SiriusPoint Ltd. (SPNT) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Third Point Reinsurance Third Quarter 2016 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 of Third Point. Thank you. You may begin.

Thank you, operator, welcome to the Third Point Reinsurance Limited earnings call for the third quarter of 2016. Last night, we issued an earnings press release and financial supplement which is available on our website, www.thirdpointre.bm. A replay of today’s conference call will be available through November 11, 2016 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 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 actions 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 third 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, Rob will provide an update on our business production and market conditions. Daniel will discuss the performance of our investment portfolio, and Chris will discuss our financial results in more detail. We will then open the call up for your questions. For the third quarter, we reported net income of $72.1 million or $0.68 per diluted share, compared to a net loss of $195.7 million or $1.88 per diluted share in the prior year’s period. Our diluted book value per share increased by 5.2% in the quarter to $13.55. Our underwriting operation continues to generate strong cash flow, which is invested by Third Point LLC. In the quarter we generated 22 million of net investment income on float and total float stood at $582 million at the end of the quarter. Total net investments to equity stand at 1.5 times, which is the level that we’re targeting given risk management considerations. In the third quarter our investment portfolio performed strongly with a return of 4% which compares to negative return of 8.7% in last year’s third quarter. Overall, our total return model performed well this quarter. I would now like to turn the call over to Rob, to provide an update on our business production and market conditions.

Thank you, John. The performance of our property and cash of the reinsurance segment in the third quarter was in line with expectations, given current market conditions and the lines of business on which we focus. For the quarter we produced a combined ratio of 106.5%. There was $40,000 of net favorable reserve development for the quarter as a result of small offsetting movements within several lines of business. As a reminder, we reserve by contract and review contract each quarter. Gross premiums written for the quarter, decreased by 63 million to 143 million as compared to the third quarter of 2015. Although the decrease was primarily due to one large reserve cover that was written in the third quarter of 2015, it’s important to remember that we focus on a small number of larger transactions including reserve covers and multiple year contracts that may not renew or may renew in a different comparable period. This makes quarter-to-quarter comparisons difficult. We’re more focused on increasing diluted book value share and do not target any particular premium growth rate. While it sums you to the bottom of the pretty soft [ph] market cycle, we remain cautious and expect market conditions to remain very difficult. In order to maintain our underwriting discipline therefore, our premium writings might continue to decrease in the short run. We are deemphasizing certain lines of business which we believe to be underpriced, such as non-standard auto and home owners and increasing our focus on higher margin areas, such as mortgage insurance and types of transactions that produce significant float such as reserve covers. I’ll now turn the call over to Daniel to discuss our investment performance.

Thanks, Rob and good morning. The Third Point Reinsurance investment portfolio managed by Third Point LLC gained 4% in the third quarter of 2016, net of fees and expenses versus returns for the S&P and CS event-driven indices of 3.9% and 3% respectively for the quarter. The count was up 6% year-to-date through September net of fees and expenses. The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC. Third Point has generated profits in 2016 through a combination of diversified portfolio construction, reducing credit security selection and proactive repositioning around macroeconomic events. In the third quarter we took advantage of dips in the market to reload our portfolio, especially in equities. We had positive performance in each sub-strategy and geographic region in which we invest and generated alpha during each month of the quarter. The Third Point equity portfolio returned 5.5% on average exposure during the third quarter. We’re nearly twice the return of the S&P 500 index, with approximately half of the equity market exposure. Each sector contributed to returns with consumer and TMT as our top performers. We maintain high conviction in our U.S. centric portfolio, which is a mix of constructive dispositions, debenture winnings, source and value compounders. In Q3, our corporate credit portfolio returned 11.8% on average exposure, handily beating the high box high yield index return of 5.1% for the same period. During the quarter we were able to reload on performing energy credits, which we entered and exited profitably earlier I the year. Year-to-date, our corporate credit portfolio performance has been nearly tripled that of the high yield index and other strategy posted modest gains driven by strong performance from some positions in our private portfolio. Now, I’d like to turn the call over to Chris to discuss our financial results.

