Hedge fund-backed reinsurer Third Point Re is confident of recording an underwriting gain in the first-quarter of the year and, over time, expects this side of its balance sheet to become a meaningful contributor to overall returns.
Third Point Re announced towards the end of 2018 that although investments would remain the key driver of its financial results, it felt it was the right time to target some higher margin, higher risk business to its reinsurance portfolio.
From the start of January 2019, the investment-oriented reinsurer commenced writing property catastrophe business, and, during its Q1 2019 results announcement, Chief Executive Officer (CEO) Dan Malloy said that within the next year or so, its evolving underwriting strategy would drive a profit.
While still negative, Third Point Re’s underwriting performance did improve in both the second-quarter and first-half of 2019, and combined with a strong investment return, saw the firm report H1 2019 net income of $186 million, compared with a loss of $6.4 million in 2018.
For the full year 2019, Third Point Re recently reported net income of $200 million versus a loss of $317 million in 2018. This result includes an underwriting loss of $22.3 million and net investment income of $282.6 million, leading to a combined ratio of 103.2% for the year. In comparison, Third Point Re fell to an underwriting loss of $42.1 million in 2018 and recorded an investment loss of $251.4 million, reporting a combined ratio of 106.8% for the year.
So, while the dramatic shift in investment income clearly helped the company produce $200 million of net income for the year, it’s clear that its evolving underwriting strategy is also improving this side of the balance sheet and is edging closer to profitability.
Speaking during the company’s fourth-quarter and full year 2019 earnings call, CEO Malloy and Chief Financial Officer (CFO), Chris Coleman, discussed Third Point Re’s underwriting initiatives.
“Our new underwriting initiatives continue to benefit results and we remain on track to deliver underwriting profitability in 2020. Over time, our goal is to deliver a combined ratio in the mid-90s as we work to deliver value from both sides of our balance sheet by taking a prudent mix of underwriting and investment risk.
“As we deliver more consistent results over time, we expect to close the persistent discount that our shares trade to book value and our peer group,” explained Malloy.
He continued to note that the build-out of its property cat book went well for 2019, adding that it recently completed a successful renewal season where it further refined this class of business which ultimately led to an expectation of higher profits without assuming additional aggregate cat exposure.
“We have reshaped our portfolio away from retrocessional quota share treaties, which accounted for approximately half of our property catastrophe premium in 2019…Looking forward, we expect the catastrophe market to provide meaningful rate increases at April 1 and June 1,” added Malloy.
CFO Coleman echoed Malloy and said that as the company heads into 2020, it expects to report underwriting profitability in Q1 2020, absent catastrophe losses exceeding expectations.
“As our underwriting strategy shifts, we expect underwriting to become a meaningful contributor to overall returns more in line with our peers.
“As Dan Malloy mentioned earlier, we believe this will drive a more balanced return contribution from underwriting and investment activities, which we believe will make our business model more attractive to investors and ultimately improve our valuation,” said Coleman.
