Third Point Reinsurance (TPRE) Q1 2020 Earnings Call Transcript

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Third Point Reinsurance (TPRE 1.32%)
Q1 2020 Earnings Call
May 08, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Third Point Reinsurance first-quarter 2020 earnings conference. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris Coleman, chief financial officer.

Thank you, sir. You may begin.

Chris Coleman -- Chief Financial Officer

Thank you, operator. Welcome to the Third Point Reinsurance limited earnings call for the first quarter of 2020. Last night, we issued an earnings press release and financial supplement, which is available on our website, www.thirdpointre.bm. Leading today's call will be Dan Malloy, chief executive officer.

Before I turn the call over to Dan, I would like to remind you that many of the remarks today will contain forward-looking statements based on current expectations. Actual results may differ materially from those projected as a result of certain risks and uncertainties. Please refer to the earnings press release and the company's other public filings, where you will find risk factors that could cause actual results to differ materially from these forward-looking statements. In addition, management will refer to certain non-GAAP measures, which management believe allow for a more complete understanding of the company's financial results.

A reconciliation of these measures to the most comparable GAAP measure is presented in the company's earnings press release. At this time, I will turn the call over to Dan Malloy.

Dan Malloy -- Chief Executive Officer

Good morning, and thank you for joining our first-quarter 2020 earnings call. Today, I'll provide the highlights of our financial results followed by an overview of the underwriting and market conditions that we are experiencing. Chris will then cover our financial results in more detail. I will finish with concluding remarks, and we will then open the call for questions.

We are living in very uncertain times, and our hearts go out to all those affected by the COVID-19 global pandemic. I would also like to take a moment to thank our employees for their hard work during this especially challenging environment. Our entire team has moved to remote working while continuing to run the business and creatively addressing our clients' needs. I have been enormously proud to see how the individuals and our company have responded.

Turning to our results. Third Point Re generated a net loss of $184 million, and our return on equity was a negative 13% for the first quarter of 2020. Our first-quarter result was driven by a negative investment return of 7.3%, primarily due to the equity market volatility resulting from the COVID-19 pandemic. Our diluted book value per share at the end of the first quarter was $13.05, representing a decrease of 13.2% since year-end 2019.

Since quarter end, our investment portfolio has recovered a portion of the losses, having risen 3.5% in April, generating approximately $85 million of net investment income for the month. Our combined ratio for the first quarter was 97%, which included our current estimate of COVID-19 losses of $9.5 million or 6.5 percentage points on our combined ratio. We reported a small benefit from favorable reserve development in the quarter. This is now our 15th quarter in a row with no prior-year adverse reserve development.

The COVID-19 underwriting losses that we recorded in the first quarter were driven primarily by contingency exposures or event cancellation, as well as certain casualty, specialty and multiline quota share contracts. We will record our best estimate of losses related to COVID-19 as they are incurred by our cedents, and expect a continued effect in future quarters. That being said, the largest source of our estimated losses related to COVID-19, based on our current estimate estimates, is event cancellation, for which the majority of our expected losses for this line of business were recognized in Quarter 1. It is important to note that the insurance industry's loss, as well as our own related to COVID-19 are subject to a high degree of uncertainty given the unknown duration and severity of the pandemic.

Despite our overall loss, our capital position remains very strong and I am pleased to report our first quarter of underwriting profitability in Third Point Re's history, which is a testament to our talent underwriters, our expansion into property cat and other higher-margin business and reducing our writings and line of business that no longer fit with our revised underwriting strategy. Now let me turn to an update on underwriting and current market conditions. The build-out of our property catastrophe portfolio continues according to plan, and we have added a number of new clients so far in 2020. As a result of improvements in market pricing and the repositioning of our portfolio, we expect to increase our expected margins from this line of business without increasing risk.

There's a lot of market discussion and significant uncertainty as to how COVID-19 will flow through the property insurance and reinsurance markets, in particular, potential for losses resulting from business interruption from commercial property insurance. While we are not entirely immune to this issue, our property catastrophe portfolio has focused on clients writing personal lines, meaning we have less exposure to commercial property insurance. Our non-catastrophe business, which still represents the majority of our reinsurance premium, continues to show underwriting improvement. Since most of our business is pro rata, we are benefiting from both primary pricing trends and from an improvement in specific reinsurance contract terms and conditions.

However, the pro rata nature of our business, also will result in contract by contract premium volume volatility resulting from the impact of COVID-19 on many of our clients' businesses. We continue to reposition the non-cat portfolio away from float generating low-margin contracts toward business, which offers increased profitability in improving market segments. And this shift in strategy is a driver in the reduction in premium in the first quarter. However, as we have stated many times, we have several large contracts, and in some cases, may not renew or may not -- or may renew in noncomparable periods, and thus would not try and extrapolate premium movements in any given quarter.

Within our specialty business, we expect to see a significant reduction in credit risk exposed lines of business, in particular, mortgage reinsurance in the short term. The practical implications of the lockdowns in place in many countries make the origination of new mortgage loans difficult. While the effect of these actions will likely cause a material drop in new business production in the short term, it may provide opportunities for increased volumes of business improve terms once the COVID-19 crisis has abated. In other specialty lines we write, many of which are specialty catastrophe focused, we expect to see significant market impacts from COVID-19 and potential new opportunities with significant rate increases and improvements in terms and conditions.

