Business context and reporting period
Third Point Reinsurance Ltd. (NYSE: TPRE), a Bermuda-based specialty property and casualty reinsurer, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The filing describes one operating segment: Property and Casualty Reinsurance. The request identifies Siriuspoint Ltd., but the filing itself is for Third Point Reinsurance Ltd.; investors should verify the intended issuer.
Key financial results
Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net premiums earned | $203.2 | $128.0 | $501.8 | $412.0 |
| Total revenues | $200.1 | $124.4 | $722.7 | $437.3 |
| Net income (loss) attributable to common shareholders | $(15.1) | $(13.3) | $170.9 | $(19.7) |
| Basic earnings (loss) per share | $(0.16) | $(0.14) | $1.86 | $(0.20) |
| Net underwriting income (loss) | $(5.5) | $(6.3) | $(12.9) | $(17.7) |
| Combined ratio | 102.7% | 104.9% | 102.6% | 104.3% |
| Net investment income (loss) | $(3.1) | $(3.6) | $220.9 | $25.4 |
At September 30, 2019, total assets were $3,438.7 million, total liabilities $2,055.2 million, and shareholders’ equity $1,383.6 million. Cash and cash equivalents were $693.1 million; restricted cash was $816.5 million. Cash, cash equivalents and restricted cash totaled $1,509.6 million, while restricted investments were a further $220.0 million. Operating cash flow for the nine months was $96.7 million, compared with $22.3 million in 2018.
Senior notes had $115.0 million principal outstanding, carried at $114.0 million net of deferred costs, bearing 7.0% interest and due February 2025. The company reported compliance with debt covenants. Shareholders’ equity increased from $1,204.6 million at December 31, 2018, primarily due to nine-month net income.
Material changes versus prior periods
- Nine-month net income improved to $170.9 million from a $19.7 million loss. The principal driver was $207.6 million of income from the related-party investment fund; the company reported a 10.2% net investment return on assets managed by Third Point LLC for the period. The third quarter itself remained loss-making, with a 0.2% investment return.
- Nine-month gross premiums written increased 8.6% to $497.6 million. Q3 premiums rose to $95.4 million from $30.1 million, including $58.7 million from a retroactive reinsurance contract. Premiums can vary substantially because of large, customized and retroactive contracts.
- Underwriting losses narrowed, but combined ratios remained above 100%, indicating underwriting expenses exceeded earned premiums. Nine-month ratio improvement reflected a lower loss ratio, partly offset by a higher acquisition-cost ratio.
- Net favorable prior-year reserve development was $88.8 million for the nine months, but was largely offset by $84.5 million of increased acquisition costs, principally profit commissions on a retroactive contract. Net underwriting improvement from reserve development and premium-estimate changes was $3.8 million.
- The company redeemed $760.0 million from the investment fund and reallocated $750.0 million to cash and short-term, highly liquid fixed-income assets during 2019. Its fund investment fell to $818.6 million from $1,284.0 million at year-end 2018.
Outlook, risks and unusual items
- Management expected improved reinsurance pricing and terms to continue through at least the January 2020 renewals. It aimed to bring the combined ratio below 100% in 2020, subject to catastrophe losses, and planned to expand property catastrophe and specialty underwriting.
- Management said the higher-risk underwriting mix prompted a shift toward liquid fixed-income assets and greater liquidity. It cautioned that the change in investment mix could reduce future investment returns, while aiming for a more balanced and less volatile contribution from underwriting and investments.
- Q3 and nine-month 2019 catastrophe losses were $12.7 million, net of reinstatement premiums and profit commission adjustments, from Hurricane Dorian and Typhoon Faxai. Management noted casualty loss trends may be accelerating, although observed portfolio trends were within pricing and reserving expectations.
- Loss reserves were $1,060.0 million, including $927.0 million of incurred-but-not-reported reserves. Reserve estimates, premium earnings estimates and contract profit commissions involve significant judgment. The related-party fund is managed by Third Point LLC; the company does not control its investment decisions and often cannot independently corroborate underlying security valuations.
- The $200 million unsecured revolving credit and letter-of-credit facility expired July 30, 2019 and was not renewed. At quarter-end, $228.1 million of letters of credit were issued and fully collateralized; restricted cash and investments support reinsurance and credit obligations. Management said existing facilities and available trust collateral were adequate for obligations.
- Other stated risks include catastrophe and reserve volatility, investment-market and liquidity exposure, counterparties and brokers, access to letters of credit and capital, and potential U.S. tax treatment as a passive foreign investment company (PFIC). No material litigation was reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm issuer identity: this is a Third Point Reinsurance Ltd. filing, not a filing bearing the Siriuspoint Ltd. name.
- Assess how much nine-month earnings depended on investment-fund gains and whether those returns are repeatable; distinguish the profitable nine-month period from the Q3 net loss.
- Review reserve adequacy and the durability of favorable development, particularly the retroactive contract and its offsetting profit commissions.
- Track underwriting profitability: the combined ratio was still above 100%, and the 2020 target was expressly subject to catastrophe events.
- Evaluate liquidity and collateral availability, including restricted balances, the non-renewed unsecured facility and the timing of potential claims.
- Consider related-party investment management, limited visibility into fund holdings and valuations, and the disclosed PFIC tax uncertainty.