Montpelier Re Holdings' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: Montpelier Re (MRH)

Montpelier Re Holdings Ltd. (NYSE:MRH)

Q3 2013 Earnings Call

October 29, 2013 8:00 am ET

Executives

Jonathan Kim - General Counsel & Secretary

Christopher Harris - President & CEO

Mike Paquette - CFO

Chris Schaper - President, Montpelier Re Bermuda

Richard Chattock - Chief Underwriting Office, Lloyd Syndicate

Jason Pratt - CIO

Analysts

Sarah DeWitt - Barclays

John Deysher - Pinnacle

Ryan Byrnes - Janney Capital Markets

Ian Gutterman - BAM

Alex Lopez - Portales Partners

Christine Worley - JMP Securities

Operator

Greetings, ladies and gentlemen, and welcome to the Montpelier Group's Third Quarter 2013 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 third quarter 2013 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 through November 11.

Our speakers this morning are Christopher Harris, President and CEO; and Mike Paquette, Chief Financial Officer. Also with us are Chris Schaper, President of Montpelier Re Bermuda; Richard Chattock, Chief Underwriting Office of our Lloyd Syndicate; and Jason Pratt, Chief Investment Officer.

Chris will give his commentary on the quarter 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. I'm pleased to report that Montpelier executed well across all of our underwriting platforms in the third quarter. Montpelier Re Bermuda, Montpelier at Lloyd's and Blue Capital together delivered strong profitability with a 54% combined ratio and 4.2% growth in fully converted book value per share plus dividend. Net written premium of $102 million including all managed premium were flat versus a year ago quarter reflecting our consistently disciplined approach.

Our focused underwriting strategy has contributed to a strong first nine months of 2013 for Montpelier with a year-to-date operating ROE of 12.8%. This is a solid validation of our work to build on our objectives, operating as a preferred partner for our clients and brokers and as a successful and effective manager of both risk and capital.

During the quarter, we further strengthened and broadened the risk analytics services we bring to our clients with the successful launch of the Montpelier Risk Institute. In addition, the market reach of the group had continued to expand through our targeted development of Montpelier at Lloyd's and the Blue Capital platform.

Our 18% quarterly loss ratio reflects solid underwriting performance across our property and specialty lines, a lack of any major catastrophe impacting our portfolio mix and the benefit of $36 million of prior period reserve releases.

The prior year releases were distributed across all major reporting classes, the largest contributor was the individual risk segment which accounted for half of the overall release. The total IBNR to reserve ratio ended the quarter at 62% versus 63% last quarter. Overall, we experienced a 2% decrease in our internal renewal price index during the third quarter. However, we saw some diversion in rate level movements among business segments and within geographies.

Competitive pricing continues to be a factor in the property catastrophe reinsurance space with rate decreases of 10% for U.S. business and 3% for international business during the quarter. Other specialty treaty rate level also decreased by 6% for the same period. By contrast, rates within the individual risk segment were flat for the quarter and consistent with the prior quarter we saw positive rate movement of plus 5% within the property specialty segment if we continue to see the benefit of stronger original rates.

Turning to PML as shown on Page 6 of the supplement, U.S. hurricane remains our largest zonal PML at 25% of shareholders equity.

On the capital side, through nine months of the year, we spent approximately $145 million on share repurchases.

In closing, we produced strong financial results for our shareholders during the third quarter. And as we approached the important January renewal season, we believe we are well-positioned to respond to your clients need across all of our platforms.

And with that, I will turn it over to Mike to provide more detail on the financial.

Mike Paquette

Thank you, Chris. We end of the quarter was a fully converted book value per common share of $28.06, an increase of 4.2% for the quarter and 8.7% year-to-date, each after taking into account our common dividend.

Our operating income for the quarter was $72 million or a $1.38 per common share and our net income was $53 million or a $1.02 per commons share, each expressed after preferred share dividend.

Net premiums written and earned in the third quarter were flat in comparison to a year ago as premiums originated through our Blue Capital initiatives replaced those of our former music operation.

