payments made to foreign affiliates of U.S. taxpaying entities, but it's subject to a hurdle, it's subject to an annual total cash payment, which is averaged over 3 years. And so right now, we project to be well under that hurdle amount.

Okay, great. And would that -- I mean, would that presence if it did go through, if the law did go through with something like that, would that alter your U.S. growth plans?

No. We are based on current projections for the next 5 years and that's about as far out as we project. We'll be under that hurdle amount.

Okay, great. Now, just -- did Third Point write any retro this quarter? And then how are you -- you had mentioned a little bit about demand for capital relief covers kind of increasing, how would you categorize that market?

And when you say retro, you mean retro cat, like a [reload or] (inaudible) or retroactive insurance...

[I was thinking of] retroactive reinsurance, really capital [related] deals.

Yes. So the answer in terms of whether we wrote any in a quarter is no. We did not have any retroactive reinsurance contracts written this quarter. There was a couple of large ones written in the second quarter.

Okay. And then how would you categorize, like your quote submissions on -- what kind of [color] are you seeing through your...

The demand for surplus relief [lengthening] inquiries are up substantially this quarter -- substantially in the last few weeks. And so both in the form of quota share contracts and reserve covers. I think more of the reserve cover inquiries are coming out of Lloyd's and that's because reserve covers or their impact on capital is sort of well-known. You put the reserve cover into the Lloyd's model and it spits out a capital benefit that the seniors can count on. It's a little tougher in the U.S. because the rating agencies' treatment is not as prescribed as it is at Lloyd's.

Okay, great. So just moving on to the cost side. Your acquisition costs were down about $11 million just on an absolute dollar basis for the quarter, year-over-year, but the net written premium growth was up significantly. So how should we just be thinking about the relationship between those 2?

Sure. I mean, I think as we've said previously, we tend to focus more on trends in the total composite ratio, in total underwriting income, rather than the component parts of the composite ratio. I think as we've talked in the past, many of our contracts have very different component parts, and therefore individual contracts and how they're earning in any given quarter can change the mix. Yes, the other thing, too, is many of our contracts have commission structures where loss development is offset by acquisition cost movements. So looking at the current quarter, there's really nothing unusual flowing through this quarter other than just a higher proportion of earnings on contracts with lower acquisition costs. And then if you're looking at just the absolute dollar reduction this quarter compared to last quarter, there's just a lower amount of earned premium coming through this quarter, and so that's really what's driving the dollar reduction this period.

And then just one final one. Were there any nonrecurring expense impacts that you had this quarter from -- you know, Harvey or Irma and Maria that you don't expect to continue going forward?

Well, there's the $5.3 million of losses that relate to those cat events. So that $5.3 million we expect to be non-recurring...

Yes, and that's all flowing just through the losses.

There's no -- nothing through expenses.

Okay. So there was no higher, like, adjustment expenses that you guys had to incur?

No. That $5.3 million net cat loss that we refer to is really all flowing through the loss expense line.

At this time, I would like to turn the call over to Mr. Bredahl for concluding remarks.

Thanks, everyone, for joining us for the earnings call. We look forward to talking to you next quarter. In the meantime, if you have any questions, please give us a call. Bye-bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.