IPC Holdings, Ltd. Q1 2008 Earnings Call Transcript

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 |  About: IPC Holdings Ltd. (IPCR)
by: SA Transcripts

IPC Holdings, Ltd. (IPCR) Q1 2008 Earnings Call April 25, 2008 8:30 AM ET

Executives

[Sean Simon] - Vice President, Controller

Jim Bryce - President, Chief Executive Officer

John Weale - Senior Vice President, Chief Financial Officer

Analysts

Susan Spivak - Wachovia

Scott Heleniak - Ferris, Baker Watts

Josh Shanker - Citigroup

Rod Bodman - Capital Returns

Jay Cohen - Merrill Lynch

Tom [Licap] - Perry Capital

Chris Neczypor - Goldman Sachs

Operator

Welcome to today's teleconference. (Operator Instructions) At this time I would like to turn the call over to [Sean Simon].

Sean Simon

Welcome to the IPC Holdings first quarter 2008 conference call. My name is Sean Simon, Vice President and Controller of IPC, and with me this morning our Jim Bryce, President and CEO, and John Weale, Senior Vice President and CFO.

During our discussions this morning we may make forward-looking statements and while these statements represent our best current judgment of 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 our soon-to-be-issued Form 10-Q for more details on the risk factors.

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

Jim Bryce

I'll keep my first quarter comments relatively brief as I believe the numbers speak for themselves and I'd like to keep some time open for questions on capital management.

It should be noted that the first quarter is generally the footprint for the calendar year, with some 60% to 65% of the annual deposit premiums written in the quarter. Reasonably healthy market conditions for pricing remain in the U.S.A., but with less robust conditions seen elsewhere, with some decreases for pricing for nonU.S. business.

Loss activity in the first quarter was somewhat benign for cat reinsurers, but certainly an active quarter for attritional cat losses and for major risk losses around the globe.

The larger cat events included the Emma storm loss in Europe, flooding and tornados in the U.S. Midwest and South, and flooding yet again in areas of Australia. Many reinsurers were more impacted by risk losses in the quarter, with estimates on these risk events ranging from some $4 billion to $6 billion and more, with business interruption still a major uncertainty which to quantify.

The first quarter of 2008 risk losses are probably second in magnitude only to the third quarter of 2001 with the tragedy of 9/11. Hopefully these losses will serve as a wake-up call to the commercial property market, which was showing signs of weakening following the events of 2005.

We are now completing our ninth solid quarter with positive results, with generally strong premium pricing, continued earnings and growing shareholders equity. These results also reflect generally healthy market conditions and a relatively benign period in terms of major cat events. These conditions demand that underwriting discipline and capital management to be the main tools to ensure companies to successfully steer through the upcoming market challenges facing us in the remainder of 2008.

We wrote premiums of $198 million in the first quarter of 2008, which was basically down over last year. Rates and premiums moved in line with retentions and exposures. Our underwriting discipline required our retiring from some accounts and the corresponding requirement to recalibrate our capital. Modeling changes and restructuring did affect in some cases a change in demand, and this was offset in a few cases with loss retentions and stronger companies increasing retentions.

These premiums are again underwritten with the same high standards as we've had in the past. However, absent of any major loss, the market is anticipated to continue to weaken in terms of pricing, and there is generally an anticipation of moderately reducing pricing for the remainder of 2008.

In light of same, our Board was [sore in] need to recalibrate our capital requirements going forward, and we have been actively repurchasing shares, on which John will give us more details in his section of the call.

The second quarter renewals continue to be healthy, but with continued pressure on rates in the U.S.A. and some renewals outside the U.S. seeing single-digit decreases.

The second quarter is principally the annual renewal quarter for Japan and Asia. In Japan, the focus was again on placing initially the pro rata and then the excessive loss. The pro rata renewals and the progress renewals were heavily impacted by risk losses, and this generally favorably impacted cat treaties, which in the main renewed loss free and as is.

I will now hand over to John, who will review some of the financial highlights.

John Weale

Following up some brief remarks regarding the financial aspects from our first quarter results in 2008, clearly our investment income for the quarter suffered a significant decline in comparison the first quarter of 2007, primarily due to the lack of a dividend from the fund of hedge funds that we have invested in. In the first quarter of 2007, we had benefited from a dividend of $7.9 million.