We incurred no individually significant catastrophe losses during the quarter. The loss ratio was 18%, which includes $36 million or 23 point of favorable prior year loss reserve movement.

Our total general and administrative expenses of $31 million for the quarter were consistent with those of a year ago. The slight increase in this quarter's operating expenses was largely offset by a decrease in our incentive compensation accruals.

Our total investment return for the quarter was 0.6% and our net investment income was $17 million. During the quarter, we experienced $5 million of net realized and unrealized investment gain.

Our fixed maturities at quarter end at a average duration of 2.0 years, net of associated shortened derivative position and average credit quality is AA minus. Our equity and alternative investments comprised 7% and 5% of our ending shareholders equity respectively.

The non-controlling interest shown on our financial statement reflects the third party capital deployed within our growing Blue Capital operation, as well as the earnings thereon.

During the quarter, we repurchased 1.2 million common shares at an average cost per share of $25.53. Thus far in the fourth quarter, we have repurchased an additional 330,000 shares at an average cost per share of $26.66. Our shareholders equity is currently $1.6 billion and our total capital is $2 billion.

We continue to make progress towards completing The Blue Capital Reinsurance Holdings Limited IPO. We launched the IPO today and hope to complete that process over the course of the next few weeks.

I will now turn the discussion back to Jon.

Jonathan Kim

Thank you, Mike. Before I turn it over to the operator for Q&A I would like to remind our callers that on October 7, 2013 Blue Capital Reinsurance Holdings Limited filed its initial registration statement with the SEC for a potential initial public offering of its common shares on New York Stock Exchange. While this transaction is pending we are precluded from speaking about it further. So we must decline to answer to any questions that you may have regarding Blue Capital Re during this call.

Question-and-Answer Session

Operator

Ladies and gentleman, at this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question is from Amit Kumar at Macquarie Capital.

Unidentified Analyst

Hi, good morning, this is Emily (inaudible) on for Amit. I was hoping to talk a little bit about further relations during the quarter particularly the property specialty individual list segment. What sort of lines and accident areas were the big driver there?

Christopher Harris

Okay, good morning, Emily, thank you for the question. As I noted in my script, we had released across the portfolio but did about half were concentrated in the individual risk segment. There we had two specific large cases where ultimately they just settled below our attachment point at reasonable amounts up there but ultimately we had two claims settled below our attachment point, so we saved something there.

We also had a little bit of benefit from foreign exchange particularly with some of the London reserves during the quarter. So I think the combination of those. And then we also had a small commutation of a small claim as well.

So in terms of accident years the, it was really a mix. But of the $36 million about $14 million came from the -- $14 million to $15 million came from 2012 and then the rest was spread amongst some of the earlier years.

Unidentified Analyst

And then moving on to capital management, has the thought process at all changed on share buybacks given current valuations and market opportunities? Would it probably reasonable to anticipate returning roughly sort of operating earnings for the year?

Christopher Harris

Okay, thanks, Emily. I think there were a couple of questions in there. I would say first off, certainly our philosophy on capital management hasn’t changed, I mean some of the inputs and the analysis we do change over time and certainly one of those is the valuation of our stock, one of those is the opportunity that we see in the underwriting environment and we will continue to weigh all off that together. But I think certainly we have been pretty steady with repurchasing our share this year and so you shouldn’t expect to see any dramatic change in our philosophy there.

You talked about kind of operating income versus net income and clearly you've seen some unrealized losses this year. So on a net income basis, we purchased about 120% of the net income to-date versus 75% of the operating income. I think that’s fairly consistent with what we see in today’s environment.

Operator

Our next question comes from Sarah DeWitt of Barclays.

Sarah DeWitt - Barclays

Given the decline in prices that we're seeing, should we think about future top line growth as being down about commensurate with the price decline or do you expect to write more risk business to offset this?

