Siriuspoint Ltd (SPNT) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Third Point Reinsurance Second Quarter 2018 Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to Chris Coleman, CFO. Please go ahead.

Thank you, operator. Welcome to the Third Point Reinsurance Ltd. Earnings Call for the Second Quarter of 2018. 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 second quarter 2018 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?

Thank you, Chris. Before we discuss operating results for the quarter, I want to explain the impact of the investment account restructuring that we announced last night.

As we mentioned on our previous earnings call, we've been working to restructure our investment account from a separately managed account structure to a fund structure. The new limited partnership agreement and related agreements that were attached as part of our 8-K filing last night accomplished this.

We'll begin transitioning our assets to new fund structure on August 31, and we expect that by September 30, we'll be reporting our balance sheet under this new structure. Although this represents a significant structural change, we'll manage the company into a similar level of investment exposure with investment guidelines, liquidity provisions and redemption rights remaining broadly similar under the new fund structure.

Along with creating operational and financial reporting efficiencies, we believe that this balance sheet presentation results in a better reflection of how investors and other users of our financial statements already think about our investment portfolio.

As a result of this change and consistent with prior comments, we expect to exceed the 25% loss reserves to total assets threshold at year-end as defined in the recent tax definition of passive foreign investment company, or PFIC, with minimal impact to expected shareholder returns and operations.

Now I'll move on to our financial results. During the quarter, we generated net income of $20 million for a return on beginning equity of 1.2%. Our combined ratio improved to 103.6% from 107.0% in the second quarter of 2017 and from 104.5% for the first quarter of 2018. We are committed to driving our combined ratio lower by continuing to carefully manage expenses, pushing for improved pricing on renewals and carefully expanding our writings into higher-margin lines of business and forms of reinsurance.

The increased focus on higher-margin business includes increasing our ratings of specialty lines, writing lower layer excess covers in addition to quota share contracts and writing some shorter-tail event-type covers. In the past couple of months, we've added 2 very experienced senior underwriters with strong market relationships as well as the support staff to help with this effort.

Our combined ratio was also benefiting from some modest improvement in market pricing. Ceding commissions in several cases decreased at renewal and more than offset loss ratio trends. As I mentioned on our last earnings call, we believe the improvement is due in part to the heavy cat losses experienced by the industry in 2017. Outsized cat profits and historically low cat activity years leading up to 2017 had been masking the rampant underpricing of non-cat lines of business.

Given the expected improvement in our underwriting results and Third Point LLC's continued out-performance of their hedge fund peers, we believe that our shares are trading at an attractive level.

During the quarter, we repurchased approximately 2.7 million of our common shares in the open market for $37 million or $13.62 per share on average and for the first half of the year, we repurchased approximately 4.3 million of our common shares for $60 million. We continue to believe that buying back shares below book is an appropriate use of our capital. As we've noted in the past, we plan to buy back shares during open windows when we trade at or below 95% of diluted book value per share, subject, of course, to rating agency and regulatory capital requirements and currently, we have $140 million available under our existing share purchase plan.

I'll now hand the call over to Daniel Loeb, who will discuss our investment results.

Thanks, Rob, and good morning. The Third Point Reinsurance investment portfolio managed by Third Point LLC was up 1% for the second quarter of 2018 net of fees and expenses, bringing year-to-date returns to 0.8%. In comparison, the S&P 500 was up 3.4% and 2.7% for the same periods respectively. The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC. Slightly positive performance during the second quarter pushed Third Point into profitable territory for 2018. The net performance masks strength in several of our largest positions. At quarter-end, we had a long list of mark-to-market declines in names that we expect will recoup their losses.

Losses in our short hedge portfolio outweighed gains from single name shorts. After generating strong returns in Argentine sovereign debt between 2014 to 2017, we've recycled some of our realized profits into a small portfolio of emerging markets equities, primarily Argentine banks.

Unfortunately, we overstayed our welcome in the region and took losses on those securities last quarter when EM currencies weakened dramatically. In Q2, we made several adjustments to our equity portfolio. We initiated several core long-equity positions across various sectors and exited any direct investments in emerging markets. We continue to focus on short selling and added several team members dedicated to shorts over the last several months.

During the quarter, our equity portfolio returned 3.2% on average exposure. Strong performance in our TMT and healthcare portfolio was partially offset by negative returns in financials, consumer and across our short book. Our dedicated short portfolio has generated an ROA of 3% in 2018, suggesting alpha generation of 5.7% for the year.

Our current modest investments and credit strategies reflect the limited opportunity set and that made little impact on performance this year. Our corporate and sovereign credit portfolios returned 0.2% and 4.6% for the quarter, respectively. We've been finding some compelling investment opportunities in structured credit, and that book returned 3.3% in Q2, comparing favorably to returns of 0.9% for the HFN, hedge fund mortgage, index for the same period.

While it is important to stay abreast of political events and shifts in economic policy, data and forecasts, our performance is driven primarily by bottoms-up fundamental investing and only rarely by our ability to read a macro crystal ball. Still, we spend time studying global market dynamics, because every few years, doing so gives us a chance to decisively shift positioning our asset classes when we recognize turning points in extremely volatile markets while others remain offsides.

