Business context and reporting period
Third Point Reinsurance Ltd. (NYSE: TPRE), a Bermuda-based property and casualty reinsurer, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted. The company operated one reportable segment: Property and Casualty Reinsurance.
The filing covers the company before its proposed merger with Sirius International Insurance Group. Following the merger, the company planned to change its name to SiriusPoint Ltd.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $263.7m | $200.1m | $503.0m | $722.7m |
| Net premiums earned | $141.7m | $203.2m | $428.8m | $501.8m |
| Net investment income | $122.0m | $(3.1)m | $74.1m | $220.9m |
| Net income (loss) available to common shareholders | $68.7m | $(15.1)m | $9.1m | $170.9m |
| Basic earnings (loss) per share | $0.74 | $(0.16) | $0.10 | $1.86 |
| Net underwriting loss | $(28.1)m | $(5.5)m | $(21.3)m | $(12.9)m |
| Combined ratio | 119.9% | 102.7% | 105.0% | 102.6% |
Q3 revenue and earnings improved principally because of a $110.6m gain from the related-party Third Point Enhanced LP (TP Fund), versus a $5.8m loss a year earlier. Nine-month investment income and earnings fell sharply from 2019, when TP Fund generated $207.6m of income. Investment results are therefore a substantial source of period-to-period volatility.
Gross premiums written were $60.8m in Q3 and $422.5m year to date, down 36% and 15%, respectively, from comparable 2019 periods. Management attributed the declines in part to its underwriting strategy shift and nonrenewal of business that no longer met its criteria. Nine-month net premiums earned fell 15%.
At September 30, 2020, total assets were $3.53bn, total liabilities $2.11bn, and shareholders’ equity $1.43bn. Cash and cash equivalents were $513.8m, with a further $1.10bn restricted; restricted cash and investments are committed to reinsurance collateral or letters of credit. Operating cash flow for the first nine months was $45.3m, down from $96.7m in 2019. Cash, cash equivalents and restricted cash totaled $1.62bn, down $38.5m since year-end 2019.
Senior notes had $115.0m principal outstanding, carried at $114.2m net of deferred costs, bearing 7.0% interest and due in 2025. The company reported compliance with debt covenants. It had $275.2m of letters of credit issued, fully cash-collateralized. Management said it expected cash, operating cash flow and investment income to meet projected operating and debt-service needs for at least 12 months.
Material changes, outlook and risks
- Underwriting and claims: The Q3 combined ratio worsened to 119.9%; the nine-month ratio was 105.0%, both above the 100% underwriting break-even level. Q3 catastrophe losses were $29.6m, including Hurricane Laura and other events. COVID-19-related net losses were $15.6m for Q3 and $35.0m year to date, primarily involving event cancellation, business interruption, casualty and multi-line contracts. Management emphasized that ultimate pandemic claims remain uncertain.
- Reserve development: Nine-month prior-year loss reserves had $30.4m of favorable development, but associated acquisition costs and premium adjustments reduced the net underwriting benefit to $2.6m. By comparison, 2019 had $88.8m of favorable development and a $4.3m net underwriting benefit.
- Investment positioning: The company expanded into corporate and structured credit in 2020, including non-investment-grade asset-backed securities, and used short U.S. Treasury positions to hedge some interest-rate exposure. Management reported positive Q3 investment returns, led by long equities and credit, but warned that market volatility could continue. A 10% decline in equity and equity-linked holdings was estimated to reduce portfolio value by $93.8m.
- Merger and financing: The proposed Sirius merger, announced August 6, had estimated consideration of $788m and was expected to close in Q1 2021, subject to approvals and other conditions. Sirius Series B preference holders agreed to convert into up to $260m face value of new perpetual preference shares carrying an 8% cumulative cash dividend. The company terminated its proposed $125m bridge commitment after that agreement. On November 2, after quarter-end, it entered into a $300m revolving credit facility, available upon merger closing and subject to customary conditions and financial covenants.
- Arcadian: The company consolidated its 49%-owned managing general agent as a variable interest entity and committed up to $18m under an unsecured note bearing 8%; no amount had been drawn at September 30. Arcadian began operations October 1. Management noted execution and reinsurance-placement risks.
- Business outlook: Management saw potential for improved reinsurance pricing as pandemic and catastrophe losses constrain industry capital, but described future COVID-19 losses, economic effects and market opportunities as highly uncertain. It provided no specific numerical earnings or revenue guidance. Management reported no material disruption to operations from remote working.
- Other matters: A shareholder complaint related to the merger had been received; the company said it intended to defend itself. It reported no material legal proceedings and stated disclosure controls were effective.
Most important facts for investors to verify
- Merger closing status, final consideration and financing, including the preference-share terms, potential dilution and the availability and covenants of the $300m facility.
- COVID-19 and catastrophe claim development, reserve adequacy, and whether favorable prior-year reserve development continues to be offset by commissions or other adjustments.
- Whether underwriting results improve: premiums, business mix, loss trends and combined ratio, especially as the company moves toward higher-margin lines.
- TP Fund performance, related-party fees, investment concentration and liquidity, including exposures to non-investment-grade and potentially illiquid securities.
- Arcadian’s ability to build its business, place quota-share reinsurance and earn returns sufficient to justify the company’s capital commitment.