Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our unaudited condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q.
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and ”Special Note Regarding Forward-Looking Statements”. Our actual results may differ materially from those contained in or implied by any forward looking statements.
Special Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, international expansion, future operations, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,” “continues,” “could,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this Quarterly Report on Form 10-Q.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:
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fluctuation in results of operations;
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more established competitors;
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losses exceeding reserves;
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downgrades or withdrawal of ratings by rating agencies;
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dependence on key executives;
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dependence on letter of credit facilities that may not be available on commercially acceptable terms;
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dependence on financing available through our investment accounts to secure letters of credit and collateral for reinsurance contracts;
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potential inability to pay dividends;
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inability to service our indebtedness;
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limited cash flow and liquidity due to our indebtedness;
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unavailability of capital in the future;
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fluctuations in market price of our common shares;
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dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting;
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suspension or revocation of our reinsurance licenses;
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potentially being deemed an investment company under U.S. federal securities law;
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potential characterization of Third Point Reinsurance Ltd. and/or Third Point Re as a passive foreign investment company;
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future strategic transactions such as acquisitions, dispositions, merger or joint ventures;
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dependence on Third Point LLC to implement our investment strategy;
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termination by Third Point LLC of our investment management agreements;
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risks associated with our investment strategy being greater than those faced by competitors;
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increased regulation or scrutiny of alternative investment advisers affecting our reputation;
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Third Point Reinsurance Ltd. and/or Third Point Re potentially becoming subject to U.S. federal income taxation;
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potentially becoming subject to U.S. withholding and information reporting requirements under the Foreign Account Tax Compliance Act;
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changes in Bermuda or other law and regulation that may have an adverse impact on our operations; and
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other risks and factors listed under “Risk Factors” in our most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.
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Any one of these factors or a combination of these factors could materially affect our financial condition or future results of operations and could influence whether any forward-looking statements contained in this report ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and you should not place undue reliance on them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition, while we do, from time to time, communicate with security analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not our responsibility.
Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” and the “Company,” as used in this report, refer to Third Point Reinsurance Ltd. and its directly and indirectly owned subsidiaries, including Third Point Reinsurance Company Ltd. (“Third Point Re”) and Third Point Reinsurance (USA) Ltd. (“Third Point Re USA”), as a combined entity, except where otherwise stated or where it is clear that the terms mean only Third Point Reinsurance Ltd. exclusive of its subsidiaries.
Overview
We are a holding company domiciled in Bermuda. Through our reinsurance subsidiaries, we provide specialty property and casualty reinsurance products to insurance and reinsurance companies on a worldwide basis. Our goal is to deliver attractive equity returns to our shareholders by combining profitable reinsurance underwriting with superior investment management provided by Third Point LLC, our investment manager. We believe that our reinsurance and investment strategy differentiates us from our competitors.
We manage our business on the basis of one operating segment, Property and Casualty Reinsurance. We also have a corporate function that includes our investment income on capital, certain general and administrative expenses related to corporate activities, interest expense, foreign exchange gains (losses) and income tax expense.
Property and Casualty Reinsurance
We provide reinsurance products to insurance and reinsurance companies, government entities, and other risk bearing vehicles. Contracts can be written on an excess of loss basis or quota share basis, although the majority of contracts written to date have been on a quota share basis. In addition, we write contracts on both a prospective basis and a
retroactive basis. Prospective reinsurance contracts cover losses incurred as a result of future insurable events. Retroactive reinsurance contracts cover the potential for changes in estimates of loss and loss adjustment expense reserves related to loss events that have occurred in the past. Retroactive reinsurance contracts can be an attractive type of contract for us as they can generate an underwriting profit should the ultimate loss and loss adjustment expenses settle for less than the initial estimate of reserves and the premiums received at the inception of the contract generate insurance float. The product lines that we currently underwrite for this operating segment are: property, casualty and specialty. We assume a minimal amount of property catastrophe risk and we anticipate that our property catastrophe exposures will consistently remain low when compared to many other reinsurers with whom we compete.
Insurance float is an important aspect of our property and casualty reinsurance operation. In an insurance or reinsurance operation, float arises because premiums from reinsurance contracts and consideration received for deposit accounted contracts are collected before losses are paid on reinsurance contracts and payments are made on deposit accounted contracts. In some instances, the interval between cash receipts and payments can extend over many years. During this time interval, we invest the cash received and seek to generate investment returns. Float is not a concept defined by U.S. GAAP and therefore, there are no comparable U.S. GAAP measures. As a result, net investment income on float, is considered to be a non-GAAP measure.
We believe that over time, our property and casualty reinsurance segment will contribute to our results by both generating underwriting income as well as generating float. In addition, we expect that float will grow over time as our reinsurance operations expand.
Investment Management
Our investment strategy is implemented by our investment manager, Third Point LLC, under two long-term investment management contracts. We directly own the investments that are held in two separate accounts and managed by Third Point LLC on substantially the same basis as Third Point LLC’s main hedge funds.
Non-GAAP Financial Measures and Other Financial Metrics
We have included certain financial measures that are not calculated under standards or rules that comprise GAAP. Such measures, including net investment income on float, book value per share, diluted book value per share, change in diluted book value per share and return on beginning shareholders’ equity, are referred to as non-GAAP financial measures. These non-GAAP financial measures may be defined or calculated differently by other companies. We believe these measures allow for a more complete understanding of our underlying business. These measures are used by management to monitor our results and should not be viewed as a substitute for those determined in accordance with GAAP. Reconciliations of non-GAAP measures to the most comparable GAAP figures are included below.
In addition, we refer to certain financial metrics such as net investment return on investments managed by Third Point LLC, which is an important metric to measure the performance of our investment manager, Third Point LLC. A more detailed description of this financial metric is included below.
Key Performance Indicators
We believe that by combining a disciplined and opportunistic approach to reinsurance underwriting with investment results from the active management of our investment portfolio, we will be able to generate attractive returns for our shareholders.
The table below shows the key performance indicators that we believe are most meaningful in analyzing our consolidated business for the
three and six
months ended
June 30, 2017
and
2016
:
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Three months ended
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Six months ended
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June 30,
2017
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June 30,
2016
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June 30,
2017
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June 30,
2016
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Key underwriting metrics for Property and Casualty Reinsurance segment:
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($ in thousands, except for per share data and ratios)
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Net underwriting income (loss) (1)
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$
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(12,111
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)
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$
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(25,576
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)
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$
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(20,761
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)
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$
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(32,199
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)
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Combined ratio (1)
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107
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%
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119.2
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%
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106.6
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%
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111.9
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%
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Key investment return metrics:
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Net investment income
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$
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107,325
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$
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86,346
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$
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235,835
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$
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46,236
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Net investment return on investments managed by Third Point LLC
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4.5
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%
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4.0
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%
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10.6
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%
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1.9
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%
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Key shareholders’ value creation metrics:
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Book value per share (2) (3)
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$
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15.36
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$
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13.57
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$
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15.36
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$
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13.57
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Diluted book value per share (2) (3)
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$
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14.74
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$
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13.16
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$
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14.74
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$
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13.16
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Change in diluted book value per share (2)
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5.0
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%
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4.1
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%
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12.0
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%
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0.2
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%
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Return on beginning shareholders’ equity (2)
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5.0
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%
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4.0
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%
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12.8
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%
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0.2
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%
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Invested asset leverage (3)
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1.53
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1.55
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1.53
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1.55
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(1)
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See
Note 21
to the accompanying condensed consolidated financial statements for a calculation of net underwriting loss and combined ratio.
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(2)
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Book value per share, diluted book value per share, change in diluted book value per share and return on beginning shareholders’ equity are non-GAAP financial measures. There are no comparable GAAP measures. See reconciliations below.
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(3)
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Prior year comparatives represent amounts as of December 31,
2016
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Net Underwriting Income (Loss) for Property and Casualty Reinsurance Segment
One way that we evaluate the performance of our property and casualty reinsurance results is by measuring net underwriting income (loss). We do not measure performance based on the amount of gross premiums written. Net underwriting income or loss is calculated from net premiums earned, less net loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities. See additional information in
Note 21
to our condensed consolidated financial statements.
Combined Ratio for Property and Casualty Reinsurance Segment
Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net, acquisition costs, net and general and administrative expenses related to underwriting activities by net premiums earned. This ratio is a key indicator of a reinsurance company’s underwriting profitability. A combined ratio of greater than 100% means that loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities exceeded net premiums earned. See additional information in
Note 21
to our condensed consolidated financial statements.
Net Investment Income
Net investment income
is an important measure that affects overall profitability.
Net investment income
is primarily affected by the performance of Third Point LLC as our exclusive investment manager and the amount of investable cash, or float, generated by our reinsurance operations. Pursuant to our investment management agreements, Third Point LLC is required to manage our investment portfolio on substantially the same basis as its main hedge funds, subject to certain conditions set forth in our investment guidelines. These conditions include limitations on investing in private securities, a limitation on portfolio leverage, and a limitation on portfolio concentration in individual securities. Our investment management agreements allow us to withdraw cash from our investment accounts with Third Point LLC at any time with three days’ notice to pay claims and with five days’ notice to pay expenses.
