Q3 2020 Third Point Reinsurance Ltd Earnings Call

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Greetings and welcome to the third point reinsurance third quarter 2020, <unk> earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should prior operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Christopher Coleman Chief Financial Officer. Thank you you may begin.

Thank you operator welcome to the third point reinsurance limited earnings call for the third quarter of 2020.

Last night, we issued an earnings press release and financial supplement which is available on our website Www Dot third point re Dr yen.

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 Companys 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 believes 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.

Thank you Chris.

Good morning, and thanks for joining our third 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 as well as a brief update on the status of our pending merger with serious.

We will then open the call for your questions.

Starting with our results.

For the third quarter, we generated net income of $69 million and our return on equity was 5.1%.

Our third quarter results were driven by a rebound in our investment in the third point enhanced fund, resulting in a consolidated investment return for the quarter of 4.8%.

Our diluted book value per share at the end of the third quarter was $15.06.

Representing an increase of 4.8% as compared to the second quarter of Twentytwenty.

Our combined ratio for the third quarter was 119.9%, reflecting a number of industry cat events as well as the ongoing impact of COVID-19.

The combined effect of property cat losses that occurred in the period.

And updated estimates recorded 19 added 32 points to our combined ratio in the quarter of which 21 points were from property catastrophes.

And 11 points were result of COVID-19.

We reported a small benefit from favorable reserve dealt development in the quarter.

And this is now our 17th quarter in a row with no prior year adverse reserve development.

Our COVID-19 underwriting losses in the quarter were driven primarily by business interruption.

We prudently added $10 million to our reserve position largely due to the legal uncertainty arising out of the recent decision on the F.C. a test case in the UK this quarter.

This is despite having no reported COVID-19, VI related losses from our Cedents and having received no indication that they expect to cede any such losses to us.

We also believe there is limited relevance to the us market from the UK case and much of our exposure is from the U.S.

Despite the property cat losses, and a prudent estimate of Covidien 18 claims in this period.

Underlying portfolio continues to perform in line with our shift in underwriting strategy.

We have transitioned the portfolio into higher expected margin products, which will have greater volatility as we have seen in our third quarter result, but with higher expected underwriting profitability.

Now, let me turn to an update on underwriting and current market conditions.

As a result of improvements in property catastrophe market pricing and the repositioning of our portfolio away from Retrocessional quota share contracts.

Our expected margin from this line of business has increased while maintaining the same level of expected risk.

There continues to be significant market discussion and uncertainty as to how Covidien 18, it will impact the property insurance and reinsurance market.

In particular potential losses, resulting from commercial property business interruption insurance.

While we are not entirely immune to this issue our property catastrophe portfolio has and continues to be focused on clients, writing personal lines with less exposure to commercial property insurance.

We do however expect to see continued rate strengthening and 2020 one across our portfolio as a result of market movements.

Our non catastrophe business, which still represents a majority of our reinsurance premium continues to show underwriting improvement.

As a result of COVID-19 continue.

Continued low interest rates property cat loss activity over the last three years and deterioration of prior year events, such as Hurricane aroma, most insurance and reinsurance lines of business are hardening and experiencing material 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 trends.

As a result, we are focused on adding new clients and pursuing opportunities across most property and casualty reinsurance lines of business within our risk tolerance.

Our efficient operating structure and creativity in structuring solutions for clients and brokers has allowed us to react quickly to the new opportunities emerging from the market dislocation.

Lastly, and an area of our business that I continue to be very excited about is our selective focus on strategic transactions, where we combine reinsurance and investment capital to create long term partnerships and optionality on future reinsurance premium.

During the quarter, we closed on our investment in Arcadia and risk capital a new EMG, we helped form with John Boylan, a recognized leader in the excess casualty insurance market.

Our Kadien has commenced operations in the fourth quarter, focusing on excess casualty and professional liability, we expect arcadian to contribute $100 million or more of profitable gross premium in 2021 and combined with our other strategic transactions is expected to contribute meaningfully.

To the underwriting profits of serious point.

I will now hand, the call over to Chris to provide an update on the merger and to discuss our financial results in more detail.

Thanks, Dan.

Firstly as it relates to our pending merger with Syria.

We remain on track for a first quarter 2021 close.

As we announced recently, we have filed our joint proxy statement prospectus with the SEC and our shareholder vote is scheduled for November 20 Threerd.

Serious point will be well positioned to support growth with the just announced closing of a $300 million revolving credit facility as well as the previously announced rollover of the serious preference be holders into a capital qualifying security of serious point.

Both of these transactions will be effective upon close and indicated strong support for serious point.

We look forward to the closing of this transaction and the exciting opportunities ahead.

Now turning to our financial results for the third quarter, we generated net income of $69 million or 73 cents per diluted share.

We generated a net underwriting loss of $28 million for the third quarter and our combined ratio was 119.9%.

Compared to 102.7% in the prior year third quarter.

Our current quarter combined ratio included $30 million of cat losses, and $16 million of COVID-19 losses.

The total impact was 32 points on the combined ratio for the quarter.

The prior years quarter combined ratio included $13 million or six points on the combined ratio related to cat losses in that period.

Our gross premiums written for the third quarter was $61 million, which compares to $95 million in the prior year quarter. The decrease was primarily due to one retroactive reinsurance contract of $59 million recognized in the prior year quarter with no comparable premium.

In the current period this.

This decrease was partially offset by new contracts bound in the current year period and other timing differences.

Gross premiums written for the nine month period was $422 million compared to $498 million for the prior years nine months a decrease of 15%.

The decrease 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.

In addition, the prior year period included $59 million related to the one retroactive reinsurance contract.

These decreases were partially offset by new contracts bound in the current year period and other timing differences.

Net investment income for the third quarter was $122 million, which compares to a net investment loss of $3 million for the three months ended September Thirtyth 2019.

Gains from our investment in the third point enhance fund were $111 million, representing a 14.6% return in the quarter.

Primarily driven by gains in long equity.

As of the end of the third quarter, our investment in the third point enhance fund was $869 million and the credit investments in our separately managed account were $87 million.

These two components of our portfolio represent the risk assets portion comprising approximately 36% of our 2.7 billion of total investments.

The remainder of the investment account is invested in treasuries and cash equivalents.

Total general and administrative expenses were $21 million for the third quarter of 2020 compared to $9 million for the prior year period.

The increase was primarily due to an $11 million increase in professional and regulatory fees associated with our merger with serious.

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

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

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Keypad.

You did see it appears that there are no questions. At this time I would like to turn the floor back over to Dan Weiss for closing comments.

All right well, thank you operator, and thanks to everyone who joined our call. This morning.

It's a very exciting time at third point re and I'd like to leave you with a few concluding thoughts.

First we've made substantial progress over the last 18 months transforming our business into a global specialty reinsurance company and I couldn't be more pleased with the positioning of our cat portfolio as its underlying profitability is better than we planned. Additionally, we see an opportunity to further improve.

Proves the profitability of our non cat portfolio as the market continues to harden in a number of lines of business I'd like to thank our underwriting team for the tremendous job they've done transforming our business.

Our second we're working hard to close our merger with serious group and the initial planning and integration is going very well.

This merger is all about focusing on our underwriting talent in order to capitalize on the improving market trends.

There is a well known and respected reinsurer and they have a global network and a 75 year history of working with clients and brokers.

Our team has a strong underwriting culture and a commitment to fostering relationships.

Once together serious point will be a significant player 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 deepening. These all important client relationships and offering a wider range of coverage at a time when they are needed more than ever third.

Third our assets will be invested in a diversified portfolio with a more traditional investment allocation. This.

This means lower volatility, while still taking advantage of opportunities to improve returns across asset classes.

Fourth we expect the merger to be accretive to both earnings per share and return on equity in the first full year. After close while also positioning the company for attractive book value and earnings growth.

This should result in a re rating of the Companys trading multiple to a level more in line with our peers. So as you can see our merger with Sirius is a transformative and should result in real value creation for our shareholders.

Thank you for your time today hope everyone remain self safe and in good health will speak next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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