Third Point Reinsurance Ltd. (to be renamed SiriusPoint Ltd. following merger) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company is a Bermuda-based property and casualty reinsurer; substantially all investments were managed by Third Point LLC. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net premiums earned | $140.8m | $145.5m | $287.1m | $298.5m |
| Total revenues | $278.0m | $214.6m | $239.3m | $522.6m |
| Net investment income (loss) | $137.2m | $69.1m | $(47.8)m | $224.1m |
| Net income (loss) | $124.0m | $53.1m | $(59.6)m | $186.0m |
| Basic EPS | $1.33 | $0.58 | $(0.65) | $2.02 |
| Net underwriting income (loss) | $2.4m | $(1.7)m | $6.8m | $(7.4)m |
| Combined ratio | 98.3% | 101.1% | 97.6% | 102.5% |
| Net cash provided by operating activities | Not presented quarterly | $30.4m | $97.8m |
Financial position and liquidity
- At June 30, total assets were $3.49bn, total liabilities $2.14bn and shareholders’ equity $1.36bn, compared with $3.44bn, $2.03bn and $1.41bn, respectively, at December 31, 2019.
- Cash and cash equivalents were $584.8m; restricted cash was $887.3m. Cash, cash equivalents and restricted cash totaled $1.47bn, down from $1.65bn at year-end. Management reported $756.4m of unrestricted, liquid investment assets.
- Operating cash flow was $30.4m; investing cash outflow was $206.8m and financing cash outflow was $5.5m. The company attributed lower operating cash flow year over year primarily to lower net reinsurance receipts and investing outflows primarily to purchases of fixed-income investments.
- Senior notes had $115.0m principal outstanding, bear 7.0% interest and mature February 2025; carrying value net of deferred costs was $114.2m. The company reported compliance with debt covenants. It also had $262.2m of issued, cash-collateralized letters of credit.
Changes and operating performance
- Q2 net income increased year over year, driven mainly by higher investment income, including $98.6m from the related-party investment fund. The fund’s strong Q2 return followed a first-half loss: the company reported a 14.9% Q2 return for TP Fund but a negative 11.9% six-month return.
- For the first half, the investment portfolio’s net return was negative 1.9%, versus positive 10.3% in 2019. The resulting $47.8m net investment loss was the principal driver of the six-month net loss.
- Gross premiums written rose 90.7% in Q2 to $157.6m, but declined 10.1% for the first half to $361.7m. Management cited new business and premium estimate increases in Q2; the six-month comparison reflected nonrenewal of prior-year contracts as underwriting strategy shifted. Net premiums earned declined in both periods.
- Underwriting improved: Q2 combined ratio fell to 98.3% from 101.1%; the first-half ratio improved to 97.6% from 102.5%. Lower acquisition-cost ratios helped, while the Q2 loss ratio rose to 63.3% from 56.6%.
Outlook, risks and unusual items
- The company recognized net COVID-19-related losses, net of additional premiums, of $9.9m in Q2 and $19.4m in the first half. These were primarily associated with event cancellation and certain casualty and multiline contracts. Management stressed that ultimate claims remain uncertain and estimates reflect information available at June 30.
- Management expected pandemic-related industry losses and reduced capacity could support stronger reinsurance pricing, but described the effects on existing and future business as highly uncertain. It reported no material operational disruption from remote work and said COVID-19 had not impaired liquidity or regulatory capital requirements to date.
- Management continued to reorient underwriting toward higher-expected-margin property and specialty business and expected underwriting to contribute more to returns over time. No specific earnings or revenue guidance was provided. It anticipated continued investment-market volatility.
- Investment risks include market volatility, non-investment-grade and potentially illiquid asset-backed securities, counterparty and credit risk, and reliance on Third Point LLC and the related-party fund. The company disclosed $428.1m of non-investment-grade investments and said asset-backed securities represented 17.2% of managed net investments.
- On August 6, 2020, after quarter-end, the company agreed to acquire Sirius International Insurance Group. Estimated consideration was $788m; closing, subject to customary conditions and regulatory approvals, was expected in Q1 2021. Related financing included a $125m committed bridge facility and an approximately $50m equity commitment. The company warned of completion, integration, financing, dilution and synergy risks.
- There were no material legal proceedings reported. Management said disclosure controls were effective and there were no material changes to internal control over financial reporting.
Most important facts for investors to verify
- How COVID-19 claims develop beyond the $19.4m first-half estimate, including potential reserve strengthening and effects on cedents’ premium volumes.
- Whether investment returns recover, and the valuation, credit quality and liquidity of the fund and expanded structured-credit portfolio.
- The adequacy of loss reserves: first-half prior-year development was net favorable by $10.1m, while reserve and premium estimates remain judgment-dependent.
- Merger approvals, final consideration and financing, closing timing, dilution, integration risks and expected benefits.
- Liquidity available for claims and collateral needs, given restricted cash, letter-of-credit collateral and limits on subsidiary distributions.