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 business 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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results of operations fluctuate and may not be indicative of our prospects;
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more established competitors;
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losses exceeding reserves;
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highly cyclical property and casualty reinsurance industry;
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downgrade or withdrawal of ratings by rating agencies;
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significant decrease in our capital or surplus;
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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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inability to service our indebtedness;
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limited cash flow and liquidity due to our indebtedness;
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inability to raise necessary funds to pay principal or interest on debt;
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potential lack of availability of capital in the future;
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credit risk associated with the use of reinsurance brokers;
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future strategic transactions such as acquisitions, dispositions, mergers or joint ventures;
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dependence on Third Point LLC to implement TP Fund’s investment strategy;
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decline in revenue due to poor performance of TP Fund’s investment portfolio;
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TP Fund’s investment strategy involves risks that are greater than those faced by competitors;
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termination by Third Point LLC of our or TP Fund’s investment management agreements;
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potential conflicts of interest with Third Point LLC;
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losses resulting from significant investment positions;
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credit risk associated with the default on obligations of counterparties;
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ineffective investment risk management systems;
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fluctuations in the market value of TP Fund’s investment portfolio;
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trading restrictions being placed on TP Fund’s investments;
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limited termination provisions in our investment management agreements;
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limited liquidity and lack of valuation data on certain TP Fund’s investments;
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U.S. and global economic downturns;
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specific characteristics of investments in mortgage-backed securities and other asset-backed securities, in securities of issues based outside the U.S., and in special situation or distressed companies;
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loss of key employees at Third Point LLC;
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Third Point LLC’s compensation arrangements may incentivize investments that are risky or speculative;
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increased regulation or scrutiny of alternative investment advisers affecting our reputation;
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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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failure of reinsurance subsidiaries to meet minimum capital and surplus requirements;
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changes in Bermuda or other law and regulation that may have an adverse impact on our operations;
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Third Point Re and/or Third Point Re BDA potentially becoming subject to U.S. federal income taxation;
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potential characterization of Third Point Re and/or Third Point Re BDA as a passive foreign investment company;
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subjection of our affiliates to the base erosion and anti-abuse tax;
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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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risks associated with the change in our investment management structure;
and
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other risks and factors listed under “Risk Factors” in our most recent Annual Report on Form 10-K, as updated by our Quarterly Report on Form 10-Q for the period ended June 30, 2018 (the “Q2 10-Q”), this Quarterly Report on Form 10-Q, 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. (“Third Point Re”) and its directly and indirectly owned subsidiaries, including Third Point Reinsurance Company Ltd. (“Third Point Re BDA”) 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 Re 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, the investment manager of Third Point Enhanced LP (“TP Fund”). 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. Non-underwriting income expenses are presented as a reconciliation to our consolidated results include: net investment income, certain general and administrative expenses related to corporate activities, interest expense,
foreign exchange gains (losses)
and
income tax (expense) benefit
.
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 currently assume a minimal amount of property catastrophe risk and our property catastrophe exposures have remained 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.
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 hope to grow float over time as our reinsurance operations expand.
Investment Management
During the period covered by this report, we transitioned to a new investment management structure, as previously disclosed in our Q2 10-Q and as disclosed in Note 4 to the condensed consolidated financial statements included in this Form 10-Q.
We expect our overall investment exposures, returns, fees paid to Third Point LLC and TP GP as well as the investment guidelines, liquidity and redemption rights to be generally similar under the new LPA and TP Fund IMA compared to what would have been expected under the separate accounts managed under the JV Agreements, assuming similar underlying investment portfolio returns and exposure levels. However, there can be no assurance of such results.
The TP Fund investment strategy, as implemented by Third Point LLC, is intended to achieve superior risk-adjusted returns by deploying capital in both long and short investments with favorable risk/reward characteristics across select asset classes, sectors and geographies. Third Point LLC identifies investment opportunities via a bottom-up, value-oriented approach to single security analysis supplemented by a top-down view of portfolio and risk management. Third Point LLC seeks dislocations in certain areas of the capital markets or in the pricing of particular securities and supplements single security analysis with an approach to portfolio construction that includes sizing each investment based on upside/downside calculations, all with a view towards appropriately positioning and managing overall exposures.
Limited Partnership Agreement
In accordance with the investment guidelines under the LPA, the underlying investment portfolio of TP Fund is managed on a basis that is substantially equivalent to Third Point Offshore Master Fund L.P., which is managed by Third Point LLC, but with increased exposures through the use of additional financial leverage. The leverage of TP Fund will be managed based on the terms of the LPA to generally target a “leverage factor” of (a) one and one half times (1.5x) for investments in liquid securities and (b) one time (1x) for investments in illiquid securities and ABS securities, in each case, as determined by TP GP in its sole discretion. In addition, pursuant to the LPA, TP GP will be required to apply the following limitations for TP Fund: (1)
Composition of Investments
: at least 60% of the investment portfolio will be held in debt and equity securities of publicly traded companies and governments of the Organization of Economic Co-operation and Development (“OECD”) high income countries, asset backed securities, cash, cash equivalents and gold and other precious metals; (2)
Concentration of Investments
: other than cash, cash equivalents and United States government obligations, TP Fund’s total exposure to any one issuer or entity will constitute no more than 15% (multiplied by the exposure multiplier described above) of the investment portfolio’s total exposure; (3)
Liquidity
: the portfolio of TP Fund will be invested in such fashion that the Company has a reasonable expectation that it can meet any of its liabilities as they become due; and (4)
Net Exposure Limits
: the net exposure may not exceed two times net asset value for more than 10 trading days in any 30-trading day period. Net exposure represents the short exposure subtracted from the long exposure in a given category.
Under the LPA, the TPRE Limited Partners will have the right to withdraw funds weekly from TP Fund to pay claims and expenses as needed, to meet capital adequacy requirements and to satisfy financing obligations. The TPRE Limited Partners may also withdraw their investment upon the occurrence of certain events specified in the LPA and may withdraw their investment in full on December 31, 2021 and each successive three-year anniversary of such date.
The term of TP Fund shall continue until the occurrence of certain events described in the LPA.
With respect to each of the TPRE Limited Partners, TP GP receives a performance allocation equal to 20% of the net investment income allocated to each limited partner’s capital account in TP Fund. The performance allocation is calculated at the end of each fiscal year of TP Fund as 20% of the net increase, if any, allocated to the limited partner’s capital account in TP Fund for such fiscal year, minus the management fee and any loss recovery account balance relating to such capital account. See
Note 11
to the condensed consolidated financial statements included in this Form 10-Q for a breakdown of the management and performance fees paid in connection with our investment in TP Fund.
Collateral Assets IMA
On July 31, 2018, Third Point Re BDA and Third Point Re USA entered into an investment management agreement with Third Point LLC (the “Collateral Assets IMA”), effective August 31, 2018, pursuant to which Third Point LLC serves as investment manager of certain collateral assets that are not expected to be transferred to TP Fund. The Collateral Assets IMA will continue in effect for so long as either Third Point Re BDA or Third Point Re USA remains a limited partner of TP Fund. The Collateral Assets IMA includes provisions limiting liability of Third Point LLC and its affiliates to specified circumstances and providing for indemnification by Third Point Re BDA and Third Point Re USA for certain losses incurred by Third Point LLC and its affiliates. Third Point Re BDA and Third Point Re USA will be responsible for any and all third party expenses incurred by them or on their behalf that are directly attributable to the management of the collateral assets, other than those borne by Third Point LLC. No asset-based or performance-based compensation will be paid to Third Point LLC by Third Point Re BDA or Third Point Re USA under the Collateral Assets IMA.
Upon three business days’ prior written notice, Third Point Re BDA and Third Point Re USA may withdraw all or a portion of the collateral assets effective as of any calendar month end or on the close of business on each Wednesday during a month.
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.
Although the industry experienced significant losses in 2017, there continues to be significant underwriting capacity available and market conditions remain challenging. While many market participants were hopeful that the significant catastrophe losses in 2017 would lead to improvements in pricing, terms and conditions within the property catastrophe line of business with the possibility of improvements in other reinsurance lines, improvements were generally lower than market expectations. However, we are seeing some signs of improvement in reinsurance terms and conditions and underlying pricing in the capital relief structures on which we have historically focused. We are cautiously optimistic that we will continue to see similar improvements across our in force portfolio as well as new business opportunities.
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. As our capital position strengthens and market conditions gradually improve, we expect to incrementally expand the lines of business and forms of reinsurance on which we focus to help drive our combined ratio below 100%. This may include lines of business and forms of reinsurance with increased risk profiles where we believe the higher expected margins adequately compensate us for the increased risk. We have begun writing some excess of loss casualty covers in lines of business where we have historically assumed only quota share exposure. We plan to expand into new specialty lines of business and to write a modest amount of property catastrophe business beginning in 2019 and have hired two experienced senior underwriters with strong market relationships in these lines of business as well as support staff to help us with this effort.
