Third Point Re slips on investment returns, cat fund still contributes

by Artemis on February 27, 2015

Bermuda-located hedge fund strategy reinsurance firm Third Point Re slipped to a loss on lower investment returns in Q4. However, key indicators show ongoing improvement in underwriting returns and even the soon-to-close ILS fund contributed positively again.

Property and casualty reinsurer Third Point Reinsurance Ltd., backed by hedge fund Third Point LLC and its fund manager Dan Loeb’s, follows a total return strategy. This involves underwriting lower-volatility business often at higher combined ratios, while the assets are invested by the hedge fund seeking to boost performance, while providing investors with a total return through share price gains and dividends.

That means the reinsurers results are at the whim of the performance of Dan Loeb’s hedge fund though, and in the fourth-quarter of 2014 the investment performance dropped resulting in a loss at the reinsurer in Q4.

Third Point Re reported last night a net loss of $14.7m for the fourth quarter of 2014, compared with net income of $80.1m in Q4 2013. Results for the full year were also hit by lower investment performance, with the end result being net income of $50.4m in 2014 compared with $227.3m in 2013, a drop of 77.8%.

“The overall results for the quarter were disappointing due to challenging investment market conditions,” John Berger, Chairman and Chief Executive Officer, commented. “While slightly higher than the returns of the broader hedge fund indices, the return on our investment portfolio managed by Third Point LLC was slightly negative for the quarter.”

Hedge fund returns are fickle and the current investment climate has been challenging for stock pickers and asset pickers like Dan Loeb. In the fourth quarter the asset portfolio of Third Point Re saw a -0.4% return. But it is the full-year investment decline that contributed significantly to the lower full-year income, with a 6% investment return for the year considerably lower than the 23.9% return reported for 2013.

Positively, Third Point Re is showing all the signs of improving the underwriting side of its business and in the fourth quarter very nearly broke even, a target of the firm is to get the combined ratio under 100%.

“We are making significant progress in developing our reinsurance business and believe we are well positioned to benefit from future investment portfolio gains. In the fourth quarter of 2014, gross premiums written increased by fifty percent, our combined ratio dropped to 100.2% and our float grew to $389.2 million,” Berger said.

Gross premiums written have been growing, with $253.8m in Q4 2014 and $613.3m for the full-year, compared to $162.3m in Q4 2013 and $401.9m for the full-year 2013. The combined ratio of 100.2% in Q4 2014 is considerably better than 106.3% reported for Q4 2013. While the full-year combined ratio came in at 102.2%, which is again much better than 107.5% for 2013.

So the underwriting loss has been steadily shrinking, which is a natural occurrence of a longer-tailed book of business coming to fruition over time. If 2014 investment returns had been nearer to the prior year, we’d be looking at a very healthy set of results for the reinsurance firm.

Interestingly, despite being in the process of run-off, the third-party reinsurance capital investment management unit of the reinsurer, Third Point Reinsurance Investment Management Ltd., showed that there is still a profit to be made.

The insurance-linked investment unit, which operates the catastrophe reinsurance and insurance-linked securities (ILS) fund named the Third Point Reinsurance Opportunities Fund Ltd., returned a larger contribution to the parent reinsurer once again in Q4.

Net income attributed to the catastrophe fund manager was $0.8m and $4.6m for the quarter and year ended December 31, 2014, respectively, compared to net income of $0.8m and $3.4m for the prior year periods. Net assets under management for the Third Point Re catastrophe fund grew to $119.7m by the end of 2014, compared to $104m the year earlier.

Despite this, the contribution is perhaps not sufficient to make it viable for Third Point Re. It may be that the property catastrophe focus of the cat fund is also a little distracting, as Third Point Re does not underwrite that kind of business on its balance-sheet.

The reinsurer said; “We are winding it down due to challenging market conditions and competition with other collateralized reinsurance and insurance-linked securities vehicles. Catastrophe reinsurance pricing and the fees available to manage catastrophe risk have decreased significantly in the past two years. The Catastrophe Fund Manager will continue to manage the runoff of the remaining exposure in the Catastrophe Fund.”

Part of the process of closing down the Third Point Re catastrophe investment fund involves investing in Hiscox’s Kiskadee ILS platform, with the first $5m having been invested on January 2nd. Hiscox had been a seed investor in the Third Point Re fund since its launch.

Looking ahead, Third Point Re will be more expansive in 2015 thanks to its recently established U.S. underwriting platform. This should give the reinsurer greater access to business and allow it to grow premiums written again.

Berger explained; “We are pleased that we have completed the initial capitalization of Third Point Reinsurance (USA) Ltd., our United States underwriting platform. We expect continued growth in the near term due to this expansion of our underwriting platform and a robust deal pipeline.”

Third Point Re is not the only hedge fund strategy reinsurer to have suffered from recent difficulties in investment markets. PacRe, the Validus – AlphaCat and Paulson joint venture has also suffered from poor investment performance.

When the investment returns are particularly bad it can wipe out results, as seen for the Third Point Re in Q4. However, as the underwriting result improves, as it has significantly, when investment returns bounce back (which they inevitably will at some point) Third Point Re will likely post very healthy results.

The additional risk and return in a hedge fund strategy may even help reinsurers like Third Point Re to outperform peers which follow more vanilla asset management strategies. The trick will be in delivering that return quarter after quarter, especially when the investment climate remains so challenging.

Also read:

M&A doesn’t make sense for us, market to get tougher: Third Point Reinsurance.

Third Point Re launches debt offering to capitalise U.S. operations.

Third Point Re invests first $5m in Kiskadee as cat fund closure begins.

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