Third Point Reinsurance Ltd. — Q2 2014 Form 10-Q
Issuer note: The filing is for Third Point Reinsurance Ltd. (NYSE: TPRE), not Siriuspoint Ltd. It covers the quarter and six months ended June 30, 2014; financial amounts below are in U.S. dollars unless noted.
Business context and reporting period
Bermuda-based specialty property and casualty reinsurer, with Property and Casualty Reinsurance and Catastrophe Risk Management segments. Its investment portfolio is managed by Third Point LLC. The results are unaudited; management cautions that six-month results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Gross premiums written | $145.5m | $98.2m | $233.1m | $194.2m |
| Net premiums earned | $78.8m | $62.3m | $152.0m | $95.8m |
| Net investment income | $40.5m | $32.8m | $90.5m | $114.2m |
| Net income | $31.3m | $26.2m | $71.1m | $100.7m |
| Diluted EPS | $0.29 | $0.33 | $0.66 | $1.26 |
| P&C combined ratio | 102.7% | 105.5% | 104.9% | 107.7% |
- Underwriting: P&C generated underwriting losses of $2.1m in Q2 and $7.2m year to date. Combined ratios remained above 100%, meaning underwriting expenses exceeded earned premiums.
- Margins and expenses: Q2 loss ratio was 57.3% and acquisition-cost ratio 38.1%; year-to-date ratios were 60.5% and 36.7%. Higher acquisition costs reflected a different business mix, including the absence of a large, low-acquisition-cost retroactive contract written in 2013.
- Investments: Third Point LLC-managed portfolio return was 2.3% for Q2 and 5.5% year to date, versus 3.2% and 12.2% in 2013. Six-month net investment income declined despite higher average invested assets.
- Balance sheet at June 30: Total assets were $2.590bn; total liabilities $1.047bn; total shareholders’ equity $1.543bn. Cash and cash equivalents were $36.0m and restricted cash $222.1m. Investments in securities and commodities were $1.807bn.
- Debt and liquidity: The balance sheet does not show conventional borrowings. It includes $281.1m due to brokers, $122.0m in deposit liabilities, and $184.6m in loss reserves. Letter-of-credit facilities totaled $300m at quarter-end, of which $128.0m had been drawn; the Citibank facility was increased after quarter-end. Management expected available cash, underwriting cash flows and investment income to meet at least the next 12 months’ requirements.
- Cash flow, six months: Operating activities provided $23.2m, investing activities used $25.3m, and financing activities provided $6.4m. Cash and cash equivalents rose $4.4m to $36.0m.
Material changes versus prior comparable periods
- Q2 net income rose 19.3%, while six-month net income fell 29.4%, chiefly reflecting the lower year-to-date investment return.
- Six-month gross premiums written rose 20.0% and net premiums earned rose 58.6%. Growth reflected new business and increased participations on renewals; premium volumes can be volatile because the company writes some large contracts.
- The year-to-date combined ratio improved to 104.9% from 107.7%, but underwriting remained unprofitable. General and administrative expense ratios improved as earned premiums grew.
- Loss reserves increased to $184.6m from $134.3m at year-end 2013. Management reported $1.1m of net adverse prior-year loss development, primarily related to a crop contract, plus $1.5m of reserve increases associated with premium estimate changes.
- Shareholders’ equity increased to $1.543bn from $1.510bn. Book value per share rose to $14.21 from $13.48 at year-end; diluted book value per share rose to $13.72 from $13.12.
Outlook, commentary, risks and unusual items
- Management described reinsurance markets as challenging due to excess underwriting capacity and pricing pressure, especially in catastrophe reinsurance; it cited average 2014 property-catastrophe renewal price declines of more than 10%. The company expects to limit Catastrophe Fund size until conditions improve.
- Direct catastrophe exposure is principally limited to the company’s $55.4m investment in the Catastrophe Fund, with no additional guarantees or recourse disclosed. The fund’s NAV was $111.4m at quarter-end.
- Key risks include reserve estimation uncertainty, premium-estimate volatility, investment-market and valuation risk, broker/counterparty credit risk, reliance on Third Point LLC and letter-of-credit facilities, and the possibility of an A.M. Best downgrade. A 10% increase in IBNR reserves would reduce total shareholders’ equity by an estimated 0.9%.
- Investments are marked to market; a hypothetical 10% decline in equity and equity-linked holdings would reduce investment value by $133.0m. A 100-basis-point rate increase was estimated to reduce portfolio value by $18.7m.
- Related-party investment management and performance fees were $38.2m for the first half. A $22.0m performance fee payable to a related party was recorded at June 30. These fees are significant to investment results.
- The company recorded $2.4m of income tax expense for the first half, including withholding taxes and a $1.4m provision for uncertain tax positions. No formal litigation or arbitration proceedings were reported; no material changes to previously disclosed risk factors were identified.
- No specific earnings or financial guidance was provided. Management’s forward-looking statements are subject to risks and may differ materially from actual results.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is Third Point Reinsurance Ltd., not Siriuspoint Ltd.
- Track whether underwriting improves to a combined ratio below 100%, and monitor loss reserves and crop-related development.
- Assess investment returns, portfolio exposures, valuation methods and related-party fees, particularly given the year-over-year decline in first-half investment performance.
- Review liquidity and collateral availability, broker balances, letter-of-credit utilization and the effect of the post-quarter Citibank facility increase.
- Evaluate the sustainability and concentration of premium growth, including large contracts, business mix, broker sourcing and catastrophe-market pricing.