Net Investment Income
on Float
We track cash flows generated by our property and casualty reinsurance operations, or float, in separate accounts that allow us to also track the
net investment income
generated on the float. We believe that
net investment income
on float is an important consideration because it assists our management and investors in evaluating the overall contribution of our property and casualty reinsurance operations to our consolidated results.
Net investment income
on float as presented is a non-GAAP financial measure. See the table below for a reconciliation of
net investment income
on float to
net investment income
.
Net investment income
for the
three and six
months ended
June 30, 2017
and
2016
was comprised of the following:
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Three months ended
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Six months ended
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June 30,
2017
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June 30,
2016
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June 30,
2017
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June 30,
2016
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($ in thousands)
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Net investment income on float
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$
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31,206
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19,098
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$
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67,326
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$
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10,837
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Net investment income on capital
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75,926
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67,014
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168,049
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34,918
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Net investment income on investments managed by Third Point LLC
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107,132
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86,112
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235,375
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45,755
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Net gain on investment in Kiskadee Fund
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193
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234
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460
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481
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Net investment income
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$
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107,325
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$
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86,346
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$
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235,835
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$
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46,236
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Net Investment Return on Investments Managed by Third Point LLC
Net investment return represents the return on our investments managed by Third Point LLC, net of fees. The net investment return on investments managed by Third Point LLC is the percentage change in value of a dollar invested over the reporting period on our investment assets managed by Third Point LLC, net of non-controlling interests. The stated return is net of withholding taxes, which are presented as a component of
income tax expense
in our
condensed consolidated statements of income
. Net investment return is the key indicator by which we measure the performance of Third Point LLC, our investment manager.
Book Value Per Share and Diluted Book Value Per Share
Book value per share and diluted book value per share are non-GAAP financial measures and there are no comparable GAAP measures. Book value per share is calculated by dividing shareholders’ equity attributable to shareholders by the number of issued and outstanding shares at period end, net of treasury shares. Diluted book value per share represents book value per share combined with the impact from dilution of all in-the-money share options issued, warrants and unvested restricted shares outstanding as of any period end. For unvested restricted shares with a performance condition, we include the unvested restricted shares for which we consider vesting to be probable. Change in book value per share is calculated by taking the change in book value per share divided by the beginning of period book value per share. Change in diluted book value per share is calculated by taking the change in diluted book value per share divided by the beginning of period diluted book value per share. We believe that long-term growth in diluted book value per share is the most important measure of our financial performance because it allows our management and investors to track over time the value created by the retention of earnings. In addition, we believe this metric is used by investors because it provides a basis for comparison with other companies in our industry that also report a similar measure.
As of
June 30, 2017
, book value per share was
$15.36
, representing
an increase
of
$0.79
per share, or
5.4%
, from
$14.57
per share as of
March 31, 2017
. As of
June 30, 2017
, diluted book value per share was
$14.74
, representing an
increase
of
$0.70
per share, or
5.0%
, from
$14.04
per share as of
March 31, 2017
. The increases were primarily due to net income in the period.
As of
June 30, 2017
, book value per share was
$15.36
, representing
an increase
of
$1.79
per share, or
13.2%
, from
$13.57
per share as of
December 31, 2016
. As of
June 30, 2017
, diluted book value per share was
$14.74
, representing an
increase
of
$1.58
per share, or
12.0%
, from
$13.16
per share as of
December 31, 2016
. The increases were primarily due to net income in the period.
The changes in book value per share and diluted book value per share were also impacted by share activity including share repurchases and the issuance of performance restricted shares.
The following table sets forth the computation of basic and diluted book value per share as of
June 30, 2017
and
December 31, 2016
:
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June 30,
2017
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December 31,
2016
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Basic and diluted book value per share numerator:
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($ in thousands, except share and per share amounts)
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Total shareholders' equity
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$
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1,576,132
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$
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1,449,725
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Less: non-controlling interests
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(19,809
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)
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(35,674
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)
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Shareholders' equity attributable to shareholders
|
1,556,323
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|
1,414,051
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Effect of dilutive warrants issued to founders and an advisor
|
46,512
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46,512
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Effect of dilutive stock options issued to directors and employees
|
51,930
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|
52,930
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Diluted book value per share numerator:
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$
|
1,654,765
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$
|
1,513,493
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Basic and diluted book value per share denominator:
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Issued and outstanding shares, net of treasury shares
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101,339,828
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104,173,748
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Effect of dilutive warrants issued to founders and an advisor
|
4,651,163
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4,651,163
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Effect of dilutive stock options issued to directors and employees
|
5,174,333
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5,274,333
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Effect of dilutive restricted shares issued to directors and employees (1)
|
1,127,928
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|
878,529
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Diluted book value per share denominator:
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112,293,252
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114,977,773
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Basic book value per share
|
$
|
15.36
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$
|
13.57
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Diluted book value per share
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$
|
14.74
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$
|
13.16
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(1)
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As of
June 30, 2017
, the effect of dilutive restricted shares issued to directors and employees was comprised of
107,847
restricted shares with a service condition only and
1,020,081
restricted shares with a service and performance condition that were considered probable of vesting.
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Return on Beginning Shareholders’ Equity
Return on beginning shareholders’ equity as presented is a non-GAAP financial measure. Return on beginning shareholders’ equity is calculated by dividing net income (loss) by the beginning shareholders’ equity attributable to shareholders. We believe that return on beginning shareholders’ equity is an important measure because it assists our management and investors in evaluating the Company’s profitability.
For the
three and six
months ended
June 30, 2017
, we have also adjusted the beginning shareholders’ equity for the impact of the shares repurchased on a weighted average basis. This adjustment increased the stated returns on beginning shareholders’ equity.
Return on beginning shareholders’ equity for the
three and six
months ended
June 30, 2017
and
2016
was calculated as follows:
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Three months ended
|
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Six months ended
|
|
June 30,
2017
|
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June 30,
2016
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|
June 30,
2017
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June 30,
2016
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($ in thousands)
|
Net income
|
$
|
74,578
|
|
|
$
|
53,376
|
|
|
$
|
178,764
|
|
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$
|
2,247
|
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Shareholders’ equity attributable to shareholders - beginning of period
|
1,501,681
|
|
|
1,331,247
|
|
|
1,414,051
|
|
|
1,379,726
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Impact of weighting related to shareholders’ equity from shares repurchased
|
(9,863
|
)
|
|
(2,609
|
)
|
|
(16,882
|
)
|
|
(1,305
|
)
|
Adjusted shareholders’ equity attributable to shareholders - beginning of period
|
$
|
1,491,818
|
|
|
$
|
1,328,638
|
|
|
$
|
1,397,169
|
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|
$
|
1,378,421
|
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Return on beginning shareholders’ equity
|
5.0
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%
|
|
4.0
|
%
|
|
12.8
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%
|
|
0.2
|
%
|
Invested asset leverage
Invested asset leverage is a ratio calculated by dividing our net investments managed by Third Point LLC by shareholders’ equity attributable to shareholders and is a key metric in assessing the amount of insurance float generated by our reinsurance operation that has been invested by our investment manager, Third Point LLC. Given the sensitivity of our return on beginning shareholders’ equity to our net investment return on investments managed by Third Point LLC, invested asset leverage is an important metric that management monitors. It is also an important metric by which we evaluate our capital adequacy for rating agency and regulatory purposes. Maintaining an appropriate invested asset leverage to optimize the return potential of the Company, while maintaining sufficient rating agency and regulatory capital is an important aspect of how we manage the Company.
Revenues
We derive our revenues from two principal sources:
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•
|
premiums from property and casualty reinsurance business assumed; and
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•
|
income from investments.
|
Premiums from our property and casualty reinsurance business assumed are directly related to the number, type and pricing of contracts we write. Premiums are earned over the contract period based on the exposure period of the underlying contracts of the ceding company.
Income from our investments is primarily comprised of interest income, dividends, and net realized and unrealized gains on investment securities included in our investment portfolio.
Expenses
Our expenses consist primarily of the following:
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|
•
|
loss and loss adjustment expenses;
|
|
|
•
|
investment-related expenses;
|
|
|
•
|
general and administrative expenses;
|
Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and loss experience of the underlying coverage. Loss and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a number of years.
Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to writing reinsurance contracts and are presented net of commissions ceded under reinsurance contracts. We amortize deferred acquisition costs in the same proportion that the premiums are earned.
Investment-related expenses primarily consist of management fees we pay to our investment manager, Third Point LLC, and performance fees we pay to TP GP. A 1.5% management fee calculated on net investment assets under management is paid monthly to Third Point LLC. In addition, a performance fee equal to 20% of the net investment income is paid annually to TP GP. See Note
8
to our condensed consolidated financial statements for additional information on our Founders and management, performance and founders fees. We include these expenses in
net investment income
in our
condensed consolidated statements of income
. The performance fee is subject to a loss carryforward provision pursuant to which TP GP is required to maintain a Loss Recovery Account which represents the sum of all prior period net loss amounts, not offset by prior year net profit amounts, and which is allocated to future profit amounts until the Loss Recovery Account has returned to a positive balance. Until such time, no performance fees are payable under the Investment Agreements.
General and administrative expenses consist primarily of salaries, benefits and related payroll costs, including costs associated with our incentive compensation plan, share compensation expense, legal and accounting fees, travel and client entertainment, fees relating to our letter of credit facilities, information technology, occupancy and other general operating expenses.
