Siriuspoint Ltd (SPNT) 2018 Q3 法說會逐字稿

Greetings, and welcome to Third Point Reinsurance Third 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, Chief Financial Officer. Please go ahead.

Thank you, operator. Welcome to the Third Point Reinsurance Limited Earnings Call for the Third 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 third 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 the operating results, I want to briefly comment on the impact of the investment account restructuring that we completed during the quarter.

As we mentioned during last quarter's earnings call, we entered into several agreements to restructure our investment account from a separately managed account to an investment-in-a-fund structure. The transition was completed during September, and we are now reporting our balance sheet under this new structure. As we stated last quarter, we plan to 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. As a result of this change, we exceed the 25% reserves to total assets threshold at the Bermuda operating company level where the PFIC test is applied and expect to continue to exceed this threshold at year-end.

Now, we'll move on to discuss the financial results, our underwriting plans and market conditions.

During the quarter, we generated a net loss of $13 million, driven by a small underwriting loss combined with a small investment loss. Chris will discuss our financial results in more detail shortly.

Reinsurance market conditions are challenging. Although we were seeing some modest improvement in pricing at the end of 2017 and early in 2018 on the back of significant loss events late in 2017, the momentum of those improvements has seemed to taper off.

As a reinsurer, we are affected by 2 layers of pricing change. We continue to see some improvement in underlying primary pricing across most lines, and we've seen some improvement in reinsurance terms, mainly exceeding commissions on quota share contracts. But whether this is enough to keep pace with loss cost trends is difficult to say, and therefore, we view net pricing to us on recent deals as being about flat.

As we've talked about for the last couple of quarters, we continue to position the company to gradually shift our underwriting appetite, and I'll stress, gradually.

While this is not an expression of great optimism for an improving pricing environment, we think that, for several reasons, it makes sense to gradually shift our underwriting appetite to include some higher-margin business, which should bring down our combined ratio to below 100%.

From the inception of the company, the primary focus of the underwriting strategy was to generate low-cost float and to minimize underwriting volatility. We've now built an underwriting portfolio of stable float, which allows us to manage the company to an optimal investment exposure level with very good capital efficiency.

Investment returns will remain the key driver of our financial results, but we believe it now makes sense to add a modest amount of higher-margin, albeit higher-risk, business, including property cat, to our reinsurance portfolio.

We are completing our seventh year of operation, have more than doubled in size since our inception and can diversify our portfolio into higher-margin areas on a very capital-efficient basis. We can add margin with little use of risk capital, because we are starting from a very low risk portfolio, and we'll focus on areas with little correlation to existing business.

Please note, however, that we still expect our total risk limits, PMLs and underwriting volatility to remain much lower than most of our reinsurance company peers. During 2018, we've added 2 very experienced senior underwriters with strong market relationships as well as support staff to help us with this effort.

Now, in addition to working hard to improve our underwriting results, we are carefully managing our capital.

During the quarter, we repurchased approximately 5.5 million of our common shares in the open market for $73 million or $13.36 per share.

We continue to believe that buying back shares below book is an appropriate use of our capital.

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

Thanks, Rob, and good morning.

The Third Point Reinsurance investment portfolio managed by Third Point LLC was down 0.2% for the third quarter of 2018 net of fees and expenses, bringing year-to-date returns to positive 0.6%. In comparison, the S&P 500 was up 7.7% and 10.6% for the same periods, respectively. The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC.

In Q3, gains in our equity and credit portfolios were overshadowed by our losses in our other strategy, largely driven by our losing merger arbitrage bet on NXP Semiconductors.

The equity's portfolio returned 1.5% on average exposure in the third quarter as strength from investments in the industrials and financial sectors was partially offset by losses in TMT and consumer. Through September, the strategy returned 4% for the year.

Our credit team generated robust results on our limited exposure to the asset class in Q3. Investments in corporate and sovereign credit returned 4.1% on weighted average exposure during the third quarter. Finally, the APS portfolio added to its impressive run for the year in Q3.

Investments in structured credit had an ROA of 1.2% for the quarter, bringing the return on assets to 11.6% for the year, outpacing the HFN hedge fund mortgage index year-to-date return of 3.3%. The past month has been a challenging time in equity markets and for our portfolio. The market selloff was primarily triggered by a fear that the Fed would raise rates faster than expected at a time when growth outside the U.S. was faltering.

While equities and interest rates tend to move together over long periods of time, in the short term, sharp rate moves can cause equities to struggle. This fear was exacerbated by investors' concerns over the strength of corporate earnings and a potentially escalating trade war. The combination proved toxic for the market and especially for cyclicals. We do not believe we are at risk of a recession in the near term, but we expect volatility to remain elevated through year-end.

As we saw in February, and again in October, it's become increasingly essential to understand the changes that have taken place in the market structure when investing in single stocks and considering portfolio construction. We've been studying the evolution and incorporating changes to both individual security analysis and portfolio risk management to better inform our views.

As event-driven strategies become increasingly out of favor, we think the integration of these new tools into our investment process will help us to better identify pivotal points of inflection from a shift from equities to credit or among other factors or in sector rotation.

