SiriusPoint Ltd. (SPNT) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the Third Point Reinsurance Limited Fourth Quarter and Full Year 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [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 for Third Point Reinsurance. Thank you sir, you may begin.

Thank you, operator. Welcome to Third Point Reinsurance Limited earnings call for the fourth quarter of 2014. Last night we issued an earnings press release, which is available on our website www.thirdpointre.bm. A replay of today's conference call will be available until March 06, 2015 by dialing the phone numbers provided in the earnings press release and through our website following this call. Leading today's call will be John Berger, Chairman and CEO of Third Point Re. But before we begin, please note that management believes certain statements in the teleconference may constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about expectations, estimates, and assumptions concerning future events and financial performance of the company and are subject to significant uncertainties and risks that could cause current plans, anticipated actions, and the Company's future financial condition and results to differ materially from expectations. Those uncertainties and risks include those disclosed in the Company's filings with the U.S. Securities and Exchange Commission. 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, such as diluted book value per share, 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 measures is presented in the company's earnings press release. At this time, I will turn the call over to John Berger.

Thanks, Chris. Good morning and thank you for taking the time to join our fourth quarter 2014 earnings call. In addition to Chris Coleman, CFO of Third Point Re, with me today are Rob Bredahl, President and Chief Operating Officer of Third Point Re and Daniel Loeb, CEO of Third Point LLC, our Investment Manager. I will provide an overview of our financial results, Rob will provide an update on recent events, Daniel will discuss the performance of our investment portfolio, and then Chris will discuss our financial results in more detail. We had a net loss of $14.7 million or $0.14 per diluted share, compared to net income $80.1 million or $0.75 per diluted share in last year’s fourth quarter. While our Investment Manager, Third Point LLC outperformed most of its peer hedge fund managers, investment returns on our investment portfolio managed by Third Point LLC were down slightly in the fourth quarter. Given our strategy to balance our reinsurance risk with greater investment portfolio risk when compared to traditional reinsurance companies, and given our much higher expected investment returns, variability in our investment returns is to be expected, including the occasional down quarter. Daniel Loeb will discuss these results in more detail in a couple of minutes. Our reinsurance operations continued to develop at or better than planned and we are well positioned to benefit from future investment gains. In the fourth quarter, our combined ratio will continue to improve. We registered strong growth in gross written premium and our float generation was solid. Our combined ratio for the property and casualty segment improved to 100.2% in the latest quarter from a 106.3% in last year’s fourth quarter. The combined ratio was steadily improving due to growth in earned premium and a resulting decrease in our G&A expense ratio. In our third year of operations earned premiums continue to grow rapidly while our G&A expenses are growing at a much more moderate rate. Our G&A expense ratio was 3% in the fourth quarter of 2014, a decrease from 9.5% in the fourth quarter of 2013. Gross premiums written for the quarter increased by $92million or 56% to $254 million versus $162 million for the same period of the previous year. Flow which typically increases or decreases in line with gross written premium albeit with the time lag increased to $389 million at December 31, 2014. At year end 2013, Float was at $215 million. The increase in gross written premium was primarily due to strong business production especially out of the U.K. market. I am very pleased with the flow of opportunities that we are seeing and the quantity and quality of the deals in our pipeline. The market remains extremely competitive but we have successfully combated this competitiveness by cultivating our relationship and expanding our marketing presence first in London with the formation of our U.K. marketing office last year and now to the U.S. with a formation of Third Point Reinsurance USA. Third Point Reinsurance USA is now fully staffed has secured A minus rating from A.M. Best and will begin writing business over the next several months. While our pipeline and prospects for future growth remained strong, I need to stress as I have on every earnings call that we are still a young company and focus on larger deals and therefore quarter-over-quarter comparisons may not be meaningful. Finally I would like to take a moment to discuss the significant steps that we have taken to bolster our Executive ranks. In the quarter we promoted Rob Bredahl, the President and Chief Operating Officer, and Chris Coleman, the Chief Financial Officer. We are very excited for Chris to take over Rob’s duties as CFO and for Rob to increase his focus on Third Point’s operations as well as business development. We also made two significant hirers in the quarters. We hired Tom Wafer, as President of Third Point Re USA and Jonathan Norton as Chief Actuary of Third Point Re USA. Jonathan will also be Chief Reserving Actuary for the Third Point Group. Tom, Jonathan and I work together at Chubb Re and its successor companies Harbor Point and Alterra, while we’ll discuss our plans for the U.S. in more detail in a moment. I will now hand the call over to Rob Bredahl. Rob?