In addition to the lack of dividend, investment income was also impacted due to a small reduction in the yield on the fixed income portfolio.

Our net gains and losses on investments - which represent the change in fair value of the portfolio during the quarter together with any realized gains and losses from the sale of investments - were a negative $6.0 million compared to a net gain in the first quarter of 2007 of $8.7 million.

In the first quarter of 2008, the net loss was comprised of a $35.7 million gain from fixed income securities, but a $41.7 million loss from our investments in a number of equity funds. This loss would have probably been larger if we had not trimmed $120 million or 28% of the allocation from those investments in January of this year.

We again benefited from a relatively low level of incurred losses, which Jim has just discussed. The few losses that did occur during the first quarter of 2008 were partly offset by some additional reductions in several of the events that occurred in 2007 as our [inaudible] continue to reevaluate their estimate of their exposures to those events.

Our net paid claims in the quarter - the first quarter of 2008 - were approximately $2 million compared to approximately $84 million of net paid claims in the first quarter of 2007. Approximately $17 million of our paid claims in the first quarter of 2008 related to Katrina, Rita and Wilma, and another $17 million with respect to 2007 events.

Our net operating cash flow in the first quarter of 2008 was a positive $74.8 million compared to $66.6 million in the first quarter of 2007.

During the quarter we used $66.4 million to pay dividends and to buy back shares.

Fully diluted book value per common share was $33.26 at March 31, 2008. As Jim commented in the press release, during the first quarter of 2008 we completed the balance of the outstanding share repurchase authorization in 2007 and part of the new $300 million authorization provided by the Board in February of this year. As of this week we have completed one-third of that new authorization.

Yesterday the Board of Directors declared a quarterly dividend of $0.22 per common share. This amount will be paid on June 20, 2008 to shareholders of record on June 4, 2008. In addition, the Board also declared a preferred dividend of $0.475781 per preferred share payable on May 15, 2008 to shareholders of record on May 1, 2008.

I'm now going to hand back to Jim, who'll open the Q&A session.

Jim Bryce

We'll take any questions you may have.

Questions-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Susan Spivak - Wachovia.

Susan Spivak

I just wanted to follow up on the trend of the increasing retentions. I kind of look at it as a good news-bad news scenario because it puts you further away from the risk and protects you in a quarter like this, but at the same time premium is shrinking and it forces you to manage capital, which is tough to balance given the monoline focus.

So that being said, could you update us on any potential diversification plans and how have some of your recent conversations about this with the rating agencies gone?

Jim, could you give us an outlook on what you see in terms of the renewals in June, July in Florida?

Jim Bryce

I think in terms of the issue of retentions, we saw in '06 retentions starting to go up. They went up dramatically again in '07. And I think this first quarter of '08 is probably the last calibration, I would say, of retentions going up.

We've had a rather benign '06 - '07. People feel comfortable with the retentions, but the level of retention on a national basis has ratcheted up by billions and billions of dollars. So I think the retention level is probably where it should have been pre-Katrina, Rita and Wilma, so right now retentions will probably remain a part from, I would say, companies with M&A activity may slightly increase, but again, these retentions are representing a significant part of earnings. And the ceding companies truly have skin in the game, which makes us feel very comfortable.

I think in terms of the renewals, as I said, 60% - 65% was [1/1]. We've seen the second quarter renewals. Japan, it looked good. I think the U.S.; unfortunately, we're getting more and more pressure on rate. Our underwriting discipline will hold, but we are not prepared to write business for the sake of writing business. If it's not properly rated, we will continue to reduce.

I think in terms of the results, we've now had nine solid quarters and these have been really quarters with loss activity, but as you quite rightly highlighted, the retention levels now really have the low to medium-sized events fully on the balance sheets of our insureds, and we're really here for the major event, which is what the cat treaty is there for.

And I think we're building up earnings. The market discipline seems to be weakening. The business op we're not renewing is finding a home. I think unfortunately from what the brokers are telling us, they're finding a home and not only that, they're overplaced. So there is an appetite for writing underpriced business. It's not here at IPC.

