Business context and reporting period
Third Point Reinsurance Ltd. (the registrant named in the filing) is a Bermuda-based provider of global specialty property and casualty reinsurance. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, with comparisons to 2016. The filing describes one operating segment: Property and Casualty Reinsurance. The request metadata names Siriuspoint Ltd.; that does not match the registrant identified in this filing and should be verified.
Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross premiums written | $174.5 million | $142.6 million | $477.5 million | $536.6 million |
| Net premiums earned | $106.0 million | $128.2 million | $417.5 million | $398.1 million |
| Net investment income | $89.0 million | $88.4 million | $324.8 million | $134.6 million |
| Net income available to common shareholders | $54.7 million | $72.1 million | $233.4 million | $74.3 million |
| Diluted earnings per share | $0.52 | $0.68 | $2.22 | $0.70 |
| Combined ratio | 111.9% | 106.5% | 108.0% | 110.2% |
| Net underwriting loss | $12.6 million | $8.3 million | $33.3 million | $40.5 million |
| Investment return managed by Third Point LLC, net of fees | 3.6% | 4.0% | 14.6% | 6.0% |
At September 30, 2017, total assets were $4.37 billion, total liabilities $2.73 billion, and total shareholders’ equity $1.62 billion. Common-shareholder equity was $1.61 billion. Book value per share was $15.90 and diluted book value per share was $15.24.
Cash and cash equivalents were $6.4 million, while restricted cash was $477.4 million. Restricted cash and investments together were $805.4 million. The company reported $1.95 billion of unrestricted liquid investment assets, as defined in the filing. Prime-broker borrowing was $580.1 million; total amounts due to brokers were $602.2 million. The company had $115.0 million of senior notes outstanding, carried net of deferred costs at $113.7 million, bearing 7.0% interest and due in 2025.
For the first nine months, operating cash flow was $31.8 million, investing cash flow was $14.4 million, and financing cash flow was negative $49.8 million. Cash declined by $3.5 million to $6.4 million. Management said it expected cash, operating cash flows, and investment income to meet projected requirements and debt service for at least the next 12 months, while noting that future financing might be needed if those sources prove insufficient.
Material changes versus comparable periods
- Nine-month net income rose to $233.4 million from $74.3 million, principally reflecting higher investment gains: net investment income increased to $324.8 million from $134.6 million. The investment return managed by Third Point LLC was 14.6%, versus 6.0%.
- Third-quarter net income fell to $54.7 million from $72.1 million despite slightly higher net investment income, with lower earned premiums, a weaker underwriting result, and foreign-exchange losses among the factors.
- Nine-month gross premiums written declined 11.0% year over year, while net premiums earned increased 4.9%, partly because $85.6 million of retroactive reinsurance premium was recognized and fully earned when written.
- The nine-month combined ratio improved to 108.0% from 110.2%, but remained above 100%, indicating an underwriting loss before investment income. The Q3 ratio worsened to 111.9% from 106.5%.
- Prior-year reserve development was favorable by $31.7 million for the first nine months of 2017, primarily from retroactive reinsurance contracts; profit commissions largely offset its underwriting benefit. The comparable 2016 period had $15.0 million of adverse development.
- Shareholders’ equity increased from $1.45 billion at year-end 2016, primarily due to earnings, partly offset by $40.9 million of share repurchases. The company repurchased 3.3 million shares at a weighted average $12.38 per share during the nine-month period; $51.7 million remained authorized under the program.
Outlook, commentary, risks and unusual items
- Management described reinsurance markets as historically cyclical and, for recent years, highly competitive with excess capacity and pricing pressure. It planned to remain selective, which could constrain premium growth; it also said 2017 premiums could decline further.
- Management cited significant 2017 catastrophe losses, including Hurricanes Harvey, Irma and Maria and two Mexican earthquakes. Industry estimates referenced in the filing put insured catastrophe losses for 2017 above $100 billion. The company reported $5.3 million of net underwriting losses from third-quarter catastrophes and characterized its own losses as modest. It expected potentially greater demand for reinsurance but said the effect on capacity and market conditions was uncertain.
- Investment performance is a major earnings driver, and management explicitly expects investment returns and consolidated net income to be volatile. The portfolio is actively managed and includes long and short positions, derivatives, and non-investment-grade assets. A 10% decline in equity and equity-linked positions was estimated to reduce portfolio value by $172.5 million.
- Other notable exposures include $405.8 million of securities sold short, $75.8 million of derivative assets, and $17.3 million of derivative liabilities. Written put options had a maximum payout amount of approximately $346.9 million, subject to possible offset from assets received on settlement. The filing warns of market, counterparty, valuation, and liquidity risks, particularly for non-investment-grade asset-backed securities and private investments.
- Senior notes were in covenant compliance. Letter-of-credit facilities totaled $425 million, with $209.5 million utilized and fully collateralized; a $50 million facility was not renewed in August 2017. Access to prime-broker borrowing helps fund collateral requirements, and a reduction could constrain reinsurance activity or float.
- The filing discusses potential U.S. tax exposure, including uncertainty over U.S. trade-or-business status, PFIC and CFC rules, and proposed 2017 U.S. tax legislation. The company says outcomes could materially affect operations, financial condition, or U.S. shareholders’ tax treatment; the legislative proposals were not final.
- The company reclassified certain related-party noncontrolling interests as redeemable, including $31.2 million at December 31, 2016. It said the presentation error did not affect common-shareholder equity, retained earnings, income, EPS, or cash flows and was not material to prior filings.
- No material legal proceedings were reported. Management concluded disclosure controls were effective at September 30, 2017, with no material change in internal control over financial reporting during the quarter. No numeric earnings or premium guidance was provided.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Third Point Reinsurance Ltd., not Siriuspoint Ltd., and confirm the intended reporting period.
- Assess how sustainable investment-driven earnings are, including portfolio concentration, leverage, short positions, derivatives, and the sensitivity of results to market moves.
- Review reserve adequacy and the extent to which favorable prior-year development on retroactive contracts was offset by profit commissions; monitor catastrophe claims and future development.
- Evaluate the persistent underwriting losses and combined ratios above 100%, alongside management’s selective underwriting approach and uncertain premium growth.
- Check liquidity and collateral constraints: low unrestricted cash, restricted assets, prime-broker borrowing, letter-of-credit availability, and the timing of reinsurance claim payments.
- Monitor U.S. tax developments and the company’s exposure under PFIC, CFC, and U.S. trade-or-business rules, as well as the valuation and liquidity of non-investment-grade and Level 3 assets.