Christopher Harris

Okay. Thanks, Sarah. I mean, I won’t give specific guidance on our premium targets for next year or into the future. I guess what I can is certainly I think we have a good track record of managing our risk and our capital and allocating it where we see the best opportunity is. And I think certainly to the extent we see pricing pressure but it's less about pricing pressure and its more about do we think the returns were seen on the business still meet our hurdles. And I mean, if you're looking at property catastrophe specifically, while we do expect to see some rate pressure I think the rates are still adequate in most sectors there but it does become -- it means there will be more complex underwriting process for us because you are going to have to work harder to differentiate between the better paid and the worst paid accounts. So I think it will mean that fewer accounts start to hit our hurdles.

And then I guess this second point I would make is, we do write lines of business outside of property catastrophe. That represents about 40% of our overall premium volume and when you start to look at those other lines of business, we do expect there will be a few pockets where we will see opportunities next year. And I think nothing particularly with our platform in Lloyd's we should be well position to capitalize on some opportunities in the non-catastrophe line there. I think we have performed well there. That platform has been solidly profitable over the last few years. And to the extent particularly within the individual risk business, some of the other specialty lines, we think there may be some opportunities next year if we see uptick in rates within some of those pockets.

Sarah DeWitt - Barclays

And then just following up on your comment about your accounts are starting to hit your hurdle and rate of return is prop cat, what RoE or you writing new business at and how does that compare to your hurdle of return?

Christopher Harris

So it is not one where I'm going to get into giving specific numbers there, Sarah.

Operator

Our next question comes from John Deysher at Pinnacle.

John Deysher - Pinnacle

I was just curious in terms of the pricing price shares that we are seeing in some of your lines. How much of that might be due to these catastrophe bonds or cat bonds that we're reading a lot about? As you know it is an alternative to reinsurance and I was just curious if you are seeing any of that presence in your marketplace?

Christopher Harris

Okay. Thanks John for the question. I will turn that one over to Chris Schaper.

Chris Schaper

Hey, John, this is Chris Schaper. Yes, just in terms of what we are seeing cat bonds certainly makeup a portion of the business. They can create some differences relative to rate when we're looking at attachments that are further up in programs. But for the most part, what we are seeing is rates throughout programs having different effects so to speak, I mean different layers there different effects in terms of -- in terms of price. So the cat bonds themselves do not really have a dramatic effect across board with regards to the cap rates. They actually, in some cases, create some changes in how programs are structured and that can create an opportunities for us.

John Deysher – Pinnacle

So you are not seeing a major impact in this? Sorry, go ahead.

Christopher Harris

Yes, I think, John, it is fair to say that the impact has been fairly limited. I mean, it is a very narrow segment of the market. It's traditionally been targeted at a low rate online, high attaching business. So I think they had some impact there but the more widespread impact has been much less from cat bonds.

John Deysher – Pinnacle

Do you see that changing at all going forward?

Chris Schaper

Hey, John, this is Chris Schaper. No, I don't see that changing in terms of causing any dramatic changes in rate as result of the cap bond market.

Operator

Our next question comes from Ryan Burns of Janney Capital Markets.

Ryan Burns – Janney Capital Markets

Just I guess quickly, obviously you guys have these new vehicles you are using, but does that impact the way that you guys underwrite in your core, I guess, prop cat book with maybe a less high layer business going forward, maybe moving down? I'm just trying to figure out that if your core prop cat book is evolving I guess as cat bonds evolve as well.

Christopher Harris

Okay. Thanks Ryan, I will let Chris Schaper handle that one as well.

Chris Schaper

Hi, Ryan. No, it's not actually changing how we're underwriting our business. In fact, one of core issues is that Montpelier does bring to the table a particular discipline in terms of underwriting risk. And so in regard to the capital that's coming to the organization that or underwriting practice that we have will not change nor will our strategy in terms of taking risk.

Christopher Harris

Yes, and I would almost say it does not change, but in some ways it comes more important. When you enter an environment that's becoming more complex and potentially more competitive, I think the ability that you have a nimble process, that you're able to source risk, manage risk, price risk in a very consistent way, I think that becomes more of a competitive advantage in a market like today.