Key Performance Indicators
We believe that by combining a disciplined and opportunistic approach to reinsurance underwriting with investment results from the active management of TP Fund’s investment portfolio, in which we invest, we will be able to generate attractive returns for our shareholders. The key financial measures that we believe are most meaningful in analyzing our performance are: net underwriting income (loss) for our property and casualty reinsurance segment, combined ratio for our property and casualty reinsurance segment,
net investment income (loss)
, net investment return on investments managed by Third Point LLC, basic book value per share, diluted book value per share, growth in diluted book value per share, return on beginning shareholders’ equity attributable to Third Point Re common shareholders and invested asset leverage.
The table below shows the key performance indicators for our consolidated business for the
three and nine
months ended
September 30, 2018
and
2017
:
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Three months ended
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Nine months ended
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September 30,
2018
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September 30,
2017
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September 30,
2018
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September 30,
2017
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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 loss
(1)
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$
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(6,317
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)
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$
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(12,565
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)
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$
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(17,734
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)
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$
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(33,326
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)
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Combined ratio
(1)
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104.9
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%
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111.9
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%
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104.3
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%
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108
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%
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Key investment return metrics:
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Net investment income (loss)
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$
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(3,590
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)
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$
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88,968
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$
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25,377
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$
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324,803
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Net investment return on investments managed by Third Point LLC
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(0.2
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)%
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3.6
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%
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0.6
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%
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14.6
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%
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Key shareholders’ value creation metrics:
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Basic book value per share
(2) (3)
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$
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16.37
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$
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16.33
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$
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16.37
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$
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16.33
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Diluted book value per share
(2) (3)
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$
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15.60
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$
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15.65
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$
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15.60
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$
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15.65
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Change in diluted book value per share
(2)
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(0.2
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)%
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3.4
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%
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(0.3
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)%
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15.8
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%
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Return on beginning shareholders’ equity attributable to Third Point Re common shareholders
(2)
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(0.8
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)%
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3.5
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%
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(1.2
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)%
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16.8
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%
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Invested asset leverage
(3)
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1.6
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1.6
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1.6
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1.6
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(1)
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See
Note 24
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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Basic book value per share, diluted book value per share, change in diluted book value per share and return on beginning shareholders’ equity attributable to Third Point Re common shareholders are non-GAAP financial measures. There are no comparable GAAP measures. See reconciliations in “Non-GAAP Financial Measures and Other Financial Metrics”.
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(3)
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Prior year comparatives represent amounts as of December 31,
2017
.
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Key Underwriting Metrics for Property and Casualty Reinsurance segment
See “Segment Results -
Property and Casualty Reinsurance
” below for additional details.
Key Investment Return Metrics
Net investment income (loss)
is an important measure that affects overall profitability.
Net investment income (loss)
is primarily affected by the performance of Third Point LLC as TP Fund’s exclusive investment manager and the amount of investable cash generated by our reinsurance operations. Pursuant to the investment management agreement between TP Fund and Third Point LLC, Third Point LLC is required to manage TP Fund’s investment portfolio on a basis that is substantially equivalent to Third Point Offshore Master Fund L.P., subject to certain conditions set forth in TP Fund’s 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. The LPA allows us to withdraw cash from the TP Fund at any time with three days’ notice to pay claims and with five days’ notice to pay expenses.
Net investment income (loss)
is net of investment fee expenses, which include performance and management fees to related parties.
See “Investment Results” below for additional information regarding investment performance and net investment return on investments managed by Third Point LLC.
Key Shareholders’ Value Creation Metrics
Basic Book Value Per Share and Diluted Book Value Per Share
Basic book value per share and diluted book value per share are non-GAAP financial measures and there are no comparable GAAP measures. See “Non-GAAP Financial Measures and Other Financial Metrics” for reconciliations.
As of
September 30, 2018
, basic book value per share was
$16.37
, representing
an increase
of
$0.06
per share, or
0.4%
, from
$16.31
per share as of
June 30, 2018
. As of
September 30, 2018
, diluted book value per share was
$15.60
, representing
a decrease
of
$0.03
per share, or
0.2%
, from
$15.63
per share as of
June 30, 2018
. The changes were primarily due to the impact of share repurchases and the net loss in the period.
As of
September 30, 2018
, basic book value per share was
$16.37
, representing
an increase
of
$0.04
per share, or
0.2%
, from
$16.33
per share as of
December 31, 2017
. As of
September 30, 2018
, diluted book value per share was
$15.60
, representing
a decrease
of
$0.05
per share, or
0.3%
, from
$15.65
per share as of
December 31, 2017
. The changes were primarily due to the impact of share repurchases and the net loss in the period.
The changes in basic book value per share and diluted book value per share were also affected by share activity including share repurchases and the issuance of performance restricted shares.
Return on Beginning Shareholders’ Equity Attributable to Third Point Re Common Shareholders
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders as presented is a non-GAAP financial measure. See “Non-GAAP Financial Measures and Other Financial Metrics” for reconciliation.
The decrease in return on beginning shareholders’ equity attributable to Third Point Re common shareholders for the
three and nine
months ended
September 30, 2018
compared to the
three and nine
months ended
September 30, 2017
was primarily due to a net loss in the current year periods.
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 Third Point Re common shareholders and is a key metric in assessing the amount of float generated by our reinsurance operation. 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 in order to optimize our return potential, while maintaining sufficient rating agency and regulatory capital is an important aspect of how we manage the Company. We generally target an invested asset leverage ratio within a range of approximately 1.5 to 1.6, which we believe appropriately balances our return potential against the risk within our investment portfolio.
Invested asset leverage was consistent between
September 30, 2018
and
December 31, 2017
.
Consolidated Results of Operations—
Three and nine
months ended
September 30, 2018
and
2017
:
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 nine
months ended
September 30, 2018
and
2017
:
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|
|
|
|
|
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|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Change
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Change
|
|
|
($ in thousands)
|
|
Net underwriting loss
|
$
|
(6,317
|
)
|
|
$
|
(12,565
|
)
|
|
$
|
6,248
|
|
|
$
|
(17,734
|
)
|
|
$
|
(33,326
|
)
|
|
$
|
15,592
|
|
|
Net investment income (loss)
|
(3,590
|
)
|
|
88,968
|
|
|
(92,558
|
)
|
|
25,377
|
|
|
324,803
|
|
|
(299,426
|
)
|
|
Net investment return on investments managed by Third Point LLC
|
(0.2
|
)%
|
|
3.6
|
%
|
|
(3.8
|
)%
|
|
0.6
|
%
|
|
14.6
|
%
|
|
(14.0
|
)%
|
|
Corporate expenses
|
(4,748
|
)
|
|
(5,927
|
)
|
|
1,179
|
|
|
(14,138
|
)
|
|
(15,552
|
)
|
|
1,414
|
|
|
Other income (expense)
|
1,362
|
|
|
(3,846
|
)
|
|
5,208
|
|
|
(6,616
|
)
|
|
(8,852
|
)
|
|
2,236
|
|
|
Interest expense
|
(2,074
|
)
|
|
(2,074
|
)
|
|
—
|
|
|
(6,154
|
)
|
|
(6,151
|
)
|
|
(3
|
)
|
|
Foreign exchange gains (losses)
|
1,979
|
|
|
(5,437
|
)
|
|
7,416
|
|
|
4,215
|
|
|
(10,233
|
)
|
|
14,448
|
|
|
Income tax (expense) benefit
|
111
|
|
|
(3,475
|
)
|
|
3,586
|
|
|
(4,407
|
)
|
|
(14,080
|
)
|
|
9,673
|
|
|
Net income (loss) available to Third Point Re common shareholders
|
$
|
(13,281
|
)
|
|
$
|
54,685
|
|
|
$
|
(67,966
|
)
|
|
$
|
(19,680
|
)
|
|
$
|
233,449
|
|
|
$
|
(253,129
|
)
|
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
net investment income (loss)
and therefore in our consolidated results.
