Third Point Reinsurance Ltd. — FY 2016 Form 10-K
Filing identity: The supplied filing is for Third Point Reinsurance Ltd. (NYSE: TPRE), not SiriusPoint Ltd. It covers the fiscal year ended December 31, 2016; the filing also reports unaudited fourth-quarter results.
Business context and reporting period
Bermuda-based holding company providing specialty property and casualty reinsurance through its subsidiaries. Its strategy combines selective underwriting, focused largely on quota-share and customized contracts, with an actively managed investment portfolio run by Third Point LLC. The Catastrophe Fund and Catastrophe Reinsurer were dissolved in February 2016; the company reports one operating segment, Property and Casualty Reinsurance, plus a corporate function.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Gross premiums written | $617.4 million | $702.4 million |
| Net premiums earned | $590.2 million | $602.8 million |
| Net investment income (loss) | $98.8 million | $(28.1) million |
| Net income (loss) | $27.6 million; $0.26 per diluted share | $(87.4) million; $(0.84) per diluted share |
| Net underwriting loss | $(50.1) million | $(28.3) million |
| Combined ratio | 108.5% | 104.7% |
| Net investment return, Third Point LLC-managed portfolio | 4.2% | (1.6)% |
| Operating cash flow | $4.8 million | $187.8 million |
Net income recovered from the prior-year loss, mainly as investment performance returned to positive territory. The investment portfolio’s 4.2% return nevertheless trailed the S&P 500’s 12.0% return. Underwriting remained loss-making: the combined ratio exceeded 100%, and acquisition costs rose to 37.6% of earned premiums from 31.7%, despite a lower loss ratio.
At year-end, total assets were $3.90 billion, total liabilities $2.45 billion, and total shareholders’ equity $1.45 billion. Investments in securities were $2.65 billion; cash and cash equivalents were $10.0 million. The company reported $1.45 billion of unrestricted liquid investment assets and $726.2 million of restricted cash and investments. The balance sheet included $115.0 million principal of 7.0% senior notes due 2025, shown net of deferred costs at $113.6 million, and $899.6 million due to brokers, including $855.6 million of prime-broker borrowings.
Letters of credit totaled $231.8 million issued against $525.0 million of facilities. Operating cash flow fell substantially, which management attributed mainly to lower float generation and the absence of retroactive reinsurance contracts in 2016. The filing does not provide a clear standalone Q4 operating cash flow value.
Material changes and fourth-quarter results
- Gross premiums written declined 12.1% year over year. Management cited non-renewals, including contracts not renewed because of pricing or terms, partly offset by $111.4 million of new business and upward premium-estimate revisions.
- Specialty increased to 49.6% of gross premiums from 37.2%; casualty fell to 34.5% from 46.6%. No retroactive premium was written in 2016, versus $108.1 million in 2015.
- Net adverse prior-year reserve development was $10.5 million in 2016, versus $5.4 million favorable in 2015. Identified pressure included auto, Florida homeowners’ water-damage claims and workers’ compensation.
- Fourth-quarter net loss was $46.7 million, or $0.45 per diluted share, compared with net income of $42.2 million, or $0.39 per diluted share, in Q4 2015. Q4 2016 net investment loss was $35.8 million; net premiums earned were $192.1 million.
- Shareholders’ equity increased to $1.45 billion from $1.40 billion; diluted book value per share rose 2.4% to $13.16. The company repurchased 644,768 shares for $7.4 million during 2016, with $92.6 million remaining under the authorization.
Outlook, commentary, risks, and unusual items
Management described market conditions as challenging and deteriorating, with abundant reinsurance capacity and increasing competition. It planned to remain selective, prioritizing underwriting quality over premium growth, and said 2017 premiums could decline further. Management cited opportunities in customized solutions and U.S. mortgage-related reinsurance, while noting that traditional reinsurers were pursuing its target lines more aggressively.
- Investment and leverage risk: Portfolio strategy includes long and short positions, derivatives, and non-investment-grade asset-backed securities. A 10% fall in equity and equity-linked positions was estimated to reduce investment value by $152.0 million. Short positions can have theoretically unlimited loss potential; reported gross exposure was 137% of portfolio NAV.
- Reserving and underwriting uncertainty: A 10% increase in estimated ultimate losses would reduce shareholders’ equity by an estimated 5.7%, after contractual commission offsets. Reserve estimates rely on cedent data and actuarial assumptions.
- Liquidity and collateral: Collateral requirements, access to letters of credit and prime-broker borrowing, and the liquidity of some investments could constrain underwriting or require asset sales. The company reported $855.6 million of prime-broker borrowing at year-end.
- Debt and capital constraints: The 7.0% notes are guaranteed by the parent; insurer dividends are restricted by Bermuda solvency, liquidity, and capital rules. Third Point Re USA must maintain at least $250 million of capital under a net-worth maintenance agreement.
- Manager dependence and fees: Third Point LLC’s renewed investment agreements run through December 2021, with a management fee reduced from 2.0% to 1.5% effective December 22, 2016, and 20% performance compensation subject to loss recovery provisions.
- Other items: The company requested full redemption of its $27.7 million Kiskadee Fund investment, with distributions expected in 2017 and 2018. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. No material litigation was reported. A CEO transition was announced for March 1, 2017.
Important facts for investors to verify
- Whether underwriting pricing, acquisition costs, and reserve development improve, especially in auto, homeowners’, and workers’ compensation exposures.
- How much of investment gains and book-value growth is repeatable, given 2016’s recovery from a negative 2015 return and substantial portfolio leverage.
- Current prime-broker borrowing, collateral needs, available letter-of-credit capacity, and liquidity under stressed claims or market conditions.
- Actual 2017 premium trends and the effect of management’s selective underwriting stance on earned premiums and float.
- Regulatory capital headroom, dividend capacity, and the parent’s ability to meet obligations under its guarantee of the senior notes.
- Whether the announced leadership change and investment-manager relationship affect underwriting execution, investment results, or governance.