Lastly, an area of our business that I'm excited about is our selective focus on strategic transactions, where we can combine our responsiveness, reinsurance capital, and in some cases, investment capital create long-term partnerships with rights to profitable future reinsurance premium. We have closed several transactions to date and believe our efficient operating model, combined with our skill set in both reinsurance and capital markets is a differentiating factor in our successful origination and execution of these transactions, which we expect will represent a growing proportion of our premium over time. We believe that up to 10% of our volume for the 2020 underwriting year could come from these initiatives. I will now hand the call over to Chris, who will discuss our financial results in more detail.

Chris Coleman -- Chief Financial Officer

Thanks, Dan. For the first quarter, we generated a net loss of $184 million or $1.99 per diluted share, which translates into a return on beginning equity for the quarter of negative 13%. We generated $4.4 million of net underwriting income for the first quarter, and our combined ratio was 97% compared to 103.8% in the prior year first quarter. The improvement reflects the shift in our underwriting strategy and business mix toward higher-margin business.

Our gross premiums written for the first quarter was $204 million, which compares to $320 million in the prior-year quarter. The decrease in gross premiums written was primarily due to certain contracts that we did not renew, including one multi-line contract for $103 million, which no longer fit our underwriting criteria as part of our shift in underwriting strategy to improve underwriting margins. This decrease was partially offset by new contracts bound in the current year period, including new property catastrophe and specialty contracts that were more in line with our underwriting focus. Net investment loss for the quarter was 185 million, which reflects a loss of 201 million from our investment in the Third Point Enhanced fund, partially offset by net investment income of $15 million from collateral and other investments.

The first quarter of 2020 presented one of the most challenging investing environments since the 2008 financial crisis. As the pandemic unfolded, our investment in the Third Point Enhanced fund was exposed to the sharp market decline. Certainly, after the sell-off began, Third Point LLC repositioned the fund's portfolio by reducing net equity exposures. Third Point LLC also meaningfully shifted investments within the fund to structured and corporate credit securities.

In addition, we purchased a further $220 million in credit position outside of the Third Point Enhanced fund, which Third Point LLC also manage on our behalf as they saw opportunities to invest in credit. These additional investments consist of corporate debt from liquid high-quality issuers, as well as a portfolio of non-investment-grade structured credit securities, primarily in residential mortgage-backed securities and consumer loans. Our April consolidated net investment return was 3.5%, which included a 10% net return on our investment in the Third Point Enhanced fund and significant gains from the new credit portfolio, bringing our consolidated year-to-date investment return through April to negative 4%. As of March 31st, 2020, our investment in the Third Point Enhanced fund of $660 million represented approximately 28% of our total investments of 2.4 billion.

The new credit purchases just mentioned represent approximately $240 million after a $20 million gain in March or approximately 10% of total investments, with the remaining balance of approximately 62% invested in U.S. treasuries or equivalents or money market instruments, which also includes our collateral assets. Total general and administrative expenses, $10 million for the first quarter of 2020 compared to $12 million for the prior-year period. The decrease was primarily the result of lower annual incentive plan accruals for 2020 and lower credit facility fees.

Our incentive plan accrual was lower in 2020 compared to 2019, reflecting performance in the respective periods against target metrics. Foreign exchange gains represent FX gains on our net reinsurance liabilities held in foreign currencies. As a reminder, these were offset by FX losses on balances held in trust accounts in generally similar amounts, which are recorded as part of net investment losses. We retained very little net FX exposure on our reinsurance contracts as a result of keeping natural hedges between loss reserves and collateral and other assets held in the same currency.

Now let me turn the call back to Dan for concluding remarks.

Dan Malloy -- Chief Executive Officer

Thank you, Chris. It has undoubtedly been an unusual quarter with the social and economic impact of the COVID-19 pandemic being felt across the globe. We believe we are conservatively positioned, and our approaches remain prudent, focused and technical. As a result, we are prepared to withstand continued market volatility.

Importantly, we are committed to looking at new opportunities as trading conditions improve, and as always, aiming to support our customers and brokers with innovative reinsurance coverages. We remain confident in our ability to address new industry developments and capture business opportunities to create attractive shareholder returns. We also remain committed to establishing a more balanced and diversified business through a prudent mix of underwriting and investment risk. As we execute and deliver more consistent results over time, we expect to close the persistent discount that our shares trade to book value and to trade at a valuation level more consistent with our peer group.

We thank you for your time, and we'll now open the call for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Gentlemen, I'm showing no questions in queue. Do you have any additional or closing comments?

Dan Malloy -- Chief Executive Officer

Sure. Thanks again for listening into our first-quarter 2020 call. We look forward to talking to you next quarter. And in the meantime, stay safe and healthy.

Thank you.

Operator

[Operator signoff]

Duration: 21 minutes

Call participants:

Chris Coleman -- Chief Financial Officer

Dan Malloy -- Chief Executive Officer

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