Third Point Reinsurance Ltd (TPRE) Q4 2020 Earnings Call Transcript

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Third Point Reinsurance Ltd (TPRE -2.46%)
Q4 2020 Earnings Call
Feb 24, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Third Point Reinsurance Limited Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Christopher Coleman, Chief Financial Officer. Please go ahead, sir.

Christopher S. Coleman -- Chief Financial Officer

Thank you, operator. Welcome to the Third Point Reinsurance Limited earnings call for the fourth quarter of 2020. Last night, we issued an earnings press release and financial supplement, which is available on our website www.thirdpointre.bm. With me here today is Dan Malloy, our Chief Executive Officer; and David Junius, our Chief Operating Officer.

Before we begin, 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.

Daniel V. Malloy -- Chief Executive Officer

Thank you, Chris. And good morning, everyone. I'm glad you can join our fourth quarter 2020 earnings call. Today, I will provide the highlights of our financial results, followed by an overview of current underwriting and market conditions. Chris will cover our financial results in more detail, and David will provide an update on our pending merger with Sirius.

Our results for the fourth quarter and full year 2020 are mixed, with strong investment results tempered by COVID-19 and reserve strengthening we took in the fourth quarter related to U.S. casualty reserves. For the fourth quarter, we generated net income of $134 million, bringing our full year net income of $144 million. Our return on equity for the fourth quarter was 10.1%. Our diluted book value per share at the end of the fourth quarter was $16.42, representing an increase of 9.2% since year end 2019.

The combined ratio for the fourth quarter was 123%, which included $37 million or 20 percentage points on the combined ratio related to prior year reserve development, where we increased certain U.S. casualty reserves in response to broader industry trends of social inflation. We have closely watched social inflation, the rising trend in recent years of frequency and severity of large court awards and settlements, and determined it was appropriate to take action at this time based on our cumulative claims experience on the reserving actions of our cedents and peers. The reserve increase was focused on a limited number of casualty retrocession contracts, which were significantly cut back in 2019 and '20 as part of our new underwriting strategy.

Our fourth quarter results also included $12 million attributable to the ongoing impacts of COVID-19, and $7 million attributable to property cat events, which is roughly in line with expected cat loads. Combined, losses related to COVID-19 and property cat events had a total impact of 10 points on the combined ratio.

Now let me turn to an update on underwriting and current market conditions. At the January 1, 2021 renewals, we continued to see improvements in property catastrophe market pricing and expected margins. There continues to be significant market discussion and uncertainty as to how the ongoing COVID-19 pandemic will impact the property insurance and reinsurance markets. In particular, the quantum of potential losses resulting from commercial property business interruption insurance and how that might flow into property reinsurance programs. We do expect to see continued rate strengthening during the remainder of 2021 across our property catastrophe portfolio as a result of market reaction to loss affected business.

Our non-catastrophe business, which still represents a majority of our reinsurance premium, continues to show underwriting improvement. As a result of COVID-19, continued low interest rates, property catastrophe loss activity from the last four years and deterioration of prior year's results, most insurance and reinsurance lines of business are hardening and experiencing improvements in both rate and terms and conditions. Since the large majority of our business by premium is pro rata, we are benefiting from both of these trims. As a result, we are focused on pursuing opportunities across many property and casualty reinsurance lines of business within our risk tolerances.

Additionally, our efficient operating structure and creativity in developing solutions for clients and brokers, has allowed us to react quickly to new opportunities emerging from the changing market. As an example of this, an area of our business that I continue to be very excited about is our focus on strategic transactions, where we combine our risk-taking capacity with investment capital to create long-term partnerships. Arcadian Risk Capital, a Bermuda-headquartered MGA that we helped form during 2020 with an equity investment, and which is issuing our insurance policies in excess casualty and professional lines, has contributed $19 million in additional gross premiums during its first quarter of operations. We Arcadian to write $100 million or more of profitable gross premium in 2021. This, combined with our other strategic transactions, is expected to contribute meaningfully to the underwriting profits of SiriusPoint once the merger closes.

I will now hand the call over to Chris to discuss our financial results in more detail.

Christopher S. Coleman -- Chief Financial Officer

Thanks, Dan. For the fourth quarter, we generated net income of $134 million or $1.43 per diluted share. This resulted in net income of $144 million for the year or $1.53 per diluted share. We generated a net underwriting loss of $42 million for the fourth quarter and our combined ratio was 123% compared to 104.8% in the prior year fourth quarter. Our current quarter combined ratio reflects the impact of prior year adverse reserve development, cat losses and COVID losses that Dan reviewed in detail.

Our gross premiums written for the fourth quarter were $166 million, which compares to $134 million in the same period in the prior year. The increase in gross premiums written was primarily due to $46 million of new premium written in the quarter, including $19 million from Arcadian that Dan mentioned earlier. Gross premiums written for 2020 were $588 million compared to $632 million in 2019, which is a decrease of 7%. The decrease in gross premiums written was primarily due to certain contracts that we did not renew, including certain contracts which no longer fit our underwriting criteria as a result of our shift in underwriting strategy. This decrease was partially offset by new contracts bound in the current year.

Net investment income for the fourth quarter was $205 million, which compares to $62 million for the fourth quarter in 2019. Net investment income in the quarter was primarily attributable to our investment in the Third Point Enhanced fund. The funds gains were primarily driven by long equity positions, particularly in Activist names and private positions that began to approach public markets. Corporate and structured credit positions that benefited from vaccination and reopening optimism were also valuable contributors.

