Q4 2019 Earnings Call

Greetings and welcome to the third point reinsurance fourth quarter 2019 earnings Conference call.

At this time, all participants ARNA listen only mode.

Question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

Now I'll turn the conference over to your host, Chris Coleman, Chief Financial Officer.

Thank you operator welcome to the third point reinsurance limited earnings call for the fourth quarter of 2019.

Last night, we issued an earnings press release and financial supplement which is available on our website Www Dot third point re dot B M.

Leading today's call will be Dan Malloy, 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 expectation.

Actual results may differ materially from those projected as a result out of certain risks and uncertainties.

Please refer to the earnings press release in the Companys other public filings.

Are you will find risk factors that could cause actual results could differ materially from these forward looking statements.

In addition management will refer to certain non-GAAP measures, which management believes allow for a more complete understanding of the Companys financial result.

A reconciliation of these measures to the most comparable GAAP measure is presented in the Companys earnings press release.

At this time I will turn the call over to Dan Malloy.

Thank you Chris.

Good morning.

I'm glad you can join our fourth quarter 2019 earnings call.

Today I will provide the highlights of our financial results followed by an update on the transition of our business model to a specialty reinsurer.

Conclude with a discussion of market conditions.

Following my talk Daniel Loeb, CEO third point, LLC will speak to our investment performance and Chris will cover our financial results in more detail.

We'll then open the call for your questions.

To start we're very pleased with our results for the fourth quarter and full year 2019.

For the 2019 fourth quarter, we generated net income of $30 million and our return on equity was 2.1%.

Bringing our full year net income to $201 million and return on equity to 16.7%.

Our diluted book value per share at the ended the fourth quarter was $15.04, representing a growth of 15.9% since year end 2000 do they change.

Oh combined ratio for the fourth quarter was 104.8%, which included property catastrophe losses of $16 million or 8.2 percentage points.

We reported a small benefit from favorable reserve development in the quarter.

And the fourth quarter of 2019 is now our 14th quarter in a row with no prior year adverse reserve development.

Our full year 2019, combined ratio was 103.2% and improvement of almost four points from last year.

We are encouraged by these results.

The evolution of our business model.

And 2019 was an important year of transition.

Our new underwriting initiatives continue to benefit results and we remain on track to deliver underwriting profitability in 2020.

Overtime, our goal is to deliver a combined ratio in the mid Ninetys as we work to deliver value for both sides of our balance sheet.

Taking a prudent mix of underwriting and investment risk.

As we deliver more consistent results overtime, we expect to close the persistent discount that our shares trade to book value and our peer group.

Now, let me turn to an update on the underwriting and current market conditions.

The build out of our property catastrophe portfolio went according to plan for 2019.

We recently completed a successful January one renewal cycle, where we made further refinements to our property catastrophe book.

Resulting in an increase in expected profitability without assuming more aggregate catastrophe exposure.

We have reshaped our portfolio away from Retrocessional quota share treaties, which accounted for approximately half of our property catastrophe premiums in 2019.

Toward more retrocessional occurrence excess of loss contracts.

As the risk return dynamics in that segment of the market presented the most attractive opportunity for the allocation of our property catastrophe aggregate.

Looking forward.

We expect the catastrophe market to provide meaningful rate increases at April 1st and June 1st.

Our new specialty lines underwriting team to join during 2019 is now fully integrated and is contributing to our goal of achieving underwriting profitability in 2020.

Their specialty catastrophe market is broadly flat.

So we are proceeding conservatively in the build out of this portfolio.

It is worth noting that we do not have significant exposure.

Corona virus as a result of this prudent buildout.

Our non catastrophe business, which still represents a majority of our reinsurance premium continues to show improvement.

Since most of this business is pro rata, we are benefiting both from primary pricing trends and from an improvement in specific reinsurance contract terms and conditions.

We continue to reposition the non cat portfolio away from float generating low margin contracts toward business, which offers increased profitability in improving market segments.

The shift in the mix of our non cat portfolio has and will continue to contribute to improving underwriting results.

It continues theme this quarter has been industry commentary on rise in 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 have considered that in our pricing reserving.

While there is recognition in the market that loss trends are increasing and some firms have booked adverse reserve development as a result.

The observe trends thus far in our portfolio have been within our pricing in reserving expectations.

As we noted last quarter.

Our exposure to these loss trends is partially mitigated by the fact that much of our portfolio is proportional reinsurance.

Primary business, we're per occurrence limit supply.

We also have relatively less exposure to some classes that had been more affected by the recent changes in trend such as commercial auto and do you know.

I will 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.

Third point enhanced LP that third point reinsurance investment portfolio actively managed by third point LLC was up 5.1% for the fourth quarter of 2019 net of fees and expenses, bringing 2019 returns to 22.9%.

When combined with the company's fixed income portfolio consolidate investment results for the quarter were up 2.4%, bringing the full year returned to 12.8%.

In 2019 third point re oriented its investment strategy with an enhanced focus on portfolio construction reduced net an increase gross equity exposure through thoughtful trade construction inactive its positions and by increasing but individual shorts and portfolio hedges to dampen volatility and amplify idiosyncratic returns.

Efforts to optimize portfolio management led to more alpha generation unless market exposure.

We also focused on our core strengths, including activist investing in acquiring stakes in high quality companies during significant market sell us activism, which is now over 50% of equity exposure has been a source of outsize returns for third points 2011, and has become a more valuable strategy and the changing market environment.

In 2019, the from allocated additional internal resources to sourcing and implementing activist ideas and increased exposure to the highest level in the firm's history. We initiated three new activist investments in 2019, specifically, Sony Esler, Luxottica and Prudential the top five performers for the.