Other expenses consist of investment credit expenses on deposit and reinsurance contracts and changes in the fair value of embedded derivatives in our deposit and reinsurance contracts.
Interest expense consists of interest expense incurred on TPRUSA’s $115.0 million senior unsecured notes (the “Notes”) issued in February 2015. The Notes bear interest at 7.0% and interest is payable semi-annually on February 13 and August 13 of each year. Also included in interest expense is the amortization of certain costs incurred in issuing the Notes. These costs are amortized over the term of the debt and are included in interest expense.
Foreign exchange gains (losses) consist of the revaluation of monetary assets and liabilities denominated in foreign currencies to U.S. dollar, our functional currency.
Income taxes consist primarily of taxes incurred in the U.S. as a result of our U.S. operations and withholding taxes and uncertain tax positions on certain investment transactions in the U.S. and in certain foreign jurisdictions.
Business Outlook
The reinsurance markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, as defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been affected by several factors, including industry losses, the impact of catastrophes, changes in legal and regulatory guidelines, new entrants and investment results including interest rate levels and the credit ratings and financial strength of competitors.
While management believes pricing remains adequate for certain types of business on which we focus, there is significant underwriting capacity currently available and market conditions remain challenging. We believe excess capacity is due to strong retained earnings in the reinsurance industry primarily as a result of historically low catastrophe losses in recent years, an influx of capacity from collateralized reinsurance and other insurance-linked securities vehicles and increased competition from new entrants with similar total return business models to ours. While we do not participate in the property catastrophe excess of loss reinsurance segment, we believe that traditional reinsurers facing extreme price pressure in this segment are more aggressively pursuing our targeted lines of business.
We focus on segments and clients where we believe we benefit from relatively more attractive pricing opportunities due to the strength of our relationships, the tailored nature of our reinsurance solutions, an acute need for reinsurance capital as a result of market dislocation, a client’s growth or historically poor performance.
Most of our senior management team have spent decades within the reinsurance market and have strong relationships with intermediaries and reinsurance buyers from which we are receiving a strong flow of submissions in the lines and types of reinsurance we target. Although we are typically presented by brokers with proposed structures on syndicated deals, we often seek to customize the proposed solution for the client while improving our risk and return profile and establishing our position as the lead reinsurer in the transaction. We also look for non-syndicated opportunities where a highly customized solution is needed. These solutions may take the form of aggregate stop loss covers, loss portfolio transfers or other forms of reserve covers where clients seek capital relief and enhanced investment returns on the assets that back their loss and unearned premium reserves.
During our first four years of operation through 2015, we had significant premium growth and float generation and reached a premium level that supports our fixed expense base and an invested asset leverage that appropriately utilizes our capital. As a result of challenging market conditions, it has been more difficult to originate reinsurance opportunities that meet our underwriting standards and therefore gross written premium in 2016 was slightly lower than 2015. Given current market conditions and our focus on improving underwriting results, it is possible that our premiums written for 2017 may decline further.
Consolidated Results of Operations—
Three and six
months ended
June 30, 2017
and
2016
:
The following table sets forth the key items discussed in the consolidated results of operations section, and the period over period change, for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30,
2017
|
|
June 30,
2016
|
|
Change
|
|
June 30,
2017
|
|
June 30,
2016
|
|
Change
|
|
($ in thousands)
|
Net underwriting income (loss) (1)
|
$
|
(12,111
|
)
|
|
$
|
(25,576
|
)
|
|
$
|
13,465
|
|
|
$
|
(20,761
|
)
|
|
$
|
(32,199
|
)
|
|
$
|
11,438
|
|
Net investment income
|
107,325
|
|
|
86,346
|
|
|
20,979
|
|
|
235,835
|
|
|
46,236
|
|
|
189,599
|
|
Net investment return on investments managed by Third Point LLC
|
4.5
|
%
|
|
4.0
|
%
|
|
0.5
|
%
|
|
10.6
|
%
|
|
1.9
|
%
|
|
8.7
|
%
|
Foreign exchange gains (losses)
|
(4,781
|
)
|
|
8,068
|
|
|
(12,849
|
)
|
|
(4,796
|
)
|
|
10,454
|
|
|
(15,250
|
)
|
Income tax expense
|
(5,307
|
)
|
|
(5,310
|
)
|
|
(3
|
)
|
|
(10,605
|
)
|
|
(3,381
|
)
|
|
7,224
|
|
Net income
|
$
|
74,578
|
|
|
$
|
53,376
|
|
|
$
|
21,202
|
|
|
$
|
178,764
|
|
|
$
|
2,247
|
|
|
$
|
176,517
|
|
|
|
(1)
|
Property and Casualty Reinsurance segment only.
|
A key driver of our consolidated results of operations is the performance of our investments managed by Third Point LLC. Given the nature of the underlying investment strategies, we expect volatility in our investment returns and therefore in our consolidated
net income
. See additional information regarding investment performance in “Investment Results” section below.
The other key changes in
net income
for the
three and six
months ended
June 30, 2017
compared to the prior year
periods
were primarily due to the following:
|
|
•
|
The decrease in net underwriting loss for the
three and six
months ended
June 30, 2017
was primarily due to adverse development on certain contracts in the prior year periods compared to small favorable development in the current year periods. See “Segment Results” below for additional details.
|
|
|
•
|
The change in foreign exchange gains (losses) was primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds where the United States dollar weakened in the current year periods compared to prior year periods where the United States dollar strengthened.
|
|
|
•
|
The increase in income tax expense for the
six
months ended
June 30, 2017
was primarily the result of an increase in taxable income generated by our U.S. subsidiaries.
|
Segment Results—
Three and six
months ended
June 30, 2017
and
2016
.
The determination of our reportable segments is based on the manner in which management monitors the performance of our operations. For the
periods
presented, our business comprises one operating segment, Property and Casualty Reinsurance. We have also identified a corporate function that includes investment results, certain general and administrative expenses related to corporate activities, interest expense,
foreign exchange (gains) losses
and
income tax expense
.
Property and Casualty Reinsurance
The following table sets forth net underwriting results and ratios, and the period over period changes for the Property and Casualty Reinsurance segment for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30,
2017
|
|
June 30,
2016
|
|
Change
|
|
June 30,
2017
|
|
June 30,
2016
|
|
Change
|
|
($ in thousands)
|
Gross premiums written
|
$
|
156,564
|
|
|
$
|
196,866
|
|
|
$
|
(40,302
|
)
|
|
$
|
302,918
|
|
|
$
|
394,022
|
|
|
$
|
(91,104
|
)
|
Net premiums earned
|
173,558
|
|
|
133,122
|
|
|
40,436
|
|
|
311,567
|
|
|
269,924
|
|
|
41,643
|
|
Loss and loss adjustment expenses incurred, net
|
107,379
|
|
|
104,131
|
|
|
3,248
|
|
|
193,274
|
|
|
188,807
|
|
|
4,467
|
|
Acquisition costs, net
|
68,641
|
|
|
48,482
|
|
|
20,159
|
|
|
123,093
|
|
|
100,169
|
|
|
22,924
|
|
General and administrative expenses
|
9,649
|
|
|
6,085
|
|
|
3,564
|
|
|
15,961
|
|
|
13,147
|
|
|
2,814
|
|
Net underwriting income (loss )
|
(12,111
|
)
|
|
(25,576
|
)
|
|
13,465
|
|
|
(20,761
|
)
|
|
(32,199
|
)
|
|
11,438
|
|
Net investment income on float
|
31,206
|
|
|
19,098
|
|
|
12,108
|
|
|
67,326
|
|
|
10,837
|
|
|
56,489
|
|
Other expenses
|
2,105
|
|
|
3,173
|
|
|
(1,068
|
)
|
|
(5,006
|
)
|
|
(5,879
|
)
|
|
873
|
|
Segment income (loss)
|
$
|
16,990
|
|
|
$
|
(9,651
|
)
|
|
$
|
26,641
|
|
|
$
|
41,559
|
|
|
$
|
(27,241
|
)
|
|
$
|
68,800
|
|
Underwriting ratios (1):
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
61.9
|
%
|
|
78.2
|
%
|
|
(16.3
|
)%
|
|
62.0
|
%
|
|
69.9
|
%
|
|
(7.9
|
)%
|
Acquisition cost ratio
|
39.5
|
%
|
|
36.4
|
%
|
|
3.1
|
%
|
|
39.5
|
%
|
|
37.1
|
%
|
|
2.4
|
%
|
Composite ratio
|
101.4
|
%
|
|
114.6
|
%
|
|
(13.2
|
)%
|
|
101.5
|
%
|
|
107.0
|
%
|
|
(5.5
|
)%
|
General and administrative expense ratio
|
5.6
|
%
|
|
4.6
|
%
|
|
1.0
|
%
|
|
5.1
|
%
|
|
4.9
|
%
|
|
0.2
|
%
|
Combined ratio
|
107.0
|
%
|
|
119.2
|
%
|
|
(12.2
|
)%
|
|
106.6
|
%
|
|
111.9
|
%
|
|
(5.3
|
)%
|
|
|
(1)
|
Underwriting ratios are calculated by dividing the related expense by net premiums earned.
|
Gross Premiums Written
The amount of gross premiums written and earned that we recognize can vary significantly from period to period due to several reasons, which include:
|
|
•
|
We write a small number of large contracts; therefore individual renewals or new business can have a significant impact on premiums recognized in a period;
|
|
|
•
|
We offer customized solutions to our clients, including reserve covers, on which we will not have a regular renewal opportunity;
|
|
|
•
|
We record gross premiums written and earned for reserve covers, which are considered retroactive reinsurance contracts, at the inception of the contract;
|
|
|
•
|
We write multi-year contracts that will not necessarily renew in a comparable period;
|
|
|
•
|
We may extend and/or amend contracts resulting in premium that will not necessarily renew in a comparable period;
|
|
|
•
|
Our reinsurance contracts often contain commutation and/or cancellation provisions; and
|
|
|
•
|
Our quota share reinsurance contracts are subject to significant judgment in the amount of premiums that we expect to recognize and changes in premium estimates are recorded in the period they are determined.
|
As a result of these factors, we may experience volatility in the amount of gross premiums written and net premiums earned and period to period comparisons may not be meaningful.