Investment Results
Investment Portfolio
The following tables present the total long, short and net exposure of our net investments managed by Third Point LLC as of
September 30, 2018
and December 31, 2017 by strategy and geography. The tables as of September 30, 2018 include our investments in TP Fund and collateral assets managed by Third Point LLC. The tables as of December 31, 2017 include collateral assets managed by Third Point LLC and our investments in the separate accounts in place prior to the change in the investment management structure described in Note 4 to the condensed consolidated financial statements included in this Form 10-Q.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
Long
|
|
Short
|
|
Net
|
|
Long
|
|
Short
|
|
Net
|
|
Equity
|
97
|
%
|
|
(24
|
)%
|
|
73
|
%
|
|
98
|
%
|
|
(25
|
)%
|
|
73
|
%
|
|
Credit
|
17
|
%
|
|
(3
|
)%
|
|
14
|
%
|
|
16
|
%
|
|
(4
|
)%
|
|
12
|
%
|
|
Other
|
8
|
%
|
|
(1
|
)%
|
|
7
|
%
|
|
10
|
%
|
|
(2
|
)%
|
|
8
|
%
|
|
|
122
|
%
|
|
(28
|
)%
|
|
94
|
%
|
|
124
|
%
|
|
(31
|
)%
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
Long
|
|
Short
|
|
Net
|
|
Long
|
|
Short
|
|
Net
|
|
Americas
|
98
|
%
|
|
(24
|
)%
|
|
74
|
%
|
|
93
|
%
|
|
(29
|
)%
|
|
64
|
%
|
|
Europe, Middle East and Africa
|
20
|
%
|
|
(2
|
)%
|
|
18
|
%
|
|
7
|
%
|
|
—
|
%
|
|
7
|
%
|
|
Asia
|
4
|
%
|
|
(2
|
)%
|
|
2
|
%
|
|
24
|
%
|
|
(2
|
)%
|
|
22
|
%
|
|
|
122
|
%
|
|
(28
|
)%
|
|
94
|
%
|
|
124
|
%
|
|
(31
|
)%
|
|
93
|
%
|
In managing TP Fund’s investment portfolio, Third Point LLC assigns every investment position a sector, strategy and geographic category. The dollar exposure of each position under each category is aggregated and the exposure
percentages listed in the exposure table represent the aggregate market exposure of a given category against the total net asset value of the consolidated account. Long and short exposure percentages represent the aggregate relative value of all long and short positions in a given category, respectively. Net exposure represents the short exposure subtracted from the long exposure in a given category. Third Point LLC reports the composition of TP Fund’s total managed portfolio on a market exposure basis, which it believes is the appropriate manner in which to assess the exposure and profile of investments and is the way in which it manages the portfolio. Under this methodology, the exposure for equity swaps and futures contracts are reported at their full notional amount. The notional amount of any derivative contract is the underlying value upon which payment obligations are computed. For an equity total return swap, for example, the notional amount is the number of shares underlying the swap multiplied by the market price of those shares. Options are reported at their delta adjusted basis. The delta of an option is the sensitivity of the option price to the underlying stock price. The delta adjusted basis is the number of shares underlying the option multiplied by the delta and the underlying stock price. Credit derivatives are reported in accordance with their equivalent underlying security exposure. Cash and cash equivalents are excluded from exposure calculations.
Investment Returns
The following is a summary of the net investment return by investment strategy on investments managed by Third Point LLC for the
three and nine
months ended
September 30, 2018
and
2017
. The net investment return includes our investment accounts, inclusive of collateral assets managed by Third Point LLC, prior to August 31, 2018, the date of the change in the investment management structure described in Note 4 to the condensed consolidated financial statements included in this Form 10-Q, and our investment in TP Fund and collateral assets managed by Third Point LLC from the date of the transition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
|
Long
|
|
Short
|
|
Net
|
|
Long
|
|
Short
|
|
Net
|
|
Equity
|
1.9
|
%
|
|
(1.1
|
)%
|
|
0.8
|
%
|
|
3.5
|
%
|
|
(0.9
|
)%
|
|
2.6
|
%
|
|
Credit
|
0.2
|
%
|
|
—
|
%
|
|
0.2
|
%
|
|
0.5
|
%
|
|
(0.1
|
)%
|
|
0.4
|
%
|
|
Other
|
(1.2
|
)%
|
|
—
|
%
|
|
(1.2
|
)%
|
|
0.9
|
%
|
|
(0.3
|
)%
|
|
0.6
|
%
|
|
Net investment return on investments managed by Third Point LLC
|
0.9
|
%
|
|
(1.1
|
)%
|
|
(0.2
|
)%
|
|
4.9
|
%
|
|
(1.3
|
)%
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Total Return Index
|
|
|
|
|
7.7
|
%
|
|
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
|
Long
|
|
Short
|
|
Net
|
|
Long
|
|
Short
|
|
Net
|
|
Equity
|
4.5
|
%
|
|
(3.1
|
)%
|
|
1.4
|
%
|
|
16.8
|
%
|
|
(3.0
|
)%
|
|
13.8
|
%
|
|
Credit
|
0.9
|
%
|
|
(0.2
|
)%
|
|
0.7
|
%
|
|
0.6
|
%
|
|
(0.5
|
)%
|
|
0.1
|
%
|
|
Other
|
(2.0
|
)%
|
|
0.5
|
%
|
|
(1.5
|
)%
|
|
1.9
|
%
|
|
(1.2
|
)%
|
|
0.7
|
%
|
|
Net investment return on investments managed by Third Point LLC
|
3.4
|
%
|
|
(2.8
|
)%
|
|
0.6
|
%
|
|
19.3
|
%
|
|
(4.7
|
)%
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Total Return Index
|
|
|
|
|
10.6
|
%
|
|
|
|
|
|
14.2
|
%
|
Net investment return represents the return on our net investments managed by Third Point LLC, net of fees. The net investment return on net investments managed by Third Point LLC is the percentage change in value of a dollar invested over the reporting period on our net investment assets managed by Third Point LLC. Effective August 31, 2018, we transitioned from our separately managed account structure to investing in the TP Fund, managed by Third Point LLC. In addition, certain collateral assets supporting reinsurance contracts held by Third Point Re BDA and Third Point Re USA (the “Collateral Assets”) are managed by Third Point LLC from the effective date. See Note 4 to our condensed consolidated financial statements for additional information. The net investment return reflects the combined results of investments managed on behalf of Third Point Re BDA and Third Point Re USA prior to the transition date of August 31, 2018 and the investment in the TP Fund and Collateral Assets from the date of transition. Prior to the transition
date of August 31, 2018, the stated return was net of noncontrolling interests and net of withholding taxes, which were 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.
For the three months ended September 30, 2018, slightly negative overall performance was primarily attributable to the macroeconomic and other portfolio caused by losses related to one merger arbitrage position. Losses were almost fully offset by positive returns generated by the long/short equity portfolio and modest gains in the credit investment portfolio. Within long equities, most sectors generated positive returns with Industrials and Financials as the strongest contributors. Long equity gains were reduced by negative attribution from the single name short equity investments and market hedges.
For the nine months ended September 30, 2018, the investment portfolio performance was positive. Strong results from several core long equity positions were partially reduced by losses from short equity investments, including market hedges. The portfolio benefited from positive contribution from each long equity sector with the exception of Consumer. Across the remaining portfolio, positive performance in credit investments, especially structured credit, was offset by losses in the macroeconomic and other portfolio, primarily driven by detraction related to one merger arbitrage position.
For the three months ended September 30, 2017, the investment portfolio generated positive net returns from each investment strategy with equities remaining the strongest performing strategy for the quarter. Gains generated from long investments in every sector except consumer were partially offset by losses in the short portfolios for most sectors as well as market hedges. Performance was primarily attributable to long activist or long-term growth investments in the industrials, healthcare and technology, media and telecommunications sectors. Within credit, long sovereign investments in Latin America and U.S.-based structured credit positions drove gains. Exposure in the other strategy remains modest and positive returns from long risk arbitrage, currency, private and macroeconomic portfolios were partially offset by losses in the corresponding short portfolios.
For the nine months ended September 30, 2017, the net investment results were primarily attributable to our equity portfolio. Within equities, the investment account saw positive net returns from every sector led by healthcare, industrials, consumer and technology, media and telecommunications. The long portfolio added meaningful returns while the short portfolio generated alpha amidst a strong broader market backdrop. Within credit, gains in each sub-strategy on the long side were partially offset by negative performance by the short performing credit book. Positive returns from risk arbitrage, private and currency investments negated modest detraction from macroeconomic hedges in the other strategy
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.
The other key changes in our consolidated results for the
three and nine
months ended
September 30, 2018
compared to the prior year
periods
were primarily due to the following:
Corporate Expenses
General and administrative expenses allocated to corporate activities include allocations of payroll and related costs for certain executives and non-underwriting activities. We also allocate a portion of overhead and other related costs based on a headcount analysis. The decrease in general and administrative expenses related to corporate activities for the
three and nine
months ended
September 30, 2018
was primarily due to a decrease in our annual incentive plan compensation expense, partially offset by higher stock compensation expense and professional fees. Our incentive plan accrual was lower for the
three and nine
months ended
September 30, 2018
compared to the
three and nine
months ended
September 30, 2017
to reflect the lower performance of the Company in the
periods
relative to the incentive plan compensation performance metrics. The higher stock compensation expense is a result of an increase of our accruals for restricted shares with performance conditions reflecting improvement in our underwriting results in the periods. The increase in professional fees is primarily due to legal, accounting and consulting fees incurred in conjunction with the investment restructuring.
Other Expenses (Income)
Other expenses are comprised of expenses (income) relating to interest crediting features in certain reinsurance and deposit contracts. The other income for the
three and nine
months ended
September 30, 2018
is the result of two deposit contracts that were commuted in the period, resulting in gains recognized. We also revised estimates of underlying assumptions in the current year periods on certain deposit liability contracts resulting in a decrease in other expenses compared to prior periods.
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 related to the senior notes.
Foreign Exchange Gains (Losses)
The foreign exchange gains were primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds to the United States dollar, which had strengthened during the current year period compared to the prior 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. As a result, the foreign exchange gains on loss and loss adjustment expense reserves in the current year
periods
were offset by corresponding foreign exchange losses included in net investment income resulting from the revaluation of foreign currency reinsurance collateral held in trust accounts. 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 16
to our condensed consolidated financial statements for additional information regarding income taxes. The decrease in income tax expense for the
three and nine
months ended
September 30, 2018
was primarily the result of a decrease in taxable income generated by our U.S. subsidiaries.
Segment Results—
Three and nine
months ended
September 30, 2018
and
2017
.
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.
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 nine
months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Change
|
|
September 30,
2018
|
|
September 30,
2017
|
|
Change
|
|
|
($ in thousands)
|
|
Gross premiums written
|
$
|
30,064
|
|
|
$
|
174,539
|
|
|
$
|
(144,475
|
)
|
|
$
|
458,189
|
|
|
$
|
477,457
|
|
|
$
|
(19,268
|
)
|
|
Gross premiums ceded
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,125
|
)
|
|
(2,550
|
)
|
|
(15,575
|
)
|
|
Net premiums earned
|
127,993
|
|
|
105,975
|
|
|
22,018
|
|
|
411,972
|
|
|
417,542
|
|
|
(5,570
|
)
|
|
Loss and loss adjustment expenses incurred, net
|
88,706
|
|
|
77,275
|
|
|
11,431
|
|
|
265,326
|
|
|
270,549
|
|
|
(5,223
|
)
|
|
Acquisition costs, net
|
40,841
|
|
|
33,974
|
|
|
6,867
|
|
|
149,830
|
|
|
157,067
|
|
|
(7,237
|
)
|
|
General and administrative expenses
|
4,763
|
|
|
7,291
|
|
|
(2,528
|
)
|
|
14,550
|
|
|
23,252
|
|
|
(8,702
|
)
|
|
Net underwriting income (loss)
|
$
|
(6,317
|
)
|
|
$
|
(12,565
|
)
|
|
$
|
6,248
|
|
|
$
|
(17,734
|
)
|
|
$
|
(33,326
|
)
|
|
$
|
15,592
|
|
|
Underwriting ratios (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
69.3
|
%
|
|
72.9
|
%
|
|
(3.6
|
)%
|
|
64.4
|
%
|
|
64.8
|
%
|
|
(0.4
|
)%
|
|
Acquisition cost ratio
|
31.9
|
%
|
|
32.1
|
%
|
|
(0.2
|
)%
|
|
36.4
|
%
|
|
37.6
|
%
|
|
(1.2
|
)%
|
|
Composite ratio
|
101.2
|
%
|
|
105.0
|
%
|
|
(3.8
|
)%
|
|
100.8
|
%
|
|
102.4
|
%
|
|
(1.6
|
)%
|
|
General and administrative expense ratio
|
3.7
|
%
|
|
6.9
|
%
|
|
(3.2
|
)%
|
|
3.5
|
%
|
|
5.6
|
%
|
|
(2.1
|
)%
|
|
Combined ratio
|
104.9
|
%
|
|
111.9
|
%
|
|
(7.0
|
)%
|
|
104.3
|
%
|
|
108.0
|
%
|
|
(3.7
|
)%
|
|
|
|
|
(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 may 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 nine
months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
|
($ in thousands)
|
|
Property
|
$
|
(3,578
|
)
|
|
(11.9
|
)%
|
|
$
|
(3
|
)
|
|
—
|
%
|
|
$
|
(1,549
|
)
|
|
(0.3
|
)%
|
|
$
|
(8,818
|
)
|
|
(1.9
|
)%
|
|
Casualty
|
37,028
|
|
|
123.2
|
%
|
|
161,110
|
|
|
92.3
|
%
|
|
233,758
|
|
|
51.0
|
%
|
|
263,323
|
|
|
55.2
|
%
|
|
Specialty
|
(3,386
|
)
|
|
(11.3
|
)%
|
|
13,432
|
|
|
7.7
|
%
|
|
221,639
|
|
|
48.4
|
%
|
|
113,601
|
|
|
23.8
|
%
|
|
Total prospective reinsurance contracts
|
$
|
30,064
|
|
|
100.0
|
%
|
|
$
|
174,539
|
|
|
100.0
|
%
|
|
$
|
453,848
|
|
|
99.1
|
%
|
|
$
|
368,106
|
|
|
77.1
|
%
|
|
Retroactive reinsurance contracts
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
4,341
|
|
|
0.9
|
%
|
|
109,351
|
|
|
22.9
|
%
|
|
|
$
|
30,064
|
|
|
100.0
|
%
|
|
$
|
174,539
|
|
|
100.0
|
%
|
|
$
|
458,189
|
|
|
100.0
|
%
|
|
$
|
477,457
|
|
|
100.0
|
%
|
The
decrease
in gross premiums written of
$144.5 million
, or
82.8%
, for the three months ended
September 30, 2018
compared to the three months ended
September 30, 2017
was driven by:
Factors resulting in decreases:
|
|
|
|
•
|
We recognized $89.2 million of premium in the three months ended
September 30, 2017
related to a contract that we did not renew in the three months ended
September 30, 2018
as a result of underlying pricing, terms and conditions.
|
|
|
|
|
•
|
We recognized a net increase in premium of $7.1 million in the three months ended
September 30, 2018
compared to a net increase of $48.1 million in the three months ended
September 30, 2017
related to the net impact of contracts renewed with no comparable premium in the comparable period and contract extensions.
|
|
|
|
|
•
|
We recorded a net decrease in premium estimates of $0.3 million in the three months ended
September 30, 2018
compared to a net increase of $9.2 million in the three months ended
September 30, 2017
. The increase in premium estimates for the three months ended
September 30, 2017
was 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
September 30, 2018
resulted in a net decrease in premiums of $8.3 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:
|
|
|
|
•
|
For the three months ended
September 30, 2018
, we wrote $3.5 million of new premium, of which $2.2 million was casualty business, $0.7 million was specialty business and $0.6 million was property business.
|
The
decrease
in gross premiums written of
$19.3 million
, or
4.0%
, for the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
was driven by:
Factors resulting in decreases:
|
|
|
|
•
|
We recognized $115.3 million of premium in the
nine
months ended
September 30, 2017
related to contracts that we did not renew in the
nine
months ended
September 30, 2018
as a result of underlying terms and conditions.
|
|
|
|
|
•
|
Changes in renewal premiums for the
nine
months ended
September 30, 2018
resulted in a net decrease in premiums of $19.0 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.
|
|
|
|
|
•
|
We recorded net increases in premium estimates relating to prior periods of $12.9 million and $21.4 million for the
nine
months ended
September 30, 2018
and
2017
, respectively. The increases in premium estimates for the
nine
months ended
September 30, 2018
and
2017
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 $137.7 million in the
nine
months ended
September 30, 2018
compared to a net increase of $140.4 million in the
nine
months ended
September 30, 2017
related to the net impact of contract extensions, cancellations and contracts renewed with no comparable premium in the comparable period.
|
Factor resulting in an increase:
|
|
|
|
•
|
For the
nine
months ended
September 30, 2018
, we wrote $126.2 million of new premium, of which $111.4 million was specialty business, including one multi-line contract covering casualty and specialty risks for $91.6 million, $13.9 million was casualty business and $0.9 million was property business.
|
Gross Premiums Ceded
The increase in gross premiums ceded for the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
was primarily due to a new ceded contract covering certain of our 2018 mortgage contracts.
Net Premiums Earned
The increase in net premiums earned in the three months ended
September 30, 2018
compared to the three months ended
September 30, 2017
was primarily due to a higher in-force underwriting portfolio.
The decrease in net premiums earned in the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
was primarily due to retroactive exposures in reinsurance contracts in the prior year period, partially offset by a higher in-force underwriting portfolio in the current year period.
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 a higher in-force underwriting portfolio.
The following is a summary of the net impact from loss reserve development for the
three and nine
months ended
September 30, 2018
and
2017
:
For the three months ended
September 30, 2018
, we recognized
$1.4 million
, or
1.1
percentage points on the combined ratio, of net
adverse
prior years’ reserve development as a result of
increase
s in loss reserve estimates, offset by net
decrease
s of
$3.4 million
, or
2.7
percentage points on the combined ratio, in acquisition costs, resulting in a
$2.0 million
, or
1.6
percentage points on the combined ratio,
improvement in the net underwriting results
. The
improvement in the net underwriting results
was primarily due to net favorable loss development relating to multi-line contracts and several workers’ compensation contracts.