Year, Sony Corp, Baxter Campbell soup, United Technology, and Nestle, we're all activists positions and collectively the activism portfolio accounted for over half or 24.5% of third point enhance total gross long equity returns are 41.9% for the year.

Within equities strengthen alongside was partially offset by losses in the short portfolio.

Shorting was challenging in 2019, given the sharp.

Rise if the stock market.

Dr. moves in the fall reversed alpha generated earlier in the year losses in shorting were roughly as expected considering market performance, but the effort succeeded in reducing overall volatility data in correlation.

Credit investing has been an essential part of third points investment strategy since inception.

Portfolio contributed 20 basis points to over all fund returns for the quarter, but attracted 80 basis points from fund returns for the year bosses from an outsized positioned in Argentine government debt offset gains in Pacific gas and electric corporate debt.

Good point had a good year in structured credit specifically in RMBS securities. The gave back some profits in marketplace lending.

Structured credit offers an important source of diversification and continues to generate strong risk adjusted returns for third point.

Looking at the year ahead friendly monetary conditions, and a benign economic backdrop drove the market higher in the early weeks of the year.

These benign conditions quickly reversed themselves with the spread of the current a virus.

Well, we expect a market to normalize for now volatility will remain with us so long as the Corona situation is unresolved.

We remain focused on bottom up fundamental investing and we'll continue to monitor both the corona situation as well as the upcoming elections.

The portfolio remains more defensively positioned with lower net exposures when compared to historical exposure levels in the meantime, TTP reinvestment portfolio has defended well lets the recent volatility introduced by the krona virus.

As of December 30, Onest that third point reinsurance account represents approximately 6% of the $13.6 billion of assets actively managed by third point. Please note that assets actively managed by third point include the men hedge funds SPV is in a drawdown vehicle, but excludes fixed income and collateral.

Thats managed for TP now I'd like to turn the call over to Chris to discuss our financial results.

Thanks Daniel.

For the fourth quarter, we generated net income of $30 million or 32 cents per diluted share.

Our year to date net income was $201 million or $2 in 16 cents per diluted share.

These amounts translate into a return on beginning equity for the quarter of 2.1% and 16.7% for the year.

We generated a $10 million net underwriting loss for the fourth quarter.

And our combined ratio was one of 4.8% compared to.

111.6% in the prior year fourth quarter.

After adjusting for the impact of favorable prior year Reserve development and cat losses are combined ratio for the quarter was 97.2%.

Compared to 98.4% in Q3, and one or 1.2% in Q2.

Which demonstrates the continued improvement in our core underwriting results as the shift in our underwriting strategy and business mix towards higher margin business is reflecting in our reported results.

As we head into 2020, we would expect to report underwriting profitability in the first quarter of 2020 subject to catastrophe losses exceeding expectations.

As our underwriting strategy shifts, we expect underwriting to become a meaningful contributor to overall returns more inline with our peers.

As Daniel I mentioned earlier, we believe this will drive a more balanced return contribution from underwriting and investment activities, which we believe will make our business model more attractive to investors and ultimately improve our valuation.

Our gross premiums written for the fourth quarter was $134 million, which compares to 120 million in the prior year quarter.

The increase in gross premiums written was primarily due to $86 million of new premium written in the quarter, partially offset by the net impact of contract extensions cancellations and contracts renewed with no comparable premium in the current quarter.

Gross premiums written for 2019 was 632 million compared to $578 million for the prior year, an increase of 9%.

The increase in gross premiums written was primarily due to $93 million for two retroactive reinsurance contracts written.

In the period and $68 million of new property catastrophe business.

This increase 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 that comparable period.

Net investment income for the quarter with $62 million and was $283 million for the year.

Which reflects the returns for the periods, which Daniel discussed in detail.

Including the impacts of investment mix shifts made earlier in 2019.

Total general and administrative expenses were $13 million for the fourth quarter of 2019 compared to $8 million for the prior year period.

The increase primarily reflects higher incentive plan accruals in the 2019 quarter.

For the improved performance to date relative to the prior year period.

For the 12 month period general and administrative expenses were $54 million compared to $36 million in the prior year.

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.

Adjusting for normalized compensation and other unusual expenses impacting 2019, we would expect our gene a run rate per quarter going forward to be approximately $12 million to $13 million in total split $7 million per quarter for gene a.

Hi allocated to underwriting and included in the combined ratio in $5 million to $6 million of corporate expenses.

The foreign exchange losses in the current quarter were primarily due to the revaluation of foreign currency loss and loss expense reserves denominated in British pounds.

Where the U.S. dollar weakened in the current period compared to the prior year period.

Although we have minimal net exposure to foreign currency movements from our from foreign currency reinsurance contract.

As we typically have collateral accounts with a similar amount of foreign currency investment assets as of the net reinsurance liabilities.

These generally offsetting FX gains and losses flow through net investment income.

And the reported investment returns.

Turning to capital allocation and share repurchases, we did not repurchase any of our common shares again this quarter.

As we still as we've stated throughout 2019, we recognize that we've been trading at a significant discount to book value, which would suggest that repurchasing shares could be an effective tool for increasing book value in earnings per share in the short term.

However, we have chosen to invest our excess capital into improved underwriting performance, which we believe will drive franchise value and an improvement in the quality of our earnings through consistent underwriting profitability, a more balanced contribution to overall returns between underwriting and invest.

Thing and lower volatility of results.

We believe that these investments of our capital will ultimately improve our valuation and shareholder returns.

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

Thank you at this time, we will be conducting a question and answer session.

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One moment, please while we poll for questions.

There are no questions at this time I will now turn the call back over to management for any closing remarks.

Thank you for listening into the fourth quarter call and we look forward to talking to you next quarter.

This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great that.