The following table provides a breakdown of our Property and Casualty Reinsurance segment’s gross premiums written by line of business for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
($ in thousands)
|
Property
|
$
|
(8,827
|
)
|
|
(5.6
|
)%
|
|
$
|
7,257
|
|
|
3.7
|
%
|
|
$
|
(8,815
|
)
|
|
(2.9
|
)%
|
|
$
|
7,082
|
|
|
1.8
|
%
|
Casualty
|
118,140
|
|
|
75.4
|
%
|
|
149,129
|
|
|
75.7
|
%
|
|
205,345
|
|
|
67.8
|
%
|
|
160,506
|
|
|
40.7
|
%
|
Specialty
|
47,251
|
|
|
30.2
|
%
|
|
40,480
|
|
|
20.6
|
%
|
|
106,388
|
|
|
35.1
|
%
|
|
226,434
|
|
|
57.5
|
%
|
|
$
|
156,564
|
|
|
100.0
|
%
|
|
$
|
196,866
|
|
|
100.0
|
%
|
|
$
|
302,918
|
|
|
100.0
|
%
|
|
$
|
394,022
|
|
|
100.0
|
%
|
The
decrease
in gross premiums written of
$40.3 million
, or
20.5%
, for the three months ended
June 30, 2017
compared to the three months ended
June 30, 2016
was driven by:
Factors resulting in decreases:
|
|
•
|
We recognized a net increase in premium of $20.2 million in the three months ended
June 30, 2017
compared to a net increase of $82.4 million in the three months ended
June 30, 2016
related to the net impact of contract extensions, cancellations and contracts renewed with no comparable premium in the comparable period.
|
|
|
•
|
We recognized $52.9 million of premium in the three months ended
June 30, 2016
related to contracts that we did not renew in the three months ended
June 30, 2017
as a result of underlying terms and conditions.
|
|
|
•
|
We recorded net increases in premium estimates relating to prior periods of $14.3 million and $49.1 million for the three months ended
June 30, 2017
and
2016
, respectively. The increases in premium estimates for the three months ended
June 30, 2017
and
2016
were due to several contracts for which clients provided updated projections indicating that they expected to write more business than initially estimated.
|
|
|
•
|
Changes in renewal premiums for the three months ended
June 30, 2017
resulted in a net decrease in premiums of $5.7 million primarily due to a reduction in our participation on one contract that was renewed in the period.
|
Factor resulting in an increase:
|
|
•
|
In the three months ended June 30, 2017, we wrote $115.3 million of new premium, which included $83.9 million of new retroactive exposures in reinsurance contracts.
|
The
decrease
in gross premiums written of
$91.1 million
, or
23.1%
, for the
six
months ended
June 30, 2017
compared to the
six
months ended
June 30, 2016
was driven by:
Factors resulting in decreases:
|
|
•
|
We recognized $147.6 million of premium in the
six
months ended
June 30, 2016
related to contracts that did not renew in the
six
months ended
June 30, 2017
as a result of underlying terms and conditions.
|
|
|
•
|
We recorded net increases in premium estimates relating to prior periods of $15.6 million and $50.4 million for the
six
months ended
June 30, 2017
and
2016
, respectively. The increases in premium estimates for the
six
months ended
June 30, 2017
and
2016
were due to several contracts for which clients provided updated projections indicating that they expected to write more business than initially estimated.
|
|
|
•
|
We recognized a net increase in premium of $80.4 million in the
six
months ended
June 30, 2017
compared to a net increase of $113.6 million in the
six
months ended
June 30, 2016
related to net impact of contract extensions, cancellations and contracts renewed with no comparable premium in the comparable period.
|
|
|
•
|
Changes in renewal premiums for the
six
months ended
June 30, 2017
resulted in a net decrease in premiums of $5.7 million. Premiums can change on renewals of contracts due to a number of factors, including: changes in our line size or participation, changes in the underlying premium volume and pricing trends of the client’s program as well as other contractual terms and conditions.
|
Factor resulting in an increase:
|
|
•
|
In the six months ended June 30, 2017, we wrote $130.2 million of new premium, which included $83.9 million of new retroactive exposures in reinsurance contracts.
|
Net Premiums Earned
The increase in net premiums earned was primarily due to the addition of
$83.9 million
of new retroactive exposures in reinsurance contracts included in net premiums earned in the
three and six
months ended
June 30, 2017
, partially offset by a lower in-force underwriting portfolio. We did not write any retroactive reinsurance contracts in the
three and six
months ended
June 30, 2016
.
Net Loss and Loss Adjustment Expenses
The reinsurance contracts we write have a wide range of initial loss ratio estimates. As a result, our net loss and loss expense ratio can vary significantly from period to period depending on the mix of business. The change in our net loss and loss adjustment expenses and related ratio was primarily affected by changes in mix of business and prior years’ reserve development. The following is a summary of reserve development for the
three and six
months ended
June 30, 2017
and
2016
:
For the three months ended
June 30, 2017
, we incurred
$30.9 million
of net
favorable
prior years’ reserve development which
was primarily a result of having favorable loss development on certain retroactive reinsurance contracts. These retroactive reinsurance contracts had profit commission terms such that the favorable reserve development associated with these contracts was offset by similar increases in acquisition costs
, resulting in a net
decrease
of
$0.04 million
, or nil percentage points, in net underwriting loss.
For the three months ended
June 30, 2016
, we incurred
$14.7 million
of net adverse prior years’ reserve development. The
$14.7 million
of net adverse prior years’ reserve development was accompanied by net decreases of $1.8 million in acquisition costs, resulting in a net increase of
$12.9 million
in net underwriting loss, or 9.7 percentage points. The net impact of the adverse loss development was primarily due to:
|
|
•
|
$4.4 million of net adverse underwriting loss development relating to one multi-line contract written since 2014. This contract contains underlying commercial auto physical damage and auto extended warranty exposure. The adverse loss experience is a result of an increase in the number of reported claims and inadequate pricing in certain segments of the underlying business;
|
|
|
•
|
$4.3 million of net adverse underwriting loss development relating to a workers’ compensation contract written in 2012, 2013, and 2014 under which we have been experiencing claims developing with higher than anticipated severity, which led to an increase in our previous loss assumptions on this contract;
|
|
|
•
|
$2.7 million of net adverse underwriting loss development relating to our Florida homeowners’ reinsurance contracts, primarily as a result of higher than anticipated water damage claims and an increase in the practice of assignment of benefits whereby homeowners assign their rights for filing and settling claims to attorneys and public adjusters, which has led to increases in the frequency of claims reported as well as the severity of
|
losses and loss adjustment expenses. Contracts for which we experienced this adverse loss development have not been renewed; and
|
|
•
|
$1.9 million of net adverse underwriting loss development relating to non-standard auto contracts during the period, primarily due to the inability of cedents to promptly react to increasing frequency and severity trends, resulting in underpriced business and adverse selection.
|
For the
six
months ended
June 30, 2017
, we incurred
$32.5 million
of net
favorable
prior years’ reserve development. The
$32.5 million
of net
favorable
prior years’ reserve development for the
six
months ended
June 30, 2017
was primarily a result of having favorable loss development on certain retroactive reinsurance contracts. These retroactive reinsurance contracts had profit commission terms such that the favorable reserve development associated with these contracts was offset by similar increases in acquisition costs
, resulting in a net
decrease
of
$0.03 million
, or nil percentage points, in net underwriting loss.
For the six months ended June 30, 2016, we incurred $14.4 million of net adverse prior years’ reserve development. The $14.4 million of net adverse prior years’ reserve development for the six months ended June 30, 2016 was accompanied by net decreases of $1.9 million in acquisition costs, resulting in a net increase of
$12.5 million
in net underwriting loss, or 4.6 percentage points. As a result of limited loss development in the first quarter of 2016, the drivers of the adverse loss development for the six months ended June 30, 2016 are the same as for the three months ended June 30, 2016, which are explained above.
Acquisition Costs
Acquisition costs include commissions, brokerage and excise taxes. Acquisition costs are presented net of commissions on reinsurance ceded. The reinsurance contracts we write have a wide range of acquisition cost ratios. As a result, our acquisition cost ratio can vary significantly from period to period depending on the mix of business. Furthermore, a number of our contracts have a sliding scale commission or profit commission feature that will vary depending on the expected loss expense for the contract. As a result, changes in estimates of loss and loss adjustment expenses on a contract can result in changes in the sliding scale commissions or profit commissions and a contract’s overall acquisition cost ratio.