Thank you, Daniel. As Rob mentioned, we reported a net income of $72.1 million or $0.68 per diluted share in the third quarter of 2016, compared to a net loss of $195.7 million or $1.88 loss per diluted share in the third quarter of 2015. For the nine months ended September 30, 2016, we reported net income of $74.3 million or $0.70 per diluted common share, compared with a net loss of $129.6 million or $1.25 loss per diluted common share for the nine months ended September 30, 2015. For the three months ended June 30, 2016, diluted book value per share increased by $0.51 per share or 4.1%, to $12.88 per share from $12.37 per share as of March 31, 2016. For the six months ended June 30, 2016, diluted book value per share increased by $0.03 per share or 0.2%, to $12.88 per share from $12.85 per share as of December 31, 2015. For the quarter ended September 30, 2016, diluted book value per share increased by $0.67 per share or 5.2%, to $13.55 per share from $12.08 per share as of June 30, 2016. For the nine months ended September 30, 2016, diluted book value per share increased by $0.70 per share or 5.4%, from $12.85 per share as of December 31, 2015. Gross premiums written, decreased by 63 million or 31% to $196.9 million, for the quarter ended September 30, 2016, from 206 million for the three months ended September 30, 2015. Gross premiums written, decreased by 67 million or 11% to 537 million for the nine months ended September 30, 2016, from 603 million for the six months ended September 30, 2015. In the quarter we wrote $48 million of new business at an increase of 39 million from contracts that we renewed and increased net premium estimates of 18 million on existing contracts. These increases in written premium were more than offset by $92 million retroactive reinsurance contract that was completed in the prior year’s third quarter, 12 million of contracts that we decided not to renew because of pricing and/or terms and conditions and a net decrease of 75 million due to timing differences from contract extensions, cancellations and contracts renewed with no comparable premium in the prior year’s quarter. Net premiums earned for the quarter ended September 30, 2016 decreased by 81 million or 39%, to 128 million. Net premiums earned for the nine months ended September 30, 2016 decreased by 70 million or 15% to 398 million. The decrease in premiums earned was primarily due to retroactive reinsurance contracts of 92 million and 108 million that were written and earned in the three and nine months ended September 30, 2015 respectively. We have not written any retroactive reinsurance contracts in the comparable 2016 period. We generated $8.3 million underwriting loss for the three months ended September 30, 2016 versus an underwriting loss of 5.8 million in the prior year period and our combined ratio was 106.5% versus 102.8%. The most recent quarter included 40,000 of net favorable development compared to net adverse development of 1.4 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016 the underwriting loss was 40.5 million and the combined ratio was 110.2%. For the nine months of 2015, we produced an underwriting loss of 19.1 million and a combined ratio of 104.1%.The increase in the underwriting loss in the current nine month period was primarily due to 12.5 million of adverse loss development detailed on our last earnings call. For the quarter ended September 30, 2016, Third Point Re reported net investment income of 88.4 million, compared to a net investment loss of 193.2 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, investment income was 134.6 million, compared to a loss of 89.6 million in the nine months ended September 30, 2015. The return on investments managed by the company's investment manager, Third Point LLC, was 4.0% for the three months ended September 30, 2016 and 6% for the nine months ended September 30, 2016. This compares to negative returns of 8.7% and 4.3% for the three month and nine months period ended September 30, 2015 respectively. Corporate expenses or general and administrative expenses not allocated to underwriting activities were 6.02 million for the third quarter of 2016, compared to 3.9 million for the third quarter of 2015. The increase was due to separation cost in the current quarter. Corporate expenses were 14.4 million for the first nine months of 2016, compared to 16.7 million for the first nine months of 2015. The decrease was primarily due to higher separation cost in the prior year periods and lower stock compensation expense in the current year period. Other expense for the third quarter of 2016 was 347,000 and for the third quarter of 2015, was 670,000. For the nine month periods ended September 30, 2016 and September 30, 2015, other expense was 6.2 million and 5.7 million respectively. Other expense represents interest credits paid on deposit and certain reinsurance contracts. The foreign exchange gains for the quarter and nine months ended September 30, 2016, were primarily related to the revaluation of foreign currency loss reserves, denominated in British pounds where the U.S. dollar strengthened during the period. Income tax expense or benefit is primarily driven by the taxable income or loss generated by our U.S. based subsidiaries, as well as withholding taxes and uncertain tax provisions on our investment portfolio. We recorded an income tax expense of 2.5 million for the three months ended September 30, 2016, compared to a tax benefit of 7.8 million for the three months ended September 30, 2015. We recorded 5.9 million income tax expense in the nine months ended September 30, 2016 and 5.8 million of income tax benefit for the nine months ended September 30, 2015. I’ll now hand the call back over to John.

