Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Montpelier Re Holdings Ltd. (NYSE:MRH)

Q4 2012 Earnings Call

February 8, 2013 8:00 am ET

Executives

Jonathan Kim – Senior Vice President, General Counsel and Secretary

Mike Paquette – Executive Vice President and Chief Financial Officer

Christopher Harris – President and Chief Executive Officer

Christopher T. Schaper – President-Montpelier Reinsurance Limited

Analysts

Amit Kumar – Macquarie

Ian Gutterman – Adage Capital

Operator

Greeting ladies and gentlemen, and welcome to the Montpelier Group's Fourth Quarter and Full Year 2012 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. Jonathan Kim, General Counsel and Secretary of Montpelier Re. Thank you Mr. Kim, you may begin.

Jonathan Kim

Thank you. Good morning and welcome to Montpelier Re’s fourth quarter and full-year 2012 earnings conference call and webcast. A press release setting out our results including a detailed financial supplement have been posted to the company's website at www.montpelierre.bm. This call is being webcast live and will be available for replay for one month. Our speakers this morning are Christopher Harris, our President and CEO, and Michael Paquette, our Chief Financial Officer.

Also with us are Chris Schaper, President of Montpelier Re, Bermuda; Jason Pratt, our Chief Investment Officer; and Bill Pollett, our Chief Corporate Development and Strategy Officer and Treasurer. Chris will give his commentary on the quarter and year-end, and then Mike will present an overview of our financial results. We will then be pleased to take your questions.

Please note that during our discussions this morning, we may make forward-looking statements. Any such statements are based on the company's current plans, estimates, and expectations. Actual results could differ materially from those projected in any forward-looking statements as a result of certain risk factors disclosed previously and from time-to-time in Montpelier's filings with the U.S. Securities and Exchange Commission. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

I would now like to turn the proceedings over to Chris Harris. Chris?

Christopher Harris

Good morning, ladies and gentlemen. Thank you for joining us. 2012 was a highly successful year for Montpelier. Our focus remains on growing book value per share plus dividends, and we achieved solid growth of 17% based on this measure for the full year, despite the effect of windstorm Sandy.

A balanced contribution from underwriting, investments and capital management all contributed to our success during the year. Both our Bermuda and Lloyd’s underwriting platforms delivered strong profitability for the year with combined ratios of 66% and 89% respectively. Adjusted for reinstatements and the sale of our former US operating platform, we grew net written premiums by 10% for the year, while continuing to strengthen our relationships with key business partners.

Our investment portfolio performed very well with a total return of 5.2% in a difficult yield environment. On the capital management front, we repurchased 121 million of our common shares, which represented approximately 80% of operating earnings for the year. And with the completion of our debt refinancing in October of last year, we enter 2013 with increased capital flexibility and a lower average cost of capital.

We are particularly pleased that during the fourth quarter we continued to strengthen our capital partnership businesses, with the successful launch of Blue Capital, and renewals of existing private deals. Total partnership capital now exceeds 200 million for the group, enabling us to broaden our product mix for preferred clients and to better leverage our underwriting and risk management expertise.

Sandy was the most notable loss event of the quarter, for which we booked a 94 million impact, net of reinsurance and reinstatement premiums, consistent with our pre-announcement from early December. As a leading property catastrophe underwriter, we expect to incur losses from significant events such as Sandy, however, our balanced global portfolio enabled us to support our clients and to produce a solid profit for the full year.

In particular, Syndicate 5151continued to perform well producing a profitable 95% quarterly combined ratio. Outside of Sandy, fourth quarter losses were in line or better than expectation. Within the cross lines, run rate losses for the current quarter benefited by $5 million due to an improvement in our estimated full-year results.

Prior year reserve releases improved the full year result by $87 million. The releases were spread across major lines, but the largest contributor was a reduction of approximately 50 million for the various 2011 natural catastrophe events. Our underwriting teams executed well during the important January renewal season, although we saw market conditions become more competitive as we approached January 1.

Excluding the impact of reinstatements, we expect overall net written premiums to increase 1% to 5% for the first quarter of 2013 versus 2012. Within our property treaty lines we saw steady demand and targeted growth in our international catastrophe portfolio, most notably on selected European wind exposures, as well as with regional clients within the US. So we reduced our retrocessional exposures.

Within other specialty and individual risk lines, we expect reduced net premium writings for the first quarter. While we saw a favorable rating environment for marine, that growth was more than offset by reductions in our aerospace, engineering and specialty casualty exposures in response to weakening rate adequacy in those lines.

Page six of the financial supplement provides updated natural catastrophe exposure information for January 1 [incepting] business. US hurricane represents our peak exposure with a 1 in 250 benchmark model loss estimate of 406 million, or 25% of shareholders’ equity. This is a slight increase from 375 million at the beginning of the 2012 wind season. The 1 in 250 estimates for US earthquake and European wind both represent 15% of shareholders’ equity.

