Q3 2019 Earnings Call
Greetings and welcome to third point reinsurance third quarter 2019 earnings conference call.
At this time, all participants will be in listen only mode.
A brief question answer session will follow the formal presentation.
If anyone today should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Christopher Coleman, Chief Financial Officer, a third point reinsurance.
Coleman do you may now begin.
Thank you operator.
Welcome to the third point reinsurance limited earnings call for the third quarter of 2019.
Last night, we issued an earnings press release and financial supplement.
She's available on our website Www Dot third point re Dr yen.
Leading today's call will be Dan Boyd Chief Executive Officer.
Before I turn the call over to Dan 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, a certain risks and uncertainties.
Please refer to the third quarter 2019 earnings press release.
In the company's other public filings, including the risk factors in the company's 10-K.
Where are you will find factors that could cause actual results could differ materially from these forward looking statements.
Forward looking statements speak only as of today. They are made in a company assumes no obligation to update or revise Dan.
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 Companys financial results. A reconciliation of these measures to the most comparable GAAP measure is presented in the Companys earnings press release.
This time I will turn the call over to Dan Boy.
Thank you Chris.
Good morning, and thanks for joining our third quarter 2019 earnings call.
Today I will provide the highlights of our financial results followed by an update on underwriting strategy other company developments and market conditions.
Daniel Loeb CEO looks third point LLC, well, then speak to the investment performance and Chris will cover our financial results in more detail.
We'll then open the call up for your questions.
We reported a small net loss for the quarter, resulting in a return on equity of negative 1.1%.
Our year to date return for the nine month period, However is a positive 14.2%.
Our diluted book value per share at the end of the third quarter was $14.76.
Representing a growth of 13.7% since year end 2008 chain.
Our combined ratio for the third quarter was 102.7%, which included catastrophe losses of $12.7 million were 6.2 percentage points.
The cat losses incurred in Q3 were within our budgeted cat losses for the year to date period and were within expectations, given the scope and scale of the events.
We remain pleased with the progress, we're making and expanding our underwriting platform and expected 2019 underwriting year to be profitable.
Given the catastrophe events in Japan in California over the last few months however.
We expect our calendar year reported combined ratio dropped below 100 in 2020 , rather than initially expected fourth quarter of this year.
We're very pleased to have announced last night, the Joe Dowling.
Who serves as the Chief Executive Officer of the Brown University investment office has joined our board of directors.
You may recall that Sid Sankaran current CFO of Oscar health, and former CFO and Chief risk Officer of AI Jie also joined earlier this quarter.
We believe that both the Joe in Sid will bring valuable insights and experience to complement the strength of our existing board.
I hope forward, our strategy designed to deliver value from both sides of our balance sheet.
Now moving on to market conditions.
The build out of our catastrophe portfolio went better than expected for 2019 based on all key planned metrics.
We're pleased with our market acceptance to date as we were signed on a number of well priced accounts with top students.
During the third quarter, we wrote approximately $6 million a property cat premium, bringing our total 2018 written in this class of business to $63 million.
Going into 2020, we are watching the market dynamics and property catastrophe reinsurance and retrocessional market very closely.
From what we are seeing we expect to shape our portfolio away from Retrocessional quota share treaties.
Which represent a little more than half of our property catastrophe premiums for our 2019 portfolio.
Toward a more retrocessional excess of loss and direct property catastrophe excess of loss portfolio.
As we expect the risk return dynamics in those markets to present, the most attractive opportunity for allocation of our property catastrophe aggregates.
We think the shaping of our catastrophe portfolio as it enters its second year will further improve our metrics.
And we also expect further improvement in the pricing of our renewal portfolio, which we also think is likely.
Our new specialty lines underwriting team the joint early in 2019 has written approximately $5 million a premium during the year.
But as previously noted their portfolio is heavily weighted towards January one business.
We expect this portfolio to contribute meaningfully to our goal of achieving underwriting profitability during 2020.
Of note market conditions in these lines remained stable.
Our non catastrophe business, which still represents the majority of the portfolio continues to show evidence of improvement.
We are benefiting both from primary market trends, which a number of Ceos have talked about during this earnings season.
As well as improvement in reinsurance contract terms and conditions.
And increased demand for surplus relief transactions in the U.S. market.
And capital quota shares at Lloyds.
Another theme this earning season has been industry commentary on rising casualty loss trends in the U.S.
We have been aware of the risk of increasing inflation or loss trend over the past several years.
And if considered that at our pricing and reserving.
While there is recognition in the market by some insurers that loss trends are increasing.
The observed trend thus far on our own portfolio has been within our pricing and reserving expectations.
We have not seen a significant acceleration in frequency or severity trends.
Additionally, our exposure to increasing loss trends is partially mitigated by the fact that much of our portfolio is proportional reinsurance of primary insurance business. We're per occurrence limits are low.
We also have relatively less exposure to some classes that have been more affected by the recent changes in trend.
Such as commercial auto and commercial do you know.
