Third Point Re Reports Second Quarter 2018 Earnings Results

Three months ended

Six months ended

June 30,
 2018

June 30,
 2017

June 30,
 2018

June 30,
 2017

($ in millions, except for per share data and ratios)

Gross premiums written

$

49.8

$

156.6

$

428.1

$

302.9

Net premiums earned

$

141.5

$

173.6

$

284.0

$

311.6

Net underwriting loss ⁽¹⁾

$

(5.1)

$

(12.1)

$

(11.4)

$

(20.8)

Combined ratio ⁽¹⁾

103.6%

107.0%

104.0%

106.6%

Net investment return on investments managed by Third Point LLC

1.0%

4.5%

0.8%

10.6%

Net investment income

$

31.2

$

107.3

$

29.0

$

235.8

Net investment income on float ⁽²⁾

$

4.9

$

31.2

$

7.5

$

67.3

Net income (loss) available to Third Point Re common shareholders

$

19.6

$

74.6

$

(6.4)

$

178.8

Diluted earnings (loss) per common share

$

0.19

$

0.71

$

(0.06)

$

1.70

Change in diluted book value per share ⁽²⁾

1.6%

5.0%

(0.1)%

12.0%

Return on beginning shareholders' equity attributable to Third
Point Re common shareholders ⁽²⁾

1.2%

5.0%

(0.4)%

12.8%

Net investments managed by Third Point LLC ⁽³⁾

$

2,560.9

$

2,589.9

$

2,560.9

$

2,589.9

Invested asset leverage ⁽³⁾

1.6

1.6

1.6

1.6

(1)

See the accompanying Segment Reporting for a calculation of net underwriting loss and combined ratio.

Net investment income on float, change in diluted book value per share and return on beginning shareholders' equity attributable to Third Point Re common shareholders are non-GAAP financial measures. There are no comparable GAAP measures. See the accompanying Reconciliation of Non-GAAP Measures and Key Performance Indicators for an explanation and calculation of net investment income on float, diluted book value per share and return on beginning shareholders' equity attributable to Third Point Re common shareholders.

(3)

Prior year comparatives represent amounts as of December 31, 2017.

Three months ended

June 30, 2018

June 30, 2017

Long

Short

Net

Long

Short

Net

Equity

3.4%

(1.9)%

1.5%

6.5%

(1.1)%

5.4%

Credit

0.3%

(0.2)%

0.1%

(0.3)%

(0.3)%

(0.6)%

Other

(1.3)%

0.7%

(0.6)%

0.2%

(0.5)%

(0.3)%

Net investment return on investments
managed by Third Point LLC

2.4%

(1.4)%

1.0%

6.4%

(1.9)%

4.5%

Six months ended

June 30, 2018

June 30, 2017

Long

Short

Net

Long

Short

Net

Equity

2.7%

(2.0)%

0.7%

13.0%

(2.2)%

10.8%

Credit

0.7%

(0.2)%

0.5%

0.1%

(0.4)%

(0.3)%

Other

(0.9)%

0.5%

(0.4)%

1.0%

(0.9)%

0.1%

Net investment return on investments managed by Third Point LLC

2.5%

(1.7)%

0.8%

14.1%

(3.5)%

10.6%

THIRD POINT REINSURANCE LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of June 30, 2018 and December 31, 2017

(expressed in thousands of U.S. dollars, except per share and share amounts)

June 30,
 2018

December 31,
 2017

Assets

Equity securities, trading, at fair value (cost - $2,065,215; 2017 - $1,868,735)

$

2,427,768

$

2,283,050

Debt securities, trading, at fair value (cost - $674,673; 2017 - $711,322)

