International financial services ratings agency, A.M. Best has revised the rating outlooks to negative from stable of Third Point Reinsurance Ltd. and its subsidiaries, in light of the firm’s inability to produce an underwriting profit.
At the same time, A.M. Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings (LongTerm ICR) of “a-” of Third Point Reinsurance Company Ltd. (Bermuda) and Third Point Reinsurance (USA) Ltd. (Bermuda).
Furthermore, the ratings agency has turned negative from stable on the outlooks and affirmed the LongTerm ICRs of “bbb-” of Third Point Re (USA) Holdings, Inc. (TP USA) (Wilmington, DE) and its ultimate holding company, Third Point Reinsurance Ltd. (Bermuda).
A.M. Best has concurrently revised the outlook to negative from stable and affirmed the LongTerm ICR of “bbb-” on the $115 million 7% fixed senior unsecured notes due 2025 of TP USA.
The ratings agency explains that its negative outlooks reflect Third Point Re’s business profile, and specifically the fact that it has failed to generate underwriting profitability over a prolonged period, resulting in an average combined ratio of 105.6% from 2014 to 2018.
Third Point Re adopts a hybrid business model which is investment driven. The reinsurer looks to offset poor investment results with underwriting profit and vice versa, dependent on market conditions. However, in recent times, profitability in the reinsurance market has been under pressure, and the firm has struggled to achieve desirable results on the underwriting side of its balance sheet.
In the first-quarter of 2019, Third Point Re recorded net income of $132.9 million, driven by a $155 million investment gain that more than offset another quarterly underwriting loss for the firm.
“Furthermore, recent changes in senior management will need to prove beneficial to TPRE’s market profile over the medium to long term. The company will need to enhance its business profile gradually and achieve a core portfolio of business that can deliver a sustainable level of technical profitability going forward,” says A.M. Best.
The reinsurer announced last week that Daniel Malloy is to take over the role of Chief Executive Officer (CEO) from Robert Bredahl.
Despite the negative outlook, the current ratings of TPRE reflect its strong balance sheet strength, which A.M. Best says is very strong, as well as its operational performance, neutral business profile and appropriate enterprise risk management.
A.M. Best notes that its risk-adjusted capitalization, as measured by its Capital Adequacy Ratio (BCAR), was categorized as strongest as at the end of last year. Despite the fact that surplus has trended down over the past five years, A.M. Best expects the company to continue to run its operations while maintaining the strongest BCAR level.
“The company has not reported an underwriting profit since inception, and its investment results have been volatile and below AM Best’s expectations over the cycle. AM Best will continue to monitor the company’s underwriting performance closely in future years,” says the rating agency.
Commenting on A.M. Best’s announcement, Third Point Re CEO Malloy, said: “We are pleased to note A M Best’s recognition of our significant balance sheet strength and their confidence in our ability to maintain the strongest level of risk-adjusted capitalization. Having announced record first quarter profits, we remain focused on improving underwriting profitability to complement our investment returns, a key driver of shareholder value in our model.
“We are encouraged that our recent expansion into property catastrophe and specialty lines reinsurance is being well supported by brokers and clients who understand our approach and appreciate our innovation, expertise, and responsiveness.”
It’s been a challenging time for the hedge fund-style reinsurers such as Third Point Re, underpinned by a volatile investment performance and real struggles on the underwriting side of the business. As Third Point Re expands into the property cat space, it will be interesting to see if it can reverse its underwriting fortunes and produce profitability while maintaining a positive investment return.