We have repurchased 8 million of common shares since the beginning of the year. At current risk exposure levels, we retained significant flexibility to deploy additional capital either through share repurchases or increased underwriting commitment. We enter 2013 well positioned to build on our strengths and we intend to continue our specialist underwriting approach with a strategic focus on property, marine and other short tail lines.

With that, I will turn it over to Mike to provide more details on the financials.

Mike Paquette

Thank you, Chris. We ended the quarter with a fully converted book value per share of $26.14, a decrease of 1.3% after taking into account our common dividend.

Our operating loss for a quarter was $17 million or $0.31 per common share, and our net loss was $27 million or $0.48 per common share, each expressed after preferred share dividends. Our net loss for the quarter includes a $10 million non-operating loss from the early extinguishment of our 2013 senior notes. For the full year, our fully converted book value per share increased by 17% after taking into account our common dividend.

Net premiums written increased by 2% in the quarter, or 19% when adjusting for the impact of reinstatement premiums and the sale of MUSIC. Net earned premiums increased by 6% in the quarter, or 11% when adjusting for those previously mentioned items.

The net loss for the quarter includes a $94 million loss estimate for windstorm Sandy, partially offset by $26 million of favorable prior-year loss reserve movements. The overall combined ratio for the quarter was 116% with the individual combined ratios of our Bermuda and London operation being 121% and 95% respectively.

Acquisition costs are trending down as a result of the sale of MUSIC, and the recognition of [seeding] and profit commissions associated with our private underwriting partnerships. Operating expenses for both the quarter and the year were down versus those of 2011, but were flat when adjusting for the sale of MUSIC. The increase in our incentive compensation expenses reflect performance-based incentive accruals provided in light of our strong financial performance for the year, as measured by our 17% growth in book value per common share.

Our total investment return for the quarter was 0.6%, and our net investment income was $17 million. For the year, our total investment return was 5.2%. Our fixed maturities at year-end had an average duration of 3.3 years, net of short positions, and an average credit quality of AA minus.

Our equity in alternative investments comprised 3% and 9% of our ending shareholders’ equity respectively. In October, we issued $300 million of 10-year senior unsecured debt, with a 4.7% coupon. The majority of the net proceeds were used to fully redeem our 2013 senior notes in November.

As previously mentioned, during the quarter we incurred a $10 million loss in connection with the early redemption of those 2013 notes. We also incurred $1.2 million in incremental interest expense as a result of having both debt issuances outstanding during the redemption notice period. But these two non-recurring charges behind us, due to the lower rate associated with the 2022 senior notes, we have successfully added $72 million of additional underwriting capital with virtually no increase to our ongoing interest and other financing expenses.

During the quarter, we repurchased 590,000 shares at an average cost of $22.52 per share, and during the year we repurchased 6 million shares at an average cost per share of $20.22. Our year-end shareholders’ equity is $1.6 billion, and our total capital is $2 billion.

I will now turn the discussion over to the operator.

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from Amit Kumar of Macquarie. Please go ahead.

Amit Kumar – Macquarie

Thanks, and good morning everyone.

Christopher Harris

Hi, Amit.

Amit Kumar – Macquarie

Thanks. Two quick questions, first of all the discussion on capital, in terms of capital management, how do you foresee that happening for 2014, is the plan to repurchase earnings going forward, I guess repurchase those dividends going forward, maybe just flush that thought process out a bit, especially in light of your pricing commentary.

Christopher Harris

Okay, thanks Amit. You know, I guess I will start by saying I mean we think about capital management the same way we always have, within a risk-reward framework of how we can best grow book value per share over time. So there is going to be no change in terms of our philosophy there. And I think we’re in a good position heading into 2013. We do have a capital cushion, and that provides us some options, either deploying more capital on the underwriting side, or continuing to repurchase shares.

And I think we will watch the market closely and one of our strengths of an organization has been our ability to respond quickly to changes that we see in the market, but – and things can certainly change quickly. So we have to – you know, it is very difficult for us to give a target per se for the year. But I would say that absent any major developments, we would probably look to buyback our net income in 2013, plus a little bit I would say.

Amit Kumar Macquarie

That is very helpful.

Mike Paquette

That is going to depend on a lot of issues, and you know, we had the situation in 2012 where our plan probably would have been to buyback a little bit more, but we had a couple of specific items, really in the last 3, 4 months of the year with the timing of our debt deal, and then being blocked out of the market due to Sandy. We were probably at slower pace at repurchases in the last – the tail end of 2012 than we otherwise would have been. So I think that means we have a little bit more flexibility heading into 2013.

