IPC Holdings, Ltd. Q4 2008 Earnings Call Transcript

Feb.18.09 | About: IPC Holdings (IPCR)

IPC Holdings, Ltd. (IPCR) Q4 2008 Earnings Call Transcript February 18, 2009 9:00 AM ET

Executives

Melanie Saunders – VP and Secretary

Jim Bryce – President and CEO

John Weale – EVP and CFO

Analysts

Doug Mewhirter – RBC Capital Markets

Joshua Shanker – Citi

Justin Maurer – Lord Abbett

Operator

Good day everyone, and welcome to the IPC Holdings fourth quarter 2008 conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Melanie Saunders. Please go ahead.

Melanie Saunders

Good morning ladies and gentlemen and welcome to the IPC holdings fourth quarter 2008 conference call. My name is Melanie Saunders, Vice President and Company Secretary of IPC, and with me this morning are Jim Bryce, President and CEO and John Weale, Executive Vice President and CFO.

During our discussions this morning we may make forward-looking statements and while these statements represent our best current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. As always, we recommend that you refer to our public filings including our annual report on Form 10-K for the year ended December 31, 2007, and subsequent updates on Form 10-Q for more details on the risk factors.

And now, I'll hand over to Jim Bryce who will talk about the fourth quarter earnings.

Jim Bryce

Thank you, Mel. The fourth quarter was again a relatively quiet quarter in terms of premium activity as it is generally our least active quarter for the year. Premiums were up generally on rate increases selectively under new business and some changes in restructuring and retention. Excluding reinstatement and adjustment premiums, production was up approximately $12 million during the quarter. Loss activity for the quarter was again somewhat benign and consists of mainly updated advices for both hurricanes Ike and Gustav. Loss activity for the majority of 2008 year emanated from these two loss events.

High frequency of market risk losses in the first six months of the year had a small impact on IPC with an involvement with Alon Refinery in Texas. Other loss events impacting our portfolio to a modest degree, included losses in Queensland and New South Wales in Australia, windstorm Emma in Europe, and the tornadoes and flooding, which affected parts of the mid-West of the United States. Our loss ratio of 40.2% despite all these events is a continuing validation of underwriting expertise.

The 2008 year have the numbers speak for themselves and only reinforce the continued demand for our quality capacity. Premiums were down slightly in the 2008 year due to softening market conditions, but the overall quality of the portfolio was maintained. In 2009, we expect to see continued underwriting opportunities following 01/01 with terms and conditions improving into the 2009 year. 2008 will easily go down on record as the most horrific global financial crisis possibly of all time. Needless to say, the impact of the market’s balance sheets will certainly diminish available capacity to the market. This is expected to not only reduce supply but to further impact prices going into 2009.

The present capital market events only reinforce the high value of capital and the harsh reality that the cost of precious capital has increased for 2009. The 01/01/2009 renewals were encouraging and pretty much in line with expectations. Rates were generally up double digit on US contracts and up single digit on loss re-contracts in Europe. We believe it's fair to say that improving market is now evolving into a (inaudible) market in terms of capacity and pricing. The renewal season for 2009 has begun the year on a quite disciplined note and this is expected to continue or even improve as we go into the 2009 year. We must also bear in mind that we have probably just had the largest financial loss in history in 2008, and we are still replenishing balance sheets through the 2008 year. This is currently a better market than we have seen in some time. The service of transactional excellence always, of previous (inaudible) for IPC and our underwriting approach, staff, and our continued high ratings from AM Best and S&P all position us well in this enhanced market environment. We are confident that conditions will remain favorable going into the 01, April renewals in the second quarter. Initial discussions on these renewals certainly indicate this to be the case.

I will now hand over to John, who will give us some comments on the financials. John?

John Weale

Thank you, Jim, and good morning, ladies and gentlemen. Following with some brief remarks regarding some of the financial aspects of our fourth quarter and year-end 2008 results. As noted in our press release, net losses on investments were only $2.8 million in the fourth quarter 2008. However, this was comprised of some significant positive and negative movements from the three main segments of our investment portfolio. Off that small net amount, that was $47.9 million gained from our fixed maturity portfolio and a $39.2 million loss from our equity portfolio. Included in this amount was $21 million from our investments in global equity fund and $16.8 million from a North American equity fund. In addition, we also incurred a loss of $14.2 million from our investments in a fund of hedge funds.

