SiriusPoint Ltd. (SPNT) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Third Point Reinsurance first quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Please go ahead, sir.

Thank you, operator. Welcome to the Third Point Reinsurance Limited earnings call for the first quarter of 2016. Last night, we issued an earnings press release and financial supplement which is available on our Web site, www.thirdpointre.bm. A replay of today’s conference call will be available through May 13, 2016 by dialing the phone numbers provided in the earnings press release and through our Web site 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 this teleconference might 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 action in 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 US 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 measure is presented in the company's earnings press release. At this time, I will turn the call over to John Berger. John?

Thanks, Chris. Good morning and thank you for taking the time to join our first quarter 2016 earnings call. In addition to Chris Coleman, Chief Financial Officer of Third Point Re, with me today are Daniel Loeb, CEO of Third Point LLC, our investment manager, and Rob Bredahl, President and Chief Operating Officer of Third Point Re. On today's call, I will provide an overview of our financial results and an update on market conditions. Daniel will discuss the performance of our investment portfolio, Chris will discuss our financial results in more detail, and Rob will describe the details of the share buyback plan that our Board approved earlier this week. We will then open the call up for your questions. For the first quarter, we reported a net loss of $51.1 million or a $0.49 loss per diluted share compared to net income of $50.5 million or $0.47 per diluted share in the prior-year’s period. Our diluted book value per share decreased by 3.7% in the quarter to $12.37. We generated a negative return of 2% on our investment portfolio in the latest quarter compared to a positive return of 3% in last year's first quarter. Please note, however, that our investment manager, Third Point LLC, bounced back in April with a return of 1.8% and our investment return for the year through April is now slightly negative at 0.2%. With total net assets managed by Third Point LLC of $2.06 billion and a net invested assets-to-equity ratio of 1.53, investment returns are a key driver of our financial results. Daniel Loeb will discuss our investment returns in greater detail in just a few moments. In our Property and Casualty Reinsurance segment, we generated an underwriting loss of $6.6 million in the quarter and produced a combined ratio of 104.9%. This compares to an underwriting loss of $3.9 million and a combined ratio of 102.8% in the first quarter of 2015. Our first quarter underwriting results were in line with our expectations given current market conditions and the lines of business on which we focus. We target less volatile quota share business and avoid higher-risk property cat and other event-driven lines of business, which we believe do not combine well with our investment strategy. While lower margin, the quota share business that we write typically generates relatively higher levels of float. Reinsurance market conditions are challenging because of the excess capital that has been building since 2008 as a result of the benign risk period that we have been experiencing. Cat activity has been significantly below average and until recently companies were realizing significant reserve redundancy on casualty business. I commented during our last earnings call that I was hopeful that we were nearing the bottom of this pricing cycle, given the number of companies that are now taking reserve increases. This trend has continued in the first quarter and I remain encouraged. In our Property and Casualty Reinsurance segment, we generated premiums written of $197.2 million, a decrease of 7.6% versus the prior year's first quarter. Since we focus on a limited number of large contracts, we are prone to have significant changes in premiums written from one quarter to the next. Rather than looking at quarterly results, annual results are a much better indication of our premium volume trends. Our rate of premium growth has decreased each year since our inception a little over four years ago. With more than $700 million in premiums written in 2015 and more than $2 billion of invested assets, we have a critical mass and, therefore, in a position to increase our deal selectivity in 2016. Given the size of our average deal and normal completion timing uncertainties, it is always difficult to project our future writings. But we currently expect to generate a similar or possibly lower amount of premium in 2016 versus 2015 as we work to improve our composite ratio in a difficult market environment. I will now turn the call over to Daniel Loeb to discuss our investment performance in more detail. Daniel?