Many of our contracts have similar expected composite ratios (combined ratio before general and administrative expenses); therefore, contracts with higher initial loss ratio estimates have lower acquisition cost ratios and contracts with lower initial loss ratios have higher acquisition cost ratios. The increase in acquisition costs, net and the related acquisition cost ratio for the
three and six
months ended
June 30, 2017
was primarily due to favorable development on two retroactive reinsurance contracts which have profit commission terms such that the favorable development associated with these contracts was entirely offset by similar increases in acquisition cost, which resulted in an increase in acquisition costs of $25.8 million in the three and six months ended June 30, 2017.
Net Investment Income
Net investment income
allocated to the Property and Casualty Reinsurance segment consists of
net investment income on float
. The change in
net investment income
on float for the
three and six
months ended
June 30, 2017
compared to the
three and six
months ended
June 30, 2016
was primarily due to the change in investment returns compared to the prior year
periods
. See the discussion of
net investment income
under “Corporate Function” below for explanations of the investment returns on investments managed by Third Point LLC and total net investment income (loss) for the years presented.
General and Administrative Expenses
The increase in general and administrative expenses and the related general and administrative expenses ratio for the
three and six
months ended
June 30, 2017
comp
ared to the
three and six
months ended
June 30, 2016
was
primarily due to an increase in our annual incentive plan compensation expense, partially offset by
lower stock compensation
expense as a result of most stock options granted to certain employees being fully vested. Our annual incentive plan is based on the Company’s return on average equity and we increased our accruals in the second quarter to reflect the performance of the Company to date.
Corporate Function
The following table sets forth
net income
and the period over period changes for the Corporate Function for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30,
2017
|
|
June 30,
2016
|
|
Change
|
|
June 30,
2017
|
|
June 30,
2016
|
|
Change
|
|
($ in thousands)
|
Net investment income on capital
|
$
|
76,119
|
|
|
$
|
67,248
|
|
|
$
|
8,871
|
|
|
$
|
168,509
|
|
|
$
|
35,399
|
|
|
$
|
133,110
|
|
General and administrative expenses
|
5,365
|
|
|
4,158
|
|
|
1,207
|
|
|
9,625
|
|
|
8,384
|
|
|
1,241
|
|
Interest expense
|
2,051
|
|
|
2,046
|
|
|
5
|
|
|
4,077
|
|
|
4,094
|
|
|
(17
|
)
|
Foreign exchange gains (losses)
|
(4,781
|
)
|
|
8,068
|
|
|
(12,849
|
)
|
|
(4,796
|
)
|
|
10,454
|
|
|
(15,250
|
)
|
Income tax expense
|
(5,307
|
)
|
|
(5,310
|
)
|
|
3
|
|
|
(10,605
|
)
|
|
(3,381
|
)
|
|
(7,224
|
)
|
Segment loss attributable to non-controlling interests
|
(1,027
|
)
|
|
(775
|
)
|
|
(252
|
)
|
|
(2,201
|
)
|
|
(506
|
)
|
|
(1,695
|
)
|
Segment income
|
$
|
57,588
|
|
|
$
|
63,027
|
|
|
$
|
(5,439
|
)
|
|
$
|
137,205
|
|
|
$
|
29,488
|
|
|
$
|
107,717
|
|
Investment Results
The primary driver of our
net investment income
is the returns generated by our investment portfolio managed by our investment manager, Third Point LLC. The following is a summary of the net investment return on investments managed by Third Point LLC by investment strategy for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Long
|
|
Short
|
|
Net
|
|
Long
|
|
Short
|
|
Net
|
Equity
|
6.5
|
%
|
|
(1.1
|
)%
|
|
5.4
|
%
|
|
0.6
|
%
|
|
(0.3
|
)%
|
|
0.3
|
%
|
Credit
|
(0.3
|
)%
|
|
(0.3
|
)%
|
|
(0.6
|
)%
|
|
4.0
|
%
|
|
(0.2
|
)%
|
|
3.8
|
%
|
Other
|
0.2
|
%
|
|
(0.5
|
)%
|
|
(0.3
|
)%
|
|
(0.1
|
)%
|
|
—
|
%
|
|
(0.1
|
)%
|
Net investment return on investments managed by Third Point LLC
|
6.4
|
%
|
|
(1.9
|
)%
|
|
4.5
|
%
|
|
4.5
|
%
|
|
(0.5
|
)%
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Total Return Index
|
|
|
|
|
3.1
|
%
|
|
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Long
|
|
Short
|
|
Net
|
|
Long
|
|
Short
|
|
Net
|
Long/short equities
|
13.0
|
%
|
|
(2.2
|
)%
|
|
10.8
|
%
|
|
—
|
%
|
|
(0.7
|
)%
|
|
(0.7
|
)%
|
Credit
|
0.1
|
%
|
|
(0.4
|
)%
|
|
(0.3
|
)%
|
|
4.1
|
%
|
|
(0.4
|
)%
|
|
3.7
|
%
|
Other
|
1.0
|
%
|
|
(0.9
|
)%
|
|
0.1
|
%
|
|
(0.2
|
)%
|
|
(0.9
|
)%
|
|
(1.1
|
)%
|
Net investment return on investments managed by Third Point LLC
|
14.1
|
%
|
|
(3.5
|
)%
|
|
10.6
|
%
|
|
3.9
|
%
|
|
(2.0
|
)%
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Total Return Index
|
|
|
|
|
9.3
|
%
|
|
|
|
|
|
3.8
|
%
|
For the three months ended June 30, 2017, the long equity strategy was the primary driver of returns. Within equities, we saw positive attribution across every sector with large long investments in the healthcare and industrials portfolios contributing the majority of positive returns. Gains in our long equity strategy were partially offset by losses in market hedges and short equity positions. Modest losses in the credit strategy were primarily driven by both long and short performing credit investments. Losses from macroeconomic hedges were partially offset by gains in currency, private and risk arbitrage investments in the other strategy.
For the six months ended June 30, 2017, the net investment results were led by strong gains in the long equity strategy, outpacing the S&P 500 for the same period with significantly less exposure at risk. The strategy saw positive attribution from every sector in which the portfolio is invested. The long equity portfolio performance was partially offset by negative performance from short equity positions, including market hedges. The credit strategy detracted modestly with flat or negative performance from each sub-strategy. In the other strategy, losses from macroeconomic hedges were offset by positive contribution from risk arbitrage, private and currency investments.
The positive return for the three months ended June 30, 2016 was primarily a result of Third Point LLC’s long credit portfolios.Within credit, we saw positive performance in our sovereign, structured and corporate portfolios. Our investment accounts benefited from positive attribution from each sub-strategy with the exception of the macro and other category. Within equities, significant gains in the healthcare and industrials sectors were offset by modest losses in hedges and the technology, media and telecommunications sector.
The strong performance in the second quarter of 2016 outweighed moderate losses in the first quarter of 2016 to generate positive returns for the first sixth months of 2016, driven by Third Point LLC’s corporate and sovereign credit portfolios. Negative returns in other strategies were primarily attributable to losses in our long equity and structured credit portfolios. Outperformance from several core portfolio positions within our long equity portfolio were more than offset by the losses from one healthcare position in the six months ended June 30, 2016. The macro and other category reduced returns in the first half of 2016 as a result of a markdown of a private position and negative performance from several currency and macroeconomic hedges.
Refer to “
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
” for a list of risks and factors that could adversely impact our investments results.
General and Administrative Expenses
General and administrative expenses allocated to corporate activities include allocations of payroll and related costs for certain executives and non-underwriting staff. We also allocate a portion of overhead and other related costs based on a related headcount analysis. The increase in general and administrative expenses related to corporate activities for the
three and six
months ended
June 30, 2017
was
primarily due to an increase in our annual incentive plan compensation expense, partially offset by
lower stock compensation
expense. Our annual incentive plan is based on the Company’s return on average equity and we increased our accruals in the second quarter to reflect the performance of the Company to date.
Interest Expense
In February 2015, TPRUSA issued $115.0 million of senior notes bearing 7.0% interest. As a result, our consolidated results of operations include interest expense.
Foreign Exchange Gains (Losses)
The foreign exchange losses for the
three and six
months ended
June 30, 2017
compared to the foreign exchange gains for the
three and six
months ended
June 30, 2016
was primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds into the United States dollar, which had strengthened during the prior year period compared to the current year period. For these contracts, non-U.S. dollar reinsurance assets, or balances held in trust accounts securing reinsurance liabilities, generally offset reinsurance liabilities in the same non-U.S. dollar currencies resulting in minimal net exposure. Refer to “
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
” for further discussion on foreign currency risk related to our reinsurance contracts.
Income Taxes
See
Note 13
to our condensed consolidated financial statements for additional information regarding income taxes. The increase in income tax expense for the
six
months ended
June 30, 2017
compared to the
six
months ended
June 30, 2016
was primarily due to higher taxable income generated by our U.S. subsidiaries.
