Third Point Reinsurance Ltd. (pre-merger SiriusPoint) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. The filing is by Third Point Reinsurance Ltd., which expected to be renamed SiriusPoint Ltd. upon closing its announced merger with Sirius International Insurance Group.
Business context
Bermuda-based property and casualty reinsurer with one reported operating segment. Its strategy was shifting toward higher-margin, higher-risk property, casualty and specialty business, alongside an actively managed investment portfolio. It reported $3.7 billion in assets and $1.6 billion in common shareholders’ equity at year-end.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Gross premiums written | $588.0 million | $631.8 million |
| Net premiums earned | $610.9 million | $700.1 million |
| Net underwriting loss | $63.2 million | $22.3 million |
| Combined ratio | 110.3% | 103.2% |
| Net investment income | $278.9 million | $282.6 million |
| Net income available to common shareholders | $143.5 million | $200.6 million |
| Basic / diluted earnings per share | $1.54 / $1.53 | $2.18 / $2.16 |
| Net cash from operating activities | $73.4 million | $141.1 million |
- Annual investment return on assets managed by Third Point LLC was 10.6%, versus 12.8% in 2019. Net investment income remained broadly stable, but lower TP Fund income was largely offset by higher income from collateral and other investments.
- Book value per share increased: basic to $16.88 from $15.37 and diluted to $16.42 from $15.04. Return on beginning common shareholders’ equity fell to 10.1% from 16.7%.
- Year-end total assets were $3.726 billion; total liabilities were $2.160 billion; total shareholders’ equity was $1.565 billion. Cash, cash equivalents and restricted cash totaled $1.714 billion, including substantial amounts pledged or held in trust.
- Operating cash flow declined to $73.4 million. Investing activities provided $6.1 million, compared with $786.9 million in 2019, which included substantial net redemptions from TP Fund. Financing activities used $19.5 million.
- Debt included $115 million face value of 7.0% senior notes due 2025 ($114.3 million net carrying value). The company reported compliance with debt covenants. Letters of credit issued totaled $303.4 million; $968.3 million of restricted cash and investments were held in trust to secure reinsurance obligations.
Material changes and unusual items
- Gross premiums written declined 6.9%, while the mix changed: casualty rose to 35.4% of premiums from 24.0%, property to 29.3% from 22.8%, and specialty fell to 30.4% from 39.3%. The company cited nonrenewal of business that no longer fit its strategy, partly offset by $182.7 million of new premium.
- The combined ratio worsened to 110.3%, reflecting a higher loss ratio (76.2% versus 57.6%) despite a lower acquisition-cost ratio (30.6% versus 42.2%). Underwriting remained loss-making.
- FY2020 underwriting results included $46.7 million of net COVID-19 losses and $36.6 million of net catastrophe losses. The filing also reported $15.0 million of net adverse prior-year reserve development, particularly in general liability and multi-line business; 2019 had $98.5 million of favorable reserve development.
- For the fourth quarter, net income available to common shareholders was $134.4 million, compared with $29.7 million in Q4 2019. Q4 net investment income was $204.8 million versus $61.6 million, while net premiums earned were $182.0 million versus $198.4 million. The quarter’s profit was therefore strongly investment-driven.
- The company invested approximately $220 million in opportunistic credit during Q1 amid pandemic-driven market dislocations, later selling many investment-grade positions after recovery. The year-end opportunistic credit portfolio was $48.1 million. Investment assets managed by Third Point LLC totaled $2.878 billion, up from $2.590 billion.
- Corporate expenses rose to $39.8 million from $30.4 million, primarily due to $16.7 million in merger-related professional and regulatory fees. Total management and performance fees to related parties were $79.8 million, versus $19.6 million in 2019; the filing describes revised performance-fee treatment for certain fixed-income and other investments.
Outlook, merger and principal risks
- Management expected pandemic-related claims uncertainty, low interest rates, market volatility and economic conditions to continue affecting the reinsurance industry. It saw improving pricing and terms across many lines but emphasized that the ultimate COVID-19 impact remained uncertain.
- The merger agreement valued total consideration at approximately $788 million at announcement. Required regulatory approvals had been received, and closing was expected February 26, 2021. The company anticipated a broader global platform and four post-merger operating segments; it also expected to outsource most fixed-income investments to third-party managers while retaining a strategic investment relationship with Third Point LLC.
- Merger financing and capital commitments are material: Sirius Series B holders agreed to receive up to $260 million face value of new perpetual preference shares carrying an 8% cumulative cash dividend, subject to cash substitution options. A $300 million revolving facility would become available upon merger closing. The filing warns of integration, execution, dilution, capital and cost risks; realized synergies and accretion were not assured.
- AM Best affirmed the subsidiaries’ A- rating in June 2020, then placed the ratings under review with developing implications after the merger announcement. A rating downgrade could affect business, collateral needs and liquidity.
- Loss reserves are a major estimation risk: reserves were $1.310 billion, including $1.043 billion of IBNR. The filing’s sensitivity analysis estimated that a 10% increase in subject ultimate losses would increase net underwriting loss by $148.6 million and reduce shareholders’ equity by 9.5% (before related investment-income effects).
- Other key exposures include catastrophe losses, casualty social inflation, investment volatility and illiquidity, concentrated broker distribution, collateral requirements, counterparty risk, and constraints on dividends from regulated subsidiaries. The company said it did not expect to pay common dividends for the foreseeable future.
Most important facts for investors to verify
- Merger completion, final consideration and preference-share terms, and the actual integration costs, capital needs and benefits.
- Whether COVID-19 claims and casualty/social-inflation trends develop beyond booked estimates; monitor reserve development and the large IBNR balance.
- Whether underwriting turns profitable as the portfolio mix shifts; FY2020’s 110.3% combined ratio indicates underwriting losses before investment income.
- Investment performance, related-party fee arrangements, and liquidity of assets available to meet claims and collateral demands.
- Post-merger rating outcomes, subsidiary capital and dividend capacity, and use of the $300 million revolving facility.
Audit note: Ernst & Young issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting.