Third Point Re’s investments trump underwriting in Q2

Bermuda based hedge fund backed reinsurance firm Third Point Re saw its asset side outperform in the second quarter of 2016, as a rise in its combined ratio and a technical underwriting loss was compensated for by higher investment returns.

This is the promise of the hedge fund backed, investment oriented, or total return, reinsurance strategy, that by using both assets and liabilities, profit can be achieved even if one side turns sour.

Of course that’s not always the case and most hedge fund reinsurers are still struggling to keep their underwriting profitable. As the real sweet spot is to report a combined ratio of under 100, while also reporting positive investment performance in the hope of outperforming the traditional reinsurance market.

Q2 2016 saw Third Point Re, which is backed by Daniel Loeb’s Third Point LLC hedge fund, struggle on the underwriting side.

The reinsurer reported net income of $53.4 million for the second quarter of 2016, compared to net income of $15.7 million for Q2 2015, as its investment results compensated for the underwriting loss. For the first six months of 2016, Third Point Re reported net income of $2.2 million, compared to $66.1 million for H1 2015, which was largely down to worse investment results in the first-quarter.

On the underwriting side, Third Point Re continues to make progress in terms of adding scale, writing more premiums again, but the technical underwriting loss due to adverse development on some contracts saw a high combined ratio reported.

John Berger, Chairman and Chief Executive Officer, explained; “During the second quarter, we generated premiums written of $196.9 million, an increase of 6.9% compared to the prior year’s second quarter. Our combined ratio for the quarter was 119.2%, which was disappointing and reflects adverse development on several contracts in the quarter.  Market conditions in the lines of business that we focus on continue to present challenges in finding profitable underwriting opportunities.”

But the investment side of the business was sufficiently profitable to wipe out the Q2 underwriting loss and helping the reinsurer to a profit.

“Our investments performed well in the second quarter. We generated an investment return of 4.0% in the second quarter and a further 2.6% in July bringing the year to date return through July to 4.6%,” Berger commented.

The investment income for the quarter is reported as net of $86.3m and $19.1m of investment income on float, which wiped out the -$25.6m underwriting loss to present a profit of $53.4m for the quarter.

It’s been a testing time for the hedge fund reinsurers over the last twelve months, with terrible investment performance now bouncing back, as evidenced in July of this year, but the underwriting side of the businesses still suffering.

It’s vital that the underwriting side is controlled, in order to become more profitable and to make those quarters where investments suffer due to market volatility, which will continue to be the case as the investment strategy is more risky, less negative.

The hope is that over the longer term by leveraging both sides of the balance-sheet a profitable reinsurance business can be formed that has the chance of outperforming the market, thanks to the additional juice provided by the investments. We’ve yet to see that evidenced meaningfully and some continuity of positive results is likely required to appease shareholders at this point.

Also read:

– Hedge fund reinsurers benefit from strong investments in July.

– Third Point Re renews investment agreement with Loeb’s hedge fund.