Once again the bright spot in the investment portfolio with the allocation to mortgage backed securities which produced a gain of $2.3 million from the quarter ended December 31, 2008. While in dollar terms it's a small amount, on a percentage gain basis that represents almost an 8% annualized returns. As noted during our third quarter earnings call we have made a small allocation to this asset class during that quarter. At December 31, 2008, this represented 5.7% of our total maturity portfolio and 4.6% of the total investment portfolio. At the end of December 2008, our unrealized gain losses were a net gain of $11.0 million from our fixed maturity portfolio, a net gain of $4.1 million from our mortgage backed securities portfolio, a net loss of $6.8 million from our equity investments, and a net loss of $31.7 million from our investments in a fund of hedge funds.

We generated positive net operating cash flow in the fourth quarter of 2008 of $13.7 million compared to $11.4 million generated in the fourth quarter of 2007. We used part of our excess cash balances to add $53.2 million to our investments in equities, with $41.5 million invested in a US large cap equity fund, and we added another $21.5 million to our investments in the global equity fund. Also in the fourth quarter we used $75 million to repay part of the bank loan that was used to finance share repurchases towards the end of the second quarter of 2008. At December 31, 2008 there remains an outstanding balance of $75 million on that bank loan.

It should also be noted that towards the end of 2008, we issued a redemption notice for $50 million, part of our investment in the fund of hedge funds. This redemption was effective January 31, 2009, and we expect to receive the majority of these monies within the next week. During the fourth quarter of 2008, we paid net loss of $59.7 million, as we started to receive paid claim payment requests in respect to hurricane Ike, which totaled $30.3 million. During the fourth quarter we also benefited from loss reserve reductions resulting from foreign currency exchange fluctuations, primarily the pound sterling. These partly offset the exchange loss created as a result of the revaluation of receivable balances in that same currency. Other than currency fluctuations, there was little reserve development either positive or negative in the quarter, aside from those previously reported with respect to hurricane Ike and Gustav.

For the year ended December 31, 2008, total net paid claims were $171.6 million compared to $298.9 million in 2007. The fully diluted book value per common share was $33.07 at December 31, 2008. The diluted number of shares is now hopefully easier for you all to estimate, because on November 15, 2008 the conversion of our mandatory convertible preferred shares took place. The total fully diluted number of shares calculating book value at December 31, 2008 was approximately 55.97 million. On February 17, 2009, our Board of Directors declared a quarterly dividend of $0.22 per common share. This amount will be paid to shareholders on March 18, 2009 for shareholders of record of March 4, 2009.

I’m now going to hand back to Jim who is going to open the Q&A session.

Jim Bryce

Thank you, John. And Melissa, on that note, we will take any questions which the participants may have.

Question-and-Answer Session

Operator

(Operator instructions) We'll go first to Doug Mewhirter with RBC Capital Markets.

Doug Mewhirter – RBC Capital Markets

Hi, good morning. I had just two questions. First with January renewals, how would you say your – compared with last year's January renewals, you had – was your exposure growth and also your price growth.

Jim Bryce

Well, in terms of the 01/01s, in the US, we retained all of the renewals for programs. Those programs were not renewed not because of pricing but because of the request for the inclusion of terrorism. As you know, we following 9/11 took the posture that (inaudible) entertain terrorism but not in the original contracts, it has to be looked at separately, rated separately, information given separately and those four programs did not meet our requirements. Rate increases in US averaged 12% both on loss impacted and loss recontracts. In the non-US, where again, conditions were less robust. We pretty much renewed the account with an overall rate increase in the area of 6%, and quite frankly we would expect those increases to go up as we go into 2009.

Doug Mewhirter – RBC Capital Markets

And so it sounds like Asia, which Asia is the 4/1 renewals, if I'm not mistaken. Historically the rates haven't been – they have kind of lagged the rest of the world. But it sounds like you're, I guess cautiously optimistic about what might happen over there?