Amit Kumar Macquarie

Got it. And the second question I guess it is a two-part question in some senses. With all the new capacity if you will, the non-traditional players coming in, there is this debate, ongoing debate that the 4-1, and especially 6-1 renewals could come under significant pressure, just based on how much new capital has entered, what is your view of the non-traditional capital coming in, and what are sort of the early signs you are seeing or hearing from brokers or underwriters on the ground in terms of rate pressures?

Christopher Harris

Okay. I will let Chris Schaper talk about some of the outlook for the middle of the year. You know, I think there is always going to be competition in our market. I think one thing in terms of the total capital coming into the market, I think, there has definitely been an increase in supply, but it might not be as big as some market participants think because there is a tendency for people to make a big splash or a lot of commentary when they are bringing new capital in.

But there is also capital leaving that I think you don’t hear about as much either through some companies winding up or just looking to quietly reduce the capacity they put out. And also I think the industry has been relatively disciplined about returning capital to shareholders in a variety of forms. So I will stop there and maybe let Chris talk about what he thinks we might see for mid-year, but you know, it is fair to say we probably deployed a little bit more capacity at 1-1 in anticipation there could be some pressure as we go through the year.

Christopher T. Schaper

Thanks Chris. Hi Amit. Yes, I would say that what we are seeing are some signs of activity that are a bit earlier than normal. Clients are out in the market. They are talking about some of the changes they may be thinking about relative to their portfolios, a view that is probably going to be a bit earlier market as a result of some of these earlier conversations that are taking place.

That being said, I think you know, it is important to note that I think success in this particular market has a lot to do with legacy portfolios or historic portfolios, you know, firms that have been in this market in the past, those that have strong client broker relationships, strong infrastructure from an operational point of view, but also I think having different capital capabilities is important as well, and Montpelier has got a radiant capability as well as (inaudible) capability, and I think there is strength with that when we move into this particular market.

I also think that what is important is the ability to think restructuring, and think through different offerings to provide to clients. So I think we have those types of capabilities, you are going to operate well in this market, but I think maybe under a bit more pressure. But again, just to kind of circle back, we are seeing more discussions that are a bit earlier stage than normal.

Amit Kumar Macquarie

Got it. And I guess relative to that and I will stop, you talked about the weakening rate adequacy in some lines for 1-1 renewals, was that more from excess capacity or was that due to lack of losses in that line?

Christopher T. Schaper

This is Chris Schaper again. It is a little bit of both. I think when you get outside of the cat space, or outside of the property space, there is still pressure there. I think some firms view that area is beneficial from a diversification point of view. The issue there is they can’t make money, I think as you think about that hasn’t really filtered through to every single firm out there. So there is still pressure in those lines. We just felt that for us it makes sense to continue to deploy in certain transactions and sort of scale back relative to that.

Amit Kumar – Macquarie

Got it. Okay, I will stop here. Thanks for all the answers and congrats on the quarter.

Christopher Harris

Thank you.

Operator

Our next question will come from [Ryan Burns]. Please go ahead.

Unidentified Analyst

Good morning everybody. It is a nice quarter. I just had a little surprise to see the incentive comp remain high in the quarter. Obviously with the Sandy losses just wanted to see what your thoughts are there?

Mike Paquette

Sure, [Ryan]. It is Mike Paquette. I will answer that. In the third quarter, we increased our incentive compensation to a particular level and felt no need to take that down in the fourth quarter because we had still met that same hurdle. As a result, what you see in the fourth quarter is a quarter of the year’s results. So I know you question, your question is we bounce around from quarter-to-quarter, but we have maintained our level of incentive comp from what you saw at the third quarter, and as a result you see an even 25% this quarter.

Unidentified Analyst

Okay. Thank you.

Christopher Harris

I mean, I think from a high level we grew book value per share by 17% in an environment where 10-year treasury yields are less than 2% then we think that is a good return for our shareholders during the year.

Unidentified Analyst

And remind me, 70% is that kind of the max target for you guys, or for book value plus dividend growth, or when bonus accruals kind of stop getting higher, or how does that work again?

Christopher Harris

Yes, yes. You are very near the top there. You are at the top actually.

Unidentified Analyst

Okay, great. And then also the net investment income kind of had a nice bump up on a linked quarter basis, was there anything any one time was going on there in the fourth quarter?

Christopher Harris

No. Everything is fine. That is going to bounce around a little bit based on the characterization of certain of our investments between net investment income, and realized and unrealized gains, but nothing particularly unusual in this quarter.

Unidentified Analyst

Okay, great. And then just my last one, I guess is there a certain size and scale, you would like the Blue Capital to be for I guess for fee incomes to really start flowing through, or is it just time or where is the target for that?

Christopher Harris

Okay. Thanks for the question [Ryan]. Yes, we don’t have a specific dollar target. I mean, I think it is important the way we look at our capital partnerships, and I like to make the point that this isn’t something new that we have started. We have a history of developing and managing successful capital partnerships for almost the last 10 years. And I think what they have all had in common is that they need to be targeted to a specific client need.