Thanks, John. To start I’d like to take a moment to address the catastrophe reinsurance market and the decision we made in the fourth quarter here to exit this line of business. In our view, the outlook for the Cat market remains challenged with little opportunity for improvement over the medium term. While we are pleased with our Cat funds investment performance catastrophe reinsurance pricing and the fees available to manage Cat risks have decreased significantly over the last two years. In fact, we believe that the significant influx of capital directly into the Cat market through fund structures has primarily lower potential profits in this segment. As a result, we made decision of wind down or remain exposure and reallocated resources to more compelling business opportunities. Among these opportunities was the formation of the new class for Bermuda reinsurance company that will focus on underwriting U.S. business through an underwriting production office in New Jersey. We believe that being close to our clients and brokers will help us originate incremental business and in some cases help us make better underwriting decisions. While this new Bermuda base and regulated reinsurer will be U.S tax payer to its onshore marketing and underwriting activities, it will supported by our existing finance, legal and compliance infrastructure located in Bermuda. The new reinsurers has been capitalized with a total of $265 million has a A minus rating from A.M. Best and will be supported by 75% quota share backed to our existing company. As John mentioned the new office will be lead by Tom Wafer, President and Jonathan Norton, Chief Actuary. Joining Tom and Jonathan in the U.S from our existing Bermuda Company will be Tony Urban who will assume the role of Chief Underwriting Officer and Shane Haverstick [ph] will assume the role of Chief Operating Officer. This team has a tremendous amount of reinsurance experience and outstanding relationship throughout the industry. And now, I’d like to turn the call over to Daniel Loeb who will discuss the performance of our investment portfolio during the fourth quarter. Daniel?

Thanks, Rob, and good morning everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC lost 40 basis points in the fourth quarter of 2014, net of fees and expenses, versus returns for the S&P and CS event driven indices of plus 4.9% and minus 2.2% respectively for the quarter. The Third Point Reinsurance account represents approximately 11% of assets managed by Third Point LLC. Profits in November were offset by losses in October and December in a volatile market environment. Gains in the fourth quarter were driven by strength in several core equity positions and were offset by weakness in our government and corporate credit portfolios. Our hedge book performed well unless the volatility, but was large enough to entirely offset losses. Third Point’s equity portfolio returned 1.8% on average exposure during the fourth quarter bringing total return for the strategy to 6.6% for 2014. Strength in several large, core positions in the healthcare, consumer and TMT sectors outweighed modest losses in energy and industrials and commodities. For the year, healthcare was our strongest performing sector contribution more than half of overall equity return. Third Point’s corporate credit portfolio lost 8.2% on average exposure during the fourth quarter driven primarily by losses in our performing credit book. Corporate credit had a strong year overall, however returning 6.1% on average exposure in 2014 compared to the Barclays high yield index return of 90 basis points. Our macro portfolio lost money during the quarter due to weakness in one of our government positions. We were able to capitalize on volatility throughout the year to build another large sovereign credit position at attractive levels, which we continue to own. Our mortgage portfolio was essentially flat for the fourth quarter, concluding a very strong year. Overall return on average exposure for 2014 was 21.3% nearly four times the CHFN hedge fund mortgage index return of 5.4%. The AVS book contributed nearly half of the investment portfolios returns within average exposure of roughly 20%. Looking back at 2014, we believe our performance was diminished by portraying an excessive exposure in an environment of increased market volatility. However, our solid stock selection, mix of credit and equity strategies and avoidance of major mistakes in certain industries and geographies help generate modest gains. We believe we are well positioned for the current market and are increasing seeing compelling opportunities across strategies around the world. Now, I’d like to turn the call over to Chris to discuss our financial results.

