Q4 2020 Third Point Reinsurance Ltd Earnings Call
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Good morning, ladies and gentlemen, and welcome to the third point reinsurance Ltd fourth quarter, 'twenty and 'twenty earnings Conference call. During today's presentation, all parties will be in a listen only mode and they're 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.
Thank you operator welcome to the third point Reinsurance Ltd 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 Dot third point re adopt the M.
With me here today, and as Dan Malloy, our Chief Executive Officer, and David Junior 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 and actual results may differ materially from those projected as a result of certain risks and uncertainties. Please.
These 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 and.
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 and the company's earnings press release.
At this time I will turn the call over to Dan.
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 Christopher.
Chris will cover our financial results in more detail and David will provide an update on our pending merger with serious.
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 and 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 to $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 nine 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 and 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 and our cumulative claims experience and on the reserving actions of our seed and <unk> and peers.
And the reserve increase was focused on a limited number of casualty retro session 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 one 2021 renewals, we continue to see improvements and property catastrophe market pricing and expected margins.
And 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 the 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 and 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 pursuing opportunities across many property and casualty reinsurance lines of business within our risk tolerances.
Additionally, our efficient operating structure and creativity and 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 and and 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.
Our Katy and risk capital of Bermuda headquartered MGA that we help formed during 2020 with an equity investment and which is issuing our insurance policies and excess casualty and professional lines has contributed $19 million and additional gross premiums during its first quarter of operations.
We expect our katie into rate $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 serious point once the merger closes.
I will now hand, the call over to Chris to discuss our financial results in more detail.
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%.
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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 and the same period and the prior year.
The increase and gross premiums written and was primarily due to $46 million of new premium written in the quarter include.
Including $19 million from our Acadian 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 and 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 and underwriting strategy.
This decrease was partially offset by new contracts bound and 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 and the quarter was primarily attributable to our investment and the third point enhanced fund.
The funds gains were primarily driven by long equity positions, particularly and Actavis names and private positions that began to approach public markets.
Corporate and structured credit positions that benefited from vaccination and reopening optimism. We're also valuable contributors.
As of the end of the fourth quarter, our investment and the third point enhanced fund stands at $1.1 billion.
And the credit investments and 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 investment.
The remainder of the investment accounts is invest did and treasuries and cash equivalents.
Turning to market volatility and the first quarter of 2021, we have no material exposure to the stocks and associated short squeezes that have been and 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 and although we like other market participants has seen a marginal increase and volatility due to market rotations.
Total general and administrative expenses were $17 million for the fourth quarter of 2020 compared to $13 million from the prior year period.
The increase was primarily driven by higher stock compensation expense merger related expenses as well as our Canadian MGA expenses.
Now, let me turn the call over to David for an update on our pending merger with serious group.
Thank you, Chris and good morning, everyone I am very pleased to be here today and as we are set to close on our merger with serious group and embark on the next chapter of our company's story, the combined company, which will be renamed serious point will be differentiated by an outstanding team of experienced underwriters.
With the proud underwriting history and employee specialists across the world.
Our global platform with access to admitted and non admitted paper and Europe, the U S Bermuda and Lloyds.
The ability to offer clients and brokers the diverse reinsurance and insurance franchise, including a niche and hard to replicate European branch network and of specialized A&H business and.
And H serious point, we will have the benefit of our dedicated in house managing General underwriters, Our monarch Corp, and Internet International Medical group and serious point independent in house investments and capital market.
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We believe that our merger we will remove the overhang that Ltd. Both third point re and serious groups valuations. These include CMI ages large ownership position and serious groups and serious groups diminished liquidity and access to capital markets.
In addition, the merger will complete the transformation to a traditional reinsurance business model with an eye towards 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.
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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 serious points 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 the re underwrite this portfolio over time to boost profitability, while lowering the volatility of the book we have already taken a step towards achieving this goal in the January one renewal cycle and as TP re wrote less property cat.
Ultimately, our focus is to deliver and underwriting profit and stable loss reserves and reduced cat volatility.
The second pillar revitalizing growth focuses on growing our differentiated higher margin business lines, including A&H and specialty.
Where we have well established franchises for the past few years, the insurance market has experienced hardening of rates, but the rate increases have varied from the line to the line. The areas that are more specialized and have seen the strongest price gains and 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 and our Canadian risk, where we are leveraging experienced talent with the with existing market relationships to quickly respond to a turn and the U S. Casualty market, we partnered to create arcadian, but John Boylan, who is the 30 year track record.
Our goal is to invest and our own businesses as well as opportunities like the 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 modernize and breakout is focused on technology.
Our goal is to ensure that serious point is at the forefront of change through technology and innovation, we will seek to partner with technology enabled companies to assist them and 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 the.
We execute on these three strategic pillars, we expect our combined ratio to gradually improve as we grow our higher margin businesses and we're also reducing the risk and our portfolio. We believe that this shift and resulted in an improvement to both of our return on equity and our book value per share our near term goal is to deliver of peer profitability and return.
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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 and our higher margin businesses.
Sirius is a well known and respected reinsurer with a global network and of 75 year history with clients and brokers.
The team has a strong underwriting culture and our commitment to fostering relationships.
We believe that the merged company will be of 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 and they are 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, I hope, everyone remains safe and and good health.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.