Thanks, John. And good morning, everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC lost 2% in the first quarter of 2016 net of fees and expenses versus returns for the S&P and Credit Suisse event-driven indices of 1.4% and minus 4.5% respectively for the quarter. The Third Point Reinsurance account represents approximately 14% of assets managed by Third Point LLC. In the first quarter of 2016, we saw significant reversal of trends that began last summer, including short bets on China, commodity prices and commodity-linked cyclical names and long investments tied to the strong US dollar. Many investors were caught offsides by the shifting market dynamics. We moved quickly and decisively to reposition our portfolio by covering most of our shorts and shifting our credit exposure from net short to net long, with a specific focus on energy names. Unfortunately, we failed to reposition our long equity book quickly enough and thus missed some of the market rally. The Third Point equity portfolio was down 1.4% on average exposure in Q1. Losses were primarily attributable to two concentrated positions in the healthcare sector. Aside from these positions, we saw strength in many of our core investments and initiated several new, attractively valued companies during the selloff that occurred early in the quarter. Our corporate credit portfolio was up 2% on weighted average exposure in Q1, driven by performing credit investments in energy, financials and TMT. Sovereign credit returned 7% on average exposure during the quarter, led by a large debt on Argentine government debt. Following strong performance for most of 2015, our structured credit portfolio felt the impact of a liquidity squeeze in Q1 and was down 3.3%. Certain subsectors of the market were impacted more significantly than others and our portfolio was relatively well protected from the more challenged asset classes. We have since seen a return of liquidity to the space. Preserving capital during this volatile quarter left us well positioned to take advantage of interesting situations arising from continued market dislocation. We maintain a thoughtfully constructed portfolio of event-rich equity investments, continue to opportunistically invest in credit, and believe our structured credit portfolio offers attractive risk-adjusted returns. Now, I’d like to turn the call over to Chris to discuss our financial results.

Thank you, Daniel. As John mentioned, we reported a net loss of $51.1 million or a $0.49 loss per diluted share in the first quarter of 2016 compared to net income of $50.5 million or $0.47 per diluted share in the first quarter of 2015. Our diluted book value per share decreased by 3.7% in the quarter to $12.37. In our Property and Casualty Reinsurance segment, gross premiums written decreased by $16.2 million or 7.6% to $197.2 million for the quarter ended March 31, 2016 from $213.4 million for the quarter ended March 31, 2015. The decrease in premiums written was primarily due to $30 million for contracts that we made the decision not to renew in the quarter and one $60 million contract that was not subject to renewal. Although our premiums written was down slightly period-over-period, we added $36 million of new business in the quarter. Net premiums earned for the first quarter of 2016 decreased by $2.3 million or 1.7% to $136.8 million. The decrease in net premiums earned is primarily due to $16 million of net premiums earned related to retroactive exposures and reinsurance contracts for the three months ended March 31, 2015 compared to no such earned premium for the three months ended March 31, 2016. This decrease was partially offset by a larger in-force underwriting portfolio. We generated a $6.6 million underwriting loss in the three months ended March 31, 2016 compared to an underwriting loss of $3.9 million in the prior-year period and our combined ratio was 104.9% compared to 102.8%. The movements in net underwriting loss and combined ratio were affected by the continued market pressure on underwriting margins. The net underwriting loss and combined ratio for the three months ended March 31, 2016 included a decrease in net underwriting loss of $0.2 million or favorable development for the three months ended March 31, 2016 related to changes in estimates of prior year’s loss reserves and the related impact of acquisition costs compared to a $1.0 million increase in net underwriting loss for the three months ended March 31, 2015. For the three months ended March 31, 2016, Third Point Re recorded a net investment loss of $40.1 million compared to net investment income of $64.9 million for the three months ended March 31, 2015. The return on investments managed by the company's investment manager, Third Point LLC, was negative 2.0% for the three months ended March 31, 2016 compared to positive 3.0% for the three months ended March 31, 2015. As Daniel just covered in greater detail, the net investment results for the three months ended March 31, 2016 were attributable to losses in our long equity and structured credit portfolios, which were partially offset by strong performance in performing credit and sovereign credit. Outperformance from several core portfolio positions within our long equity portfolio was offset by negative returns in two significant equity investments in the healthcare sector. Corporate expenses or general and administrative expenses not allocated underwriting activities were $4.2 million for the first quarter of 2016 compared to $4.9 million for the first quarter of 2015. The decrease was primarily due to lower legal and other professional advisor expenses and lower payroll and stock compensation expenses. Other expenses for the first quarter of 2016 and the first quarter of 2015 was constant at $2.7 million. Other expenses represent interest credits paid on deposit and certain reinsurance contracts. In February 2015, Third Point Re USA Holdings issued $115 million of senior notes bearing an interest rate of 7%. As a result, we had $2 million of interest expense for the first quarter of 2016 and $1 million for the first quarter of 2015. Income tax expense or benefit is primarily driven by taxable income or loss generated by our US-based subsidiaries as well as withholding taxes and uncertain tax provisions on our investment portfolio and, to a lesser extent, taxes in relation to our UK-based subsidiaries. We recorded an income tax benefit of $1.9 million for the three months ended March 31, 2016 and an income tax expense of $1.3 million for the three months ended March 31, 2015. I’ll now hand the call over to Rob Bredahl. Rob?