I think that is what we do well as an organization as we want to have multiple products that we can bring to our preferred clients, and with the idea that hopefully over time we can help grow that market as well because I think there are some areas where having different types of products can help spur demand, and I think ultimately we think that is healthy for ourselves and for all of the reinsurance market if we can grow the size of that.

You know, right now if I look at our partnership capital, it is a little bit over 200 million versus our shareholders’ equity. You know, we don’t think that balance is way out of whack at the moment. It could probably grow a little bit, but I would say we’re not looking to grow that for the sake of just trying to add some fee income. If we see growth, it is going to be because we are responding to client needs and developing a little broader product mix to give us a better chance to optimize our portfolio returns.

Unidentified Analyst

Great. Thank you.

Operator

(Operator instructions) And our next question will come from Ian Gutterman of Adage Capital. Please go ahead.

Ian Gutterman Adage Capital

Great. Thanks guys.

Christopher Harris

Hi, Ian.

Ian Gutterman Adage Capital

Good morning. Do you have the breakout or just rough breakout of cats, the sandy losses by the four business segments, it seemed like a lot was in the individual risk from me trying to back into what I get from that?

Christopher Harris

I don’t have the exact mix here in front of me, but it would be the two buckets it would have the most would be the property catastrophe bucket and the individual risk.

Ian Gutterman Adage Capital

So, individual risk…

Christopher Harris

The majority would be in property cat, but there would definitely be some within individual risk as well.

Ian Gutterman Adage Capital

Okay, and the individual risk is what I was curious about, it just seemed – I was guessing 30 million or 40 million, which I think is the biggest cat you have had there in quite a while, was that mostly Lloyd’s was this something else, what drove that?

Christopher Harris

I mean, there is a variety of lines in there. Obviously individual risk is a fairly large bucket for us, but the two biggest contributors would be kind of large commercial property, and then you would also have some loss from marine in there as well. Again it wouldn’t be a particularly significant number, but the property and marine individual risk business would be making up the majority of that.

Ian Gutterman Adage Capital

Okay.

Christopher Harris

I think certainly the Northeast is an area of the country where we have more exposure potentially to that type of loss, but I think our treaty exposures in that area complement that exposure fairly well in terms of being more personal lines oriented and less flood exposed.

Ian Gutterman Adage Capital

Got it, got it. Okay, I was just trying to get a sense of the exposure there. And then my other one is just I mean I have read a little bit about Blue Capital, but can you just talk a little bit about the structure and why you did it the way you did as far as it being publicly listed as opposed to the typical private sponsors and such, and just sort of describe the structure and how it contrasts to things you have done in the past that others have done in the market?

Christopher Harris

Okay, yes, thanks Ian. And again, I think it is important to step back and look at all of our ventures business. As you said, the majority of the deals that we have done previously and you know continue to do generally are more on a private basis. So I think the closed end fund that we launched that is different in terms of the nature of it being more of a public facility.

I think one of the attractions, one of the things we thought made sense there was that gives you a little bit more permanence of that capital. So in terms of being able to plan and particularly if you look at the types of clients that we are servicing with that, it tends to be more direct reinsurance and more long-term buyers of reinsurance, so we want to be able to provide them a stable product and a stable set of options over time, whereas I think you contrast that – I think a lot of the facilities you have seen have been more focused on retrocessional or much higher target rate online business, which we think frankly is probably easier in terms of being able to enter that business, but it is also it is a very difficult place to underwrite.

I think the spread between the winners and the losers can be pretty big in that space, and if deals like we have seen a lot of what I would call small operations, kind of two guys an ILW pricing sheet, running around, trying to chase some of that business. That is not really what we are targeting. We certainly wanted a more long-term facility there that we think is going to help us support our preferred clients, and ultimately allow us to grow our market position within some of the more persistent buyers of reinsurance as opposed to the more opportunistic end of the market.

Ian Gutterman Adage Capital

Got it, got it. Can you remind me is it – are you offering collateralized capacity or is it…?

Christopher Harris

It does operate on a collateralized basis, and it would generally be – the majority of the exposure will be ultimate net loss covers, our indemnity based product. It doesn’t mean that there might not be some other potential structures in there. We have the flexibility, but at this point we think more the demand will be on traditional loss covers.

Ian Gutterman Adage Capital

Got it, great. Okay, thank you.

Operator

(Operator instructions) There are no further questions at this time. Mr. Kim, please proceed with your closing remarks.

Jonathan Kim

Thank you, operator. That concludes our proceedings this morning from the company’s point of view. I would like to thank you all very much for your participation, and I invite you to join us again at our first quarter 2013 earnings call.

Operator

This concludes today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Montpelier Re Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts