Bermuda headquartered Third Point Re, the reinsurer linked to hedge fund manager Daniel Loeb, delivered an underwriting profit in the first quarter of this year, but fell to a net loss due to the Covid-19 pandemic effects on its investment portfolio.
Third Point Re appears to have turned a corner in terms of its underwriting, delivering a combined ratio of 97% for Q1 2020, which is its lowest for at least two years.
The reinsurance company has been adjusting its strategy in recent quarters, underwriting more shorter-tailed business in an effort to make the portfolio stand on its own and placing less emphasis on the hedge fund style investments that had previously been the profit driver.
In seeking to become a more balanced business as a result, Third Point Re aims to deliver across both assets and underwriting liabilities in future. But in the first-quarter Covid 19 impacted the investment side significantly.
The result was that Third Point Re has reported a net loss of $183.6 million for Q1 of 2020, compared to net income of $132.9 in the prior year period.
The reinsurer underwrote some $115.5 million less in gross premiums during Q1, but this was largely due to the cancellation of business that it feels no longer meets its strategy, including one multi-line contract for $103.2 million.
At the same time, Third Point Re said that new contracts were bound as well, including new property catastrophe and specialty contracts which are more in line with its changing, more short-tailed focused underwriting strategy.
The shift in business mix drove the improvement in underwriting performance, but the underwriting result was hit by net losses of $9.5 million, net of additional premiums, or 6.5% on the combined ratio, relating to Covid-19, Third Point Re said.
These pandemic losses largely came from contingency exposures (event cancellation) as well as certain casualty and multi-line quota share contracts.
The underwriting side performance is much improved and this first quarter with a sub-100 combined ratio in quite some time could set a new benchmark target for the reinsurer going forwards.
The investment side though suffered from the pandemic related global financial market contagion and decline in equities, driving the Third Point Re investment portfolio to a negative -7.3% return for the quarter and a net investment loss of -$185 million.
This period has been “one of the most challenging investing environments since the financial crisis,” the reinsurer said, but noted that the hedge fund managing its assets Third Point LLC has positioned itself to benefit from the rebound, making some investments in equities expected to make gains in the future.
For Third Point Re the shift in strategy means it could be less reliant on the investment side going forwards, able to make more of its profits from underwriting instead.
When the stars align and both sides of the balance-sheet perform, it could still be looking to outperform the market, perhaps even more so than it had been able to previously when it relied solely on the investment performance.
Commenting on the results Dan Malloy, Chief Executive Officer of Third Point Re said, “Our thoughts and sympathies are with those affected by the health, social, and economic impacts of the ongoing COVID-19 pandemic. Despite the overall loss in the quarter, our capital and liquidity positions remain strong and I would like to commend the efforts of our team, working remotely, who helped produce a combined ratio of 97.0% for the quarter. This improved underwriting result is a significant milestone in the ongoing transformation of the company to a specialty reinsurer.
“Our diluted book value per share at the end of the quarter was $13.05, representing a 13.2% decrease from year end. The decrease was primarily due to a first quarter investment return of negative 7.3% reflecting the market volatility caused by COVID-19. The investment portfolio has already partially recovered some of this loss with a positive 3.5% investment return for April. With our strong capital position, we believe we are well positioned to continue our prudent underwriting and investment strategies.”