Thanks, Daniel, as John mentioned we generated a net loss of $14.7 million or $0.14 per diluted share in the fourth quarter. For the full year 2014, we reported net income of $50.4 million or $0.47 per diluted share compared with compared with net income of $227.3 million or $2.54 per diluted share in 2013, diluted book value per share decreased by $0.13 per share, or 1.0% in the quarter to $13.55. For the full year 2014, diluted book value increased by $0.43 per share, or 3.3%, to $13.55 from $13.12 as of December 31, 2013. In our Property and Casualty Reinsurance segment, gross premiums written increased 56% to $254 million for the four quarter 2014 from $162 million for the fourth quarter of 2013. For the full year 2014, gross premiums written increased 53% to $601 million from $394 million for the full year 2013. The increase in gross premiums written for the quarter included $242 million of new business written offset by $39 million of business that did not renew and $114 million of business that did not have a comparable renewal in the current quarter. The increase in gross premiums for the year included $370 million of new business partially offset by $101 million of business that did not renew and $141 million of business that did not have a comparable renewal in the year. Net premiums earned in the Property and Casualty Reinsurance segment increased $124 million were 219% to $181 million during the fourth quarter of 2014 and increase $220 million or 103% to $432 million for the year ended December 31, 2014, reflecting the continued growth in our in-force portfolio. In addition, the three months and year ended December 31, 2014 included $80 million and $83 million respectively of premiums related to retroactive exposures in Reinsurance contracts where we record the premiums as written and earned at inception of the contract. As a result of the increase in earned premium, our general and administrative expense ratio decreased to 3% in the fourth quarter of 2014 compared to 9.5% in the same period of the previous year and our combined ratio improved to 100.2% from 106.3%. After attributing income to non-controlling interest the net income from the Catastrophe Risk Management segment was $840,000 for the fourth quarter of 2014 compared to net income of $797,000 in the fourth quarter of 2013. Net assets under management for the catastrophe fund were approximately $120 million as of December 31, 2014. Corporate expenses or general and administrative expenses not allocated to underwriting activities was $3.9 million for the fourth quarter of 2014 compared to $2.4 million for the fourth quarter of 2013, and $14.4 million for the full year of 2014 compared to $7.3 million for the full year of 2013. The increase was due to increased headcount and payroll and related expenses and increased legal and other professional advisor expenses as a result of operating as a public company for a full year. As Daniel mentioned, the return on investments managed by Third Point LLC was negative 0.4% during the fourth quarter of 2014 compared to 6% for the same period in 2013. For the full year 2014 the return on investments managed by Third Point LLC was 5.1% compared to 23.9% for the year ended December 31, 2013. I will now hand the call back to John Berger.

Thank you, Chris. So to conclude, investment returns were down slightly in the quarter due to challenging investment market conditions, but we continue to make progress and developing our reinsurance business and are well-positioned to benefit from future investment gains. In the quarter, gross premium written grew by more than 50%, our combined ratio dropped to 100.2% and float grew to $389 million. With the expansion of our underwriting platform into the United States and an already robust pipeline I remain optimistic for the remainder of 2015 and our continued long term success. I will now open the call up to questions. Operator?

Thank you. At this we will conducing a question and answer session. [Operator Instructions] Our first question is coming comes from of Jay Cohen with Bank of America-Merrill Lynch. Please proceed with your questions.

Yes. Thank you. Let me start with the new business. You were able offset fairly sizeable headwind given that you had a decent amount of business that didn’t have a comparable renewal in the quarter. Can you talk about the kind of new business you write, the types of contracts that you were able to put on the books?

Sure, Jay. As we said, our strategies to write a pure number of large deals and the good and bad with that, the bad is when you lose them, it’s a big lost. But when you write them it’s a big win. We were able to write a multi-line opportunity out of the London market that was $125 million. We have a net – we hope there’s a renewable deal. We did a reserve deal – loss reserve deal, $45 million, that’s probably a onetime deal. We did a Florida homeowners contract that was $27 million. And then, we did a multi-line another Lloyd’s multi-line casualty deal for $27 million that again we think we’ll renew. And so it’s – I think it’s a tribute to several things, why we’re able to find these opportunities. One is as consolidation continues to happen in the marketplace they’re few true independent reinsurance companies now, most reinsurance companies are part of the bigger insurance group. And we see opportunities where companies – one big deal, the $125 million deal we did on London was a portfolio of business that is growing rapidly for the company. It was becoming too big of a percentage of the overall book and they want to partner on the business. At the same time they didn’t want to share the business with somebody who could potentially be a threat. And so I think where we may be uniquely positioned to be the counterparty in those types of situations.

Got it. That’s helpful John. Second question, quick one, maybe for Chris, was there any prior year reserve development in the quarter?

Sure Jay, for the quarter we had $1.6 million of favorable reserve development, which took a full year favorable reserve development to just under $1, 700,000. It’s a relatively modest and favorable.

Okay. Got it. And then the last question, I guess if you look at the overhead or G&A expense within underwriting, it’s been essentially flat now for about five quarters, and I guess, I would have expected that to continue to rise just given the still newness of the company. Is this a reasonable run rate to look at or should we assume that number does in fact go up?

Yes. Really, the headcount allocated to our underwriting activities is held steady and that’s certainly the major driver of the G&A allocated to underwriting. Where you will see a little bit of increase going into next year is in relation to the establishment of the U.S. operation. John mentioned the couple of the hires on the call and we’re also adding a little bit of incremental headcount to support that operation. So, you will see a little bit of an uptick, but relatively modest and also we’ll be adding incremental earned premium at the same time from the U.S. operations. So, on a consolidated basis we should still be able to maintain similar overall G&A expense ratios.