With this in mind, our view of the current economic backdrop is: One, U.S. growth will remain buoyed at a high level due to the fiscal stimulus impulse from spending increases coming into the system; two, inflation has remained stable in the first half of the year with little sign of impending acceleration, despite a record-low unemployment rate; three, the cycle can extend longer than many people think, as companies are in good shape, particularly in the U.S. and the consumer is strong while carrying only modest debt levels; and four, equities are not expensive at 16x forward earnings. We believe the risk of recession in the next year remains low, and without this concern weighing heavily on markets and with the tailwinds we have described, we believe equity should go higher but at a more moderate pace.

We remain actively engaged with many of our core equity positions and anticipate positive portfolio developments in the coming months.

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

Thanks, Daniel. Our diluted book value per share at the end of the second quarter was $15.63, which was an increase of $0.24 or 1.6% from March 31, 2018. Net investment income for the quarter was $31 million, which reflects the returns for the quarter, which Daniel discussed in detail.

Our gross premiums written for the second quarter was $50 million, which was a decrease of $107 million or 68% from the prior year's second quarter. Gross written premium increased by $125 million or 41% to $428 million from $303 million for the first half of 2017. The lower gross premiums in the second quarter primarily reflects retroactive reinsurance contracts that were written in last year's second quarter compared to only a small amount in the current quarter. As we have stated many times, quarter-to-quarter comparisons of premiums can be difficult given timing of certain renewals and types of contracts.

We generated a $5 million net underwriting loss for the second quarter, and our combined ratio was 103.6% compared to 107.0% in the prior year's second quarter and 104.5% for the first quarter of 2018.

For the 6-month period, we generated an $11 million net underwriting loss compared to an underwriting loss of $21 million in the prior year period, and our combined ratio was 104.0% compared to 106.6%.

For the quarter ended June 30, 2018, we recorded a net $2.4 million improvement in the net underwriting results related to changes in estimates of prior year's loss reserves net of the related impact of acquisition costs.

As Rob mentioned earlier, we continue to see some improvement in terms and conditions on several contracts that renewed in the first half of the year. The improvement in our combined ratio also reflects a lower G&A expense ratio compared to the prior year's periods.

We would expect that our combined ratio would -- will continue to gradually improve. Total general and administrative expenses for the second quarter of 2018 were $10 million compared to $15 million for the prior year period. For the 6-month period, general and administrative expenses were $19 million compared to $26 million in the prior year period. The decrease was primarily due to lower payroll-related costs and lower stock compensation expense. The lower payroll-related costs were due to lower annual incentive plan compensation expense accruals, which is based on a formula derived from certain financial performance metrics. Our accrual was lower this year compared to the prior year periods to reflect the lower performance of the company in the current year periods.

The foreign exchange gains in the current period were primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds where the U.S. dollar strengthened in the current year period compared to the prior year period.

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 foreign currency losses on the collateral flow through net investment income.

Lastly, we are pleased to announce that we have closed a $200 million, 1-year unsecured letter of credit facility for the issuance of letters of credit to support our reinsurance business. The details were disclosed in our 8-K filing last night. This facility will give us additional flexibility as part of our investment restructuring to provide collateral to our reinsurance business counterparties.

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

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

I have a few question for Dan first and then a couple for Rob. First with Dan, the July result announced last night is flattish compared with S&P up more than 3%. Could you discuss in more detail about the performance in the months in both long side as well as short side?

Sure. So we had a big investment in NXP, which obviously was a -- had a disappointing outcome, and a bunch of the NASDAQ were -- underperformed and we had some exposure to NIMs there.

Okay. You mentioned in your letter, like Facebook is one of the top winners in the second quarter, but we haven't -- sort of like the stock movements have been coming down, I just wonder what's the view on the stock going forward from here?

Yes, that was a very disappointing quarter and we exited the NIM.

Okay. And also you mentioned like in term of investment, you are gradually shifting from value specialty situation into like a growth stock. And I just wonder how would it change your investment process? And also like the investment mentality, because it might be different skill set or mentality investing value stock versus growth stock?

Yes, that so -- look, I made the point in the letter. I wouldn't describe this as a shift in our focus. Around 80% plus of our portfolio is still in non-tech -- non -- sort of -- non-tech names. And by the way, when we talk about growth, it isn't just the super-high flyers. I mean, we have -- we look at growth in financial companies, in industrial companies, so I guess the point was that we're just -- we're really looking at the strength of the businesses and we're willing to pay up a little bit more than we might otherwise have using traditional value metrics.

Okay. That's great. And then last one for you is on the sort of tariff situation, the trade war. You explained a bit in your letter, I just wonder how do you position Third Point portfolio, are you going to reduce your international exposure?

Yes, I mean that's a really tough one to answer. I don't think anyone knows the direction that this is going in, which is -- it's safe to say that there's just not much higher degree of uncertainty. I mean, we follow this -- we follow on what's going on day to day. Obviously, we thought we had a good handle on what was going on with Qualcomm and NXP and we miscalculated there. I don't think that was entirely a function of -- I mean it was probably a function of trade wars, it was also a function of the way we think the management teams handled the situation. But whatever the reason is, we made a losing bet there.