For the three months ended
September 30, 2017
, we incurred $0.8 million of net adverse prior years’ reserve development, offset by net decreases of $0.8 million in acquisition costs, resulting in minimal impact in the net underwriting loss. The net underwriting loss impact of the adverse loss development was primarily due to the following factors:
|
|
|
|
•
|
$8.8 million of net adverse loss development as a result of worse than expected loss experience on one retroactive reinsurance contract.
|
|
|
|
|
•
|
$9.2 million of net favorable loss development relating to casualty contracts where cedants reported better than expected loss experience.
|
The contracts that contributed to the loss reserve development above each had profit commission terms such that the loss reserve development associated with these contracts was offset by similar changes in acquisition costs, resulting in minimal impact in net underwriting loss.
For the
nine
months ended
September 30, 2018
, we recognized
$7.1 million
, or
1.7
percentage points on the combined ratio, of net
favorable
prior years’ reserve development as a result of
decrease
s in loss reserve estimates, offset by net
increase
s of
$2.3 million
, or
0.6
percentage points on the combined ratio, in acquisition costs, resulting in a
$4.8 million
or
1.2
percentage points on the combined ratio,
improvement in the net underwriting results
. The
improvement in the net underwriting results
was primarily due to the following factors:
|
|
|
|
•
|
$12.7 million
of net favorable underwriting loss development relating to workers’ compensation contracts, multi-line contracts and credit and financial lines contracts. The favorable development was the result of better than expected loss experience and was partially offset by
|
|
|
|
|
•
|
$7.4 million
of net adverse underwriting loss development primarily relating to our Florida homeowners’ quota share reinsurance contracts. This development is 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. This practice has led to increases in the frequency of claims reported as well as the severity of losses and loss adjustment expenses.
|
For the
nine
months ended
September 30, 2017
, we recognized
$31.7 million
of net favorable prior years’ reserve development. The
$31.7 million
of net favorable prior years’ reserve development for the nine months ended
September 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 minimal impact in the net underwriting loss.
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, for the three months ended
September 30, 2018
was primarily due to a change in mix of business and higher earned premiums in the current year period resulting in a higher acquisition cost expense amount.
The decrease in acquisition costs, net, for the
nine
months ended
September 30, 2018
compared to the prior year period was primarily due to favorable development on two retroactive reinsurance contracts in the prior year period which had profit commission terms such that the favorable development associated with these contracts was entirely offset by similar increases in acquisition costs.
See additional information in Net Loss and Loss Adjustment Expenses section above.
General and Administrative Expenses
The decrease in general and administrative expenses allocated to underwriting activities and the related general and administrative expenses ratio for the
three and nine
months ended
September 30, 2018
compared to the
three and nine
months ended
September 30, 2017
was the result of lower payroll related costs primarily due to lower annual incentive plan compensation expense accruals, partially offset by higher stock compensation expense and professional fees. Our
annual incentive plan is based on a formula derived from certain financial performance metrics. Our incentive plan accrual was lower for the
three and nine
months ended
September 30, 2018
compared to the
three and nine
months ended
September 30, 2017
to reflect the lower performance of the Company in the
periods
relative to the incentive plan compensation performance metrics. The higher stock compensation expense is a result of an increase of our accruals for restricted shares with performance conditions reflecting improvement in our underwriting results in the periods. The increase in professional fees is primarily due to legal, accounting and consulting fees incurred in conjunction with the investment restructuring.
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 book value per share, diluted book value per share, change in diluted book value per share and return on beginning shareholders’ equity attributable to Third Point Re common shareholders, 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 TP Fund’s investment manager, Third Point LLC. A more detailed description of this financial metric is included below. We also refer to other generic performance metrics which are described and explained in this subsection. As a result of the change in the Company’s investment account structure described in
Note 4
to the accompanying condensed consolidated financial statements, we no longer believe that net investment income on float is meaningful in analyzing our performance.
Non-GAAP Financial Measures
Net Investment Return on Investments Managed by Third Point LLC
Net investment return represents the return on our net investments managed by Third Point LLC, net of fees. The net investment return on net investments managed by Third Point LLC is the percentage change in value of a dollar invested over the reporting period on our net investment assets managed by Third Point LLC. Effective August 31, 2018, we transitioned from our separately managed account structure to investing in TP Fund. In addition, certain collateral assets supporting reinsurance contracts are managed by Third Point LLC from the effective date. See Note 4 to our condensed consolidated financial statements for additional information. The net investment return reflects the combined results of investments managed on behalf of Third Point Re BDA and Third Point Re USA prior to the transition date of August 31, 2018 and the investment in TP Fund and collateral assets from the date of transition. Prior to the transition date of August 31, 2018, the stated return was net of noncontrolling interests and net of withholding taxes, which were 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, TP Fund’s investment manager.
Basic Book Value Per Share and Diluted Book Value Per Share
Basic book value per share and diluted book value per share are non-GAAP financial measures and there are no comparable GAAP measures. Basic book value per share, as presented, is a non-GAAP financial measure and is calculated by dividing shareholders’ equity attributable to Third Point Re common shareholders by the number of common shares outstanding, excluding the total number of unvested restricted shares, at period end. Diluted book value per share, as presented, is a non-GAAP financial measure and represents basic 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 basic book value per share is calculated by taking the change in basic 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.
The following table sets forth the computation of basic and diluted book value per share as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
Basic and diluted book value per share numerator:
|
($ in thousands, except share and per share amounts)
|
|
Shareholders' equity attributable to Third Point Re common shareholders
|
$
|
1,507,910
|
|
|
$
|
1,656,089
|
|
|
Effect of dilutive warrants issued to founders and an advisor
|
34,950
|
|
|
46,512
|
|
|
Effect of dilutive stock options issued to directors and employees
|
51,422
|
|
|
51,422
|
|
|
Diluted book value per share numerator:
|
$
|
1,594,282
|
|
|
$
|
1,754,023
|
|
|
Basic and diluted book value per share denominator:
|
|
|
|
|
Common shares outstanding
|
94,169,725
|
|
|
103,282,427
|
|
|
Unvested restricted shares
|
(2,041,475
|
)
|
|
(1,873,588
|
)
|
|
Basic book value per share denominator:
|
92,128,250
|
|
|
101,408,839
|
|
|
Effect of dilutive warrants issued to founders and an advisor
|
3,494,979
|
|
|
4,651,163
|
|
|
Effect of dilutive stock options issued to directors and employees
|
5,123,531
|
|
|
5,123,531
|
|
|
Effect of dilutive restricted shares issued to directors and employees (1)
|
1,462,358
|
|
|
905,412
|
|
|
Diluted book value per share denominator:
|
102,209,118
|
|
|
112,088,945
|
|
|
|
|
|
|
|
Basic book value per share
|
$
|
16.37
|
|
|
$
|
16.33
|
|
|
Diluted book value per share
|
$
|
15.60
|
|
|
$
|
15.65
|
|
|
|
|
|
(1)
|
As of
September 30, 2018
, the effect of dilutive restricted shares issued to directors and employees was comprised of
36,097
restricted shares with a service condition only and
1,426,261
restricted shares with a service and performance condition that were considered probable of vesting.
|
Return on Beginning Shareholders’ Equity Attributable to Third Point Re Common Shareholders
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders, as presented, is a non-GAAP financial measure. Return on beginning shareholders’ equity attributable to Third Point Re common shareholders is calculated by dividing
net income available
to Third Point Re common shareholders by the beginning shareholders’ equity attributable to Third Point Re common shareholders. We believe that return on beginning shareholders’ equity attributable to Third Point Re common shareholders is an important measure because it assists our management and investors in evaluating the Company’s profitability.
For the
three and nine
months ended
September 30, 2018
,
we have also adjusted the beginning shareholders’ equity attributable to Third Point Re common shareholders for the impact of the shares repurchased on a weighted average basis. For a period where there was a loss, this adjustment decreased the stated returns on beginning shareholders’ equity and for a period where there was a gain, this adjustment increased the stated returns on beginning shareholders’ equity.
Return on beginning shareholders’ equity for the
three and nine
months ended
September 30, 2018
and
2017
was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
($ in thousands)
|
|
Net income (loss) available to Third Point Re common shareholders
|
$
|
(13,281
|
)
|
|
$
|
54,685
|
|
|
$
|
(19,680
|
)
|
|
$
|
233,449
|
|
|
Shareholders’ equity attributable to Third Point Re common shareholders - beginning of period
|
1,591,754
|
|
|
1,556,323
|
|
|
1,656,089
|
|
|
1,414,051
|
|
|
Impact of weighting related to shareholders’ equity from shares repurchased
|
(24,447
|
)
|
|
—
|
|
|
(41,526
|
)
|
|
(25,023
|
)
|
|
Adjusted shareholders’ equity attributable to Third Point Re common shareholders - beginning of period
|
$
|
1,567,307
|
|
|
$
|
1,556,323
|
|
|
$
|
1,614,563
|
|
|
$
|
1,389,028
|
|
|
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders
|
(0.8
|
)%
|
|
3.5
|
%
|
|
(1.2
|
)%
|
|
16.8
|
%
|
Other Financial Metrics
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 24
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 24
to our condensed consolidated financial statements.