Liquidity and Capital Resources
Our investment portfolio is concentrated in tradeable securities and is marked to market each day. Pursuant to our investment guidelines as specified in our two investment management agreements with Third Point LLC, at least 60% of our portfolio must be invested in securities of publicly traded companies and governments of Organization of Economic Co-operation and Development high income countries, asset-backed securities, cash, cash equivalents and gold and other precious metals. We can liquidate all or a portion of our investment portfolio at any time with not less than three days’ notice to pay claims on our reinsurance contracts, and with not less than five days’ notice to pay for expenses, and on not less than three days’ notice in order to satisfy a requirement of A.M. Best. Since we do not write excess of loss property catastrophe contracts or other types of reinsurance contracts that are typically subject to sudden, acute, liquidity demands, we believe the liquidity provided by our investment portfolio will be sufficient to satisfy our liquidity requirements to manage our operations.
As of
June 30, 2017
,
$1,886.8 million
, or
70.6%
(December 31,
2016
-
$1,452.3 million
, or
54.9%
) of our total investments in securities were classified as Level 1 assets, which are defined as securities valued using quoted prices available in active markets. See Note
4
to our condensed consolidated financial statements for additional information on the framework for measuring fair value established by U.S. GAAP disclosure requirements.
General
Third Point Reinsurance Ltd. is a holding company and has no substantial operations of its own and has moderate cash needs, most of which are related to the payment of corporate expenses. Its assets consist primarily of its investments in subsidiaries. Third Point Reinsurance Ltd.’s ability to pay dividends or return capital to shareholders will depend upon the availability of dividends or other statutorily permissible distributions from those subsidiaries.
We and our Bermuda subsidiaries are subject to Bermuda regulatory constraints that affect our ability to pay dividends. Under the Companies Act, as amended, a Bermuda company may declare or pay a dividend out of distributable reserves only if it has reasonable grounds for believing that it is, or would after the payment, be able to pay its liabilities as they become due and if the realizable value of its assets would thereby not be less than its liabilities. Under the Insurance Act, Third Point Re and Third Point Re USA, as Class 4 insurers, are prohibited from declaring or paying a dividend if they are in breach of their respective minimum solvency margin (“MSM”), enhanced capital requirement (“ECR”) or minimum liquidity ratio or if the declaration or payment of such dividend would cause such a breach. Where either Third Point Re or Third Point Re USA, as Class 4 insurers, fails to meet its MSM or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the Bermuda Monetary Authority (“BMA”).
In addition, each of Third Point Re and Third Point Re USA, as Class 4 insurers, is prohibited from declaring or paying in any financial year dividends of more than 25% of its respective total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at least seven days before payment of such dividend) with the BMA an affidavit signed by at least two directors (one of whom must be a Bermuda resident director if any of the insurer’s directors are resident in Bermuda) and the principal representative stating that it will continue to meet its solvency margin and minimum liquidity ratio.
As of December 31,
2016
, Third Point Re could pay dividends to Third Point Reinsurance Ltd. of approximately $326.9 million). Third Point Re USA has also entered into a Net Worth Maintenance Agreement that further restricts the amount of capital and surplus it has available for the payment of dividends. In order to remain in compliance with the Net Worth Maintenance Agreement we have entered into with Third Point Re USA (the “Net Worth Maintenance Agreement”), we have committed to ensuring that Third Point Re USA will maintain a minimum level of capital of $250.0 million. Failure of Third Point Re USA to maintain the minimum level of capital required by the Net Worth Maintenance Agreement could limit or prevent Third Point Re USA from paying dividends to us. As a result, Third Point Re USA could pay dividends ultimately to Third Point Reinsurance Ltd. of approximately $25.5 million as of
June 30, 2017
(December 31,
2016
- $19.6 million).
In addition to the regulatory and other contractual constraints to paying dividends, we manage the capital of the group and each of our operating subsidiaries to support our current ratings from A.M. Best. This could further reduce the ability and amount of dividends that could be paid from Third Point Re or Third Point Re USA to Third Point Reinsurance
Ltd. After several years of premium growth and float generation from our inception, we have reached a level that allows us to rationalize our expense base and appropriately utilize our capital. Given difficult market conditions and our focus on improving our underwriting results, we plan to remain selective in our underwriting which may slow the growth rate of our gross written premium.
Liquidity and Cash Flows
Historically, our sources of funds have primarily consisted of premiums written, reinsurance recoveries, investment income and proceeds from sales and redemptions of investments. Cash is used primarily to pay loss and loss adjustment expenses, reinsurance premiums, acquisition costs, interest expense, taxes, general and administrative expenses and to purchase investments.
Our cash flows from operations generally represent the difference between: (l) premiums collected and investment earnings realized and (2) loss and loss expenses paid, reinsurance purchased and underwriting and other expenses paid. Cash flows from operations may differ substantially from
net income
and may be volatile from period to period depending on the underwriting opportunities available to us and other factors. Due to the nature of our underwriting portfolio, claim payments can be unpredictable and may need to be made within relatively short periods of time. Claim payments can also be required several months or years after premiums are collected.
Operating, investing and financing cash flows for the
six
months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
($ in thousands)
|
Net cash provided by (used in) operating activities
|
$
|
(17,445
|
)
|
|
$
|
28,163
|
|
Net cash provided by (used in) investing activities
|
73,805
|
|
|
(38,941
|
)
|
Net cash used in financing activities
|
(58,056
|
)
|
|
(2,591
|
)
|
Net decrease in cash and cash equivalents
|
(1,696
|
)
|
|
(13,369
|
)
|
Cash and cash equivalents at beginning of period
|
9,951
|
|
|
20,407
|
|
Cash and cash equivalents at end of period
|
$
|
8,255
|
|
|
$
|
7,038
|
|
Operating Activities
Cash flows provided by operating activities generally represent net premiums collected less loss and loss adjustment expenses, acquisition costs and general and administrative expenses paid. The decrease in cash flows from operating activities in the
six
months ended
June 30, 2017
compared to the
six
months ended
June 30, 2016
is primarily due to lower float generated from our reinsurance operations in the
six
months ended
June 30, 2017
compared to the
six
months ended
June 30, 2016
. Excess cash generated from our operating activities is then invested by Third Point LLC, which is reflected in the cash used in investing activities.
For the
six
months ended
June 30, 2017
and
2016
, we redeemed
$15.1 million
and contributed
$36.6
million, respectively, to our separate accounts managed by Third Point LLC from float generated from our reinsurance operations. These amounts do not correspond to the net cash provided by operating activities as presented in the condensed consolidated statements of cash flows prepared in accordance with U.S. GAAP. The amount of float can vary significantly from period to period depending on the timing, type and size of reinsurance contracts we bind. Refer to “
ITEM 2. Management’s Discussion and Analysis - Property and Casualty Reinsurance
” for a definition of insurance float.
Investing Activities
Cash flows provided by investing activities primarily reflects investment activities related to our separate accounts managed by Third Point LLC. Cash flows provided by investing activities for the
six
months ended
June 30, 2017
primarily relates to proceeds from the sale of certain investments to fund cash flows from operations and share repurchases. Cash flows used in investing activities for the
six
months ended
June 30, 2016
primarily reflects the investment of float generated from our reinsurance operations, including the proceeds from deposit contracts.
Financing Activities
Cash flows used in financing activities for the
six
months ended
June 30, 2017
consisted of
$18.1 million
of net withdrawals from the non-controlling interests and $
40.9
million for shares repurchased. Cash flows used in financing activities for the
six
months ended
June 30, 2016
consisted of $7.4 million for shares repurchased partially offset by contributions received on deposit contracts.
For the period from inception until
June 30, 2017
, we have had sufficient cash flow from the proceeds of our initial capitalization and IPO, the issuance of Notes in February 2015, and from our operations to meet our liquidity requirements. We expect that projected operating and capital expenditure requirements and debt service requirements for at least the next twelve months will be met by our balance of cash, cash flows generated from operating activities and investment income. We may incur additional indebtedness in the future if we determine that it would be an efficient part of our capital structure.
In addition, we expect that our existing cash and cash flow from operations will provide us with the financial flexibility to execute our strategic objectives. Our ability to generate cash, however, is subject to our performance, general economic conditions, industry trends and other factors. To the extent existing cash and cash equivalents, investment returns and operating cash flow are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing shareholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business. There is no assurance that we would be able to raise the additional funds on favorable terms or at all. There are regulatory and contractual restrictions and rating agency considerations that might impact the ability of our reinsurance subsidiaries to pay dividends to their respective parent companies, including for purposes of servicing TPRUSA’s debt obligations.
We do not believe that inflation has had a material effect on our consolidated results of operations to date. The effects of inflation are considered implicitly in pricing our reinsurance contracts. Loss reserves are established to recognize likely loss settlements at the date payment is made. Those reserves inherently recognize the effects of inflation. However, the actual effects of inflation on our results cannot be accurately known until claims are ultimately resolved.
Cash, Restricted Cash and Cash Equivalents and Restricted Investments
Cash and cash equivalents consist of cash held in banks and other short-term, highly liquid investments with original maturity dates of ninety days or less.
See Note
3
to our condensed consolidated financial statements for additional information on restricted cash, cash equivalents and investments.