617,913

675,158

Other investments, at fair value

52,444

37,731

Total investments in securities

3,098,125

2,995,939

Cash and cash equivalents

17,451

8,197

Restricted cash and cash equivalents

569,968

541,136

Due from brokers

258,764

305,093

Derivative assets, at fair value

34,738

73,372

Interest and dividends receivable

4,385

3,774

Reinsurance balances receivable

631,952

476,008

Deferred acquisition costs, net

264,408

258,793

Unearned premiums ceded

17,606

1,049

Loss and loss adjustment expenses recoverable

1,414

1,113

Other assets

10,808

7,320

Total assets

$

4,909,619

$

4,671,794

Liabilities

Accounts payable and accrued expenses

$

12,044

$

34,632

Reinsurance balances payable

74,013

41,614

Deposit liabilities

129,700

129,133

Unearned premium reserves

792,096

649,518

Loss and loss adjustment expense reserves

791,313

720,570

Securities sold, not yet purchased, at fair value

443,216

394,278

Securities sold under an agreement to repurchase

—

29,618

Due to brokers

926,588

770,205

Derivative liabilities, at fair value

12,380

14,503

Performance fee payable to related party

4,641

—

Interest and dividends payable

5,718

4,275

Senior notes payable, net of deferred costs

113,821

113,733

Total liabilities

3,305,530

2,902,079

Commitments and contingent liabilities

Redeemable noncontrolling interests in related party

7,179

108,219

Shareholders' equity

Preference shares (par value $0.10; authorized, 30,000,000; none issued)

—

—

Common shares (Issued: 2018 - 99,627,399; 2017 - 107,227,347; Outstanding: 2018 - 99,627,399; 2017 - 103,282,427)

9,963

10,723

Treasury shares (2018 - 0; 2017 - 3,944,920)

—

(48,253)

Additional paid-in capital

994,170

1,099,599

Retained earnings

587,621

594,020

Shareholders' equity attributable to Third Point Re common shareholders

1,591,754

1,656,089

Noncontrolling interests in related party

5,156

5,407

Total shareholders' equity

1,596,910

1,661,496

Total liabilities, noncontrolling interests and shareholders' equity

$

4,909,619

$

4,671,794

THIRD POINT REINSURANCE LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

For the three and six months ended June 30, 2018 and 2017

(expressed in thousands of U.S. dollars, except per share and share amounts)

Three months ended

Six months ended

June 30,
 2018

June 30,
 2017

June 30,
 2018

June 30,
 2017

Revenues

Gross premiums written

$

49,765

$

156,564

$

428,125

$

302,918

Gross premiums ceded

(3,479)

(1,425)

(18,125)

(2,550)

Net premiums written

46,286

155,139

410,000

300,368

Change in net unearned premium reserves

95,207

18,419

(126,021)

11,199

Net premiums earned

141,493

173,558

283,979

311,567

Net investment income before management and performance fees to related parties

45,668

140,631

53,507

308,466

Management and performance fees to related parties

(14,493)

(33,306)

(24,540)

(72,631)

Net investment income

31,175

107,325

28,967

235,835

Total revenues

172,668

280,883

312,946

547,402

Expenses

Loss and loss adjustment expenses incurred, net

84,000

107,379

176,620

193,274

Acquisition costs, net

57,584

68,641

108,989

123,093

General and administrative expenses

9,696

15,014

19,177

25,586

Other expenses

3,983

2,105

7,978

5,006

Interest expense

2,051

2,051

4,080

4,077

Foreign exchange (gains) losses

(8,847)

4,781

(2,236)

4,796

Total expenses

148,467

199,971

314,608

355,832

Income (loss) before income tax expense

24,201

80,912

(1,662)

191,570

Income tax expense

(4,390)

(5,307)

(4,518)

(10,605)

Net income (loss)

19,811

75,605

(6,180)

180,965

Net income attributable to noncontrolling interests in related party

(209)

(1,027)

(219)

(2,201)

Net income (loss) available to Third Point Re common shareholders

$

19,602

$

74,578

$

(6,399)

$

178,764

Earnings (loss) per share available to Third Point Re common shareholders

Basic earnings (loss) per share available to Third Point Re common shareholders

$

0.20

$

0.73

$

(0.06)

$

1.73

Diluted earnings (loss) per share available to Third Point Re common shareholders

$

0.19

$

0.71

$

(0.06)

$

1.70

Weighted average number of common shares used in the determination of earnings (loss) per share

Basic

99,498,901

102,283,844

100,342,636

103,144,078

Diluted

102,032,485

104,569,226

100,342,636

105,149,710

THIRD POINT REINSURANCE LTD.