We are looking in terms of capital management but we're constantly looking at the level of capital that we require to satisfy the cedents, the rating agencies, the analysts. I think the recalibration in terms of the share repurchase is exactly what we needed, but we are looking and exploring all avenues to grow if possible, but only grow if we feel we can make money and get an adequate return for our shareholders.

Operator

The next question comes from Scott Heleniak - Ferris, Baker Watts.

Scott Heleniak - Ferris, Baker Watts

I wonder if you could talk about pricing where the flooding occurred in the U.K. and Australia. Obviously it was a pretty big loss event. What kind of increases are you seeing there? Are you seeing many changes in the way treaties are structured after those events? And how is IPC going to participate in those areas?

Jim Bryce

Well, I think you've got to bear in mind the U.K. has not had a major loss in a very long time. And I think the flooding events were really of a medium magnitude. It did cause some of the companies to increase retentions. We got some single and, in a handful of cases, double-digit increases in pricing. But the magnitude of the event was not of a size to dramatically increase pricing.

And it's a market that, pricing in Europe because of really the, I guess I like to refer to them as the Alpine Mafia reinsured, pricing is weaker in mainland Europe. It's still been very strong in the U.K. and in Ireland. So the level of pricing versus the level of losses for the last decade or decade and a half, there's a pretty good balance there. There's no major need to increase prices.

But retentions have gone up. That's something we like to see. And I guess in terms of renewals, the renewals have been in line with expectations. And I think conditions remain healthy in the U.K. and a little bit less so in mainland Europe.

Scott Heleniak - Ferris, Baker Watts

And the announcement of the $100 million in share repurchases that you've done since February, can you break that out about how much you've done in March versus this quarter.

John Weale

We completed the $11 million that remained from last year. We did about another, I think, $35 million, $35  $36 million up to March of the new authorization. And then post March 31 to date, then, we've taken that up to the full, to $100 of the $300 million authorization given to us in February.

Scott Heleniak - Ferris, Baker Watts

You talked about trimming some of your equity holdings in January. Any other major changes since that point? In March and April, with the U.S. in recession, how are you looking at equities right now at this point in time?

John Weale

We feel we're at the right level at the moment. Clearly we want to see what's happening with the U.S. economy over the next couple of months and if necessary we may trim it further. But we don't want to overbalance the portfolio too heavily with fixed income securities only. The equities do provide diversification as does the fund of hedge funds. I think as a percentage allocation of the total portfolio, it's likely that the hedge fund investment will increase a little bit as we continue to repurchase shares and use some of the assets available to us for that purpose.

Scott Heleniak - Ferris, Baker Watts

And then finally, do have a percent of your book that renews at 4/1? Any kind of gauge on that?

John Weale

I think we refer to it in the 10K.

Jim Bryce

I think it's about 20%.

John Weale

Twenty percent.

John Weale

Is that fairly even with last year?

Jim Bryce

Generally the only time the percentage splits changed was back, you remember, in 1999, when we had the millennium and when we had the year 2000, all our clocks are going to stop and planes are going to fall out of the sky. So a lot of people changed renewal dates off of 1/1/2000, and then subsequently they've changed them back. So the splits are generally the same.

I guess in terms of 1 April, that is actually the start of the fiscal year in some of these territories like Japan, Korea, I believe India. So I think they're pretty much in line year-over-year.

Operator

Our next question comes from Josh Shanker - Citi.

Josh Shanker - Citigroup

Can you give some sense of the rating agencies' opinion on what adequate capital is for the business at the current level of underwriting activity that you're doing? Could you deploy your entire share repurchase at this time if you so chose? Is there any way we can wrap our heads around that?

John Weale

I think it's fair to say that the level of capital we have is certainly well in excess of the minimum required by the rating agencies for the level of rating that we have. In fact, quite frankly, the amount of capital we have and has been now for quite a few years on a strictly model basis using the rating agency models, for S&P we actually would rate as a double A, but because of their prejudice against monolines they continue to only give us an A minus.

And so the answer to your question is yes, if we chose to, we could fully deploy the remaining $200 million of the existing authorization without any difficulty from a rating agency perspective.

Josh Shanker - Citigroup

Could you walk through the fully diluted book value per share calculation with me?