After the investment changes, we announced last quarter our portfolio remains approximately one third invested in the third point enhance fund and two thirds and more traditional fixed income securities.
As discussed last quarter.
This repositioning of our investments was prompted by the shift in our underwriting strategy designed to achieve our goal of delivering underwriting profitability.
As well as a more balanced contribution to our overall return from underwriting and investment.
We believe that we are well positioned to capitalize on underwriting opportunities, while still taking advantage of third point LLC his ability to outperform in managing our investments.
Which has always been the goal of our business model.
We expect to delivering underwriting profits will build the franchise value of third point re and allow us to close the gap, but our discount to book value as we demonstrate the full potential of an optimize investment strategy combined with profitable underwriting.
I'll now hand, the call over to Daniel Loeb, who will discuss the performance of our investment results in more detail.
Thank you Dan and good morning.
Good point it has to LP.
The third point reinsurance investment portfolio actively managed by third point LLC with down 0.7% for the third quarter of 2018 net of fees and expenses.
When combined with the company's fixed income portfolio consolidated investment results for the quarter were minus 0.2% equity markets were probably positive during the quarter definitely 500, and Sci World indices rose, 1.7% and 0.7% respectively. However, despite modest gains the quarter with marked by tomorrow.
Swiss Dr. rotation is positions with momentum orientation outperformed in August , but sharply reversed course in September .
In favor of lower quality value oriented laggard.
The funds equity portfolio, specifically its activists positions made the largest contribution to returns during the quarter, adding 370 basis points to performance all of the funds top five winners for the quarter. We're active this positions, including 70 Corp, Baxter International Campbell soup nationally.
And the new position in Este Lauder Luxottica.
As a little exotic and now the largest high care company in the World was was the company formed in late 2018 to the merger that's for the World leader in Ophthalmology lenses and Luxottica, the world leader in eyeglass frames and sunglasses.
Expect this position have meaningful upside over the next few years as we work with management to continue inefficient and valuable merger across two best in class businesses.
Gains in the long equity portfolio were partially offset by losses from the single name short portfolio as a scale and suddenness of the factor rotation caught us off sides in certain short positions, resulting in 70 basis points in losses for the quarter.
Year to date, the front long equity portfolio is up 24% versus the end Sci World performance at 18.2% and none of its short position has added more than 900 basis points to return.
The credit portfolio cost of funds 70 basis points during the quarter, but has been a positive contributor to returns in 2019, adding 50 basis points to the from year to date.
<unk> position in the unsecured debt, if California utility Pacific gas and electric has been a top 10 winter as a bonds right, 27% over the course of the year through September .
Our largest loss in the third quarter was in Argentina sovereign debt when a surprising outcome in the August 11th presidential primary caused the panic in the capital market, taking the taking the bonds down approximately 50% in costing the fund 76 basis points during the quarter.
Finally, our ABS portfolio posted another positive quarter within our own at 2.5%, bringing year to date returns to 10.7%.
At the outset of 2019, we can we communicated to clear objectives for the portfolio.
One of focus on alpha generation by concentrating on specialized strategies, where we haven't edge to focus on both trade construction and portfolio construction amplify idiosyncratic return and reduce systematic risk as a result, our exposure has grown modestly over the course of the year, but net equity exposure has come down.
Okay.
Throughout 2018, our net equity exposure for TP Reconsolidated has averaged less than 30%.
Despite the reduction in beta the TPV portfolio has returned 16.9% sits in 2019 compared to that.
Compared to the S&P 500, and let's see I World Index returns of 20.6, an 18.2% respectively for the same period.
P. Reconsolidated portfolio returned 10.2% for the first nine months of the year.
As we look ahead, we expect to maintain consistent net exposure levels, given where we are in the economic cycle and consideration of the upcoming us presidential election.
We believe our returns will continue to be driven by specific events in our active portfolio as well as the spread of performance between our long and short portfolios will remain watchful for any signs of conflicting macroeconomic data that could impact market.
Were pleased with result, so far this year as of September Thirtyth of third point reinsurance account represents approximately 16% of assets managed by third point.
Now I'd like to turn the call over to Chris to discuss our financial results.
Thanks Daniel.
For the third quarter, we generated a net loss of $15 million or 16 cents per diluted share.
Our year to date net income was 171 million or $1.84 cents per diluted share.
These amounts translate into a return on beginning equity for the quarter of negative 1.1% and.
And a positive 14.2% year to date.
Our diluted book value per share at the ended the third quarter was $14 in 76 cents.
Which was an increase of 13.7% from December 31 2018.
We generated a $5 million net underwriting loss for the third quarter and our combined ratio was one or 2.7%.
Compared to one of 4.9% in the prior year third quarter.
As Dan noted earlier, our current quarter combined ratio included $12.7 million or 6.2 percentage points attributable to catastrophe events net of reinstatement premiums and profit Commission adjustments.
There were no cat losses in the prior year period.
The current period underwriting result included a benefit of $3.8 million from the net impact of favorable reserve development.
