Q2 2019 Earnings Call

Thank you for standing by this is the conference operator welcome to the third point reinsurance second quarter 2019 earnings Conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions. The join the question queue. You May Press Star then one on your telephone keypad.

Should you need assistance during the conference call you May signal, an operator by pressing star and zero I would now like to turn the conference over to Mr., Chris Coleman Chief Financial Officer. Please go ahead.

Thank you operator.

Welcome to the third point reinsurance limited earnings call for the second 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 Dr yen.

Leading today's call will be Danville White, Chief Executive Officer.

Last night included in our earnings press release, we announced that the board affirmed Dan as the CEO and that he would be joining the board of directors effective immediately.

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 of certain risks and uncertainties.

Please refer to the second quarter 2019 earnings press release.

And the Companys other public filings, including the risk factors in the company's 10-K.

Where you will find factors that could cause actual results to differ materially from those forward looking statements.

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, 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 Dan Malloy.

Thank you Chris.

Good morning, and thanks for joining our second quarter 2019 earnings call.

Today, I'll provide an overview of our financial results.

Followed by an update on our underwriting strategy.

Recent developments at third point re.

And market conditions.

Daniel Loeb.

CEO of third point LLC.

We will then speak to the investment performance in more detail and Chris will cover our financial results.

We will then open the call up for your questions.

We are very pleased with this quarter's financial performance.

Our underwriting results continue to improve as we see the benefits of our shift in underwriting strategy, along with improving market conditions.

And we had another quarter of strong investment returns.

Our combined ratio for the second quarter was 101.1%.

And we are on track to achieve underwriting profitability later this year.

Subject to the ultimate quantum of property catastrophe events.

We generated a return on equity of 4% for the quarter, bringing our year to date return to 15.4%.

We are pleased to report a number of positive developments during the second quarter relating to our underwriting strategy.

The build out of our property catastrophe portfolio has gone better than expected based on all key metrics.

We were pleased with our market acceptance at the important June Onest, Florida renewal date.

And we are signed on a number of well priced accounts with top cedents.

During the second quarter, we wrote approximately $16 million of property cat premium.

Bringing our total 2019 written in this class of business to $57 million.

Our non catastrophe business.

Which still represents the majority of the portfolio.

Continues to show evidence of improvement.

We are benefiting both from primary pricing trends, which a number of Ceos have talked about during this earning season.

As well as improvement in reinsurance contract terms and conditions.

Our new specialty lines underwriting team that joined during the first and second quarters has written more than budgeted to date.

You may remember from our previous calls that their portfolio is heavily weighted toward January one business.

And based on client and broker response, so far.

We are increasingly confident that we will deliver on the $20 million to $25 million of new specialty business that we expect to write during 2020 .

Market conditions in these lines remained stable.

Building on our new business initiatives, we recently announced that David Sinclair, a 25 year industry veteran.

Will be joining our London office in September .

We are excited about the new business opportunities you will develop in both traditional reinsurance.

With a focus on Lloyds and Europe .

As well as strategic reinsurance investments, where we've already had success in taking small equity stakes in exchange for long term access to unique reinsurance opportunities.

We look forward to expanding our efforts in this area.

Our new underwriting initiatives and concurrent expansion of risk appetite requires that we make changes in our investment strategy.

Following an initial redemption of $350 million in May from the TP Fund.

At the close of Q2, we submitted a redemption notice for $400 million, bringing our total redemption to 750 million.

We have invested these amounts in high grade short term fixed income investments under the management of third point LLC.

We believe that the impact of our shift in underwriting strategy will result in a more balanced contribution from underwriting to our overall returns.

And will contribute to a lower volatility of results.

We are well positioned to capitalize on underwriting opportunities, while taking advantage of third point LLC is ability to outperform in managing our investments, which has always been the goal of our total return model.

We expected delivering underwriting profits.

We will build the franchise value of third point re and allow us to close the gap on our discount to book value.

As we demonstrate the full potential of our business model.

We feel very good about the changes that are taking place.