Great. Thanks, guys. Appreciate it.

Thank you. Our next question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your question.

Good morning and thank you for taking my call. First question for Dan. You mentioned about increasing volatility in the markets. Are you changing any of your risk-management practice in terms of like a net exposure or any limitation on the size of the positions?

Yes. We haven’t changed any of our size guidelines. We have over the course of this year brought down both our gross and our net exposure to just for the increased market volatility.

Okay. And then, could you give little bit more about your credit exposure, because it looks like they have the big swing in terms your corporate credit like performance through the year. And do you have any size constraint in that book? As well as could you talk little bit more your exposure to the Greek situation.

Yes. We’ve existed the Greek credit. We have a large exposure to Argentina. This is really in the category of Sovereign debt not corporate credit. But that’s where you’ll see some impact on our overall credit performance right now. And look, we tend to be very event driven, so it may not – the volatility is going to be higher, but so are the over time so the returns. So we’re not really playing a credit game. We’re not really playing a spread game is much as we are playing special situations where there would be more significant moves. Overall, the opportunities on the corporate side, not sovereign side are been pretty limited, so you’ve seen those exposures go down over the course of last year.

Okay. Lastly for Dan, you mentioned you’re looking for some new opportunity in the energy sector. Could you give more comments on what’s your view on the oil price and in terms of on both credit as well as equity side in the energy sector?

I think the most intelligent thing I can say about the oil price right now to quote, Bernard Baruch, I know exactly what it’s going to do. It will fluctuate. Look, in the near term, and we’ve never seen moves like this, 5% inter-day moves in on the front end of the curve. And volatility is pretty extreme to say the least. Since right now though is if you look at some of the big oil stock they really have not moved down commensurate with the price of oil. They discount quite a bit of recovery. I think that all of those funds that have been set up to “capitalized” on distress in the oil patch might be disappointed, kind of like the European funds that were setup to capitalize on European distress debt situations. So we have very – we had very little exposure going into this. We’ve really – we try to focus on companies like Phillips 66, where we think that the impact on oil prices is exaggerated on the stock price, but we don’t really have any measure key positions yet. And when the energy – when the equity themselves sold off hardest, we were expecting – we were trying to be patient and wait for the inevitable next shoe to drop, but equities have already move in anticipation of recovery. So we’re kind of – we’re pretty much on the side lines in energy.

Thank you so much for the answers. Now switching to the underwriting side, so John and Rob and Chris, we saw a tick-up in terms of the last ratio for the quarter. Is that related to these sort of retro contracts or is that a normal run rate going forward?

It’s hard to focus in on quarter-to-quarter even year-to-year comparison on our loss ratio. It really depends on the mix of business. For example, two extremes. One is when we write a loss reserve deal and we had up a sizeable one in the fourth quarter that comes in at 100% loss ratio. Then there is no ceding commission, so that boost the loss ratio up. On the other side is when we write a Florida Homeowners deal with limited cat exposure. And the benefit for the cat protection as a company buys, but the cost of that reflected in the ceding commissions, so you end up with a very low loss ratio but very high ceding commission could be as high as 50 plus percent. And so, what we recommend is looking at what we call it composite ratios, the combined ratio without our G&A, and still we get a good comparison on a quarter-to-quarter, year-to-year basis. It really depends on the mix of business and it fluctuates.

So, are you still looking for a breakeven in 2015 underwriting?

Yes. We’re getting close. It’s going to again, depend on the mix of business. If we’re successful on the loss reserve front and we hope to be. That’s going to – that business comes in as I said at our 100% loss ratio, so that drives us to a 100 or above if you’re adding some frictional costs on that. What we said is that if that segment becomes big enough we’ll break that out separately and show the economics. So I think when I look at the progress we’ve made on our combined ratio over the three years and that its 100.2 for the fourth quarter. We’re pretty happy with the progress we’ve made and where we are. If we’re right around that plus or minus percent, we call that success.

My last question is on industry consolidation you’ve seen in the recent wave, in particular the Bermuda names and what’s – where do you think Third Point will play in the industry consolidation in terms, are you looking for acquisitions or like how would that impact the competitiveness in your market?