Thank you, Chris. We’ve always told investors that if our shares persistently trade below book value that we consider introducing the share buyback program. While in recent months our shares traded below book value at times at valuation that we believe is attractive, and therefore, earlier this week our Board of Directors authorized a new common share repurchase program for up to an aggregate of $100 million of the company’s outstanding shares. We expect the share repurchases to be made from time to time in the open market or in privately negotiated transactions in accordance with applicable security laws and regulations, including Rule 10b-18. The timing, form and the amount of the shares repurchased under the program will depend on a variety of factors, including market conditions, our capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. I’ll now hand the call back to John who will conclude our prepared remarks. John?

Thank you, Rob. Despite challenging reinsurance and investment market conditions, we remain confident that our total return business model will generate superior returns over time. After significant financial market volatility to start the year that caused an investment loss in our first quarter, our investment manager, Third Point, rebounded strongly in March and April and our investment returns through April are now slightly negative at 0.02%. We have positioned the company to withstand near-term market volatility and to be one of the leading beneficiaries of any market improvement. We’re at full-scale with a relatively low risk reinsurance portfolio of more than $2 billion invested assets. We thank you for your time and will now open the call for questions. Operator?

Thank you. The floor is now open for questions. [Operator Instructions] At the time, our first question is coming from Kai Pan of Morgan Stanley. Please proceed with your question.

Thank you. And good morning. So first few questions for Dan. Dan, you mentioned in your quarterly letters that the first quarter, most catastrophic period for performance, for hedge fund as well. You said it is the first innings of a washout. As well as we know, some large pension fund insurer pulling back on allocation in hedge funds. So do you feel pressure on the – from Point LLC front and what do you see opportunities here?

I think the point was it was a catastrophic period of underperformance relative to what the market did. You factor exposures, some concentrated positions in stocks that had big declines, I think, affected other hedge funds. I want to make it clear, it was not a catastrophe for Third Point. I think we did a reasonable job of protecting capital. I’m never delighted to be in the minus column, but given what happened to a number of other funds this quarter, it puts us in good position to deploy capital into the kind of environment that we’re in. So we’re seeing opportunities in distressed debt. So I want to stress. We’re not in a credit cycle where I think there’s going to be massive opportunities due to a slowing economy and large defaults. But we are seeing a lot of dislocations in various credits and we have been scooping up some very attractive names in – we’ve talked about this in the past, some fulcrum securities in energy companies. On the sovereign debt front, we’ve talked about Argentina. And there are a couple of distressed situations out there that we have been buying. I think structured credit is also – it was really off only for liquidity reasons, not for fundamental reasons. So we feel good about that portfolio. And I think the most interesting space right now is just in equities that are getting oversold or just underappreciated and under-owned that are in the industrial sector. And also, we wrote about it in our letter. Companies going through transformative mergers where I think you really need to look out one to two years and we’re in a market where people have very itchy trigger fingers and they’re selling or they're not taking positions until these sorts of deals are completed, things like Time Warner-Charter, Dow that we’re involved in. But in a few other of these, sort of – we call them the pro forma situations where companies are going through transformative transactions.

That's great detail. And then on the – so the two healthcare positions you mentioned, have you made any portfolio changes on those positions?

Sorry, which two healthcare.

Those two that you mentioned that dragged down first-quarter performance.

Okay. So we had three major healthcare positions – Baxter, which is doing extremely well, and then the other two are Amgen and Allergan. So these are both great companies. I think Allergan has been kind of battered by the one-two punch, first the Treasury changed the rules and the Pfizer-Allergan merger was basically broken up in a way. We really didn't expect that. We did a lot of research with public policy people and lawyers. This was an unusual situation. We thought there was a good margin of safety in Allergan because the underlying business is very good. Management in Brent Saunders is excellent. So we have confidence in Allergan to get through this. The catalysts there are the sale of Teva, potential repurchase of shares with proceeds from that, and I think when people were able to see Allergan kind of get back on track with clean quarters and a balance sheet that's cleaned up with the Teva transaction behind them. We expect that to continue doing well. And similarly for Amgen, it's down a little bit this year. They have a great product line. Growth is good. And these are companies that are trading at valuations that have not been seen in the last decade in pharmaceutical companies. So we are confident in both those companies going forward.