Jim Bryce

Well, the 01, April is really the renewal date for Japan and Korea, also India which we’re not presently involved. But in Japan, we have two financial underwriters for out visiting just recently. I think there is a growing awareness of the financial hurricanes, which not only impacted us but impacted everyone including the Japanese. And they are being more realistic in terms of what they expecting for prices to access our capital for renewals at 01 April. I think the other thing I said we see with the consolidation they're buying larger limits of cover, larger limits of cover do require a market consensus, and the market consensus now is that prices have to go up.

Doug Mewhirter – RBC Capital Markets

Okay, thank you, that's helpful. And if you could just finish up with any kind of update on either windstorm Kyrills, if that may have an impact if any on your portfolio and the Australian wildfires.

Jim Bryce

Well, windstorm Kyrills, at this point, is not really seen as a major event. It's currently – we're just receiving initial loss advises. So we will be impacted, but at this point a very few advices have been given. We have not really released anything because the information just isn't there. But we are not expecting that from the model losses given now Spain, we have no involvement. France, obviously we do. We do expect to get some losses, and as we said in the past, loss activity is not necessarily bad. In terms of the bush fires in Australia, it's truly a horrific event in terms of loss of both life and property. But again it's still a bit premature to measure the magnitude of loss in terms of insurance and reinsurance events. It is fair to say, that retentions have risen significantly in that market in the recent Cat events in the last few years. But at this point it's just too early to say.

John Weale

You have to understand that there are certain sections and certain towns which Australian police have cordoned off as they are trying to track down the arsonist who caused a lot of these fires and caused this and caused this horrific loss of life. So it's very difficult for loss adjusters and so on, to get into these places to find out exactly the scale and scope of the damage.

Jim Bryce

And as we found in the brush fires in California, I'm sure there will be some discussion over the question is it one event, is it multiple events. Most certainly, it would seem from the indication we received today it is multiple events. Some are arson and some are natural causes.

Doug Mewhirter – RBC Capital Markets

Okay, thanks. That's all my questions.

John Weale

Thank you.

Operator

We will go next to Joshua Shanker with Citi.

Joshua Shanker – Citi

Thank you. Thoughts on the non-prime areas of the marketplace, Japan, Australia. Do you believe that given the disparity in pricing there will be capacity withdrawn from these areas and how do you feel looking at your model about writing business in these areas in the emerging markets?

Jim Bryce

Well, we do have an involvement both in Australia and Japan. You gather that just from our losses in the past. We really are looking at the fact that those two markets – and international market in general has lagged the reality of the cost of capital, but this is the year where I think the message is going to get home. How much prices go up remains to be seen, but most certainly the risk appetite of all of our clients globally has reduced significantly as a result of both the Cat events and the financial events in 2008. So, we do expect demand to be up. We think that the market dislocations in Europe and globally will favorably impact us. Clients are looking for more diversification, with reinsurance of proven track record of service and stable underwriting teams. We're now in our 17th year. So I think we are very well positioned to take advantage not only in Australia and Japan, but also the so-called, BRICs, Brazil, Russia, India and China. This last year, we did have China following the, again the horrific earthquake losses in China earlier in the year. So we're now in that market and I think we’ve got great prospects for 2009. Market conditions are great.

Joshua Shanker – Citi

And do you think that longer term is it sustainable or do you think we're in sort of a one year opportunity for the situation.

Jim Bryce

I think as we’ve seen the economies grow in both India and China that the question of insurance being sold will most certainly be increasing the need for reinsurance, given especially those two territories exposed to both typhoons, earthquake, windstorms, flooding, the demand can only increase as the market economies grow in both those areas. I think, it's definitely sustainable, at least in the immediate future.

Joshua Shanker – Citi

Okay, thank you very much.

Jim Bryce

You're welcome.

Operator

We take our next question from Justin Maurer with Lord Abbett.

Justin Maurer – Lord Abbett

Good morning guys.

Jim Bryce

Good morning.

Justin Maurer – Lord Abbett

Just from an investment portfolio perspective, you mentioned the $50 million redemption on the hedge fund. What is that – just looking at your balance sheet of 365 of equity investments, that is both the equity investments and the hedge fund, correct?

John Weale

That is correct, yes.

