Filing identity and reporting period
The supplied filing is Third Point Reinsurance Ltd.’s unaudited Form 10-Q for the three months ended March 31, 2016, not a filing for SiriusPoint Ltd. The company provides specialty property and casualty reinsurance and has its investments managed by Third Point LLC. The quarter’s results are not necessarily indicative of full-year results.
Financial results and position
Unless noted otherwise, amounts below are in U.S. dollars.
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Gross premiums written | $197.2 million | $213.3 million, down 7.6% |
| Net premiums earned | $136.8 million | $139.1 million |
| Net investment income (loss) | $(40.1) million | $64.9 million |
| Net income (loss) | $(51.1) million; $(0.49) per diluted share | $50.5 million; $0.47 per diluted share |
| Operating cash flow | $12.8 million | $118.0 million |
| Shareholders’ equity | $1,347.1 million | $1,395.9 million at Dec. 31, 2015 |
The investment loss was driven chiefly by unrealized losses in the long-equity portfolio; net unrealized losses on investments and derivatives were $54.8 million, partly offset by $23.2 million in realized gains. The managed portfolio returned negative 2.0%, versus positive 3.0% in Q1 2015. Total revenues were $96.7 million, compared with $204.0 million a year earlier.
Property and casualty underwriting produced a $6.6 million loss. The combined ratio was 104.9% (above 100% indicates underwriting expenses exceeded earned premiums), compared with 102.8% a year earlier. The loss ratio was 61.9%; acquisition-cost ratio, 37.8%; and underwriting general and administrative expense ratio, 5.2%. Net loss and loss-adjustment expenses incurred were $84.7 million, and acquisition costs were $51.7 million.
At March 31, total assets were $4.07 billion and total liabilities $2.72 billion. Cash and cash equivalents were $7.7 million; restricted cash was $316.9 million, and restricted cash plus restricted investments totaled $714.9 million. The company reported $1.44 billion of unrestricted liquid investment assets, as it defines them. Senior notes had $115 million principal outstanding, carried a 7.0% coupon and mature in 2025; their net carrying value was $113.4 million. The company was in compliance with debt covenants. Due to brokers was $960.7 million, including $857.7 million of prime-broker borrowings; repurchase-agreement liabilities were $170.3 million.
Cash declined $12.7 million during the quarter, to $7.7 million. Investing activities used $27.7 million and financing activities provided $2.2 million. Management said cash, operating cash flows and investment income were expected to meet projected requirements and debt service for at least the next 12 months, while noting that additional financing might be needed if those sources prove insufficient.
Material changes and management commentary
- Net loss shifted from prior-year profit, principally because investment results swung from a gain to a loss. Corporate investment loss was $31.8 million, versus income of $46.3 million a year earlier.
- Gross written premiums fell 7.6%. Management cited non-renewals, contracts without comparable renewals, and fewer prior-period premium estimate increases, partly offset by $36.4 million of new specialty business. Specialty represented 94.3% of Q1 2016 gross premiums written.
- Management reported deteriorating market conditions, abundant underwriting capacity and pricing pressure, particularly in property catastrophe reinsurance. It expects to remain selective, which may slow premium growth; no numerical earnings or premium guidance was provided.
- Four contracts each contributed more than 10% of gross premiums written, together accounting for 88.8%. The largest contract represented 48.0%; the largest broker sourced 65.0%.
- Prior-year reserve development was $0.1 million favorable, but a $5.0 million reserve increase tied to higher premium estimates was also recorded. Management said the combined effect of reserve and premium-estimate changes reduced prior-period net underwriting loss by $0.7 million.
- The Catastrophe Fund and Catastrophe Reinsurer were dissolved in February 2016 following redemption of their investments. A new share repurchase program for up to $100 million was authorized May 4, after quarter-end; timing and actual repurchases are discretionary.
Risks, contingencies and unusual items
- Investment returns are volatile. The portfolio included $429.9 million of asset-backed securities, all private-label and non-investment-grade; management identifies credit, market and liquidity risks in these holdings. Fair values for some securities rely on broker quotes or estimates, and actual sale values may differ.
- Prime-broker borrowing, short positions, repurchase agreements and derivatives create financing, collateral, market and counterparty exposures. The maximum payout associated with written put options was approximately $472.3 million; this is a disclosed maximum, not a forecast of loss.
- Liquidity is affected by collateral requirements: $714.9 million of restricted cash and investments secured letters of credit and reinsurance obligations. Letter-of-credit facilities totaled $500 million, with $263.7 million utilized and fully collateralized.
- Insurer dividend capacity is subject to Bermuda regulatory and contractual limits. The filing estimated potential dividends upstream of approximately $243.9 million from Third Point Re and $12.1 million from Third Point Re USA, subject to applicable restrictions and capital requirements.
- There were no material legal proceedings reported and no material changes to previously disclosed risk factors. The filing identifies possible reserve-estimation shortfalls, market volatility, loss of letter-of-credit or borrowing capacity, ratings changes, and dependence on Third Point LLC among its risks.
- The company accrued $1.6 million for uncertain tax positions and reported $9.8 million in net deferred tax assets. Management identified premium recognition, loss reserves and investment fair values as areas requiring significant estimates.
Important facts for investors to verify
- Confirm the intended issuer: the filing supplied is Third Point Reinsurance Ltd. (ticker TPRE), not SiriusPoint Ltd.
- Review subsequent investment returns and whether the Q1 unrealized investment losses persisted or reversed.
- Track underwriting profitability, renewal pricing, premium concentration and the effect of management’s selective underwriting strategy.
- Assess reserve development and changes in premium estimates, including the company’s sensitivity to actuarial assumptions.
- Monitor broker borrowings, collateral and restricted assets, letter-of-credit availability, and regulatory capacity to upstream dividends.
- Verify whether the authorized $100 million repurchase program was implemented and how any purchases affected capital and liquidity.