Okay, that’s great. And then lastly on Japan, that’s a real victory in terms of the corporate exodus in the 7-Eleven situation. Do you think that will be a trend in the market? And do you see more opportunity there?

It’s actually not that rare for us. I think we've taken a different sort of approach in Japan, which is to align ourselves really with government policy. So we’re not really going against the company's or against the Abe administration’s stated goal of Third Arrow Abenomics, which is to improve corporate governance and improve return on invested capital. And I think by being able to articulate a way forward for Seven & I with better governance and a better succession plan, I think it became evident to the Board that the course that they were taking was not the right one and they pivoted and they promoted the person who – Mr. Isaka who has done a fantastic job leading the 7-Eleven stores. But keep in mind, I think we've had positive experiences with Fanuc kind of helping them improve transparency and better capital allocation. We had very productive relationship with Sony and I think a mutually respectful one. One of the things we'd asked for was a spinoff of the entertainment company. While they didn't do that, they really ran the company in a much better way. So I just disagree with that. It's very rare. I just think our approach has been a little bit different and more cooperative with more modest ambitions as far as what we’re looking to see.

Great, thanks a lot for all the answers. And then switch to – to John, Rob and Chris, on the buybacks, so how much cash you’ll have on hand and would the buyback alter the investment leverage, currently already sort of like 1.5, already sort of like probably upper end of rating agencies, like target levels.

Kai, we’re basically fully invested. At the same time, most of the investments are very liquid, so it won’t be a problem to have the cash to buy the shares back. And I think one thing we really want to make clear with this, this is creating a nice option for us. We have no immediate plans to go out and buy $100 million of stock back. I think with the way our valuation goes up and down at particular points in time, buying shares back when we’re substantially below book is very attractive. We also have some limitations just on the amount of float we have and how much we could actually buy back at any point in time. So there's no – don't expect any immediate rate action. This is in no ways a reflection of – maybe we want to take money out of our managed account and buy shares back. That’s not the case at all. Rob?

The money we use to buy back the shares will come out of our separate account. So there’s cash at Third Point other than a few million dollars for operations. So if the shares trade substantially below book value, we will take money out, buy back the shares because we view it just as a relatively good investment opportunity.

And was that just open market transaction or could involve some of the sort of – their founding shareholders?

The plan allows for us to buy back shares in private transactions, but we haven't had any discussions with our private investors. So the intention is to buy back in the open market.

Okay, great. Well, thank you so much.

Thank you, Kai.

[Operator Instructions] Our next question is coming from Jay Cohen of Bank of America. Please proceed with your question.

Yes, thank you. Two questions. First is, with the new business that you did right in the quarter, can you characterize what kind of business it was? And then the second question, on the buyback, I guess I’d always assume you probably wouldn’t be buying back stock only because you have the opportunity to deploy that capital through Third Point LLC. Is what you're saying that, as your stock gets to a low level, the return you'd expect from buying back stock would exceed the return you would have from investing with Third Point?

Jay, it’s a tougher question to answer because of its relative attractiveness. But when our shares trade below book value, we think they’re cheap. And when we buy them, our book value per share increases. So it’s immediately accretive. And so, at below book value, we believe it’s attractive relative to investment opportunities in a separate account.

Can I jump in on that one? It’s sort of an apples and oranges question. It doesn't affect – the Third Point returns will be the Third Point returns. And if you can create those returns at a 10% discount, then it just accelerates the – it will just amplify the returns from the portfolio as opposed to investing in Third Point at book value.

Jay, just a point I want to make again. We have no great plans to do a big amount immediately. I think this is a great option to have for us. As our value goes – our stock price goes up and down, so it’s just a great option. And given the float and the restrictions on how much we can buy anyway, we really can do anything in a major way. But it’s just a really – we think a smart option to have.

Got it. And then the new business?

Yeah. New business was – we did about a $30 million mortgage – quota share of a mortgage insurance company and then we have a small Lloyd’s quota share of political risk, were the two new items. And the rest of the business were – it was renewals of business already on the books.

Got it. Thanks a lot.

Thank you, Jay.

Thank you. Our next question is coming from Ken Billingsley of Compass Point. Please proceed with your question.