As of the end of the fourth quarter, our investment in the Third Point Enhanced fund stands at $1.1 billion, and the credit investments in our separately managed accounts were $48 million. These two components of our portfolio represent the risk assets portion and were approximately 38% of our $2.9 billion of total investments. The remainder of the investment account is invested in treasuries and cash equivalents.

Turning to market volatility in the first quarter of 2021, we have no material exposure to the stocks and associated short squeezes that have been in the headlines as of late, either directly or indirectly to other hedge funds. We believe our investment managers have steered us clear of such exposures, although we, like other market participants, has seen a marginal increase in volatility due to market rotations. Total general and administrative expenses were $17 million for the fourth quarter of 2020 compared to $13 million for the prior year period. The increase was primarily driven by higher stock compensation expense, merger-related expenses, as well as Arcadian MGA expenses.

Now let me turn the call over to David for an update on our pending merger with Sirius Group.

David W. Junius -- Chief Operating Officer

Thank you, Chris, and good morning, everyone. I am very pleased to be here today, as we are set to close on our merger with Sirius Group and embark on the next chapter of our company's story. The combined company, which we renamed SiriusPoint, will be differentiated by an outstanding team of experienced underwriters with a proud underwriting history and employee specialists across the world, a global platform with access to admitted and non-admitted paper in Europe, the U.S., Bermuda and Lloyd's. The ability to offer clients and brokers the diverse reinsurance and insurance franchise, including a niche, hard to replicate European branch network and a specialized A&H business.

In A&H, SiriusPoint will the benefit of our dedicated in-house managing general underwriters, Armato Corp, and International Medical Group and SiriusPoint's independent in-house investments and capital market expertise. We believe that our merger will remove the overhangs that limited both Third Point Re and Sirius Group's valuations. These include CMIHs large ownership position in Sirius Group and Sirius Group's diminished liquidity and access to capital markets. In addition, the merger will complete the transformation to a traditional reinsurance business model, with an eye toward being innovative and entrepreneurial. That said, to truly unlock the value that we know exists, we need to continue to improve our profitability, better manage our risk, grow higher margin differentiated businesses and invest in technology.

To achieve these goals, we have created three strategic pillars, which I would likely to briefly touch on this morning. Firstly, we intend to focus and stabilize SiriusPoint's current reinsurance portfolio. The combined portfolio has experienced challenges over the last few years, as has been evidenced in our company's combined ratio. Our goal is to reunderwrite this portfolio over time to boost profitability, while lowering the volatility of the book. We have already taken a step toward achieving this goal in the January 1 renewal cycle, as TPRE wrote less property cat. Ultimately, our focus is to deliver an underwriting profit and stable loss reserves and reduced cat volatility.

The second pillar, revitalizing growth. Focus is on growing our differentiated higher margin business lines, including A&H specialty, where we have well established franchises. For the past few years, the insurance market has experienced hardening rates, but the rate increases have varied from line-to-line. The areas that are more specialized have seen the strongest price gains. In our next phase, we will seek to allocate our capital to the best opportunities and react quickly to new risks. We believe that this approach is illustrated by our recent investment in Arcadian Risk, where we are leveraging experienced talent with existing market relationships to quickly respond to return in the U.S. casualty market. We partnered to create Arcadian with John Boylan, who has a 30-year track record. Our goal is to invest in our own businesses as well as opportunities like our Acadian to drive profitable growth, which will lead to improved shareholder returns and accelerate book value. As we grow our higher margin businesses, we expect our portfolio will be better balanced.

The third pillar, modernizing breakout is focused on technology. Our goal is to ensure that SiriusPoint is at the forefront of change through technology and innovation. We will seek to partner with technology-enabled companies to assist them in growing quickly by providing capital and paper, while participating in the economics through our investment as well as through primary insurance, reinsurance and fee revenue.

As we execute on these three strategic pillars, we expect our combined ratio to gradually improve as we grow our higher margin businesses, while also reducing the risk in our portfolio. We believe that this shift will result in improvement to both our return on equity and our book value per share. Our near-term goal is to deliver peer profitability and returns, which should close the persistent discount to book value that both TPRE and Sirius Group have experienced over time. Longer-term, we expect our fast and flexible tech-focused model to deliver superior returns, but are realistic in our need to walk before we can run.

Dan, back to you for closing remarks.

Daniel V. Malloy -- Chief Executive Officer

This is an exciting time at Third Point Re and the future is very bright. This merger is about focusing on our underwriting talent to capitalize on improving market trends as well as investing in our higher margin businesses. Sirius is a well known and respected reinsurer with a global network and a 75-year history with clients and brokers. Their team has a strong underwriting culture and a commitment to fostering relationships. We believe that the merged company will be a significant presence with the capital structure platforms, underwriting talent and most importantly, clients already in place. The key to our success will be our ability to improve our profitability by leveraging our excellent client relationships and offering a wider range of products at a time when they're needed more than ever.

As we've discussed, we believe that our merger with Sirius will be truly transformative and create long-term value for our shareholders.

Thank you, operator, and thanks to everyone who joined our call this morning. Hope everyone remains safe and in good health.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 17 minutes

Call participants:

Christopher S. Coleman -- Chief Financial Officer

Daniel V. Malloy -- Chief Executive Officer

David W. Junius -- Chief Operating Officer

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