And are confident in our ability to grow book value for the benefit of shareholders more consistently over time.

I will now hand, the call over to Daniel Loeb, who will discuss the performance of our investment results in more detail.

Thank you and good morning.

First I'd like to welcome Dan Malloy as TP re is new CEO .

We've already started productive.

Dialogue with Dan and we look forward to working with him in the future.

Good point enhanced LP, the third point reinsurance investment portfolio actively managed by third point LLC generated positive returns of 5.8% for the second quarter of 2019 net of fees and expenses.

When combined with the company's fixed income portfolio consolidated investment results for the quarter were 2.9%.

The third point reinsurance account represents approximately 18% of assets managed by third point.

In our previous communications with TP re shareholders, we outlined our plans for investing in 2019 to generate alpha by concentrating on specialized strategies, where we believe we have an edge and a reduced market risk by a lower net exposures unless beta in the portfolio.

Our net exposure is averaged 40% throughout the year considering this reduction in exposure and beta we're pleased to have generated gains of 17.7% for TP through June .

The consolidated portfolio returned positive 10.4% during the same period.

Each of our investment strategies combined to positive returns in Q2 and also for the year to date with equities driving 80% of the profits.

As a result of our repositioning at the beginning of 2019 and several new investments in event driven and activists situations.

Our equity portfolio has the highest proportion of idiosyncratic to other types of risk such as market sector in factor.

In the past five years, our equity book return on average exposure was 7.8% for Q2 and 25.7% for the first half of the year.

Gains were largely due to strong performance in core equity long positions, especially those with an activist component.

Our recently announced investments Sony was the largest contributor in Q2 gains if you'd like to learn more about our position we shared our thesis an upside case on www dot a stronger Sony Dot com.

In credit.

Corporate credit returned 1.7% on average exposure for Q2, and 3.1% for the year, our largest position in the unsecured debt of California utility business.

Pacific gas and electric has been the best performer in the portfolio. So far this year.

Our modest sovereign credit portfolio returned 9.1% for Q2, bringing year to date returns to 21%.

Returns for the strategy are primarily attributable to recent investment in the sovereign debt.

Other Latam country, where we have successfully invested before.

Finally, EPS also performed well generating an aro at 4.5% for the quarter and 7.8% for the year.

As we move into the second half the year, we believe our portfolio positioning, especially late in the economic cycle and strategic focus allows us to take advantage of market corrections and to be prepared to shift investments across the capital structure Opportunistically now I'd like to turn the call back over to the TP re management team to discuss our financial results.

Thanks Daniel.

For the second quarter, we generated net income of $53 million or 57 cents per diluted share, bringing our year to date net income to $186 million or $2 per diluted share.

Which translates into a return on beginning equity for the second quarter of 4% and 15.4% year to date.

Our diluted book value per share at the end of the second quarter was $14.51.

Which was an increase of 11.8% from December 31 2018.

We generated a 2 million dollar net underwriting loss for the second quarter and our combined ratio was 101.1%.

Compared to 103.6% in the prior year second quarter.

The improvement was primarily due to a shift in business mix.

Including earnings on a property catastrophe portfolio that we began writing in 2019.

For the second quarter, we recorded a small net improvement in underwriting results related to changes in estimates of prior years loss reserves.

Net of the related impact of acquisition costs.

We have now had 12 quarters in a row of favorable or flat prior year net impact of reserve development.

Our gross premiums written for the second quarter was $83 million, which compares to $50 million in the prior year quarter.

The increase in gross premiums written was primarily due to new contracts found in the current year period.

Including $16 million of new property catastrophe business.

Gross premiums written for the first half of 2019 was $402 million compared to 428 million.

For the first half of 2018, a decrease of 6%.

The decrease in gross premiums written for the six month period was the net effect of timing differences contracts that we did not renew in the current year and new contracts written in the current year period, including 50 million $57 million of new property catastrophe business.

Net investment income for the quarter was $69 million and was $224 million for the six month period.

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

Total general and administrative expenses were $20 million for the second quarter of 2019.