Liquidity and Capital Resources
Liquidity Requirements
Third Point Re is a holding company and has no substantial operations of its own. Its cash needs primarily consists of the payment of corporate expenses. Its assets consist primarily of its investments in subsidiaries. Third Point Re’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. Cash at the subsidiaries 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.
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 BDA 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 BDA 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 BMA.
In addition, each of Third Point Re BDA 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,
2017
, Third Point Re BDA could pay dividends to Third Point Re of approximately $357.5 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 Re of approximately $24.3 million as of December 31,
2017
.
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 BDA or Third Point Re USA to Third Point Re. We are also subject to customary termination provisions, within certain of our reinsurance contracts, based on a reduction of capital and surplus. The terms of these provisions vary by contract but are typically set at a 20% or greater reduction capital and surplus over any 12 month period. These provisions could further restrict our ability to pay dividends or make distributions from our operating subsidiaries to Third Point Re.
Other Liquidity Requirements
Third Point Re fully and unconditionally guarantees the $115.0 million of debt obligations issued by TPRUSA, a wholly owned subsidiary. See
Note 13
to our condensed consolidated financial statements for detailed information on our Senior Notes.
Third Point Re may also require cash to fund share repurchases. See
Note 17
to our condensed consolidated financial statements for detailed information on our share repurchases.
Sources of Liquidity
Historically, our sources of funds have primarily consisted of premiums written, reinsurance recoveries, investment income and proceeds from sales and redemptions of investments.
See Note 4 for information regarding the LPA and transition of our investment structure from a separate account structure to TP Fund.
We expect our overall investment exposures, returns, fees paid to Third Point LLC and TP GP as well as the investment guidelines, liquidity and redemption rights to be generally similar under the new LPA and TP Fund IMA compared to what would have been expected under the separate accounts managed under the JV Agreements, assuming similar underlying investment portfolio returns and exposure levels. However, there can be no assurance of such results.
TP Fund’s investment portfolio is concentrated in tradeable securities and is marked to market each day. Pursuant to the investment guidelines as specified in the TP Fund IMA, 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 may withdraw all or a portion of our capital account balance from TP Fund at any calendar month end or at the close of business on each Wednesday during a month, 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. We believe the liquidity profile of the net investments underlying the TP Fund, the Company’s rights under the LPA to withdraw from the TP Fund as well as the operating cash on hand will provide us with sufficient liquidity to manage our operations.
In addition, we expect that our cash and cash equivalents on the balance sheet 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 cash and cash equivalents on the balance sheet, investment returns and cash flow from operations 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 Flows
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, underwriting and other expenses paid. Cash flows from operations may differ substantially from
net income (loss)
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
nine
months ended
September 30, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
($ in thousands)
|
|
Net cash provided by operating activities
|
$
|
22,285
|
|
|
$
|
31,820
|
|
|
Net cash provided by investing activities
|
286,366
|
|
|
192,845
|
|
|
Net cash used in financing activities
|
(227,064
|
)
|
|
(49,760
|
)
|
|
Net increase in cash, cash equivalents and restricted cash
|
81,587
|
|
|
174,905
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
549,333
|
|
|
308,891
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
630,920
|
|
|
$
|
483,796
|
|
Operating Activities
Cash flows from 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 provided by operating activities in the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
is primarily due to lower float generated from our reinsurance operations. Excess cash generated from our operating activities is typically then invested by Third Point LLC.
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 in our separate account investment structure prior to the investment restructure and the cash contributions to TP Fund after the investment restructure, including the subscriptions receivable. The transfer of the net investment assets and liabilities to TP Fund, as described
in Note 4 to our condensed consolidated financial statements, had limited impact on our liquidity. Cash flows provided by investing activities for the
nine
months ended
September 30, 2018
primarily relates to proceeds from the sale and maturity of certain investments to fund share repurchases of
$133.4 million
. Cash flows provided by investing activities for the
nine
months ended
September 30, 2017
primarily relates to net proceeds from the sale and maturity of certain investments which was partially used to fund share repurchases of $40.9 million.
Financing Activities
Cash flows used in financing activities for the
nine
months ended
September 30, 2018
consisted of
$133.4 million
for shares repurchased and
$98.0 million
of net withdrawals from total noncontrolling interests. Cash flows used in financing activities for the
nine
months ended
September 30, 2017
consisted of $16.8 million of withdrawals from total noncontrolling interests and $40.9 million for shares repurchased.
For the period from inception until
September 30, 2018
, 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.
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
$41.6 million
, or
4.8%
, to
$826.0 million
as of
September 30, 2018
from
$867.6 million
as of
December 31, 2017
. The
increase
was primarily due to
an increase
in the number of reinsurance contracts that required collateral. 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
13
to our condensed consolidated financial statements for additional information regarding our letter of credit facilities.
As of
September 30, 2018
,
$262.6 million
(
December 31, 2017
-
$250.5 million
) of letters of credit, representing
42%
of the total available facilities of
$625.0 million
, had been issued (
December 31, 2017
-
59%
(based on total available facilities of
$425.0 million
)). 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 a minimum rating from rating agencies. 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
September 30, 2018
.
Cash Secured Letter of Credit Agreements
Under the cash secured letter of credit facilities, we provide collateral that consists of cash and cash equivalents. As of
September 30, 2018
, total cash and cash equivalents with a fair value of
$180.5 million
(
December 31, 2017
- $250.5 million) was pledged as collateral against the letters of credit issued. Prior to the change in the investment account structure, our ability to post collateral securing letters of credit and certain reinsurance contracts depended in part on our ability to borrow against certain assets in our investment accounts through prime brokerage arrangements. As a
result of the change in our investment account structure, we no longer borrow from prime brokers to post cash collateral for cash secured letter of credit agreements but hold sufficient cash to post collateral securing letters of credit and certain reinsurance contracts outside of our investments in TP Fund. See Note 4 for additional information regarding the impact of the investment restructuring including the investment of collateral by Third Point LLC under the Collateral IMA.
Unsecured Revolving Credit and Letter of Credit Facility Agreement
On July 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA entered into a one-year, $200.0 million Unsecured Revolving Credit and letter of Credit Facility Agreement with various financial institutions (the “Credit Agreement”) to support obligations in connection with our reinsurance business written by Third Point Re BDA and Third Point Re USA. The Credit Agreement expires on July 30, 2019. The Credit Agreement is fully and unconditionally guaranteed by Third Point Reinsurance Ltd.
Financial Condition
Shareholders’ equity
As of
September 30, 2018
, total shareholders’ equity was
$1,507.9 million
, compared to
$1,661.5 million
as of
December 31, 2017
. The
decrease
was primarily due to a net loss available to Third Point Re common shareholders of
$19.7 million
and share repurchases of
$133.4 million
.
Investments
As of
September 30, 2018
, total cash and net investments managed by Third Point LLC was
$2,455.1 million
, compared to
$2,589.9 million
as of
December 31, 2017
. The
decrease
was primarily due to net
redemptions
of
$153.6 million
, primarily to fund share repurchases and cash flows from operations, partially offset by the
net investment income
on net investments managed by Third Point LLC of
$25.4 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
Prior to the change in our investment account structure, the derivatives in our investment portfolio were considered off-balance sheet arrangements. Refer to Note 4 and Note 8 for additional details. 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.
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
2017
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
nine
months ended
September 30, 2018
. Refer to Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations”, included in our
2017
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:
Change in Investment Structure
As described in Note 4 to our condensed consolidated financial statements, effective August 31, 2018, we transitioned from a separate account investment structure to an investment in the TP Fund, a related party investment fund. In addition, certain collateral assets held by Third Point Re BDA and Third Point Re USA will continue to be invested and managed by Third Point LLC. As a result of this transition, we remain exposed to many of the same market risks; however, these market risks are now risks associated with the investments underlying the TP Fund and no longer related to our direct holdings in the investments and securities.
For the information disclosed in relation to periods subsequent to the August 31, 2018 effective date of the investment structure changes, we have estimated the investment risks related to the investment portfolio within our investment in TP Fund based on information provided by the investment manager of TP Fund, Third Point LLC. For the comparative information disclosed for periods prior to August 31, 2018, the information relates to the investments and securities held in our separate accounts.
Equity Price Risk
The investment manager of TP Fund, Third Point LLC, tracks the performance and exposures of the TP Fund, 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
September 30, 2018
, net investments managed by Third Point LLC, including investments underlying the TP Fund, 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 TP Fund’s investment portfolio. As of
September 30, 2018
, a 10% decline in the value of all equity and equity-linked derivatives would result in a loss to the Company of $173.0 million, or 7.0% of total net investments.