John Weale

Well, there are several moving parts to this. Obviously, there's the basic book value per share, and the dilution primarily comes from the conversion, the asset conversion of our preferred shares. The amount that is convertible is a moving number because it varies depending on our share price over time. So I think at as of March 31, I think the as if conversion was about 8.6 million shares. The maximum is 9 million shares and the minimum is 7.5 or 7.25, I think. But it does move.

And then on top of that is the small amount of dilution that comes from long-term stock awards provided to the employees of the company. But that's a fairly minor piece compared to the impact of the convertibles.

Josh Shanker - Citigroup

And currently you're calculating it as of the quarter end was -

John Weale

The book value per common share?

Josh Shanker - Citigroup

Fully diluted book value.

John Weale

Yeah, 33.26.

Josh Shanker - Citigroup

32326.

Operator

And our next question comes from Ron Bodman - Capital Returns.

Rod Bodman - Capital Returns

Just so I got the number right, its 33.26, is that right?

Jim Bryce

Yes.

Rod Bodman - Capital Returns

Obviously the pace of the buyback picked up in April relative to the first three months. What was behind that sort of change of activity level?

John Weale

Well, we were pretty much precluded from buying back shares until after we'd released earnings, the fourth quarter earnings, which didn't take place until the third week of February. So we only started buying back shares at the very end of February onwards.

Rod Bodman - Capital Returns

And then did you face a period in early April where you also sort of faced a blackout because you were getting ready to release these numbers?

John Weale

No, no. We took steps to allow us during the current year - or during the current quarter - to be able to buy back shares under a 10b5 plan.

Rod Bodman - Capital Returns

And I assume that continues that's just not a one-month vehicle I take it, right?

John Weale

Correct, although, yeah, we have to make sure that all the appropriate documentation is in place whenever we're approaching a blackout period.

Rod Bodman - Capital Returns

I think I've heard the question a couple of times, I don't know, over the last two quarters, maybe three quarters, about - and this is the question of sort of diversification - and I was wondering, candidly, that question, that thought sort of scares me. I sort of view - you guys are specialists and generally sort of top tier performers there, so the thought of sort of going afield is an alarm bell to me. And so I was curious how do you think about diversification, please?

Jim Bryce

I think if you look at the staff, I'm approaching 40 years in the business. I've worked in five different countries. I guess my last 15 years has been property cat but I've got another 20 years experience multi-line, multi-territory, multi-class. We've got in terms of our senior underwriters, I think we've got 120 years plus between the top four employees, so we've got a well-seasoned staff.

We feel the last 15 years in property cat has been very successful run for us. We've had, as I said, nine strong quarters, but we do have management experience and underwriting experience outside of property cat. We've learned from experience which means we've learned from not only our mistakes but other people's mistakes.

I think we've got the depth and back bench of experience to, if we think we can make money and if we think we can get the returns for our shareholders, we can enter other classes of business. One of our underwriters was actually an underwriting member in Lloyd's for quite some time. And as I said, we've got the experience to manage it.

We would naturally have to bring in talent in terms of people that are in touch with the business and have been in touch with the business in recent times because the classes are constantly evolving, developing new policy forms, and also the reinsurance is changing. But we do have the experience.

And I guess when people talk about underwriters; I think you really have to differentiate between well-seasoned, talented underwriters and what I call the counterfeit variety. And the counterfeit variety is quite well spread globally. But high caliber, you're looking at a very small group of people. I think a high percentage of them are here in Bermuda. But underwriters with talent and underwriters with seasoned experience are very difficult to come by.

John Weale

I'd also add that whilst we totally agree with you that our performance has been, we think, pretty good and that we've done very well over the last 15 years, unfortunately, based on the valuation that we're given and also rating agency attitudes is we are not being rewarded for the specialist monoline platform. And clearly in terms of value for our shareholders, the Board quite rightly feels that we need to look to do something potentially that would add value and improve our overall valuation. And that may or may not include diversification.

Jim Bryce

Yes. Only if we think we can make money.

Rod Bodman - Capital Returns

. I would just add that some of those points you made with respect to sort of the current valuation of the stock, the rating agency view that very well may be fleeting or a short-lived circumstance. And I'm sure 40 years of experience or the numbers that you cited surely reflect that sentiment comes and goes and often just an earth-moving event that sort of wakes people up to sort of the wisdom of sticking to your knitting.