We’re not actively looking. We are aware of what’s going on. Our model is with the emphasis on the more risk taking on the investment side and then tailoring our underwriting to that really limits the companies that would make sense for us to acquire. Also you look at valuations reasonably good companies are going to go for a pretty high price. So I really don’t see its being active in that area. At the same time, we’re always interested. We get approach whenever anybody is in play, you were certainly aware of it. But I don’t see it’s been active in that area.

I would just add, we look at various way to enter the U.S. market including a couple of possible acquisition targets in determine that it was more efficient better economic own company.

Great. Thank you so much for the answers.

Thank you.

Thank you. [Operator Instructions] Our next question is coming from the line of Brett Shirreffs with Keefe, Bruyette & Woods. Please proceed with your question.

Congrats on the quarter and thanks for taking my questions. First, I want to touch on the U.S. platform. Will that establishment change or expand your risk appetite at all on the underwriting side?

Pretty much it will be the business we’ve been writing and we really like the progressional growth we’ve had on the underwriting side to go from $200 million to $400 million or $600 million in our third year. The purpose of forming the U.S. Company is just greater access to business. The United States is the biggest market, so we think so we think having people on the ground actively looking for the types of deals that we want will be beneficial, but we’re still looking for the types of business that we been writing, so, no change at all in our risk appetite.

Okay. Maybe just a little bit technical. How will you decide where the business is written in the U.S. or on the Bermuda balance sheet?

We have established very black and white guideline, so it’s not an arbitrary thing. And so, the U.S. operation will be kind of like the regular business that we write, the non-standard auto, the non-Florida homeowners, the Texas homeowners. And then any business that is kind of regular reinsurance of ceding companies where we want our people visiting the companies, been able to do the claims audits, the underwriting audits, visiting with senior management. That’s going to be the U.S. business. In Bermuda, we will be doing the reserve deals anything out of the Bermuda market obviously anything out of London International business will come through the Bermuda office. But we have very, very clear guidelines on what is done where.

Okay. And that’s helpful. And then on a homeowner side, we heard about public company eliminating their homeowner quota share just recently. Just wonder if you could provide some outlook on the Florida demand side?

We don’t at this point we think it’s going to be similar. The Florida homeowner companies now are, they’re making money. They’re growing surplus. The certainly have more financial wherewithal than. Before many of them do. At the same time many of them are still dependent on the quota shares as part of their capital structure. So, we’ll see a lot of them renew at the end of the second quarter, so we’ll see. We don’t -- I think it’s safe to say, we don’t expect major changes but we’ll see.

Okay. And then just lastly, wonder if you could provide any more information on the reserve deal, the nature of the exposure there?

Its longer tail U.S. casualty business, there’s a segment of excess casualty. There’s some professional liability business in there. We like deals where we think we’re going to have the duration holding on to the money for five plus years. So almost all of our reserve deals will be U.S. casualty dominated.

Any time we do a reserve deal there’s a limit and the limit tend to be small relative to the reserves we take under our balance sheet.

Yes. It’s a good point, we’re not taking big limits. There are limits – there are risk in these deals, but they are not unlimited reserve deals.

Got it. Thank you. Good luck on the future.

Thank you.

Thanks, Brett.

Thank you. We do have a follow-up question coming from the line of Jay Cohen with Bank of America/Merrill Lynch. Please proceed with your questions.

Yes. Thank you. Given that the debt that was issued in the U.S. should we pretty much expect your overall tax rate to remain around zero?

Jay, the capitalization of the new U.S. Company, which is about $265 million, that invested capital will be subject to tax. Certainly, the reason why we issued the debt out of the U.S. intermediate holding company would they take advantage of the tax reducibility of that interest as part of the U.S. group. I don’t have the effective tax rate to hand, but it’s basically going to be the tax on the investment income generated from – on the capital of the New U.S. operation with some benefit from the interest expense. And then, just the taxation on the underwriting profit generated out of the U.S. operation, we do have the 75% quota share arrangement in place, so that will certainly result at least the portion of those profits being succeeded to the Bermuda company.

Would you expect the underwriting margin in the U.S to essentially equal what you’re doing in Bermuda or could it be different given somewhat of a different expense structure?

I think it’s going to be a very similar, Jay. Now we are with Tony Urban and Shane Haverstick [ph] now Tom Wafer joining us. These are very well established guys. I don’t think there are magic pots of profits out there, but there is a chance that we do find some business that has bigger profit margin than we’re anticipating, but I would expect this going to remain pretty similar to what we’ve done.

Very good. Thanks a lot.

Thank you, Jay.

Thank you. It appears there are no further questions at this time. I would like to hand floor back over to Mr. Berger for any additional concluding comments.

We thank everybody for dialing in. We look forward to our earnings call next quarter. Thank you.