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, $420.0 million, or 11.7%, were written in currencies other than the U.S. dollar. As of
September 30, 2018
, loss and loss adjustment expense reserves included $161.7 million (December 31,
2017
- $177.2 million) and net reinsurance balances receivable included $14.9 million (
December 31, 2017
- $27.0 million) in foreign currencies. These foreign currency liability exposures were generally offset by foreign currencies held in trust accounts of $179.8 million as of
September 30, 2018
(
December 31, 2017
- $179.9 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 of TP Fund
Third Point LLC continually measures foreign currency exposures in the TP Fund 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 TP Fund 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 within the TP Fund 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
September 30, 2018
, through our investment in TP Fund, the Company had total net short exposure to foreign denominated securities representing 10.3% of the Company’s investment in the TP Fund, including cash and cash equivalents of $251.9 million. As of
December 31, 2017
, our total net short exposure to foreign denominated securities represented 26.2% of our investment portfolio including cash and cash equivalents, of $695.0 million.
The following table summarizes the net impact that a 10% increase and decrease in the value of the U.S. dollar against select foreign currencies would have had on the value of the TP Fund as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% increase in U.S. dollar
|
|
10% decrease in U.S. dollar
|
|
|
Change in fair value
|
|
Change in fair value as % of investment portfolio
|
|
Change in fair value
|
|
Change in fair value as % of investment portfolio
|
|
|
($ in thousands)
|
|
Hong Kong Dollar
|
$
|
34,140
|
|
|
1.4
|
%
|
|
$
|
(34,140
|
)
|
|
(1.4
|
)%
|
|
Saudi Arabian Riyal
|
11,047
|
|
|
0.4
|
%
|
|
(11,047
|
)
|
|
(0.4
|
)%
|
|
Chinese Renminbi (Yuan)
|
(9,947
|
)
|
|
(0.4
|
)%
|
|
9,947
|
|
|
0.4
|
%
|
|
Swiss Franc
|
(10,400
|
)
|
|
(0.4
|
)%
|
|
10,400
|
|
|
0.4
|
%
|
|
Other
|
349
|
|
|
—
|
%
|
|
(349
|
)
|
|
—
|
%
|
|
Total
|
$
|
25,189
|
|
|
1.0
|
%
|
|
$
|
(25,189
|
)
|
|
(1.0
|
)%
|
Interest Rate Risk
Our net investments managed by Third Point LLC, including investments underlying the TP Fund, includes interest rate sensitive securities, such as U.S. treasury securities and sovereign debt instruments, 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 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 net investments managed by Third Point LLC, including investments underlying the TP Fund. However, Third Point LLC 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 net investments managed by Third Point LLC, including investments underlying the TP Fund, as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
U.S. treasuries and sovereign debt instruments
(1)
|
$
|
(12,655
|
)
|
|
(0.5
|
)%
|
|
$
|
14,598
|
|
|
0.6
|
%
|
|
Asset-backed securities
(2)
|
(2,536
|
)
|
|
(0.1
|
)%
|
|
2,552
|
|
|
0.1
|
%
|
|
Net exposure to interest rate risk
|
$
|
(15,191
|
)
|
|
(0.6
|
)%
|
|
$
|
17,150
|
|
|
0.7
|
%
|
|
|
|
|
(1)
|
Includes interest rate risk associated with investments held in reinsurance trust accounts.
|
|
|
|
|
(2)
|
Includes instruments for which durations are available on
September 30, 2018
. 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 Third Point LLC periodically monitor TP Fund’s and as a result 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 the TP Fund, 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 TP Fund’s 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 expect TP Fund will 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
September 30, 2018
, the TP Fund had de minimis commodity exposure. As of
December 31, 2017
, we had a de minimis commodity exposure.
We and Third Point LLC periodically monitor TP Fund’s 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 through reinsurance contracts with companies that write credit risk insurance. Our portfolio of risk is predominantly U.S. mortgage insurance and mortgage credit risk transfer. We provide our
clients in these lines of business with reinsurance protection against credit deterioration, defaults or other types of financial non-performance. Loss experience in these lines of business has been very good but is cyclical and is affected by the state of the general economic environment.
We proactively manage the risks associated with these credit-sensitive lines of business by closely monitoring its risk aggregation and by diversifying the underlying risks where possible. We have bought some retrocessional coverage against a subset of these risks. We have written $341.7 million, or 9.5%, of credit and financial lines premium since inception, of which
$79.0 million
was written in the
nine
months ended
September 30, 2018
. The majority of the mortgage insurance premium has been written as quota shares of private mortgage insurers, primarily in the United States.
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 of TP Fund
We are also exposed to credit risk through our net investments managed by Third Point LLC, including investments underlying the TP Fund. 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 TP Fund’s investment portfolio.
In addition, the securities and cash in the TP Fund 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. Third Point LLC 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 TP Fund’s credit risk.
As of
September 30, 2018
, through our investment in TP Fund, and as of
December 31, 2017
, through our investment portfolio managed by Third Point LLC, the Company’s holdings in non-investment grade securities, those having a rating lower than BBB- as determined by Standard & Poor's or Fitch Ratings, Baa3 by Moody's Investor Services and securities not rated by any rating agency, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31, 2017
|
|
|
($ in thousands)
|
|
Assets:
|
|
|
|
|
Asset-backed securities
|
$
|
185,155
|
|
|
$
|
225,499
|
|
|
Bank debt
|
26,192
|
|
|
14,550
|
|
|
Corporate bonds
|
98,083
|
|
|
77,086
|
|
|
Municipal bonds
|
57,019
|
|
|
—
|
|
|
Sovereign debt
|
18,320
|
|
|
26,134
|
|
|
Trade claims
|
169
|
|
|
7,496
|
|
|
Other debt securities
|
—
|
|
|
5,460
|
|
|
|
$
|
384,938
|
|
|
$
|
356,225
|
|
|
Liabilities:
|
|
|
|
|
Corporate bonds
|
$
|
11,901
|
|
|
$
|
21,699
|
|
|
|
$
|
11,901
|
|
|
$
|
21,699
|
|
As of
September 30, 2018
, through our investment in the TP Fund, and as of
December 31, 2017
, through our investment portfolio managed by Third Point LLC, ABS holdings were private-label issued, non-investment grade securities, and none of these securities were guaranteed by a government sponsored entity. As of
September 30, 2018
and
December 31, 2017
, the largest concentration of our ABS holdings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
($ in thousands)
|
|
Reperforming loans
|
$
|
114,149
|
|
|
61.7
|
%
|
|
$
|
160,354
|
|
|
71.1
|
%
|
|
Market place loans
|
63,248
|
|
|
34.2
|
%
|
|
52,584
|
|
|
23.3
|
%
|
|
Other (1)
|
7,758
|
|
|
4.1
|
%
|
|
12,561
|
|
|
5.6
|
%
|
|
|
$
|
185,155
|
|
|
100.0
|
%
|
|
$
|
225,499
|
|
|
100.0
|
%
|
|
|
|
|
(1)
|
Other includes: U.S. Alt-A positions, collateralized debt obligations, commercial mortgage-backed securities, non-U.S. RMBS and aircraft ABS.
|
The TP Fund may also be exposed to non-investment grade securities held within certain investments in limited partnerships and derivatives. As a result of its investment in this type of ABS and certain other non-investment grade securities, our investment portfolio is exposed to 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 and certain other non-investment grade securities 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 loans. As an investor in these classes of ABS and certain other non-investment grade securities, the TP Fund 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, the TP Fund may be exposed to significant market and liquidity risks.
Liquidity Risk
Certain of the investments underlying the TP Fund may become illiquid. Disruptions in the credit markets may materially affect the liquidity of certain investments, including ABS, which represent
8.2%
(
December 31, 2017
- 7.5%) of total net investments managed by Third Point LLC as of
September 30, 2018
. 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 underlying the TP Fund 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
September 30, 2018
, through our investment in the TP Fund, we had
$1,767.6 million
of unrestricted, liquid investment assets, defined as unrestricted cash and investments and securities with quoted prices available in active markets/exchanges. As of
December 31, 2017
, we had $2,202.4 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 TP Fund’s 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 the TP Fund, 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
nine
months ended
September 30, 2018
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
September 30, 2018
. 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
September 30, 2018
.
Changes in Internal Control Over Financial Reporting
In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by the Company’s management, including its CEO and CFO, there have been no changes in our internal controls over financial reporting (as such term defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the quarter ended
September 30, 2018
, except for the Company’s internal controls over investments. The changes in the Company’s investment structure have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting. As a result, the Company modified the controls in place over financial reporting to address the change in financial reporting risks related to investments. Refer to Note 4, included in the Company’s condensed consolidated financial statements attached hereto for additional details
Except as described above, there were no other changes in our internal control over financial reporting that occurred during the quarter ended
September 30, 2018
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
The following should be read in conjunction with, and supplements and amends the factors that may affect the Company’s business, financial condition or results of operations described under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 10-K”), as amended and supplemented by the Q2 10-Q. Other than described herein, there have been no material changes to our risk factors from the risk factors previously disclosed in the 2017 10-K, as amended and supplemented by the Q2 10-Q. This report also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.
