Filing summary
Entity and period: The supplied filing is Third Point Reinsurance Ltd.’s Form 10-Q for the quarter ended September 30, 2013—not a filing by SiriusPoint Ltd. The company was a Bermuda-based specialty property and casualty reinsurer, with investment management by Third Point LLC. Results are unaudited; nine-month results are not necessarily indicative of full-year results.
Financial performance
Amounts below are in U.S. dollars; millions unless stated otherwise.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net premiums earned | $66.3 | $34.3 | $162.2 | $63.0 |
| Net investment income | $53.4 | $47.7 | $166.1 | $63.9 |
| Total revenue | $119.7 | $82.0 | $328.3 | $126.9 |
| Net income | $46.6 | $39.6 | $147.2 | $38.7 |
| Diluted EPS | $0.46 | $0.45 | $1.59 | $0.44 |
| P&C reinsurance combined ratio | 107.9% | 117.0% | 107.7% | 131.3% |
- Underwriting: P&C generated underwriting losses of $4.9 million in Q3 and $12.1 million year to date. Combined ratios above 100% mean underwriting expenses and claims exceeded earned premiums. The catastrophe risk management segment reported net income of $2.7 million for Q3 and $2.6 million year to date.
- Investment contribution: Third Point LLC-managed investments returned 4.3% in Q3 and 16.9% year to date, versus 6.1% and 8.4% in the comparable 2012 periods. The strong year-to-date earnings increase was chiefly investment-driven, alongside improved underwriting results. Q3 investment return was lower year over year.
- Balance sheet at September 30: Assets were $2.00 billion, liabilities $635.1 million and shareholders’ equity $1.36 billion. Investments in securities and commodities were $1.09 billion. Cash and cash equivalents were $18.7 million, with restricted cash of $159.3 million; due from brokers was $418.2 million.
- Cash flow and funding: Nine-month operating cash flow was $58.2 million, investing cash flow was negative $430.4 million and financing cash flow was positive $356.8 million. Cash declined $15.3 million to $18.7 million. The August IPO raised approximately $286 million net for the company. No funded borrowings are separately reported; liabilities include $119.0 million of deposit liabilities. Letter-of-credit facilities totaled $300 million, of which $63.5 million was drawn.
- Margins and capital: Book value per share was $12.68 and diluted book value per share $12.35, up 14.5% and 13.4%, respectively, from December 31, 2012. Acquisition costs and underwriting expenses remain material: the year-to-date P&C combined ratio was 107.7%.
Material changes and notable items
- Gross premiums written rose 47.5% year over year to $239.7 million for the first nine months, while net premiums earned increased to $162.2 million. Business mix shifted toward casualty and specialty from property, and catastrophe risk management began underwriting in January 2013.
- Investment income rose substantially year over year for the first nine months, reflecting stronger investment returns and higher average assets following the IPO and growth in reinsurance float. Investment gains include realized and unrealized market movements and are not equivalent to recurring underwriting earnings.
- Q3 included $7.5 million of reductions in prior-year premium estimates; the nine-month reduction was $28.6 million, mainly return premiums on contracts with expiration provisions. Management said the net-income impact was minimal. Prior-year reserve releases were $3.6 million, primarily on a crop contract, accompanied by a corresponding premium decrease and minimal underwriting impact.
- The IPO triggered recognition of additional share-based compensation and warrants after performance conditions were met. The filing reports $7.6 million of share compensation expense for the first nine months and $3.7 million of additional warrant fair value recorded in equity as capital-raise costs.
- As of November 4, 2013, the company reorganized the catastrophe segment by transferring the Catastrophe Reinsurer’s voting common shares to the Catastrophe Fund.
Outlook, risks and contingencies
- Management expected near-term reinsurance conditions to remain competitive because of available underwriting capacity. It viewed some market developments as potentially supportive of medium-term conditions, but provided no numerical earnings or premium guidance.
- Management said catastrophe reinsurance pricing had weakened during 2013 amid new collateralized capacity and the absence of significant catastrophe events. The company anticipated keeping its catastrophe exposure relatively limited; its stated investment in the Catastrophe Fund was $53.6 million, with no additional guarantees or recourse beyond that investment. Third-party fundraising could potentially reduce its ownership below 50% and change consolidation treatment.
- Key risks include volatile investment returns, losses exceeding reserves, uncertainty in premium estimates and actuarial reserves, catastrophe losses, broker and counterparty concentration, derivatives and short positions, and reliance on Third Point LLC and letter-of-credit facilities. The filing describes termination and collateral remedies under derivative agreements and covenant restrictions on credit facilities.
- Three brokers accounted for 68.1% of nine-month gross premiums written; four contracts each represented more than 10%. Management also disclosed risks from fair-value estimation and market/liquidity sensitivity in asset-backed securities. It reported $90.5 million of securities sold short and gross derivative notionals of $696.0 million for derivative assets and $1.49 billion for derivative liabilities; notionals are not balance-sheet exposure measures.
- There were no current litigation or arbitration proceedings, no material changes to previously disclosed risk factors, and no material changes to internal control over financial reporting. Management concluded disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Confirm the intended issuer: the filing text identifies Third Point Reinsurance Ltd., not SiriusPoint Ltd.
- Assess how much earnings and book-value growth depend on investment performance versus underwriting; P&C underwriting remained loss-making.
- Review premium-estimate changes, contract return-premium terms, reserve assumptions and the development of the crop contract.
- Examine investment exposures, derivative and short-position risks, collateral requirements, fair-value inputs and counterparty concentrations.
- Verify the consequences of the November 2013 catastrophe-segment reorganization and any future change in Catastrophe Fund ownership or consolidation.
- Consider IPO-related dilution, options and warrants, related-party investment and performance fees, and the availability and covenant terms of letter-of-credit facilities.