With fewer players looking to capitalize on these shifts through fundamental investing, we believe that our traditional approach combined with these new data-driven tactical tools should position us well to take advantage of late cycle opportunities.

In the near term, our short book continues to perform well, and we expect impending catalysts to move prices in several of our large constructive investments in the coming quarters.

Finally, in some company-specific news, Third Point Reinsurance has continued to implement its share repurchase program throughout the year.

As a result, I had to sell some of my shares in TPRE during the third quarter to reduce my ownership to just below 10% of the company's shares.

The recent sale was not due to a change in my conviction in the company or its prospects, and I remain one of TPRE's largest shareholders.

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

Thanks Daniel. Our diluted book value per share at the end of the third quarter was $15.60, which was a decrease of $0.03 from June 30, 2018.

Although we incurred a net loss during the quarter of $13 million or $0.14 per diluted share, our share repurchases at a discount to book value helped to offset the impact to our diluted book value per share.

The net investment loss for the quarter was $4 million, which reflects the returns for the quarter, which Daniel discussed in detail.

Our gross premiums written for the third quarter was $30 million, which was a decrease of $144 million from the prior year's third quarter. Gross written premium decreased by $19 million or 4% to $458 million from $477 million for the prior year's 9 months.

The lower gross premiums in the third quarter primarily related to one contract that we did not renew and contracts written or renewed in the prior year period with no comparable premium in the current year period.

We generated a $6 million net underwriting loss for the third quarter, and our combined ratio was 104.9% compared to 111.9% in the prior year third quarter.

The prior year quarter included $5 million or 5 points on the combined ratio due to catastrophe losses recorded in that period. We recorded insignificant catastrophe losses in the current year period.

Furthermore, we currently estimate less than $4 million of losses related to Hurricane Michael and other Q4 cat events to date.

Although we've not written property cat XOL contracts to date, we have a small amount of residual cat exposure through whole account and property quota share contracts.

For the quarter ended September 30, 2018, we recorded a net $2 million improvement in 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 expect our combined ratio to gradually improve, primarily due to a shift in business mix beginning in 2019.

Total general and administrative expenses for the third quarter of 2018 were $10 million compared to $13 million for the prior year period.

For the 9-month period, general and administrative expenses were $29 million compared to $39 million in the prior year period.

The decreases were primarily due to lower payroll-related costs partially offset by higher stock compensation expense and professional fees.

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. The increase in professional fees was primarily due to legal and accounting fees incurred in conjunction with the investment restructuring.

Other income expense is comprised of interest crediting features in certain reinsurance contracts and captures the economics of our deposit accounted reinsurance contracts.

The net other income for the current year period was due to the commutation of certain deposit accounted reinsurance contracts resulting in recognition of margin on these contracts and revised estimates of underlying assumptions on other deposit liability contracts.

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

(Operator Instructions) Our first question is from Michael Phillips with Morgan Stanley.

I think most of my questions are probably for Rob. I guess first to kind of get nitpicky on your talk about the property cat, can you kind of talk about the little details of kind of limits and layers that you're talking about you might do there?

Sure, we're kind of writing a small cat book. We're projecting around $40 million. And unlike most other companies, we're not trying to derive a lot of diversification within the cat book. We're going to focus on the peak zones, the better-priced peak zones, just given that we don't have any other cat, and given what we do on the investment side, we have a good amount of diversification, risk diversification. In terms of risk limits or PMLS or other measurements of cat risk, we think the average reinsurance company has a 250-year PML of about 30% of the surplus. We're going to be below 1/2 of that amount.

Okay, good. I guess, I mean, if you couple your comments about -- and they're commendable comments, gradual and modest amounts of things like this as an example, in order to get the goal of the combined ratio down to sub-100% in '19. You're doing it gradually. But if you take that with the other thoughts of -- pricing is kind of -- net pricing is about flat, so how -- it seems like an aggressive target to get below 100% that quickly doing these gradual shifts. So maybe just more thoughts on how you get there from 104%.

Yes, we have $600 million of earned premium. We'll be at a 104% this year. And so it's $24 million of additional profit. And so if you're writing a -- for example, if you're writing a $40 million cat book, the expected outcome on that is below a 50% combined ratio, just as an example. So I don't think it's all that difficult to bring it down below 100%. We're hoping to bring it down below 100% in 2019. It might take a little bit longer, but for sure, we are not going to stick our necks out and take a big bite of risk without carefully considering it. And we don't need to. We don't need to.

Okay, that makes sense. Could we maybe get into some maybe a little line-specific comments either in -- I guess both if we could, in your appetite for -- or maybe completely shying away from the workers' comp reinsurance market. And then also the same kind of question on professional liability from professional lines.

So we have, I think, 2 remaining. I'm looking around the room. We don't have a lot of workers' comp exposure today. We do have some older reserves, which are -- and it's heavily concentrated in California. And that business, those reserves, are performing very well. And so on our new books, it's limited exposure, and we're watching it carefully. The loss trends have been good. It looks like they're heading the other way with the tight employment market. And so we're going to be very careful at renewal on these deals.

