Third Point Re reports lower income in challenging market

Bermuda-based property and casualty reinsurance firm Third Point Reinsurance Ltd., backed by hedge fund manager Dan Loeb’s Third Point LLC, has reported lower income due to lower investment return and lower premiums written in the challenging market.

Third Point Re reported net income of $39.8m, or $0.37 per diluted common share, for the first quarter of 2014, compared with $74.4m, or $0.93 per diluted common share, for the first quarter of 2013, down 46.6% year on year.

Gross premiums written were down to $87.6m in the quarter, from $96m a year earlier, while showing the development of its underwriting portfolio its premiums earned were $73.3m, which is more than double the $33.5m earned in Q1 2013.

At the same time the firms combined ratio improved from 111.6% to 107.1%, again showing improvement in the firms underwriting run rate. During the quarter Third Point Re’s diluted book value per share increased by $0.31 per share, or 2.4%, to $13.43 per share from $13.12 per share as of December 31, 2013.

CEO John Berger cited the challenging market environment and entry of new capital into reinsurance as a factor in the firms Q1 result; “We continue to develop our business according to plan. In the first quarter of 2014, our ‘Total Return’ approach generated growth in diluted book value per share of 2.4%. Investment returns remained solid and our combined ratio improved to 107.1% from 111.6% in the previous year’s first quarter.  Reinsurance market conditions remain challenging, particularly with new capital entering the market, but we remain pleased with the number of attractive opportunities we are seeing.”

The firm did not renew a number of large contracts during the quarter and has pulled back entirely from its crop reinsurance business citing market conditions, causing the drop in premiums written. Third Point Re notes that as it deals in large reinsurance transactions which sometimes might not be renewed it is hard to compare some of these factors year on year.

Third Point Re’s catastrophe reinsurance linked investments segment, which includes the combined results of Third Point Reinsurance Opportunities Fund Ltd., Third Point Reinsurance Investment Management Ltd., and Third Point Re Cat Ltd. saw a small net loss for the quarter.

After attributing income to non-controlling interests, net loss from the Catastrophe Risk Management segment was $0.1m for the three months ended March 31, 2014 compared to net income of $0.2m for the three months ended March 31, 2013.  Net assets under management for the Catastrophe Fund were $106.7 million as of March 31, 2014, up slightly from the $104m reported as of December 31, 2013.

Dan Loeb’s Third Point LLC hedge fund’s performance was lower resulting in a drop in investment income compared to a year ago, which is a big factor in the dent to Third Point Re’s net income. The investment return for Q1 2014 was just 3.1%, compared to 8.7% a year before. Investment income was $50m compared to $81.4m in Q1 2013. Investment assets managed by Third Point LLC for Third Point Re rose to $1.6286 billion in the quarter.

So a mixed bag of results for Third Point Re. Clearly the competitive and challenging reinsurance market has caused the firm to pull back on certain contracts and pull out of crop reinsurance entirely, likely a smart move given the way crop losses from drought are rising lately.

At the same time the investment contribution is a lot lower than a year earlier, although the 3.1% quarterly return is still very attractive compared to reinsurers with less active or return focused investment strategies.

However, hedge fund backed reinsurers like Third Point Re could have an easier time, than those without an active investment strategy, if the current market conditions persist. They can pull back on underwriting, move to less competitive areas of the market if necessary, while all the time recouping a reasonable return from their investment income as well. The asset side can at least offset some of the challenges faced by the underwriting side, a luxury more traditional reinsurers do not have, hence the ongoing discussion that some will become more return focused in their investment strategies.