Ryan Burns – Janney Capital Markets

And then quickly, have you guys, I guess, look to see from you business as well I guess through cat bonds to get maybe a more efficient returns? And we heard some other competitors do that. I cannot quite -- it looks like your retentions are -- look pretty similar but I guess on a companywide level.

Christopher Harris

Yes, certainly we look at a number of options to optimize our portfolio on a regular basis and I think what we are seeing in the market place today that gives us a kind of a wider universe of potential opportunities as we look to optimize that portfolio. And I think it's certainly, we have done that and I have pointed in the past and we also have a number of private facilities where we partner with capital in various forms, and I would say we have done a few things through that framework as well. So, I mean, a very good question and yes and yes would be my answer; it's something that we have done and we will continue to look for more ways to do that.

Ryan Burns – Janney Capital Markets

Okay, great. And then this is my last little just numbers clean up one maybe for Jason. I know that net investment income has been kind of roughly is sequentially flat. Just trying to figure out that the new money yield versus I guess money falling off and I guess the average money in your portfolio right now and yield.

Jason Pratt

Hi, Ryan it’s been trending around 2.3% which we laid out in the supplement. Obviously, markets have been moving around over the last several months but that’s the number that we think is appropriate right now.

Ryan Burns – Janney Capital Markets

But I just wanted to make sure the new money yield is it similar to the stuff that's coming off right now? I'm just trying to figure out for modeling purpose going forward?

Mike Paquette

Yes, it’s a combination, right. I mean, we've got yields sort of across the curve. So when you think about the overall portfolio I think the combination of book yield that's running off is fairly similar to that 2.3%. So, yes, those are pretty good consistent.

Operator

The next question comes from Ian Gutterman of BAM.

Ian Gutterman - BAM

I guess start with a few numbers questions. In the property specialty the accident year was about 90% which has been higher than normal. Were there any large non-cat losses in there?

Christopher Harris

Thanks, Ian. This is Chris. No, I don’t think there was anything particularly significant from a loss standpoint. I think you will see in the, from the premium numbers were maybe down a little bit in the quarter, had some impact there but nothing that I can point to you on the loss side.

Ian Gutterman - BAM

And then for company-wise gross premiums at about 10%, net premium flat, so your retentions were not full. Was there a expiring reinsurance treaty you didn’t renew or a change in mix, I was kind of curious why retentions went up?

Christopher Harris

It was purely just related to timing differences. If you compare it back to the prior year we bought a little bit -- we bought a little bit more cover in the third quarter of the prior year. So as you said, net written premium was relatively flat but it was just timing issues on the seeded. We had purchased more of it earlier in the year in 2013.

Ian Gutterman - BAM

So is this sort of high 80 retention rate is reasonably normal?

Christopher Harris

Yes, I think if you look at the year to date number that's a reasonable proxy.

Ian Gutterman - BAM

I had one another numbers question here, okay, thanks on (inaudible) sorry. Can you just talk about reserve, how you split reserves and how you release reserves? Meaning you have round numbers kind of $100 million of releases a year for the past few years. Is that predominantly from prior years' cat events or do you book a high sort of attritional property loss ratio that if there is no event that gets released, is it a mix of the two? I'm just kind of curious how that works versus the way some other companies explain it.

Christopher Harris

Okay. Thanks, Ian. That's all we can probably talk about for a long time. But from a high level I think one of things that we -- if you look at how our reserves breakdown, I mean, really we tend to put them in three categories. We tend to have reserves for the larger cat events, then you have reserves for shock events, and then you just have your general reserves from our attritional loss. And I think if you look each of those gets handled a little bit differently in terms of the reserving process. Both the cat and the shock events tend to be very much driven by specific events and then how they -- specific claims move up or down over time.

Whereas the attritional loss ratio pick that is a little bit more difficult, you are looking across the number of lines of business, a number of different types of cedants and there you might see some more variability in those selections over time and they take a little bit longer to reflect the actual experience. So I would say our approach hasn't changed over time, but the mix of business between those buckets can change based on whether you had a run of large cats or run of large shock losses.