Restricted cash and cash equivalents and restricted investments
increase
d by
$4.2 million
, or
0.6%
, to
$730.5 million
as of
June 30, 2017
from
$726.2 million
as of
December 31, 2016
. The
increase
was primarily due to
an increase
in the number of reinsurance contracts that required collateral partially offset by lower letter of credit usage. In addition, we are now investing a portion of the collateral securing certain reinsurance contracts in U.S. treasury securities and sovereign debt. This portion of the collateral is included in debt securities in the condensed consolidated balance sheets and is disclosed as part of restricted investments.
Letter of Credit Facilities
See Note
10
to our condensed consolidated financial statements for additional information regarding our letter of credit facilities.
As of
June 30, 2017
,
$218.0 million
(
December 31, 2016
-
$231.8 million
) of letters of credit, representing
45.9%
of the total available facilities of
$475.0 million
, had been issued (
December 31, 2016
-
44.2%
(based on total available facilities of
$525.0 million
)).
Under the letter of credit facilities, we provide collateral that consists of cash and cash equivalents. As of
June 30, 2017
, total cash and cash equivalents with a fair value of
$219.5 million
(
December 31, 2016
-
$231.8 million
) was pledged as collateral against the letters of credit issued. Our ability to post collateral securing letters of credit and certain
reinsurance contracts depends in part on our ability to borrow against certain assets in our Investment Accounts through prime brokerage arrangements. See Note
5
to our condensed consolidated financial statements for additional information regarding our prime brokerage arrangements. The loss or reduction in this borrowing capacity could reduce the amount of reinsurance we write or reduce the amount of float that we contribute to our Investment Accounts.The collateral amounts securing letters of credit are included in restricted cash and cash equivalents in the condensed consolidated balance sheets. Each of the facilities contain customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements and an A.M. Best Company rating of “A-“ or higher. Each restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facilities, we will be prohibited from paying dividends. We were in compliance with all of the covenants under the aforementioned facilities as of
June 30, 2017
.
Financial Condition
Shareholders’ equity
As of
June 30, 2017
, total shareholders’ equity was
$1,576.1 million
, compared to
$1,449.7 million
as of
December 31, 2016
. The
increase
was primarily due to net income of
$178.8 million
and share compensation expense and proceeds from stock options exercised totaling
$4.4 million
, partially offset by net distributions and contributions of non-
controlling interests of
$18.1 million
, primarily related to our investment in our joint venture with Third Point LLC, and share repurchases of
$40.9 million
in the six months ended
June 30, 2017
.
Investments
As of
June 30, 2017
, total cash and net investments managed by Third Point LLC was
$2,385.5 million
, compared to
$2,191.6 million
as of
December 31, 2016
. The
increase
was primarily due to net investment income on investments managed by Third Point LLC of
$235.4 million
, partially offset by net redemptions of $34.8 million.
Contractual Obligations
There have been no other material changes to our contractual obligations from our most recent Annual Report on Form 10-K, as filed with the SEC.
Off-Balance Sheet Commitments and Arrangements
We have no obligations, assets or liabilities, other than those derivatives in our investment portfolio and disclosed in the notes to our condensed consolidated financial statements, which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
As of
June 30, 2017
, we had an unfunded capital commitment of
$3.2 million
related to our investment in the Hellenic Fund (see
Note 16
to our condensed consolidated financial statements for additional information).
Critical Accounting Policies and Estimates
For a summary of our significant accounting and reporting policies, please refer to Note 2, “Significant accounting policies”, included in our
2016
Form 10-K.
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions. We believe that the accounting policies that require the most significant judgments and estimations by management are: (1) premium revenue recognition including evaluation of risk transfer, (2) loss and loss adjustment expense reserves, and (3) fair value measurements related to our investments. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.
There have been no material changes in our critical accounting estimates for the
six
months ended
June 30, 2017
. Refer to Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations”, included in our
2016
Form 10-K.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We believe we are principally exposed to the following types of market risk:
Equity Price Risk
Our investment manager, Third Point LLC, tracks the performance and exposures of our investment portfolio, each strategy and sector, and selective individual securities. A particular focus is placed on “beta” exposure, which is the
portion of the portfolio that is directly correlated to risks and movements of the equity market as a whole (usually represented by the S&P 500 index) as opposed to idiosyncratic risks and factors associated with a specific position. Further, the performance of our investment portfolio has historically been compared to several market indices, including the S&P 500, CS/Tremont Event Driven Index, HFRI Event Driven Index, and others.
As of
June 30, 2017
, our investment portfolio included long and short equity securities, along with certain equity-based derivative instruments, the carrying values of which are primarily based on quoted market prices. Generally, market prices of common equity securities are subject to fluctuation, which could cause the amount to be realized upon the closing of the position to differ significantly from their current reported value. This risk is partly mitigated by the presence of both long and short equity securities in our investment portfolio. As of
June 30, 2017
, a 10% decline in the value of all equity and equity-linked derivatives would result in a loss of $161.7 million, or 6.6% of our total net investments managed by Third Point LLC.
Computations of the prospective effects of hypothetical equity price changes are based on numerous assumptions, including the maintenance of the existing level and composition of investment securities and should not be relied on as indicative of future results.
Foreign Currency Risk
Reinsurance Contracts
We have foreign currency exposure related to non-U.S. dollar denominated reinsurance contracts. Of our gross premiums written from inception, $381.2 million, or 13.6%, were written in currencies other than the U.S. dollar. As of
June 30, 2017
, loss and loss adjustment expense reserves included $151.2 million (December 31,
2016
- $94.5 million) and net reinsurance balances receivable included $94.9 million (
December 31, 2016
- $5.1 million) in foreign currencies. These foreign currency liability exposures were generally offset by foreign currencies held in trust accounts of $99.7 million as of
June 30, 2017
(
December 31, 2016
- $104.2 million). The foreign currency cash and cash equivalents and investments held in reinsurance trust accounts are included in net investments managed by Third Point LLC. The exposure to foreign currency collateral held in trust accounts is excluded from the foreign currency investment exposure table below.
Investments
Third Point LLC continually measures foreign currency exposures in the investment portfolio and compares current exposures to historical movement within the relevant currencies. Within the ordinary course of business, Third Point LLC may decide to hedge foreign currency risk within our investment portfolio by using short-term forward contracts; however, from time to time Third Point LLC may determine not to hedge based on its views of the likely movements of the underlying currency.
We are exposed to foreign currency risk through cash, forwards, options and investments in securities denominated in foreign currencies. Foreign currency exchange rate risk is the potential for adverse changes in the U.S. dollar value of investments (long and short) and foreign currency derivative instruments, which we employ from both a speculative and risk management perspective, due to a change in the exchange rate of the foreign currency in which cash and financial instruments are denominated. As of
June 30, 2017
, our total net short exposure to foreign denominated securities represented 8.2% (
December 31, 2016
- 10.6%) of our investment portfolio including cash and cash equivalents, of $200.8 million (
December 31, 2016
- $204.0 million).
The following table summarizes the net impact that a 10% increase and decrease in the value of the U.S. dollar against select foreign currencies would have had on the value of our investment portfolio as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% increase in U.S. dollar
|
|
10% decrease in U.S. dollar
|
|
Change in fair value
|
|
Change in fair value as % of investment portfolio
|
|
Change in fair value
|
|
Change in fair value as % of investment portfolio
|
|
($ in thousands)
|
Hong Kong Dollar
|
$
|
15,999
|
|
|
0.65
|
%
|
|
$
|
(15,999
|
)
|
|
(0.65
|
)%
|
Saudi Arabian Riyal
|
11,217
|
|
|
0.46
|
%
|
|
(11,217
|
)
|
|
(0.46
|
)%
|
Swiss Franc
|
(3,734
|
)
|
|
(0.15
|
)%
|
|
3,734
|
|
|
0.15
|
%
|
Other
|
(3,408
|
)
|
|
(0.14
|
)%
|
|
3,408
|
|
|
0.14
|
%
|
Total
|
$
|
20,074
|
|
|
0.82
|
%
|
|
$
|
(20,074
|
)
|
|
(0.82
|
)%
|
Interest Rate Risk
Our investment portfolio includes interest rate sensitive securities, such as corporate bonds, U.S. treasury securities, and sovereign debt instruments, asset-backed securities (“ABS”), and interest rate options and derivatives. One key market risk exposure for any debt instrument is interest rate risk. As interest rates rise, the fair value of our long fixed-income portfolio falls, and the opposite is also true as interest rates fall. Additionally, some of our corporate and sovereign debt instruments, ABS and derivative investments may also be credit sensitive and their value may indirectly fluctuate with changes in interest rates.
The effect of interest rate movements have historically not had a material impact on the performance of our investment portfolio as managed by Third Point LLC. However, our investment manager monitors the potential effects of interest rate shifts by performing stress tests against the portfolio composition using a proprietary in-house risk system.