Thank you, Chris. Our total return model performed well in the third quarter. Our investment portfolio managed by Third Point LLC produced strong results and was up 6% after three quarters. After taking reserve increases in the second quarter to correct some overly optimistic booking of deals, we had a more typical underwriting quarter, at least in today's soft market and produced a combine ratio of 106.5%. Our underwriting operation continues to generate strong cash flow which is invested by Third Point LLC. We have an active share buyback program with $92.6 million available under our $100 million plan but didn’t buyback any shares this quarter. We target our share price to book value of 90% for share repurchases. Our shares traded above this level while our trading window was open. If our share prices remains below 90% of the book we will buy back shares this quarter. I'll end with a quick comment on Hurricane Mathew that scrapped Florida and South Carolina in Early October. We do not write any property excess of lost treaties and therefore we have very limited exposure to hurricanes. Our only exposure is on three quarters of contracts where there is very low per occurrence limits or other features that limit our exposure. We expect total losses to be under 3 million. We thank you for your time and we will now open the call for questions. Operator?

Thank you. [Operator Instructions] Our first question is from the line of Kai Pan with Morgan Stanley. Please proceed with your question.

Thank you and good morning. First a few questions for Dan. You mentioned in your quarterly letters that we may see surprises on the election date. How do you position the portfolio to surprises and do you see potential up turn here such as post Brexit?

It wouldn’t be a surprise if I predicted it, but it isn’t just about Election Day. We generally reduce both our gross and net exposure in part because of concerns about potential volatility. So we clearly didn’t predict the outcome of Brexit, but we definitely saw that as a point in time that would, you had described some percentage to a scenario where there was surprise. So we have done the same thing here. We have reduced our exposures; we cut some positions and increased some hedges. So that’s basically where we stand and it isn’t just about the president obviously who wins is going to impact the part I think equally important is what happens in the house in Senate. So we will be looking at both congress and the race for president to determine what kind of actions we take after the election.

And then on your sort of investment style, I noticed that we haven’t heard a lot about sort of event driven or corporate activities is that just you see fewer opportunities in the current environment?

We will take this by part. We have three positions where we have taken some role in the governance of the company. Sotheby's, Dow and Baxter and we continue to be engaged in all three of those companies and so we don’t really have any new ones clearly if we saw opportunities we would take them but we haven’t. But we are very pleased with the performance of all three of those companies; Baxter is a real standout and healthcare this year performing very well. Dow is moving along with its merger with DuPont and beating numbers and doing well. Sotheby's is doing extremely well under it is new management team. So we are pleased with that, source of event driven goals. It is a little bit of two sided story on the one hand, spreads are wider there are, there is a lot of tick over activity and there is less money able to pursue those opportunities but on the other hand the regulatory environment has become more challenging than I can remember in my career. So we are seeing more broken deals and more money lost. So can't see necessarily just because spreads are wider than risk arbitrage that it is an area that we are seeing a lot of - we are seeing a lot of potential investment. I wouldn’t say that it is really translate it into making a lot of money yet. I think it will be at some point in the future we will find spots where we can do well. And as far as other types of even driven investments spin offs corporate restructurings privatization and things of that nature. We have positions in few things that are result of those but there is not a lot of new activity in that area.

Great and then you mentioned quantamental techniques in investing. I just wonder if that a new area of your focus and do you need quite a sort of different skill set for that.

We are currently using a number of data providers that help us evaluate companies, industries even the economy using data and big data analytics, we will be bringing on few people more specifically focused on that area to help it's kind of bridge the gap between our traditional fundamental analytical process and what is going in world of data but just to be clear we aren’t pursuing a quant, this isn’t to support its quant strategy, this will be using get its support our existing fundamental strategy.

