Third Point Reinsurance Ltd. (Third Point Re), Form 10-Q
Filing identity: The supplied filing is for Third Point Reinsurance Ltd., not SiriusPoint Ltd. It covers the quarter and nine months ended September 30, 2018; amounts below are U.S. dollars unless stated otherwise.
Business context and significant structure change
Third Point Re provides global specialty property and casualty reinsurance through Bermuda subsidiaries. Effective August 31, 2018, it moved substantially all investment assets and related liabilities from separately managed accounts into Third Point Enhanced LP (TP Fund), a related-party fund managed by Third Point LLC. The company now holds limited partnership interests rather than directly holding most portfolio assets. TP Fund is not consolidated; Third Point Re reported an 87.8% interest and does not control its investment decisions.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Gross premiums written | $30.1m | $174.5m | $458.2m | $477.5m |
| Net premiums earned | $128.0m | $106.0m | $412.0m | $417.5m |
| Net investment income (loss) | $(3.6)m | $89.0m | $25.4m | $324.8m |
| Net income (loss) attributable to common shareholders | $(13.3)m | $54.7m | $(19.7)m | $233.4m |
| Basic EPS | $(0.14) | $0.54 | $(0.20) | $2.27 |
| Net cash from operating activities | Not separately stated | Not separately stated | $22.3m | $31.8m |
Q3 net premiums earned rose despite much lower written premiums, reflecting a $97.9m change in net unearned premium reserves. For the nine-month period, total revenue was $437.3m versus $742.3m, and the company recorded a $19.7m common-shareholder loss versus $233.4m income a year earlier. Investment returns were a key driver: Third Point LLC-managed investments returned negative 0.2% in Q3 and positive 0.6% for the nine months, versus positive 3.6% and 14.6%, respectively, in 2017. Management attributed Q3 weakness mainly to losses from one merger-arbitrage position, partly offset by equity and credit gains.
Underwriting, balance sheet and liquidity
- Underwriting: Net underwriting loss improved to $6.3m in Q3 from $12.6m; the combined ratio improved to 104.9% from 111.9%, but remained above 100%, indicating an underwriting loss. For nine months, the loss was $17.7m versus $33.3m and the combined ratio was 104.3% versus 108.0%.
- Premium mix and changes: Nine-month gross premiums written fell 4.0%. Specialty premiums increased, while prior-year retroactive contracts and certain non-renewals affected comparisons. The Q3 decline was 82.8%, largely reflecting a $89.2m contract written in Q3 2017 that was not renewed.
- Reserves: Loss and loss adjustment expense reserves were $822.2m at September 30, up from $720.6m at year-end 2017. Nine-month prior-year reserve development was a net $11.1m adverse before related acquisition-cost effects; management cited favorable development in workers’ compensation and other lines, partly offset by adverse Florida homeowners’ water-damage and assignment-of-benefits claims.
- Balance sheet: Total assets were $3.39bn, liabilities $1.88bn, and shareholders’ equity $1.51bn, down from $4.67bn, $2.90bn and $1.66bn, respectively, at December 31, 2017. The investment restructuring materially changed the presentation of assets and liabilities, so balance-sheet comparisons need that context. Basic book value per share was $16.37; diluted book value per share was $15.60.
- Cash and liquidity: Cash and cash equivalents were $49.8m and restricted cash $581.1m. Including restricted investments, cash and restricted assets totaled $875.8m. Nine-month operating cash flow was $22.3m; cash, cash equivalents and restricted cash ended at $630.9m. Management said available cash, operating cash flow and investment income were expected to meet projected needs and debt service for at least the next 12 months, while noting cash generation depends on results and market conditions.
- Debt and facilities: Senior notes had $115.0m principal outstanding, bear 7.0% interest and mature in 2025; the company reported compliance with debt covenants. Letter-of-credit capacity totaled $625m, of which $262.6m was issued. A new $200m unsecured revolving credit/letter-of-credit facility expires July 30, 2019. Subsidiaries’ ability to distribute capital to the holding company is subject to regulatory, contractual and rating-related constraints.
- Capital returns: The company repurchased 9.8m shares for $133.4m during the first nine months, at a weighted-average $13.63 per share. $66.6m remained authorized at September 30.
Outlook, risks and unusual items
Management described reinsurance-market conditions as challenging, with ample capacity, while noting some improvement in pricing and terms for capital-relief business. It was cautiously optimistic about further improvement, aimed to expand selected lines as conditions and capital permitted, and targeted a combined ratio below 100%. It planned to enter new specialty lines and write a modest amount of property-catastrophe business beginning in 2019. These are forward-looking statements, not firm guidance.
The new related-party investment structure is a major change and concentrates investment performance and execution risk with Third Point LLC and TP GP. TP Fund targets leverage factors of 1.5x for liquid investments and 1.0x for illiquid and ABS investments, subject to the agreement’s limits. Third Point Re has limited control over the fund, and management noted it may lack access to underlying-security information used to support NAV valuations. Related-party management and performance fees, potential conflicts, investment volatility, and liquidity of some assets are important considerations.
Other disclosed risks include reserve uncertainty, cyclical mortgage and credit exposures, Florida homeowners’ claim trends, counterparty and broker credit risk, and market, currency, interest-rate and liquidity risks. A 10% decline in equity and equity-linked values was estimated to reduce value by $173.0m; a 100-basis-point rate increase was estimated to reduce net investments by $15.2m. The company reported no material legal proceedings. Disclosure controls were effective; investment restructuring materially affected, or could affect, investment-related internal controls, and controls were modified accordingly.
Key facts investors should verify
- How results evolve under the TP Fund arrangement, including investment returns, leverage, fees and the related-party governance safeguards.
- Whether underwriting results improve to a combined ratio below 100%, and the sustainability of premium volume and mix.
- Reserve development, particularly Florida homeowners’ claims and assignment-of-benefits trends, and adequacy of loss reserves.
- Availability of liquid assets and subsidiary distributions to meet claims, collateral, debt service and other obligations.
- Effects of share repurchases and the investment transition on book value per share, capital adequacy and future earnings volatility.