Operator

The next question comes from Jay Cohen - Merrill Lynch.

Jay Cohen - Merrill Lynch

I just want to make sure I totally understand the share repurchase in the first quarter. My brain's not working well these days. John, if you could just tell us the number of shares you bought back in the first quarter and the average price, that'd be helpful.

John Weale

Unfortunately, Jay, I don't have that information right to hand. I'm just trying to think off the top of my head what it was. The average price had to be somewhere in the $28 to $28.50 range, I would think.

Operator

Our next question comes from Tom [Licap] - Perry Capital.

Tom Licap - Perry Capital

I also had a quick share count question. What were your shares outstanding at the end of the quarter?

John Weale

55.7 million.

Tom Licap - Perry Capital

And that's outstanding, not the weighted average?

John Weale

That's outstanding.

Tom Licap - Perry Capital

In terms of your last comment about being open to diversification, would you be more biased towards being a buyer or a seller to achieve diversification?

Jim Bryce

We would explore any avenue as long as it enhances shareholder value.

Operator

Next question comes from Chris Neczypor - Goldman Sachs.

Chris Neczypor - Goldman Sachs

You mentioned S&P and their views on the monoline property cat platform, and I guess as you look out over the past year since the downgrade, do you have a view as to how business was lost because of this action or has this basically not been an issue?

John Weale

We are aware that we have only lost one piece of business that was directly related to the downgrade, and that was a piece of - a contract that was where we were reinsuring a subsidiary of a major bank in the U.K. and the bank's policies were very strict on nothing under an A rating. And whilst the reinsurance buyer was actually somewhat disappointed and was trying to change the bank's views for IPC specifically, unfortunately the bank was pretty rigid in their treatment. And that was the one piece of business that we are aware that we lost.

I'm not aware and I don't know if - Jim, are you aware of anything else that we lost because of the downgrade?

Jim Bryce

No, it was just that one insurer affiliated with the bank. And I guess it's ironic because that was right at the same time the bank was trying to expand business relationships with us. So it actually boomeranged and hit them in the back of the head because we obviously took that into account in terms of possibly expanding our relationship with that bank.

Operator

You have another question from Rod Bodman - Capital Returns.

Rod Bodman - Capital Returns

I was just curious to know what other underwriting vehicles you have. I assume that you have at least one; obviously that is the risk bearer for the property cat business. I was curious if you have other entities that would conceivably act as the vehicle to write a new line of business, et cetera, or are you sort of a monoline entity in that regard? Thanks.

Jim Bryce

Well, we actually have two companies.

John Weale

Two [inaudible].

Jim Bryce

Platforms. We have obviously IPCRe here in Bermuda. We also have IPCRe which was established in Dublin back in 1998. We do have business flowing through Dublin. It's a backstop for us in terms of the original reason was really to placate customers in France. There was a question about a European domicile versus Bermuda. That was the reason for establishing the Irish branch, and we actually got business. But the French reversed that posture in terms of Bermuda versus U.K. It makes no difference. Most of our business in France is written in the company here in Bermuda.

But those are our two underwriting platforms. We also have IPC Underwriting Services. That was the company that we had set up back in 2001 to assist our then-affiliate AWAC. When they wanted to get into the reinsurance business, they had five people initially. Now they've got a much larger [inaudible]. They only had five people. They wanted to give them the cat business. We set up the agency. When AWAC got to a size where they could do it on their own, we gave back the [pen]. We're currently still servicing the runoff of that account through IPC Underwriting Services as an agency.

So it's the agency, the company in Ireland and the company here in Bermuda, and obviously the holding company. Those are really the layout of our operations.

Rod Bodman - Capital Returns

And is IPC Bermuda and IPCRe Dublin, are they - I'll call them sort of sisters as opposed to stacked in the corporate structure?

John Weale

No, IPCRe Europe is a subsidiary of IPCRe Limited here in Bermuda.

Operator

We have no further questions.

Jim Bryce

I believe there are no more questions I just want to thank everyone for your time and for your interest in IPC, and we look forward to speaking with you again in our next quarter. Thank you and have a good day.

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