Ian Gutterman - BAM

Okay. I guess that what I was wondering is is there kind of a correlation between increased releases this year and several most recent years of high cat? Meaning, when we had to run the high cats you are going to have high releases probably the next year or is it as the book is diversified where we have other -- a bigger portion of reserves are non-cat, which lead to sort of more regular reserves than maybe would have seen three, four, five years ago? Maybe it is little bit but.

Christopher Harris

Yes, I mean -- I think it is a -- it think it really is a little bit of both. If -- again, if you take a look at our Q or if you go through the supplement, I mean, you can see by bucket where the reserve releases have come from and that can move around a little bit over time. I would say for 2013 year-to-date we've probably seen a little bit more other release come outside of the property catastrophe segment.

Ian Gutterman - BAM

And then, my last one was without asking your thought specifically about the IPO, but just from an MRH standpoint, can you discuss just the strategy of why it makes sense from Montpelier to have two public vehicles outside the many holding company? And just why you're going about that way as opposed to what other companies are doing?

Christopher Harris

I would love to talk about that, Ian, but sound the legal piece around the table. So I mean, I think obviously have legal restrictions. So it just limits what we can talk about at this time. But certainly I think on a future call that's something we would be happy to address.

Ian Gutterman - BAM

Can you address your current modeling standpoint? Should I assume that the accounting from a MRH balance sheet statement will be similar to the one of the vehicle, meaning you'll consolidate these growth premiums and then minority of them out for whatever premium I think that new business will write? Is that the right way you think about it?

Mike Paquette

Ian, its Mike Paquette, and the answer to that is yes, the accounting will be very similar.

Operator

Our next question comes from Alex Lopez of Portales Partners.

Alex Lopez - Portales Partners

I'm just wondering if I can get your thoughts on the insure broker catastrophe releases that have been emerging into the London market and just wondering whether if this has any competitive implications to your Lloyd's business?

Christopher Harris

Okay, thanks, Alex. I'll turn that over to Richard.

Richard Chattock

Yes, thanks, Alex. It will have an effect and I think it's difficult to describe a number to it and say how much of an impact it's going to have, both facilities tend to be while limited to the large three brokers, and clearly that's only a small proportion of our total business that we write in syndicate. So and then it reflects only a portion of the business that we get from the broker. So overall it's a pretty small number, but yes, they have an effect and it will take time probably 12 to 24 months for us to really see if that's a meaningful number to not.

Operator

Our next question comes from Ryan Byrnes of Janney Capital Markets.

Ryan Byrnes - Janney Capital Markets

I just want clear to circle back and just want to know if you guys had a, I guess, it's been a little bit of a hot-button issue right now. It's kind of -- it the Spanish surety markets, just want to know if your international surety segment you guys had an exposure to that any of those issues?

Christopher Harris

Thanks Ryan. That would not be an area of major concern for us.

Operator

(Operator Instructions) Our next question comes from Christine Worley of JMP Securities.

Christine Worley - JMP Securities

I just had a quick numbers questions on the property and specialty individual net premiums written were down, a little more than I was expecting. I know it's a line that can be sort of a lumpy but I was curious if it's just the lumpiness in the quarter or if there is something more going on?

Mike Paquette

Yes, okay. Thanks Christine. Yeah it is as you said I think the numbers can be lumpy and in this particular instance we had one large contract where we had a premium adjustment. So it came through this quarter. So it impacted the premiums from not just this quarter but a couple of prior quarters as well. So you saw little bit more of a negative impact. I think if you look again, look at the year-to-date numbers, they will give you a better estimate of the run rate.

Operator

There are no further questions at this time. If you can please proceed with your closing remarks.

Christopher Harris

Thank you. That concludes our proceedings this morning. Once again I would like to thank you for you participation and I invite you to join us again at our fourth quarter 2013 earnings call.

Operator

Conference has now concluded. Thank you for your participation.

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Montpelier Re (MRH): Q3 EPS of $1.38 beats by $0.56. (PR)