Lastly if you look at return - the year what closed today load of return from the past three years the return had been sub like double digits and trailing S&P500 I just wonder if your any source of structural changes you see in the current environment that could present you from achieving the meeting returns and out performance of the market over the long period of time.

I am not sure that’s - we are ahead of the S&P this year, I think we are slightly below the last two years, it is not meaningfully below, I think looking at the returns alone, our little bit and obviously it is important for us to generate the types of returns that you are talking about but keep in mind also that we are doing that much less volatility and roughly half the exposure to the S&P and certainly relative to other hedge funds we have outperformed. I don’t think that there is any think structurally different about the world today and we had if you moved your time frame back to five years we have actually performed very well since the financial crisis were up close to 16% net since ‘09 on an annualized basis with no down years, no significant down years like maybe we were down 1% so I think part of it is the time frame that you have picked up and I don’t think there is anything structural, it has been, it has been a challenging period I don’t use that as an excuse but there is I don’t think there has been any fundamental change in the world that will prevent us from generating very good returns going forward.

Great, thank you so much for the answers. For John, Rob and Chris, first is on the underwriting side. What’s your outlook for January renewals and where do you see opportunities that you can grow your business and in the current environment do you expect the composite ratio to be deteriorating further or there could potentially some improvement there?

Hi Kai, this is John Berger, we are - as we state we don’t write the property catastrophe book of business and that’s really a big part of the one-one activity. So my comments on what happens at one-one and the CAT [ph] book aren’t that usual, I expect though that there is a still a lot of capacity chasing business. I expect that to continue to trend down. You hear a lot of talk about their value of the bottom business side, you don’t know you are at the bottom until things start to pick up so we will see and in our outlook we still have a push on for loss reserve fields we like those, we think as the market remains challenging and investment returns are low people will focus a lot more on capital management to date our success has been in U.K. with solvency to really helping us with selling loss reserve type deals we are hoping to have a bigger push in the US on those deals we are mortgage portfolio, we started writing that almost from day one five years ago and that’s grown nicely, that has the potential to have very attractive combined ratios. We started over a year ago to emphasizing the nonstandard auto and the Florida home owners book that have been challenging from a combined ratio standpoints I think as that segment reduces in the earned premium commission on the mortgage portfolio and for successful on the loses front I don’t see maturation in the composite ratio and hopefully there is improvement.

Hey Kai, it is Robert, I would just add that the mortgage portfolio we have written and grown over the last few years earns over a one period of time up to seven year. So you will see the benefit that earning but it is going to be gradual.

Okay that’s good, how big is mortgage rebook now?

I think in inception to date Kai we have written about $225 million.

Okay that’s good. Lastly on your US operation, can you talk a little bit about that and also recent management change there?

Yeah, the US operation we had the departure of two of our underwriters. They were very active in areas that we are emphasizing; they resigned to move on to other opportunities. It is a well-staffed office and we have despite losing those two people yet we have good personal there, good marketing, good underwriting, very good actuarial so we are optimistic that as we really start to push a smaller US based loss reserved deals we can have success there and some more of I call the E&S approach is really what we do here in Bermuda there is a lot of run in the mill new stuff were looking at, we find that very competitive but we are in Bermuda same things like the loss reserve deals, residue value deals and legal indemnity type deals. We are hoping to be able to generate those types of opportunities in the U.S. So the U.S. is important and when we formed it, we said hey there is no magic, it is a very competitive market out there but purpose of the US office is that its access to business. We have very good people underground meeting with brokers, meeting with potential clients go on a daily, weekly basis where without that we would be sitting 900 miles of the coast of North Carolina trying to drum up opportunities. So despite two people leaving we are in very good shape there.

We are taking enough of your time, thank you so much for all the answers.

Thank you, Kai.

Our next question is coming from the line of Jay Cohen with Bank of America Merrill Lynch. Please proceed with your question.

Yes, thank you. Lot of my questions were answered, Chris you had mentioned one of the issues in the quarter from a revenue standpoint was some timing differences and I am wondering is that going to a, the comparison going forward or was this already accounted for in the year to date.