Compared to $10 million for the prior year period.

For the six month period general and administrative expenses were $32 million compared to $19 million in the prior year period.

The increases were primarily due to severance costs.

Which are reflected as part of corporate DNA for segment reporting purposes.

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 increased 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 have been trading at a significant discount to book value.

Which would make share repurchases and attractive capital management tool.

However, we are also mindful of the size of our capital base and market capitalization.

And we will continue to balance the accretive benefits of buying back shares at a discount to book.

With maintaining sufficient capital to support the growth of our business as well as rating agency regulatory capital and other considerations.

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

Thank you.

We will now begin the question and answer session.

They join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request.

If you are using a speakerphone. Please pick up your handset before pressing any key they withdraw your question. Please press Star then too.

We will pause for a moment as callers join the queue.

[laughter].

Okay.

Our first question comes from Sean right in back of KBW.

Please go ahead.

Good morning.

Is there any way to quantify the impacts of the separation costs.

Versus the other things driving corporate the total corporate DNA here for you or.

Sure Sherri Theres about about 6 million nonrecurring costs coming through corporate gene and the current quarter related to the separation agreement that was previously disclosed and other related costs around that.

Okay, perfect and then is some the elevated composition or compensation tied to higher retention packages for people staying at the company.

No nothing in terms of higher retention packages, but it really just a function of our per foot the performance criteria on our incentive compensation plans both on the annual cash bonus as well as share based compensation to reflect that our returns to date have exceeded budget on both the investment side overall returns as well as our combined ratio targets.

Okay, great turning to the acquisition cost ratio it looks like there's some seasonality in the twoq ratio. It looks like the last three years, it's been a little bit higher compared to the other quarters, what's driving the seasonality there and should it will persist.

Yes, it's it's less about seasonality there is really there really isn't any seasonality to the acquisition cost ratio.

What sometimes throws off the trend line is many of our contracts have profit Commission and other features that vary with.

Loss ratio movements. So you can have situations, where you have a lot loss reserve development on a contract positively or negatively that's offset by profit Commission movements, which is captured in the acquisition cost line.

When you adjust for those items the acquisition cost ratio has been relatively constant over the recent several quarters, including second quarter last year now what you'll start to see over time.

As we're shifting the mix of business towards a higher proportion of.

Property cat and other excess of loss contracts that have a lower acquisition cost ratio you will over time start to see that shift downward.

Both on the loss ratio line subject the property cat events of course, but also in acquisition cost line.

So really there's.

I guess that pay to answer your first question, there really isn't seasonality and actually has been relatively consistent when you adjust for that.

Impact of reserves.

Thank you that's very helpful for and then for Dan How do you expect a assess the likelihood of a U.S. our global recession and do you think the portfolio a his position for that possibility well.

Yes. It's a question we think about all the time and we are looking for some indication of a recession, we really don't see it anywhere.

You know it anywhere.

Any signs of it coming up in the near term, but having said that I mean, we recognize that a it's been a long time since the last one and the portfolio is really set up to be much more flexible with lower debts.

And much lower beta so that when one does inevitably come we'll be ready for it and if a market downturn happens before we'll be better positioned than we were for example last last year.

Okay, Great and then one last one I'll read to Uh huh.

How is management are there any updates on piecyk developments or how management's thinking about that.

Sure I mean as you would have seen their spend some recently issued proposed regulations that attempt to provide.

Additional clarification around defining active conduct within insurance company.

There's a lot of uncertainty right now with regard to how to interpret those regulations are proposed regulations and how to apply the guidance.

We continue to work closely with our tax advisors and industry groups to better understand the regulations and at this point, it's really immaterial it too early to tell exactly how it how it will affect the broader industry, including us.

But were certainly paying close attention to it.

Okay, great. Thank you very much.

Thank you.

This concludes the question and answer session.

I would now like to turn the conference back over to Mr., Dan Malloy, Chief Executive Officer for any closing remarks.

Thanks, everyone for joining us and look forward to talking to you next quarter.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.