SEGMENT REPORTING

Three months ended June 30, 2018

Three months ended June 30, 2017

Property and Casualty Reinsurance

Corporate

Total

Property and Casualty Reinsurance

Corporate

Total

Revenues

($ in thousands)

($ in thousands)

Gross premiums written

$             49,765

$                      -

$             49,765

$           156,564

$                      -

$           156,564

Gross premiums ceded

(3,479)

-

(3,479)

(1,425)

-

(1,425)

Net premiums written

46,286

-

46,286

155,139

-

155,139

Change in net unearned premium reserves

95,207

-

95,207

18,419

-

18,419

Net premiums earned

141,493

-

141,493

173,558

-

173,558

Expenses

Loss and loss adjustment expenses incurred, net

84,000

-

84,000

107,379

-

107,379

Acquisition costs, net

57,584

-

57,584

68,641

-

68,641

General and administrative expenses

4,963

4,733

9,696

9,649

5,365

15,014

Total expenses

146,547

4,733

151,280

185,669

5,365

191,034

Net underwriting loss

(5,054)

  n/a

  n/a

(12,111)

  n/a

  n/a

Net investment income

4,922

26,253

31,175

31,206

76,119

107,325

Other expenses

(3,983)

-

(3,983)

(2,105)

-

(2,105)

Interest expense

-

(2,051)

(2,051)

-

(2,051)

(2,051)

Foreign exchange gains (losses) (1)

8,847

-

8,847

(4,781)

-

(4,781)

Income tax expense

-

(4,390)

(4,390)

-

(5,307)

(5,307)

Net income attributable to noncontrolling interests in related party

-

(209)

(209)

-

(1,027)

(1,027)

Segment income

$               4,732

$             14,870

$             12,209

$             62,369

Net income available to Third Point Re common shareholders

$             19,602

$             74,578

Property and Casualty Reinsurance - Underwriting Ratios (2):

Loss ratio

59.4%

61.9%

Acquisition cost ratio

40.7%

39.5%

Composite ratio

100.1%

101.4%

General and administrative expense ratio

3.5%

5.6%

Combined ratio

103.6%

107.0%

Six months ended June 30, 2018

Six months ended June 30, 2017

Property and Casualty Reinsurance

Corporate

Total

Property and Casualty Reinsurance

Corporate

Total

Revenues

($ in thousands)

($ in thousands)

Gross premiums written

$           428,125

$                      -

$           428,125

$           302,918

$                      -

$           302,918

Gross premiums ceded

(18,125)

-

(18,125)

(2,550)

-

(2,550)

Net premiums written

410,000

-

410,000

300,368

-

300,368

Change in net unearned premium reserves

(126,021)

-

(126,021)

11,199

-

11,199

Net premiums earned

283,979

-

283,979

311,567

-

311,567

Expenses

Loss and loss adjustment expenses incurred, net

176,620

-

176,620

193,274

-

193,274

Acquisition costs, net

108,989

-

108,989

123,093

-

123,093

General and administrative expenses

9,787

9,390

19,177

15,961

9,625

25,586

Total expenses

295,396

9,390

304,786

332,328

9,625

341,953

Net underwriting loss

(11,417)

  n/a

  n/a

(20,761)

  n/a

  n/a

Net investment income

7,521

21,446

28,967

67,326

168,509

235,835

Other expenses

(7,978)

-

(7,978)

(5,006)

-

(5,006)

Interest expense

-

(4,080)

(4,080)

-

(4,077)

(4,077)

Foreign exchange gains (losses) (1)

2,236

-

2,236

(4,796)

-

(4,796)

Income tax expense

-

(4,518)

(4,518)

-

(10,605)

(10,605)

Net income attributable to noncontrolling interests in related party

-

(219)

(219)

-

(2,201)

(2,201)

Segment income (loss)

$             (9,638)

$               3,239

$             36,763

$           142,001

Net income (loss) available to Third Point Re common shareholders

$             (6,399)