Was the...

And then you mentioned professional liability. Professional liability -- we have limited exposure to professional liability. We have it through a couple of broader quota share contracts. And so, yes, again, pricing is not trending in a great way, but we are underexposed there.

It's a very small amount, but just the fact that you mentioned it on a prior development, was that from comp, or where was that from?

No, it was really -- it wasn't anything in particular. It was just -- I think, as we've talked about many times in the past, our reserving process looks at every deal every quarter. And so it's just in the normal course of reserving, you have a few ups and a few downs, and the net effect of that was a couple of million of favorable development in the period.

Yes, there's probably 12 contracts where there is movement, but small amounts up and down. Nothing meaningful.

No major trend.

Okay, great. And I guess last one. If you could give maybe a little more details on -- you've also talked during the prior quarters of your folks trying to get into, targeting specialty lines of business. And maybe how that's gone, and some details of what specific lines you're talking about there.

Yes, we -- as we increase the risk taking and focus on higher-margin business, we're doing it in phases. So Phase 1 is writing the cat book, which we talked about. We're also writing some excess business. Up until this year, almost 100% of our businesses has been pro rata, whether it be quota share or reserve covers. So we're moving to low-layer excess covers. And also, instead of a quota share contract, we might write an aggregate stop loss, which means there's less premium but a much lower expected loss ratio. And so that's really the major changes or additions for this year. There's a couple of lines of business that we like that we have written, namely the mortgage business, where we maintain the same exposure we've had historically, and that business takes a long time to earn in, and we're probably hitting the peak earn-in of the mortgage business we've written. And that comes in, Chris (sic) [Michael], at sort of low 80s across the portfolio. And then we like reps and warranties. And that's a rapidly growing business, so we plan to increase our portfolio on reps and warranties indemnity coverages.

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

I just wanted to, I guess, ask about the premium volumes, which the last couple of quarters, have been quite low relative to the past 5 years. Should we -- and I know you'll add some cat but not that much. Should we think of these as reasonable starting points for our models going forward? Or would you expect new large deals to come in? I know you can't forecast them. But these -- are these a good baseline for our forecasts?

Jay, we had a very large increase in the first quarter. And so our run rate premium -- per annum premium is right around $600 million and has been for the last couple of years, and we expect it to be next year. It's hard to see that in our numbers because a number of deals have been shifted, the renewal dates have been shifted, and we also have multiple-year deals, where we recognize the 3 years of premium one year and maybe none the next year. And so I think it's easier to look at our earned premium, and our earned premium has been relatively consistent for some time now.

Yes, no, that makes sense. And I guess we should expect some change in the seasonality of premiums if you're going to start writing cat or excess loss covers?

I -- we haven't decided yet how we're going to earn the cap premium, and the 2 options are the straight-line hurricane premium recognition, and the other way is to do it through the season. And so we haven't made that determination yet. We'll let you know when we do.

(Operator Instructions) Our next question is from Meyer Shields with KBW.

Really quickly, Chris or Rob, is there any way of quantifying the professional fees associated with the investment account restructure?

Sure. Yes, there was about roughly $1 million of costs incurred in the quarter just related to the legal and accounting work to get that all up, reconfigured. So that was, obviously, a onetime hit this quarter. So relatively small, but a tiny amount in this quarter for that.

Okay. And I'm trying to piece together a couple of things, but if you're running at, call it $600 million of annual premium, and there's a $90 million contract being dropped. Does that itself have any impact on sort of the anticipated underwriting profitability of the book, setting aside the extension to cat?

No, I mean, it's hard to take one individual contract, nonrenewal, and try to extrapolate that across. I mean just because offsetting that, we also had a $90 million new contract in the first quarter. So when you sort of add and subtract the normal kind of new business and nonrenewal business, we still continue to think, as Rob pointed out, that a reasonable run rate of premium is about $600 million per year.

Yes, we don't see any major changes in the earned premium level.

Okay, no, that's helpful. The final question, I guess. Can you talk about -- we've heard a lot of discussion of -- some kinds of loss cost trends inflecting in recent quarters. And I just was hoping for an update in terms of how you're reflecting that in your own accident in your loss mix?

Sure. Meyer, as you know, there's 2 layers of pricing for a reinsurance company, and we're a pure play reinsurance company. There's the underlying pricing that's controlled by the primary company. And loss cost trends are moving adversely in a number of lines, but the primary companies are also pushing rate increases very hard. And I was interested to hear on other earnings calls, primary earnings calls -- primary company earnings calls this week, a lot of optimism. And so they seem to think they're keeping pace or getting ahead of those loss cost trends. We're not sure. And where there's uncertainty or where we think they're falling behind, we reflect that in our reinsurance terms. We lower our seeding commission, for example, on quota share contracts. And so tough to generalize. The trends are different line-by-line, but we are very focused on it, and it starts with what the primary companies are doing.

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Thanks everybody for joining us. Look forward to talking to you during our next quarterly call. But if you have any questions in the meantime, please get in touch with us.

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