Good morning. Just wanted to follow-up on the new business. Again, you’re saying, of the $30 million net GPW of new business, is the majority of that’s quota share MI in political risk? Is that correct?

90% of it is mortgage.

90% of it is mortgage. And can you talk about from a timing – obviously, you’re coming in from an opportunity on the MI side. There’s been a lot of demand for it because of PMIERs requirement. Do you see increased demand for that going forward? Does this look like this might be more one-time in nature? Can you just talk about that? Do you see this also growing for you or is this just a one-off transaction?

We’ve written the private mortgage insurance business since our start. We started out with Magic almost day one, so this is steadily built. The numbers – kind of the amount of mortgages out there and the mortgage insurance, they’re really big numbers. So they kind of dwarf property-casualty surplus. So we expect to – the current deals we have in place, we expect them to grow. I don't think we’re going to see a lot of new contracts coming on the books. But the ones that are in the books, I think what we’re hoping is that the quota shares really become part of the capital structure of the mortgage insurance companies, given the restrictions on them. We haven’t done any of the GSE business. And that clearly is a growing area for other companies. But, today, we’ve done none of those.

And is there anything that’s keeping you out of it of the GSE business?

I think one factor there is, we like – there are certain – the private mortgage insurance companies have a lot of expertise, right? They're very good at it. We also have some contracts on other reinsurers that we think are very good at analyzing this business. So we like getting that second set of eyes on it. And I think one of the concerns we have on the GSE business is you pick up a fair amount of potential earthquake exposure, particularly in California on that that I think people are aware of. I'm not sure they really take that into account as an exposure on that business.

And the last question on this is, you mentioned that – obviously, we have some of the reserve increases, even though we haven’t had a lot of cat events, but reserve increases with some of the peers. Are you seeing any opportunities or some new markets that might be of interest to you that had not been available before?

I don't think so, Ken. We’re watching it. We’re seeing – it’s a very competitive market. We’re seeing many companies be very aggressive now. But it's an unsettling time, with various companies or lines of business with reserve increases. We’re still benefiting, the industries still benefit immensely from benign cat experience. But the number of single digit, but still multibillion-dollar losses are – if there are some billion here, billion there, pretty soon you're talking about real money. It’s just $2 billion here, the hailstorms in Texas, the earthquake in Japan. We’re watching, although we don't have any exposure, this fire in Canada. It’s certainly not a market turning event, but it’s going to be a very big insured event. So we’re starting to see that happening. And then who knows what happens for the rest of the year on a more major scale.

I would just add that we’re constantly examining new lines of business, merging growing lines of business like cyber. We’re very reluctant to jump into a line where we might think we’ll do better and where we just don’t understand and can quantify all the risks.

Yeah. I think every company – probably, this is an accurate statement. Just about every company in the world is looking at their book of business go, things are tough, what else can we be doing out there. I know when we’ve just totally reemphasized ourselves daily. There are very few pots of gold out there. There is no great vacuums of demand, where demand for reinsurance is so great we could jump in and make a killing. For everybody in the market, it’s a very challenging time.

And my last question, mix of business in general. If I recall correctly, you do have – at least you have a significant auto book. And then with MI, can you talk about the mix of business between what might present more of a shorter float for you for investing versus a longer horizon? I would imagine the MI business buys you a little bit more time. But the auto business has a shorter float cycle with it. So could you talk about what the mix is and what you guys are doing, if you see that changing or is that likely going to stay the same at least for the next year or two?

I think what you've seen in our brief four-year history is out-of-the-box we wrote a fair amount of the non-standard auto and the Florida homeowner quota shares that you’re either excluding or limiting the cat. We like that business. We thought it wasn't volatile, small, but pretty stable margins. Neither business generates much float. Those two areas have become very competitive and that has become a much smaller percentage of what we’re doing. So our mortgage business, we like because of the duration. But also, though, we didn’t write any in the first quarter, we like loss reserve deals. We've written a substantial number of larger loss reserve deals where the duration on those reserves are five plus years. So we really like that. We do have some professional liability now, quota shares of people writing that business. That business, at 100 or below, or 100 plus or minus, given the duration of claims is also very attractive to us. So I think we can go offline and I can give you specific percentages. I don't have them right here. But that short tail business for us has – over the four years, it has become a smaller percentage of the total and I expect that to continue to shrink.

Great. Thank you for taking my questions. Thank you.

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

We thank everybody for calling in and we’ll talk in three months.