$           178,764

Property and Casualty Reinsurance - Underwriting Ratios (2):

Loss ratio

62.2%

62.0%

Acquisition cost ratio

38.4%

39.5%

Composite ratio

100.6%

101.5%

General and administrative expense ratio

3.4%

5.1%

Combined ratio

104.0%

106.6%

Foreign exchange gains (losses) primarily result from the revaluation of foreign currency loss and loss adjustment expense reserves denominated in non-U.S. dollar. Non-U.S. dollar reinsurance assets, or balances held in trust accounts securing reinsurance liabilities generally offset reinsurance liabilities in the same non-U.S. dollar currencies resulting in minimal net exposure. As a result, the foreign exchange gains (losses) on loss and loss adjustment expense reserves in the period are offset by corresponding foreign exchange gains (losses) included in net investment income resulting from the revaluation of foreign currency reinsurance collateral held in trust accounts, which is presented as part of the Property and Casualty segment. In the three months ended March 31, 2018, the Company modified the presentation of its operating segment to allocate foreign exchange gains (losses) to the Property and Casualty Reinsurance Segment to better align with the reinsurance activities that result in these foreign exchange gains and losses.  These amounts had previously been presented as part of the Company's corporate function. Prior period segment results have been adjusted to conform to this presentation.

Underwriting ratios are calculated by dividing the related expense by net premiums earned.

THIRD POINT REINSURANCE LTD.

NON-GAAP MEASURES AND RECONCILIATIONS & KEY PERFORMANCE INDICATORS

Non-GAAP Measures

Basic Book Value per Share and Diluted Book Value per Share

Basic book value per share and diluted book value per share are non-GAAP financial measures and there are no comparable GAAP measures. Basic book value per share, as presented, is a non-GAAP financial measure and is calculated by dividing shareholders' equity attributable to Third Point Re common shareholders by the number of common shares outstanding, excluding the total number of unvested restricted shares, at period end. Diluted book value per share, as presented, is a non-GAAP financial measure and represents basic book value per share combined with the impact from dilution of all in-the-money share options issued, warrants and unvested restricted shares outstanding as of any period end. For unvested restricted shares with a performance condition, we include the unvested restricted shares for which we consider vesting to be probable. Change in basic book value per share is calculated by taking the change in basic book value per share divided by the beginning of period book value per share. Change in diluted book value per share is calculated by taking the change in diluted book value per share divided by the beginning of period diluted book value per share. We believe that long-term growth in diluted book value per share is the most important measure of our financial performance because it allows our management and investors to track over time the value created by the retention of earnings.  In addition, we believe this metric is used by investors because it provides a basis for comparison with other companies in our industry that also report a similar measure.

June 30,
2018

December 31,
2017

Basic and diluted book value per share numerator:

($ in thousands, except share and per share amounts)

Shareholders' equity attributable to Third Point Re common shareholders

$       1,591,754

$          1,656,089

Effect of dilutive warrants issued to founders and an advisor

34,950

46,512

Effect of dilutive stock options issued to directors and employees

51,422

51,422

Diluted book value per share numerator

$       1,678,126

$          1,754,023

Basic and diluted book value per share denominator:

Common shares outstanding

99,627,399

103,282,427

Unvested restricted shares

(2,050,115)

(1,873,588)

Basic book value per share denominator:

97,577,284

101,408,839

Effect of dilutive warrants issued to founders and an advisor

3,494,979

4,651,163

Effect of dilutive stock options issued to directors and employees

5,123,531

5,123,531

Effect of dilutive restricted shares issued to directors and employees

1,202,464

905,412

Diluted book value per share denominator

107,398,258

112,088,945

Basic book value per share

$              16.31

$                 16.33

Diluted book value per share

$              15.63

$                 15.65

Net Investment Income on Float

Net investment income on float is an important aspect of our property and casualty reinsurance operation. In an insurance or reinsurance operation, float arises because premiums and proceeds from deposit accounted contracts are collected before losses are paid. In some instances, the interval between receipts and payments can extend over many years. During this time interval, insurance and reinsurance companies invest the premiums received and generate investment returns.We track cash flows generated by our property and casualty reinsurance operations, or float, in separate accounts that allow us to also track the net investment income generated on the float. We believe that net investment income generated on float is an important consideration in evaluating the overall contribution of our property and casualty reinsurance operation to our consolidated results. It is also explicitly considered as part of the evaluation of management's performance for purposes of long-term incentive compensation. Net investment income  on float as presented is a non-GAAP financial measure. See the table below for a reconciliation of net investment income on float to net investment income.

