Siriuspoint Ltd quarterly report, Q2 FY2018

Business context and reporting period

This is Third Point Reinsurance Ltd.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing identifies the registrant as Third Point Reinsurance Ltd., a Bermuda-based global specialty property and casualty reinsurer; it does not identify the registrant as Siriuspoint Ltd.

The company reports one operating segment, Property and Casualty Reinsurance. Investment results managed by related party Third Point LLC are a major driver of consolidated earnings.

Financial results and key metrics

Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise stated.

Underwriting loss was $5.1 million in Q2 and $11.4 million for the six months, improving from losses of $12.1 million and $20.8 million, respectively, in the comparable 2017 periods. Combined ratios remained above 100%, indicating underwriting losses before investment results. Q2 loss and acquisition-cost ratios were 59.4% and 40.7%; six-month ratios were 62.2% and 38.4%.

Investment returns managed by Third Point LLC were 1.0% for Q2 and 0.8% for the first half, versus 4.5% and 10.6% in 2017. For the first half, realized investment and derivative gains of $130.5 million were more than offset in reported investment income by $95.5 million of net unrealized losses, alongside lower overall investment performance and related-party fees.

At June 30, 2018, total assets were $4.910 billion, total liabilities $3.306 billion, and total shareholders’ equity $1.597 billion. Common shareholders’ equity was $1.592 billion. Basic and diluted book value per share were $16.31 and $15.63, respectively, compared with $16.33 and $15.65 at year-end 2017.

Cash, cash equivalents and restricted cash totaled $587.4 million, including $17.5 million of unrestricted cash and $570.0 million of restricted cash. Restricted cash and investments securing letters of credit and other reinsurance obligations totaled $880.2 million. The company reported $2.362 billion of unrestricted liquid investment assets, as defined in the filing. Six-month operating cash flow was $13.4 million, investing cash flow was $188.5 million, and financing cash flow was $(163.8) million; cash, cash equivalents and restricted cash increased $38.1 million.

Prime-broker borrowing was $862.8 million; total due to brokers was $926.6 million, including unsettled trades. Senior notes had $115 million principal outstanding, carry a 7.0% coupon, mature in 2025, and were reported at $113.8 million net carrying value. The company said it complied with debt covenants at quarter-end.

Material changes versus comparable periods

• First-half gross premiums written increased 41.3% year over year, driven by new business and contract changes; Q2 premiums fell 68.2%, principally because Q2 2017 included $109.4 million of retroactive-reinsurance premium compared with $4.3 million in Q2 2018.
• Six-month net premiums earned declined 8.9%. Despite higher written premiums, a larger increase in net unearned premium reserves reduced the amount earned in the period.
• First-half common-shareholder results swung from $178.8 million income in 2017 to a $6.4 million loss in 2018, chiefly reflecting the sharp decline in investment income and returns. Q2 remained profitable, but earnings were substantially lower year over year.
• Unrealized losses on investments and derivatives were $95.5 million for the first half, compared with unrealized gains of $128.2 million in the prior-year period.
• The six-month prior-year reserve roll-forward recorded a $9.2 million net increase in incurred losses, including a $17.7 million increase from revised premium-earning estimates and $8.5 million of favorable loss-reserve development. After related acquisition-cost changes, management reported a $3.1 million improvement in prior-period underwriting results.
• The company repurchased 4.3 million shares for $60.4 million in the first half. Total shareholders’ equity declined from $1.661 billion at year-end, primarily due to the common-shareholder loss and repurchases.

Outlook, management commentary, risks and unusual items

Management described reinsurance market capacity as abundant and conditions as challenging, while noting modest improvement in pricing or terms in some lines and expressing cautious optimism. It highlighted the cyclical nature of the market and said it may expand into lines with higher risk where expected margins are considered adequate. No specific earnings or revenue guidance was provided. Management expected available cash, operating cash flow and investment income to meet projected operating, capital and debt-service needs for at least the next 12 months, while noting that this depends on performance and other conditions.

Florida homeowners’ quota-share business had adverse reserve development associated with water-damage claims and increased assignment-of-benefits practices, which management said increased claim frequency and severity. The company also emphasized that investment returns are volatile and that its portfolio includes market, credit, currency and liquidity exposures. A hypothetical 10% decline in equity and equity-linked derivative values would have produced an estimated $190.5 million loss at June 30. All asset-backed securities holdings were private-label and non-investment-grade; the filing cites borrower credit, market and liquidity risks.

Subsequent to quarter-end, the company entered agreements to transfer most investment assets and related liabilities into Third Point Enhanced LP, an investment fund managed by Third Point LLC, beginning August 31, 2018, with substantially all transfers expected by September 30. The new structure targets leverage factors of 1.5x for liquid investments and 1.0x for illiquid and ABS investments. The general partner will control the fund; the company warned that it would have limited control over investment decisions and that there is no assurance returns, fees, liquidity or exposures will match expectations. Management said the overall arrangements were expected to be generally similar, subject to comparable portfolio performance and exposure levels.

Also after quarter-end, the company entered a one-year, $200 million unsecured revolving credit and letter-of-credit facility expiring July 30, 2019. The facility includes a 1.50% annual letter-of-credit fee, a 0.20% commitment fee, financial covenants and rating requirements. At June 30, existing cash-secured letter-of-credit facilities totaled $425 million, of which $240.5 million was utilized.

Other notable items include a $4.6 million performance-fee payable to a related party at quarter-end; a $1.9 million accrual for uncertain tax positions; and $61.7 million of unfunded investment commitments. The company reported no material legal proceedings and no material changes to internal control over financial reporting; disclosure controls were deemed effective.

Most important facts for investors to verify

• Confirm the registrant and reporting period: this filing is for Third Point Reinsurance Ltd. for Q2 2018, not a filing that names Siriuspoint Ltd.
• Review subsequent filings for completion and terms of the Third Point Enhanced LP asset transfer, leverage actually used, performance allocations, fees and withdrawal rights.
• Track investment returns and unrealized marks, including the effect of leverage and the related-party investment-manager arrangements.
• Monitor reserve adequacy, especially Florida homeowners’ losses, assignment-of-benefits trends and changes in premium-earning estimates.
• Assess liquidity and encumbrances: restricted collateral, prime-broker borrowing, letter-of-credit capacity and the new unsecured facility’s covenants and renewal.
• Reconcile share repurchases, book value per share and any continuing dilution from warrants, options and restricted shares.