The timing difference I refer to in last year third quarter we wrote two 18 months contracts and that accounted for about $17 million worth of premium. So those two contracts will come up for renewal in the first quarter at 2017.

So all those being equal that should mean for a bit of a lift potentially in that quarter?

It should, Jay, we are pushing for better margins and so premiums is likely to remain the same or go down and so we will benefit from that but overall and our guidance is flat to down.

Got it thanks guys.

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

Good morning. I wanted to just follow up on, I think you may have answered this but I wanted to clarify, the payroll expenses jumped up on page 15 of the supplement. Was this all related to separation cost that you mentioned?

That’s right Ken, there is about $1.8 million impact in the quarter as a result of separation cost and so if you adjust for that our total G&A run rate has been about $10 million to $11 million or about three years now and we would really expect much change in that going forward.

Okay and on the business mix, this kind of a two part question, first I want to ask about property mix that jumped can you talk about what the makeup of that businesses and maybe the tail and specifically like how long that they are and going to be around from a float perspective for investing and then the same with the MI [ph] business. I believe I think you answered one question so that was six years but if you could just kind of talk about expectations there and what kind of tail it has and ability to maintain float.

The property is a mid-Atlantic home owners and all the physical damage that has run quite well really a premium relief deal, very safe occurrence limits on it and that was a two year deal that $60 million but that are pretty big chunk there. Ken you specifically have some questions on the mortgage business right.

Specifically I just want to get some color on the mid-Atlantic home owners obviously that had been home owners just kind of get an idea of how much the flow will be around because the non-standard business that you had before some of it had a much shorter tail. So just trying to get a color on the float perspective and what it does down the road.

The total amount of premium actually it is not very good indicator of how much quote we have, it is the type of premium for into right to reserve cover for example and reserve cover is written and will have that full around five years on average and so we expect a higher portion of the premium to be related to reserve covers and we also have some moment tail causality business in there and so although premiums is likely to come down we expect our float balance to remain about that constant.

Yeah, Ken if we just to exaggerate and to make the point if we stop writing business our float wouldn’t go down for few years because as Rob said the loss reserve deals, the duration of those reserves are at least five years.

Great I appreciate thanks for answering my questions.

Thank you.

Thank you. Our next question is coming from Meyer Shields of KBW. Please proceed with your question.

Great thanks, I want to follow up on Ken's question if I can as you move from what appear to be shorter deadlines to longer deadlines is that allow for any increase in the ratio of invested assets to equity?

Yeah, I mean so we have right now our net investment asset leverage is about 1.5 and as we stated previously. That’s around what our target level is and as we just explained from the last question I mean as we look forward and anticipate changing mix of business with a target of a mix of reserve covers and higher margin business which may not have the same float benefits but then also taking into account what we already have on the books from previous deals. We would expect our asset leverage to remain fairly constant in around that 1.5 level.

Okay that’s helpful. Within the loss reserve cover I guess, you noted there wasn’t much I don’t there wasn’t much if I understand correctly there was a much activity in the quarter. Is that initial demand or pricing?

These take a long time to from start to finish. And it is just the relatively large we said last year in the third quarter was a $92 million reserve deal. This quarter we didn’t have a comparable size deal, we have several in the works but they just take a long time. Our normal reinsurance deal has a renewal date, it’s January 1, July 1, June 1, our reserve deal can be done at any time, so you don’t have that deadline to get it done, so these things tend to - it’s usually pretty big decision for the company. You need buy in from the CEO, the CFO, the Chief Investment person and they just take time to bring home.

Okay, if there is an uptick in industry M&A, would that drive more demand?

Yeah, I don’t know, it’s interesting. I think it depends where it happens. Demand for losses of deals or just demand for reinsurance?

I meant losses though, but I’d be interested in your thoughts either way.

The type of reserve cover that usually goes on with an M&A deal is one where there is some - big hole in the balance sheet that the buyer or seller wants to patch as part of the deal. Those are the sort of deals for we’re looking for. We look for deals that are really capital management tools for the company and with very limited risk.

Okay, thank you very much for everything.

Thank you. At this time, I’d like to turn the floor back over to Mr. Berger for any closing comment.

Thank you very much for calling and we look forward to talking to everybody in three months.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.