The following table summarizes the impact that a 100 basis point increase or decrease in interest rates would have on the value of our investment portfolio as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 basis point increase in interest rates
|
|
100 basis point decrease in interest rates
|
|
Change in fair value
|
|
Change in fair value as % of investment portfolio
|
|
Change in fair value
|
|
Change in fair value as % of investment portfolio
|
|
($ in thousands)
|
Corporate bonds, U.S. treasuries and sovereign debt instruments
(1)
|
$
|
(9,318
|
)
|
|
(0.4
|
)%
|
|
$
|
9,660
|
|
|
0.4
|
%
|
Asset-backed securities
(2)
|
(2,990
|
)
|
|
(0.1
|
)%
|
|
3,078
|
|
|
0.1
|
%
|
Interest rate swaps and derivatives
|
4,080
|
|
|
0.2
|
%
|
|
(4,080
|
)
|
|
(0.2
|
)%
|
Net exposure to interest rate risk
|
$
|
(8,228
|
)
|
|
(0.3
|
)%
|
|
$
|
8,658
|
|
|
0.3
|
%
|
|
|
(1)
|
Includes interest rate risk associated with investments held in reinsurance trust accounts.
|
|
|
(2)
|
Includes instruments for which durations are available on
June 30, 2017
. Includes a convexity adjustment if convexity is available. Not included are mortgage hedges which would reduce the impact of interest rate changes.
|
For the purposes of the above table, the hypothetical impact of changes in interest rates on debt instruments, ABS, and interest rate options was determined based on the interest rates and credit spreads applicable to each instrument individually. We and our investment manager periodically monitor our net exposure to interest rate risk and generally do not expect changes in interest rates to have a materially adverse impact on our operations.
Commodity Price Risk
In managing our investment portfolio, Third Point LLC periodically monitors and actively trades to take advantage of, and/or seeks to minimize any losses from, fluctuations in commodity prices. As our investment manager, Third Point
LLC may choose to opportunistically make a long or short investment in a commodity or in a security directly affected by the price of a commodity as a response to market developments. From time to time, we invest in commodities or commodities exposures in the form of derivative contracts from both a speculative and risk management perspective. Generally, market prices of commodities are subject to fluctuation.
As of
June 30, 2017
, our investment portfolio had de minimis (
December 31, 2016
- de minimis) commodity exposure.
We and our investment manager periodically monitor our exposure to commodity price fluctuations and generally do not expect changes in commodity prices to have a material adverse impact on our operations.
Credit Risk
Reinsurance Contracts
We have exposure to credit risk in several reinsurance contracts with companies that write credit risk insurance, which primarily consists of mortgage insurance credit risk. Loss experience in these lines of business is cyclical and is affected by the state of the general economic environment. We provide our clients in these lines of business with reinsurance protection against credit deterioration, defaults or other types of financial non-performance. We mitigate the risks associated with these credit-sensitive lines of business through the use of risk management techniques such as risk diversification and monitoring of risk aggregations. We have written $247.2 million, or 8.8%, of credit and financial lines premium since inception, of which
$18.8 million
was written in the
six
months ended
June 30, 2017
. The majority of the mortgage insurance premium has been written as quota shares of private mortgage insurers, primarily in the United States. We also wrote a financial lines retrocessional cover that includes mortgage risk.
We have exposure to credit risk as it relates to its business written through brokers, if any of our brokers are unable to fulfill their contractual obligations with respect to payments to us. In addition, in some jurisdictions, if the broker fails to make payments to the insured under our policy, we may remain liable to the insured for the deficiency. Our exposure to such credit risk is somewhat mitigated in certain jurisdictions by contractual terms.
We are exposed to credit risk relating to balances receivable under our reinsurance contracts, including premiums receivable, and the possibility that counterparties may default on their obligations to us. The risk of counterparty default is partially mitigated by the fact that any amount owed to us from a reinsurance counterparty would be netted against any losses we would pay in the future. We monitor the collectability of these balances on a regular basis.
Investments
We are also exposed to credit risk through our investment activities related to our separate accounts managed by Third Point LLC. Third Point LLC typically performs intensive fundamental analysis on the broader markets, credit spreads, security-specific information, and the underlying issuers of debt securities that are contained in our investment portfolio.
In addition, the securities and cash in our investment portfolio are held with several prime brokers, subjecting us to the related credit risk from the possibility that one or more of them may default on their obligations to us. Our investment manager closely and regularly monitors the concentration of credit risk with each broker and if necessary, transfers cash or securities among brokers to diversify and mitigate our credit risk.
As of
June 30, 2017
and
December 31, 2016
, the largest concentration of our asset-backed securities (“ABS”) holdings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
($ in thousands)
|
Reperforming loans
|
$
|
149,570
|
|
|
66.5
|
%
|
|
$
|
44,359
|
|
|
17.4
|
%
|
Subprime RMBS
|
—
|
|
|
—
|
%
|
|
117,152
|
|
|
46.0
|
%
|
Market place loans
|
51,768
|
|
|
23.0
|
%
|
|
44,143
|
|
|
17.3
|
%
|
Other (1)
|
23,576
|
|
|
10.5
|
%
|
|
49,198
|
|
|
19.3
|
%
|
|
$
|
224,914
|
|
|
100.0
|
%
|
|
$
|
254,852
|
|
|
100.0
|
%
|
|
|
(1)
|
Other includes: U.S. Alt-A positions, collateralized debt obligations, commercial mortgage-backed securities, non-U.S. RMBS and student loans ABS.
|
As of
June 30, 2017
, all of our ABS holdings were private-label issued, non-investment grade securities, and none of these securities were guaranteed by a government sponsored entity. As a result of its investment in these types of ABS, our investment portfolio is exposed to the credit risk of underlying borrowers, which may not be able to make timely payments on loans or which may default on their loans. All of these classes of ABS are sensitive to changes in interest rates and any resulting change in the rate at which borrowers sell their properties (in the case of mortgage-backed securities), refinance, or otherwise pre-pay their loans. As an investor in these classes of ABS, we may be exposed to the credit risk of underlying borrowers not being able to make timely payments on loans or the likelihood of borrowers defaulting on their loans. In addition, we may be exposed to significant market and liquidity risks.
Liquidity Risk
Certain of our investments may become illiquid. Disruptions in the credit markets may materially affect the liquidity of certain investments, including ABS, which represent
8.4%
(
December 31, 2016
- 9.7%) of total cash and investments as of
June 30, 2017
. If we require significant amounts of cash on short notice in excess of normal cash requirements, which could include the payment of claims expenses or to satisfy a requirement of A.M. Best, in a period of market illiquidity, certain investments may be difficult to sell in a timely manner and may have to be disposed of for less than what may otherwise have been possible under normal conditions. As of
June 30, 2017
, we had
$1,886.8 million
(
December 31, 2016
- $1,452.3 million) of unrestricted, liquid investment assets, defined as unrestricted cash and investments and securities with quoted prices available in active markets/exchanges.
Political Risk
Investments
We are exposed to political risk to the extent our investment manager trades securities that are listed on various U.S. and foreign exchanges and markets. The governments in any of these jurisdictions could impose restrictions, regulations or other measures, which may have a material impact on our investment strategy and underwriting operations.
In managing our investment portfolio, Third Point LLC routinely monitors and assesses relative levels of risk associated with local political and market conditions and focuses its investments primarily in countries in which it believes the rule of law is respected and followed, thereby affording more predictable outcomes of investments in that country.
Reinsurance Contracts
We also have limited political risk exposure in several reinsurance contracts with companies that write political risk insurance.
Recent Accounting Pronouncements
Refer to Note 2 to our condensed consolidated financial statements for the
six
months ended
June 30, 2017
included in Item 1 of this Quarterly Report on Form 10-Q for details of recently issued accounting standards.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of
June 30, 2017
. Based upon this evaluation, our Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of
June 30, 2017
.
Changes in Internal Control over Financial Reporting
There have been no material changes to our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - Other Information
ITEM 1. Legal Proceedings
We anticipate that, similar to the rest of the reinsurance industry, we will be subject to litigation and arbitration from time to time in the ordinary course of business.
If we are subject to disputes in the ordinary course of our business, we anticipate engaging in discussions with the parties to the applicable contract to seek to resolve the matter. If such discussions are unsuccessful, we anticipate invoking the dispute resolution provisions of the relevant contract, which typically provide for the parties to submit to arbitration or litigation, as applicable, to resolve the dispute.
There are currently no material legal proceedings to which we or our subsidiaries are a party.
ITEM 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our Form 10-K filed with the Securities and Exchange Commission on February 24, 2017.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our repurchase of common shares during the three months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Total Number of Shares Purchased
|
|
(b) Average Price Paid per Share
(1)
|
|
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
(2)
|
April 1, 2017 - April 30, 2017
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
73,726,864
|
|
May 1, 2017 - May 31, 2017
|
1,686,547
|
|
|
12.42
|
|
|
1,686,547
|
|
|
52,787,163
|
|
June 1, 2017 - June 30, 2017
|
80,734
|
|
|
12.88
|
|
|
80,734
|
|
|
51,747,060
|
|
Total
|
1,767,281
|
|
|
$
|
12.44
|
|
|
1,767,281
|
|
|
$
|
51,747,060
|
|
(1) Including commissions.
(2) On May 4, 2016, our Board of Directors authorized a common share repurchase program for up to an aggregate of $100.0 million of the Company’s outstanding common shares.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
|
|
|
31.1
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1*
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2*
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.LAB
|
XBRL Taxonomy Extension Labels Linkbase Document
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
*
|
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
|
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
Third Point Reinsurance Ltd.
|
Date: August 3, 2017
|
|
|
/s/ J. Robert Bredahl
|
|
J. Robert Bredahl
|
|
President and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
/s/ Christopher S. Coleman
|
|
Christopher S. Coleman
|
|
Chief Financial Officer
|
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
|
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