Bermuda-headquartered hedge fund strategy reinsurance firm Third Point Re, backed by Daniel Loeb’s Third Point LLC, had a good first-quarter thanks to a lower combined ratio and good investment results, while the wind-down of its catastrophe ILS fund continues.
Property and casualty reinsurer Third Point Reinsurance Ltd., which has its assets managed by hedge fund Third Point LLC and its fund manager Dan Loeb, has been steadily building its underwriting by growing premiums, while seeking to provide a total return to investors through growth in book value and dividends.
Following an investment oriented reinsurer approach means that the results can depend on the investment performance of the Dan Loeb hedge fund, and in Q1 the returns have assisted the reinsurer to its improved results.
For Q1 Third Point Re reported net income of $50.5m, or $0.47 per share, compared with $39.8m, or $0.37 per share a year earlier, an increase of 26.9%. Book value per share increased by $0.42, or 3.1%, to $13.97 per share from $13.55 at the end of 2014.
“Through our total return business model, we aim to generate superior returns for investors by writing profitable reinsurance business and successfully investing the float generated from our reinsurance operations and our capital base through an exclusive arrangement with Third Point LLC, our investment manager,” explained John Berger, Chairman and CEO.
Perhaps most impressive is the way Third Point Re has been growing its premiums written. For Q1 the reinsurer reported $213.3m of gross premiums, up a huge 143.6% from the $87.6m written in Q1 2014. Alongside an improvement in combined ratio, which fell 102.8% from 107.1%, the growing premium base should ensure growing income over future quarters as well.
Of course when the premium base grows the amount of premium float that can be put to work in the hedge fund investment strategy provided by Dan Loeb’s Third Point LLC also grows. In fact Berger explained that in the quarter Third Point Re generated “$161.6 million of float versus $20.0 million” in the prior year period, a significant increase.
The investment return achieved by Loeb’s hedge fund for the quarter hit 3%, which is roughly aligned with the 3.1% achieved in Q1 2014. Interestingly, the returns suffered in January, slipping to a -2.3%, but February saw a +4.4% return which with 1% returned in March helped the quarter recover. That demonstrates the potential volatility in this strategy though, both for down and up side.
Berger expects the growth of premiums and increasing access to reinsurance business will continue at Third Point Re, saying; “We continue to develop a strong pipeline of new business due in part to the expansion of our underwriting platform to include a new U.S. office.”
It’s worth noting that the way premiums come in at Third Point Re can be “lumpy”, given its focus on large transactions. That means comparing quarters can be difficult and suggests that the Q1 underwriting saw some new large accounts written.
So Third Point Re continues to show that the hedge fund backed strategy is working for it, with the investment return offsetting a 100+ combined ratio. Over time the reinsurer will work to get that combined ratio down further, at which point the total return when the hedge fund delivers could be extremely good for shareholders.
Third Point Re’s third-party reinsurance capital investment management unit, Third Point Reinsurance Investment Management Ltd., continues the process of winding down the ILS fund it operates.
The insurance-linked investment unit, which operates the catastrophe reinsurance and insurance-linked securities (ILS) fund, named the Third Point Reinsurance Opportunities Fund Ltd., saw its assets under management shrink during Q1 2015 to $77m at the end of the quarter, compared to $119.7m at the end of 2014.
The reduction in assets under management was due to the Third Point Re catastrophe fund distributing $42.5m during the quarter, $21.1m of which was Third Point Re’s capital. The catastrophe risk management unit saw a small loss of $0.2m for the quarter, compared to a loss of $0.1m in Q1 2014.
The wind-down continues and Third Point Reinsurance Investment Management Ltd. will continue to manage the remaining business in the cat fund until runoff.
Third Point Re continues to provide a good example of how bringing a lower-volatility reinsurance business together with a hedge fund strategy can provide attractive results, especially when both sides of the business are performing well.