Great, Dan. I have a few more for Rob on the underwriting side. First one is at the quarterly -- at the quarter, my ratio was down like 340 basis point from the year-ago period. Mostly, the reduction is coming from the G&A expense ratio. You explained a little bit. I just wonder your second quarter, like $5 million, like G&A expenses, the run rate going forward?

Yes, Chris -- I'll let Chris take this.

Yes, it's fairly simple answer, Kai. The movement in the G&A expense ratio, it was a function primarily of our bonus accruals, which is very formula-driven and highly tied to our overall return on average equity, which was significantly lower to the first half of the year compared to last year. And so in terms of a run rate going forward, other than movements in bonus accrual tied to kind of return on average equity in the go-forward period through the remainder of the year, the overall G&A should be relatively constant.

Yes, and I'll add, Kai, that last year, with very high investment returns, the G&A expense ratio worked against us because of the compensation accruals.

Okay. And now -- you've now shifting to some specialty lines and lower layers of access laws, those will carry lower loss ratio assuming going forward, but you haven't seen that benefit in your combined ratio -- reported combined ratio yet?

We've seen a little benefit. We're incrementally shifting the portfolio towards those lines and as you know, it takes a while for the premium written to earn in. So I think the improvement in our combined ratio is the G&A that we talked about. But also, we are seeing some improvement in surplus -- really of quota share ceding commissions. They're coming down. We believe they're coming down a little bit more than the adverse loss ratio trends.

Do you see targeting underwriting breakeven or profitability in 2019?

We are.

Okay. And last one you made on the -- looks like in the quarter, there was a creep up in term expenses related to Florida assignment and benefits, and that sort of more than offset some of our reserve releases from other lines. I just wonder could you explain a little bit on that issue, and -- because we have seen some upward revision on loss estimates from Irma losses?

We had, I think 2 remaining Florida homeowner accounts. And one of them had some adverse development related to AOB. And AOB is sort of a basket covering, what are losses, one-way attorney fees and just in general, the bad legal system in Florida. And so that increase reflects us recognizing a bad trend on 1 contract.

And do you think that will be sort of -- still some potential rates there going forward?

No. We always try to stay ahead of it. I mean, there's some potential, but we think we have properly reserved it and we don't expect any further increases in the reserves.

Our next question is coming from Meyer Shields from KBW.

Two quick questions. One, I guess, Rob, you mentioned ceding commission improvements offsetting loss trends. I was hoping you could talk a little bit more about loss trends, maybe what you're seeing in property versus casualty versus specialty?

The trends are, I would say, stable to slightly worse in the general casualty lines. And ceding commissions are probably down about 3 points on average, and we think that really covers it. Specialty is across-the-board. I mean, I can't really talk about any particular trend in specialty. And then what was the last?

Property.

Yes, property. We talked about AOB. That's really our big exposure there.

Yes, and then on that, the 2 main remaining accounts on property renewed in the fourth quarter of 2017, and you'll probably recall, we talked a little bit about those there, where there was pretty dramatic improvements in the commission structures that we felt kind of compensated for the adverse loss trends we were seeing on that particular line of business.

Yes. And Meyer, the auto trends have been talked about quite a bit. And so we had a largest -- larger nonstandard auto portfolio. We've come off most of that, but there is improvement in pricing across the board.

Okay. Now that's very helpful. Two other quick ones. One, it looks like retro spend picked up a little bit, and I was hoping you could talk about the protections for buying?

The -- we bought -- we quota shared a portion of our mortgage portfolio. And yes, I think it was in part risk management, but it's more of a distribution partnership with another reinsurer, and so we also received some business back from them.

Okay. And then just finally, the tax rate. I know it's difficult to predict. Anything unusual in the second quarter? Or guidance for how we should think back half?

No. I mean, it's -- there's nothing unusual in the tax rate. What flows through the tax expense line in our income statement, along with just the normal tax rate on the income of our U.S. operation, is there's also some withholding taxes related to certain activities within the investment account. So given how small the effective tax rate is, if you have a little bit more or less withholding tax, which is primarily an investment-related type activity, it can throw off of the effective tax rate a little bit, but there's really nothing unusual going on there and really no change in our outlook for the effective tax rate of the company going forward.

(Operator Instructions) Our next question is coming from Jay Cohen from Bank of America Merrill Lynch.

Most of my questions have been answered. Just one other one that I had and that is, as far as new lines of business you're targeting, you mentioned short-tail event covers. Can you talk about what exactly that is? And how big that market is?

Well, one example is that we wrote some wildfire covers for utilities, which actually get labeled as liability business in our financial statement, but certainly event-driven covers. The other example is we [rate] marine, we've written marine for some time. We might ramp that up. We're looking at terrorism and workers' comp cat and aviation. We haven't written any of it, but we're keeping our eye on it.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you, everybody, for joining us. If you have any follow-up questions, please give us a ring. We look forward to talking to you next

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Thanks.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.