Three months ended

Six months ended

June 30, 2018

June 30, 2017

June 30, 2018

June 30, 2017

($ in thousands)

Net investment income

$           31,175

$         107,325

$           28,967

$         235,835

Less: Other investment income (loss)

(9)

193

(12)

460

Net investment income on investments managed by Third Point LLC

31,184

107,132

28,979

235,375

Less: Net investment income on capital

26,262

75,926

21,458

168,049

Net investment income on float

$             4,922

$           31,206

$             7,521

$           67,326

Return on Beginning Shareholders' Equity Attributable to Third Point Re Common Shareholders

Return on beginning shareholders' equity attributable to Third Point Re common shareholders, as presented, is a non-GAAP financial measure. Return on beginning shareholders' equity attributable to Third Point Re common shareholders is calculated by dividing net income (loss) available to Third Point Re common shareholders by the beginning shareholders' equity attributable to Third Point Re common shareholders. We believe that return on beginning shareholders' equity attributable to Third Point Re common shareholders is an important measure because it assists our management and investors in evaluating the Company's profitability. For the three and six months ended June 30, 2018, we have also adjusted the beginning shareholders' equity attributable to Third Point Re common shareholders for the impact of the shares repurchased on a weighted average basis. For a period where there was a loss, this adjustment decreased the stated returns on beginning shareholders' equity and for a period where there was a gain, this adjustment increased the stated returns on beginning shareholders' equity.

Three months ended

Six months ended

June 30, 2018

June 30, 2017

June 30, 2018

June 30, 2017

($ in thousands)

Net income (loss) available to Third Point Re common shareholders

$           19,602

$           74,578

$           (6,399)

$         178,764

Shareholders' equity attributable to Third Point Re common
shareholders - beginning of period

1,607,422

1,501,681

1,656,089

1,414,051

Impact of weighting related to shareholders' equity from shares
repurchased

(7,606)

(9,863)

(13,673)

(16,882)

Adjusted shareholders' equity attributable to Third Point Re
common shareholders - beginning of period

$      1,599,816

$      1,491,818

$      1,642,416

$      1,397,169

Return on beginning shareholders' equity attributable to Third Point
Re common shareholders

1.2 %

5.0%

12.8%

Key Performance Indicators

Net Investment Return on Investments Managed by Third Point LLC

Net investment return represents the return on our investments managed by Third Point LLC, net of fees. The net investment return on investments managed by Third Point LLC is the percentage change in value of a dollar invested over the reporting period on our investment assets managed by Third Point LLC, net of total noncontrolling interest. The stated return is net of withholding taxes, which are presented as a component of income tax expense in our condensed consolidated statements of income (loss). Net investment return is the key indicator by which we measure the performance of Third Point LLC, our investment manager.

Invested Asset Leverage

Invested asset leverage is a ratio calculated by dividing our net investments managed by Third Point LLC by shareholders' equity attributable to Third Point Re common shareholders and is a key metric in assessing the amount of insurance float generated by our reinsurance operation that has been invested by our investment manager, Third Point LLC.  Given the sensitivity of our return on beginning shareholders' equity to our net investment return on investments managed by Third Point LLC, invested asset leverage is an important metric that management monitors.  It is also an important metric by which we evaluate our capital adequacy for rating agency and regulatory purposes.  Maintaining an appropriate invested asset leverage in order to optimize our return potential, while maintaining sufficient rating agency and regulatory capital is an important aspect of how we manage the Company. We generally target an invested asset leverage ratio within a range of approximately 1.5 to 1.6, which we believe appropriately balances our return potential against the risk within our investment portfolio.