Justin Maurer – Lord Abbett

What's the rough break down between the two?

John Weale

The hedge fund at December 31 was just under $160 million. So it would be $50 million part of $160 million.

Justin Maurer – Lord Abbett

All right. So are you just reallocating that $50 million to, you mentioned the incremental investments in the equity portfolio, or just reallocating that from one to the other?

John Weale

We are actually, if you recall back in September of last year, somewhat fortuitously about September 10, we took out about $60 million from an S&P index futures fund and the reinvestment into equities that took place in December was really the reallocation of the reinvestment of those funds. The $50 million redemptions in the hedge fund is more of the reallocation back into fixed income, at least in the short term.

Justin Maurer – Lord Abbett

The 365 actually comes down by 50 then, because the equity investments were in December?

John Weale

Correct.

Justin Maurer – Lord Abbett

Got it. Okay. Any kind of premeditated thoughts on the fixed income side, you mentioned the MBS is there anything – are you guys harvesting that at this point? Are you going to let it go or any other pockets within that that look interesting?

John Weale

No. Interestingly enough, we are and have been discussing this week with our investment committee the overall asset allocation. Certainly, our advisers have suggested that we potentially look at not so much other asset classes, but other segments within the fixed income portfolio – fixed income markets, such as slightly lower grade but still investment grade credits. So in the BBB range, they think there's some great return opportunities with not the same risk profile. CMBS is another thing that's been proposed. There have been a couple asset classes that have or sub classes that are under consideration but no hard and fast decisions have been made at this point.

Justin Maurer – Lord Abbett

Okay. And John, you know the investment income relative to a lot of others held up remarkably well in the fourth quarter. Is that – with yields coming down and it sounds like if you are doing more BBB type stuff, maybe it's on a smaller basis. Is that level sustainable do you think, or we going to continue to see that erode at least through ’09?

John Weale

Clearly, as our bond portfolio matures and is replenished. Obviously, it's going to be reinvested at lower rate. So, I guess we’ve benefitted from having a sort of three or thereabout years duration. And as some of those – as some of the older bonds start maturing and get reinvested, clearly, yields will come down.

Justin Maurer – Lord Abbett

Okay. Then just Jim, since I always ask I’ll ask again. From a capital management perspective, capital (inaudible). Obviously, you guys spent the last couple of years buying shares, paying dividend, and those type of things. I presume not only for safety reasons but to play a little offense, you would like to reallocate that towards business opportunities going forward?

John Weale

Most certainly. We do not anticipate in the immediate term any share repurchases of special dividends, because right now is the time to make hay. It's a fabulous market conditions. We have increasing demand. We have demand fueled by both loss frequency, medium severity, reduced balance sheets on the client's part, reduced investment income on their part in the near term. And again, the continuing market dislocations, we see many opportunities to utilize that capital and we will.

Jim Bryce

And just to be clear, as it currently stands, we do not have anything outstanding in terms of a share repurchase authorization.

Justin Maurer – Lord Abbett

And this may be too simplistic in that regard though, but if you look at even though book value is down modestly because of the share repo, equity is down 13%, just kind of point to point. Does that imply that you therefore, are able or aren't able to write, you know, 13% less units if you will, (inaudible) price.

Jim Bryce

Well, I think price will increase. Obviously, our capacity is a function of capital. Capital is a factor in any initiative we take. But we are expecting that we can satisfy demand for existing clients. Unfortunately, not all existing clients will recognize the fact that the cost of capital has gone up quite a bit. Those clients that do not recognize that will be replaced with other clients that are really more appreciative of both the precious element of capital and the fact that the cost of that capital has gone up. So, we are constraint by how much we can write, but we feel we can satisfy our current market demand, our current customer demand and there will be some additional opportunities beyond that.

Justin Maurer – Lord Abbett

Got you. Great. Thanks guys.

Jim Bryce

You are welcome.

Operator

And it appears we have no further questions at this time. I’d like to turn the call back to our speakers for any additional or closing remarks.

Jim Bryce

Okay, well, thank you very much. I think as we have no more questions, I just want to thank everyone both for your time and effort. And thank you for your excellent questions and I just want to wish you to have a good day. Thank you.

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