Q2 2020 Third Point Reinsurance Ltd Earnings Call
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Good morning, ladies and gentlemen, and welcome to the third point in serious groups merger announcement call as a reminder. This conference is being recorded and we will not be opening the call for questions.
I would now like to turn the call over to mister Chris Coleman, please go ahead sir.
Thank you operator and good morning everyone. Thank you for joining. I'm I'm Chris Coleman Chief Financial Officer of third Point rate on the call today are who has served as chairman of third Point re and is currently a member of our board.
Simpson current the new chairman of third Point re who will also serve as chairman and chief executive officer of serious point.
And Dan Malloy Chief Executive Officer of third Point rate.
We are here today to tell you more about this exciting transaction. As a reminder. We have posted a presentation that will be referenced during this call as well as a press release outlining the transaction to the investor relations section of our website.
Before we start I would like to remind you that comments today regarding the company's future business plans prospects and financial performance are forward-looking statements that we make pursuing the Safe Harbor provisions of the private Securities litigation Reform Act of 1995.
These statements are made based on Management's current knowledge and assumptions about future events and they involve risks and uncertainties that could cause actual results to differ materially from our expectations.
In providing projections and other forward-looking statements the company disclaims any intent or obligation to update them.
For additional information on important factors that could affect these expectations. Please see our annual report for the year ended December 31st, 2019 and our subsequent filings made with the US Securities and Exchange Commission.
This communication does not constitute an offer to sell or the solicitation of any offer to buy any Securities or solicitation of any Vote or a life in connection with the proposed merger. The company's intent to file a registration statement on form s-4 containing a proxy statement prospectus with the Dead Sea and you should read the proxy statement prospectus when it becomes available because it will contain important information.
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Please and their respective directors and executive officers may be deemed to be participants in this solicitation of proxies from the stockholders and respect of the proposed birth information about each company's directors and executive officers is set forth in their respective ten K's and other reports filed with the SEC.
You may obtain additional information regarding the interest of such participants by reading the proxy statement prospectus regarding the proposed merger when it becomes available. I will now turn the call over to Josh tarkov.
Thanks, Chris, and hi everyone. Let's start with slide three.
I've been involved with third Point re since its Inception in 2011. And the creation of serious point is an exciting Reflection Point that marks a compelling path forward and creating value for all our stakeholders will be a strong top-tier Global reinsurer. Well positioned to capitalize on the unique Market opportunity that is currently underway.
As many of you already know third Point me has done substantial work over the past eighteen months to accelerate our transformation into a global Specialty reinsurance Company. This is meant a steady focus on generating profitability and expansion into more profitable lines with Mark success. In addition to the work we've done organically is we have been looking for a partner to allow us to advance accelerate our progress as a result when serious group began in strategic review earlier this year. We were immediately interested in light of their significant underwriting capabilities across key lines off on a global scale. We believe that the industrial logic of the transaction is compelling and we're confident that our stakeholders will now agree
Our Evolution as an Enterprise is worth emphasizing many of you know that we started out as a reinsurer focused on total return generating Float by writing low-volatility long-dated Reacher off during our first several years of operations under that model. We experienced some success Over time. However, it came to realize the limitations of the model it was difficult to find profitable low-volatility underwriting business and the inherent volatility of our strong investment returns was off-putting to many Insurance investors.
Now we are poised for new chapter on Evolution one that introduces new paradigm of a reinsurer partnering with an investment firm with the creation of serious point. We have a unique strategic opportunity to establish a powerful new entity that focuses on underwriting and also strives for excellence on both sides of the balance sheet.
One of the compelling aspects of this transaction is that it will clear actual or perceived market overhangs for both parties for 3.3. Obviously this transaction will allow us to completely Turn the Page from the hedge-fund re moniker. You'll hear more about our new relationship with third Point LLC in a few minutes and how it is expected to drive shareholder returns with less volatility.
for serious group
They were saddled with Market concerns relating to serious as large owner TMI group. We welcome the partnership with CMI into serious point and thank them for agreeing to a 9.9% voting cut off despite owning approximately 35% of the equity of the combined business. This could have only been accomplished by establishing a relationship of trust between us and and we are proud to have like a real partnership. We look forward to Growing the company together with them.
As announced serious points chairman and sang current who joined third Point Beach Board a year ago. As Chris mentioned said has succeeded me as chairman of the transition. I have that price since unique combination of untiring work ethic superb Insurance Acumen and diversified background making the only person are bored with considered to take on the task of reimagining a point and I look forward to supporting his efforts as a continuing board member should has incredible industry experience and insights gained through his tenure and chief officer of a month and more recently a CFO of Oscar help. He's the right person to lead serious Point as we move forward.
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so it will be supported by a great team with significant underwriting expertise across the Enterprise.
We are pleased that in combining serious and third Point re we will have some of the most talented Underwriters in the industry and this team will be a Cornerstone of our success. Both sides have long-tenured experienced writers and they'll be driving our business for example, demel oi, we will hear if I'm in a bit will be returning to his underwriting roots, and we remain as senior under any Executives of serious month following the closing.
Dan deserves immense credit for stepping into the role that third point three, which he did not seek and through his leadership commence the transformation of the company into a specialty insurer, welcome to underwriting profitability. We thank them for all its efforts and look forward to many more years working together as we continue to build serious Point. Additionally. We're very pleased that third Point Breeze former independent director. Steve death will be joining serious Point as vice-chairman Steve is a former CEO of the serious business and he knows many of the senior Executives of his operations, they're dead. So he'll work closely with Cinema team on the integration of the two companies.
Serious points management will be overseen by a strong and independent board made up of the current third point reboard and two new additions from the Sirius group board Michelle Keller and Peter Pan Am also it's worth noting that both companies share an entrepreneurial culture a laser focus on clients and enthusiasm for the growth opportunity at home.
Overeating while he'll be stepping down as CEO of serious Group by closing. We appreciate the strong oversight that will continue under his Direction between now and that time and we thank him for his leadership and dedication to serious with that. Let me hand it over to CID to share more about our transformative vision for serious Point home.
Thanks, Josh, and hi everyone.
I look forward to speaking with each of you in the months and years to come.
Those of you who don't know me. I'm an actuary by training and spent almost a decade AIG first is Chief risk officer. And then a CFO. I've had a great experience being part of the third month for the past year and I'm thrilled to have this opportunity to take the combined company to a new level of success.
I'm really looking forward to working with Dan Steve and the rest of the serious Point team to realize our vision.
Josh is a good perspective on how we got to where we are. Now. Let me tell you why I'm so excited about our future which you can see summarized on Slide.
The primary reason this is a strategic transaction for us is the people of serious group. They bring deep experience and expertise in underwriting with employee Specialists across the globe.
It's been clear to me in meeting with the team that serious has terrific under any talent and that they're deeply dedicated to their clients and excited to take the next step with me to Growing the business profitably.
The bottom line in our business is that underwriting comes first? And this is a team that is excited for the future.
It's also very clear that this transaction is transformed for US based on the platform and capabilities that we can now bring to the table.
Number of differentiators will drive our success.
First we'll have a global platform and non-admitted paper in Europe and Lloyds.
We will offer clients and Brokers that diverse reinsurance franchise including a niche hard to replicate European Branch Network and a specialized and age business off within an age will also have the benefit of their dedicated in-house managing. General Underwriters are moniker capital and International Medical Group, which are sticky relationships. Not a profit along.
This transaction is all about looking forward towards Market opportunities.
The combination of the two companies will provide serious point with a larger Capital base that will enable us to capitalize on improving market conditions.
We'll have a diversified portfolio mix across a range of attractive classes of business in a more traditional investment allocation. That will also leverage the strengths of our strategic partnership with third Point LLC wage, which I'll speak to later.
This means lower while still taking advantage of opportunities to improve risk-adjusted returns.
turning is a great opportunity for
On all traditional Financial metrics this transaction is expected to be accretive.
The transaction is expected to be accretive to both EPs and return on equity in the first year after close.
In addition to positioning the company for attractive Book value and earnings growth this transaction also removes the overhangs on both companies current valuation.
This should result in a re-rating of the combined company's trading multiple to a level more in line with our peers.
This will further enhance the value creation opportunity for serious Point shareholders.
Issuing a significant number of shares at a significant discount to book value is expected to result in some dilution to book value per share.
We expect a relatively short payback. With only a modest Improvement in the valuation profile required for us to break even.
Well, there are puts and takes to the consideration. We requiring serious groups and Approximately 80% of tangible Book value.
We believe that all of our combined shareholders in the new serious point will benefit from the long-term economic value in this deal.
We of course anticipate having the strong pro forma balance sheet with less than 30% leverage of closed and reducing over time.
We discussed our plans with the rating agencies and believe strongly that given all these factors as well as our strong performance financial performance and capitalization with further assist you to reposition our risk profile the Strategic transformation. We are executing will have positive credit implications for the combined company.
On a stand-alone basis is a very well established and insurance provider.
Teen brings a strong track record of underwriting profitability including a historical net combined ratio of performance vs the reinsurance industry.
They have two point six billion in total Capital through 1.9 billion in Gross premiums written and our top 20 Global reinsure providing a wide range of coverage has two clients that nearly a hundred and fifty countries.
This includes health and travel products to Consumers through two dedicated management General Underwriters International Medical Group and our lot of corporate capital. And as I said earlier, these are extremely valuable partnership seemed to be Central to Our Success B&H space in the long term.
Serious group is also nurtured long-standing relationships with clients and Brokers. They'll be invaluable to the combined organization. These are remarkable relationships that have stood the test of time. Do we look forward to talk to Brokers continuing to partner with us for years to come?
Is it look forward? I have a few specific thoughts on the business.
Look, I probably can't say this enough but underwriting comes first to strictly this is a terrific underwriting organization. The mailbox has lost its way a little bit and trading off growth versus managing possibility of risk.
We are going to refocus on the bottom line and improve the combined ratio.
Second we have a great platform and all the bones to be Global reinsurance player. There are some parts of the platform. We need to reinvigorate in terms of our broker and client relationships. And of course we're excited to do so
We need to modernize our infrastructure so we can get to the expense ratios that are best-in-class technology is a passion of mine and this will benefit us in the long run.
I'll be measuring improvements in the combined ratio, which as we execute will translate to book value per share growth and improvement in our own in our r o e
Before I hand it over to Dan Malloy, I'd like to chat about the new strategic partnership that we now stood third Point LLC on slide eight. We are both very excited as this is truly a win-win for both companies.
Is Josh alluded to as a captive vehicle? We had a large portion of our invested Assets in through these enhanced bumped off.
Recent months the board and management have been focused on involving that long culminating the reconstituted partnership renounced today.
Under the new Arrangement serious points traditional Investments, which will comprise the vast majority of its portfolio will be outsourced to a diversified range of third-party asset managers.
management strategies
this will be strategic differentiate the return side while also reducing volatility and creating a portfolio mix more in line with pure property-casualty reinsurers.
We already seen the benefit of this partnership and our second-quarter investment returns is we partnered with third point and Specialty asset classes that had attracted return profiles and Mito risk capital.
With that, I'd like to invite Dan to share some more color about the combined serious points underwriting platform and capabilities.
Thanks ID and good morning everyone. I've been in the reinsurance business for almost 40 years and at third Point re for almost nine. I can't remember the last time I'm so excited about have you heard today this transaction is all about focusing on underwriting talent in order to capitalize on Market opportunities.
We have the capital the platforms and the people to support a wide range of clients and profitably grow our business.
Shows what the addition of serious brings our company it is a respected Global reinsurer with 75-year history of partnering with clients and Brokers their team shares analysis underwriting culture and a commitment to fostering relationships. I know respect and have done business over the years of many of my future colleagues.
Has developed an extensive branched system that offers a range of products to clients and more than 150 countries meaningfully expanding our profiles they're integrated day and age business includes the ship of 2mg use which are big contributors to success in specialty areas of the business and syncs with our ongoing efforts towards closer ties with specialty lines distribution them.
We're also excited about the specialty lines operation a commercial insurance business that is demonstrating strong growth in the US.
I know many teams that are interested in such a platform and expect it will accelerate our Strategic investment and reinsurance grow for initiatives which accounts for about 10% of the T. 20/20 projected value.
Curious groups Global Solutions and run off business is also expected to add value as demand for its coverage has and claims handling is expected to increase and it complements our Capital product online.
Moving to slide ten years how the combined platform will look on a pro-forma basis.
Note that serious points business mix will be roughly 80% reinsurance and 20% Insurance based on the 2019 gross premiums written of about 2.5 billion hours. We have a strong pipeline of specialist Insurance opportunities that will fit well in the new company.
Combined under any businesses are complementary and will comprise 36% Global property 33% specialty and Casualty and 24% accident helps wage. That's a much broader and balanced mix for us. So we will be better positioned to respond and grow across more product line into improving Market.
Potential new class of 2020 ensures are still in the process of starting up from scratch, but it closing curious point will already be many steps ahead as you can see from 5 to 11 will be a significant player with the capital structure platform underwriting talent and most importantly the clients already in place. We expect to improve project by deepening these all important client relationships and offering a wide range of coverage at a time when we are needed more than ever.
Following the clothing. We expect serious point to be in the top tier of reinsurers by gross written premium and tangible Capital as you can see in slide twelve which shows are ranking among the volt appears.
I can tell you from experience that are larger Capital base as well. As broader product offering will give us opportunities to expand relationships with customers and Brokers thus creating value age.
With that I'd like to invite Chris to walk you through the terms of the transaction. As you know, third Point re also reported Financial results for the second quarter ending June 30th, 2020 at the same time as we announced our combination with serious. We'd like to take a few moments for Chris to speak with you about our performance.
Thanks.
Dan please turn to slide 13.
The total deal consideration is estimated at $788 which comprises stock cash and other contingent value components representing approximately 50% of serious groups reported Tangela Book value as of June 30th 2020.
The transaction is structured to provide serious shareholders with optionality to receive immediate cash value for their shares or to continue as serious Point shareholders with the ability to participate in the company's future success.
All shareholders have serious will have the ability to elect one of three options one $9.50 in cash per share.
230.3 shares plus a contingent value, right which taken together guarantee that on the second anniversary of the closing date. The electing shareholders should have received equity and cash of at least $13.73 per share in value.
Or a combination of cash entry shares 5 year warranty and an upside, right?
the third option also contains series a preference shares as part of the consideration package with an expected value of one hundred million dollars that will be set into common shares at the 3-year anniversary subject to an adjustment based on each companies respective covid-19 has
given the uncertainty around the ultimate impact of covid-19 to each company's loss estimates this mechanism provides shareholders of each company with protection should either come back Altima covid-19 has developed more than the other relative to current expectations.
C m i g serious groups majority shareholder representing approximately 96% of serious groups outstanding shares has agreed to select the third choice. They believe in the value creation potential of the combined company and are taking a majority of their consideration and shares and other contingent value instruments with significant upside potential.
TMI G has also agreed to a 9.9% voting cap that will eliminate any historical stakeholder concerns relating to Serious groups governance and access to Capital markets.
We expect that the cash portion of the deal consideration and other redemptions as may be required will be funded with excess cash and a $125 million life-long commitment. However, we do not anticipate drawing this loan commitment as we plan to access the debt and capital markets.
In addition Dan Loeb third Point re's largest individual shareholder has agreed to provide an equity commitment to purchase approximately fifty million dollars subject to a home equity commitment letter.
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Men's desire to maintain his ownership in the combined company as a validation of our business strategy.
We received positive feedback from the rating agencies and we'll continue to evaluate the capital markets for opportunities to optimize our capital structure.
The transaction is subject to shareholder approvals and customary regulatory approvals and we expect to close in the first quarter of 2021.
now shifting to our second quarter results on flight 14
For the second quarter, we generated net income of $124 or $1.33 per diluted share and our return on Equity was 10.1%
our second quarter results were driven by a significant bounce back in our investment performance resulting in a Consolidated investment return of 5.8% for the quarter wage are diluted book value per share at the end of the second quarter was $14.37 representing an increase of 10.1% for the quarter.
The shift in our underwriting strategy produced another quarter of underwriting profitability notwithstanding the continued impacts of covid-19.
Our combined ratio for the second quarter was 98.3% which included nine point nine million dollars or seven points related to additional covid-19 losses recorded in the quarter largely in line with expectations. We reported a small benefit from favorable Reserve development in the quarter and this is now our 16th Courtney with no prior. You're adverse Reserve development.
While we have recorded our current best estimate of a covid-19 impact based on the latest information available there remain significant uncertainty around the ultimate amount of claims wage type of damage resulting from the ongoing pandemic.
Overall, we are very pleased with our results our shift in business mix has placed us into higher-margin property and Specialty lines, which are benefiting from improving market conditions.
We expect to continue to benefit from our differentiated investment strategy, especially as we enter into a period of historically low interest rates our Capital position and strong and we are well-positioned to continue to deliver increasing shareholder value from both underwriting and Investments. I will now turn the call over to sit for closing remarks.
Thank you, Chris.
We'd like to thank you for your time and continued support of both third Point read and serious group and we look forward to our engagement with you as we work toward clothes and embark on our exciting future.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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