Net of offsetting commission adjustments.
The prior period included a two $2 million benefit.
After adjusting for the impact of reserve development and Cat losses, there was a significant improvement in our core underwriting results compared to the prior year period.
As the shift in our underwriting strategy and business mix towards higher margin business.
Is impacting our calendar year reported results.
The ex cat accident year combined ratio for the quarter was 98.4%.
Our gross premiums written for the third quarter was $95 million, which compares to $30 million in the prior year quarter.
The increase in gross premiums written and was primarily due to $159 million retroactive reinsurance contract written in the period.
As a reminder, retroactive reinsurance premiums are written and earned in a period of contract binding as well as recognizing a similar level of losses incurred.
Gross premiums written for the year to date 2019 was $498 million compared to 458 million.
For the prior years nine months, an increase of 9%.
The increase in gross premiums written for the nine month period was primarily due to $63 million of new property catastrophe business.
And 59 million related to one retroactive reinsurance contract.
This was partially offset by contracts that we did not renew in the current year as well as the net impact of contract extensions cancellations.
And contracts renewed with no comparable premium in the comparable period.
The net investment loss for the quarter was $3 million.
Although net investment income was $221 million for the nine month period.
Which reflects the returns for the period, which Daniel discussed in detail, including the impacts of investment mix shifts made during the second quarter.
Total general and administrative expenses were $9 million for the third quarter of 2019 compared to $10 million for the prior year period.
The changes reflect generally offsetting amounts, including a decrease in 2019.
Due to lower stock compensation expense and the impact on payroll.
After the recent departure of senior executives, partially offset by higher incentive plan accruals in the 2019 team quarter from improved performance to date relative to the prior year period.
For the nine month period general and administrative expenses were $41 million compared to 29 million in the prior year period.
The increase was primarily due to severance costs recorded in the second quarter.
As well as overall higher payroll related costs due to increasing headcount to support our underwriting expansion.
As well as higher incentive plan accruals and share compensation expense, reflecting both an increase in headcount as well as improved performance to date.
Relative to incentive targets compared to the prior year periods.
During the quarter and thus far in 2019, we have not repurchased any of our common shares.
We recognize that we've been trading at a significant discount to book value, which would suggest that repurchasing shares would be an effective tool for increasing book value and earnings per share in the short term.
However, we are also mindful of the potential to significantly improve our valuation.
By investing in our underwriting platform.
Which we believe will drive franchise value and improve the quality of our earnings through consistent underwriting profitability.
A more balanced contribution to overall returns between underwriting and investing.
And lower volatility of results.
We thank you for your time and we'll now open the call for questions operator.
Thank you.
That'd be conducting the question and answer session. If you like to ask your question. Please press star one on your telephone keypad and a confirmation tell indicate your line is the question Q.
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One moment, please what we pull for questions.
Thank you.
Our first question is from the line of Meyer Shields with KBW. Please proceed with your question.
Great. Thanks. Good morning, So just a couple of quick ones first it looks like cash and equivalents or about 25% of the invested asset portfolios. That's the right level going forward.
Yeah, I mean, some at some of that means that the easiest way mer to think of our Bob investment account managed by third point is approximately one third of the 2.5 billion is invested in the third point enhance fun.
With the remaining two third invested in fixed income now depending on in the fixed income bucket in some of that is in money markets and short dated us treasuries, which then end up mapping into that cash equivalent line on the balance sheet. So some of its just that sort of presentation difference. So it's.
Either going forward either expect to see some portion of that in cash equivalent but over time, I think you'd start to see a larger.
For a portion of that show up within the debt Securities line.
Okay. Yeah. That's another question that makes sense.
Can you clarify the line or lines of business in the third quarter retroactive reinsurance.
It's really just one one contract mayor, it's with a client that.
That we've supported in the past and during the quarter, we had a.
An additional reserve cover that that we put in place.
Okay. Thank you ms. for something in the casualty will.
It's actually a primarily of UK motor.
And you May recall buyer were not competing in the run off space. So what this is a loss portfolio transfer with the motivating factor for the transaction being capital relief.
They're able to get capital credit for shifting reserves to us.
Okay, and then just one final question I'm, not really sure how to assets, but how should we think about the catastrophe load associated with.
The property Cat book and the specialty book that should start coming onboard more significantly in 2020.
Yeah, I mean I guess.
I think your question was on just expectations for cat load impacting our results yes.
So I think probably any that we've we've talked about the level of cat losses being that we've incurred year to date being kind of roughly in line with sort of budget.
So if you quantified the impact is those cat losses over the year to date period, it's roughly two and a half points and so I would I think you could extrapolate that to a cat load up roughly two to three points I kind of a budgeted basis.
That's perfect. Thank you so much.
Thank you.
At this time I'll turn the floor back to management for closing remarks.
Well. Thank you everyone. Appreciate you are listening into our call and look forward to talking to you in February .
Thank you. This will conclude today's conference you may disconnect. Your lines at this time, we thank you for your participation.