Risks Relating to Our Investment Strategy and Investment Manager
We have transitioned to a new investment management structure, which could subject us to various risks and uncertainties, any of which could impact our investment results and could materially and adversely affect our business, financial condition and results of operations.
On July 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the Amended and Restated Exempted Limited Partnership Agreement (“LPA”) of Third Point Enhanced LP (“TP Fund”) with Third Point Advisors LLC (“TP GP”) and others, effective August 31, 2018. In accordance with the LPA, TP GP serves as the general partner of TP Fund. TP GP is beneficially owned by Daniel S. Loeb, a founder of the Company, and certain members of his family. Pursuant to an Investment Management Agreement between Third Point LLC and TP Fund dated July 31, 2018 (the “TP Fund IMA”), Third Point LLC is the investment manager for TP Fund (the “Investment Manager”). In addition, on July 31, 2018, Third Point Re BDA and Third Point Re USA, together the “TPRE Limited Partners”, and TP Fund executed a Subscription Agreement pursuant to which the TPRE Limited Partners transferred certain net investment
assets and related liabilities (collectively referred to as the “LP Transaction”) from their separate accounts to TP Fund, and TP Fund issued limited partner interests to the TPRE Limited Partners proportionate to and based on the net asset value transferred by each such entity on the applicable transfer date. Certain collateral assets consisting of debt securities and restricted cash were not transferred to TP Fund but are also managed by Third Point LLC under a separate investment management agreement. Substantially all of the net investment assets were transferred as of September 4, 2018. The Amended and Restated Joint Venture and Investment Management Agreement dated June 22, 2016 between Third Point Re, Third Point Re BDA, Third Point LLC and TP GP and the Amended and Restated Joint Venture and Investment Management Agreement dated June 22, 2016 between Third Point Re USA, Third Point Re (USA) Holdings Inc., Third Point LLC and TP GP (the “
JV Agreements
”) will be terminated on the date that all net investment assets have been transferred to TP Fund under the Subscription Agreement.
We may derive a significant portion of our income from our investment in TP Fund. Our operating results therefore depend in part on the performance of TP Fund’s investment portfolio and on Third Point LLC as the investment manager of such portfolio.
Pursuant to the TP Fund IMA, Third Point LLC is the investment manager for TP Fund. The TP Fund IMA will continue until terminated by any party thereto upon 90 days’ prior written notice to the other party. Pursuant to the TP Fund IMA, TP Fund will pay to Third Point LLC a monthly management fee equal to 0.125% (1.5% per annum) of the net asset value of TP Fund (determined as of the beginning of the month before the accrual of the performance allocation) multiplied by an exposure multiplier. The exposure multiplier will be computed by dividing the average of the daily investment exposure leverage of TP Fund by the average of the daily investment exposure leverage of Third Point Offshore Master Fund L.P.
TP Fund is not, and is not expected to be, registered as an “investment company” under the Investment Company Act of 1940 or any comparable regulatory requirements. Therefore, investors in TP Fund, including the TPRE Limited Partners, will not have the benefit of the protections afforded by such registration and regulation.
In addition, we are subject to various existing and new risks and uncertainties, some of which we may not be able to identify at this time. These risks and uncertainties could impact our investment results and could materially and adversely affect our business, financial condition and results of operations.
Many of the risks we were subject to under our prior investment management structure continue to apply under our new investment management structure.
Many of the risks we were subject to under our prior investment management structure, including those relating to our existing investment strategy and investment manager, continue to apply to us under our new investment structure. In particular, many of the risks previously disclosed relating to Third Point LLC as our prior investment manager continue to apply due to Third Point LLC’s role as the investment manager of TP Fund. For example, the risks relating to Third Point LLC’s strategy in managing investments, Third Point LLC’s risk management systems, and Third Point LLC’s use of hedging and derivative transactions in executing trades each generally remain applicable to us due to Third Point LLC’s management of TP Fund. In addition, economic and other risks remain applicable to us as a result of their impact on TP Fund’s investment portfolio, such as the potential impact of U.S. and global economic downturns. See “Risk Factors-Risks Relating to Our Investment Strategy and Investment Manager” in our 2017 10-K for additional factors that may affect the Company’s business, financial condition and results of operations.
Under our new investment management structure, we do not have control over TP Fund.
Under the LPA, TP GP has exclusive management and control of the business of TP Fund, including the authority to undertake on behalf of TP Fund all actions that, in its sole judgment, are necessary or desirable to carry out its duties and responsibilities. These broad rights of TP GP include the power to delegate its authorities under the LPA. Pursuant to the TP Fund IMA, TP GP delegates to Third Point LLC the authority to direct the investments of TP Fund and other day-to-day business of TP Fund. In addition, TP GP may resign or, subject to its minimum investment requirement, withdraw from TP Fund and may admit new limited partners without our consent. The TPRE Limited Partners have no right to remove TP GP as general partner of TP Fund and do not have any right to participate in the management and conduct of TP Fund.
Under our new investment management structure, we have limited control over the allocation and performance of TP Fund’s investment portfolio.
Pursuant to the LPA, TP GP is required to apply certain investment guidelines to TP Fund’s investment portfolio. In addition, the TP Fund IMA contractually obligates Third Point LLC, as TP Fund’s investment manager, to comply with the investment guidelines. However, we cannot assure shareholders as to exactly how assets will be allocated to different investment opportunities, including long and short positions and derivatives trading, which could increase the level of risk in our investment in TP Fund. The performance of our investment in TP Fund will depend to a great extent on the ability of Third Point LLC, as TP Fund’s investment manager, to select and manage appropriate investments for TP Fund’s investment portfolio. We cannot assure you that Third Point LLC will be successful in meeting our investment objectives.
The failure of Third Point LLC to perform adequately could significantly and negatively affect the results of our investment in TP Fund and consequently could significantly and negatively affect our business, results of operations and financial condition.
In addition, under the LPA, TP GP has the authority to dismiss from employment any and all agents, managers, consultants, advisors and other persons, including Third Point LLC. If TP GP chooses to dismiss Third Point LLC from employment as TP Fund’s investment manager, there is no assurance that TP GP will find or hire a suitable replacement. If TP GP were to hire a suitable replacement, there is no guarantee that any such replacement would provide TP Fund with comparable or better investment results than those that Third Point LLC may provide to TP Fund or than those that Third Point LLC has provided in the past to us.
TP Fund may be expected to indemnify Third Point LLC under certain circumstances in accordance with the TP Fund IMA. As a result, the capital accounts of TPRE Limited Partners in TP Fund could be reduced, which could have a material and adverse impact on our financial conditions and results of operations.
TP GP and its affiliates may engage in other business ventures and investment opportunities that may not be allocated equitably among us and such other business ventures.
Under the LPA, TP GP and its affiliates have the ability to engage in or possess interests in other business activities, including investing or disposing of securities in which TP Fund may from time to time invest. TP GP or Third Point LLC may organize and manage one or more entities or accounts that may parallel the investment activities of TP Fund. TP GP or Third Point LLC, as the case may be, may allocate investment opportunities among such entities or accounts, other affiliated funds and TP Fund as it deems to be fair and equitable in its sole discretion. However, we cannot be assured that the allocation of investment opportunities between TP Fund and such other entities, accounts or funds will be equitable.
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
September 30, 2018
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(a) Total number of shares purchased
|
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(b) Average price paid per share (1)
|
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(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)
|
|
July 1, 2018 - July 31, 2018
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
139,579,994
|
|
|
August 1, 2018 - August 31, 2018
|
3,010,293
|
|
|
13.42
|
|
|
3,010,293
|
|
|
99,183,459
|
|
|
September 1, 2018 - September 30, 2018
|
2,450,772
|
|
|
13.29
|
|
|
2,450,772
|
|
|
66,620,294
|
|
|
Total
|
5,461,065
|
|
|
$
|
13.36
|
|
|
5,461,065
|
|
|
$
|
66,620,294
|
|
(1) Including commissions.
(2) On February 28, 2018, the Company’s Board of Directors authorized the repurchase of an additional $148.3 million common shares, which, together with the shares remaining under the share repurchase program previously authorized on May 4, 2016, will allow the Company to repurchase up to $200.0 million more of the Company’s outstanding common shares in the aggregate.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
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10.33
|
|
|
10.34
|
|
|
10.35
|
|
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10.36
|
|
|
10.37
|
|
|
10.38
|
|
|
31.1
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31.2
|
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32.1*
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32.2*
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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
|
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101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
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*
|
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.
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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.
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Third Point Reinsurance Ltd.
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Date: November 6, 2018
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/s/ J. Robert Bredahl
|
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|
J. Robert Bredahl
|
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|
President and Chief Executive Officer
|
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(Principal Executive Officer)
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/s/ Christopher S. Coleman
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Christopher S. Coleman
|
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Chief Financial Officer
|
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(Principal Financial Officer and Principal Accounting Officer)
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