The Company leases office space in Pembroke, Bermuda where the Company’s principal executive office is located. Additionally, the Company leases office space in Jersey City, New Jersey for Third Point Re USA’s operations. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2020, refer to Note 21 to the accompanying consolidated financial statements.
Upon closing of the Merger with Sirius, we will operate in new locations with additional facilities, including the United States, Canada, Europe and Asia.
For discussion of our results of operations and changes in financial condition for the year ended December 31, 2019 compared to the year ended December 31, 2018 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K which was filed with the SEC on February 28, 2020.
We manage our business on the basis of one operating segment, Property and Casualty Reinsurance. Non-underwriting income and expenses, presented as a reconciliation to our consolidated results, include: net investment income (loss), general and administrative expenses related to corporate activities, other expenses, interest expense, foreign exchange losses and income tax (expense) benefit.
The total deal consideration was estimated at the time of announcement as $788.0 million, which comprises stock, cash, and other contingent value components.
We have received all required regulatory approvals, and we expect the Merger to close on February 26, 2021. Please refer to our Current Report on Form 8-K filed with the SEC on August 7, 2020, for additional description of the Merger and related transactions.
We expect that the Merger will have a material impact to our business. Following closing of the Merger, SiriusPoint plans to create a highly diversified portfolio with expanded underwriting capabilities, geographic footprint and product offerings. SiriusPoint expects to offer an enhanced scale and global platform, with access to admitted and non-admitted paper in Europe, the United States, Bermuda and Lloyd’s. Refocused underwriting strategies will
We provide reinsurance products to insurance and reinsurance companies, government entities, and other risk bearing vehicles. Contracts can be written on an excess of loss basis or quota share basis. In addition, we write contracts on both a prospective basis and a retroactive basis. Prospective reinsurance contracts cover losses incurred as a result of future insurable events. Retroactive reinsurance contracts cover the potential for changes in estimates of loss and loss adjustment expense reserves related to loss events that have occurred in the past. Retroactive reinsurance contracts can be an attractive type of contract for us as they can generate an underwriting profit should the ultimate loss and loss adjustment expenses settle for less than the initial estimate of reserves and the premiums received at the inception of the contract generate insurance float.
Insurance float is still an important aspect of our reinsurance operation. Insurance float arises because premiums from reinsurance contracts and consideration received for deposit accounted contracts are collected before losses are paid on reinsurance contracts and payments are made on deposit accounted contracts. In some instances, the interval between cash receipts and payments can extend over many years. During this time interval, we invest the cash received and seek to generate investment returns.
We believe that over time, our reinsurance operation will contribute to our results by both generating underwriting income as well as generating float.
In September 2020, we announced an investment in Arcadian Risk Capital Ltd. (“Arcadian”), a start-up led by John Boylan, a well-known industry executive with a 30-year track record in the global insurance market. We made a significant capital commitment and will own a minority stake in the newly-formed company. In addition to capitalizing Arcadian, we will also provide insurance paper and meaningful net capacity. Arcadian has been established as a managing general agent and incorporated in Bermuda where Arcadian will initially operate. Arcadian commenced operations on October 1, 2020 with a Bermuda-only platform, with a plan to expand to multiple offices over time where it will underwrite various lines of insurance business, via established broker networks. For the year ended December 31, 2020, Arcadian wrote $19.0 million of professional and general liability business.
In the third quarter of 2020, equity markets rebounded with technology-oriented stocks leading out-performance globally. Third Point LLC initiated new positions within several growth-oriented stocks that it believed would emerge even stronger in the post-COVID world. These positions contributed to positive performance in the third and fourth quarters of 2020.
The COVID-19 pandemic has had and is expected to continue to have a significant effect on the (re)insurance industry. The industry is currently being impacted by a number of factors including: uncertainties with respect to current and future COVID-19 losses across many classes of insurance business and the amount of insurance losses that may ultimately be ceded to the reinsurance market, continued low interest rates, equity market volatility and ongoing business and financial market impacts of COVID-19 associated economic downturn. The insurance industry
Outside of property catastrophe reinsurance, we have also experienced some improvement in reinsurance terms and conditions and underlying pricing across other property business in our portfolio, with the previously observed trends continuing as expected.
business, we expect COVID-19 will result in a continuation, and potentially an acceleration, of these improving pricing trends across many classes of casualty reinsurance.
While considering the impact of large-scale industry events, such as COVID-19, we incorporate the potential for elevated loss trends in our pricing analyses and endeavor to mitigate the potential impact of such increases in loss trends by structuring our contracts accordingly.
We have started to see a resumption of business opportunities in credit risk exposed lines of business, although we remain extremely cautious. The slowdown in the origination of new mortgage loans in the United States that we saw earlier in 2020 reversed dramatically in the latter part of the year, with existing and pending sales rebounding to above pre-COVID-19 levels and refinancings benefiting from lowered interest rates. We continue to see improved lending, mortgage insurance underwriting and overall production quality across our portfolio.
In other specialty lines we write, many of which are specialty catastrophe focused, we expect to see significant insurance market impacts from COVID-19 and in some cases, losses to our portfolio. We expect to see new opportunities, as many of the lines we pursue will experience significant rate increases, improvement in other terms and conditions and opportunities for new capacity resulting from a combination of increased demand and reductions in capacity from reinsurers more significantly impacted by losses from COVID-19.
We expect our underwriting strategy to change significantly following our Merger with Sirius. We expect to create a highly diversified portfolio with expanded underwriting capabilities, geographic footprint and product offerings. Following closing of the Merger, we expect to manage our business through four operating segments: Property, Specialty, Accident & Health and Runoff & Other.
Across many of our business lines, we focus on solutions driven opportunities, where we creatively structure products tailored to a client’s financial needs and objectives. In select situations, we create structures that result in long-term partnerships and optionality on what we believe to be high margin insurance or reinsurance premium with expense efficient operating models. We offer two value-added approaches to drive origination of these types of opportunities, one being solution-driven reinsurance structures that are creative, flexible and responsive to a client’s desire to use reinsurance in their capital structure, in lieu of other capital alternatives, and the other being non-reinsurance capital (equity/debt) solutions paired with reinsurance. We have closed a number of transactions, both reinsurance only and capital products combined with reinsurance, and have several pipeline opportunities. We believe our efficient operating model combined with skill sets in both the reinsurance and capital markets is a material differentiating factor in our successful origination and execution of these opportunities, which we expect will begin to represent a growing proportion of our premium volume in the future.
For our collateral assets that are generally invested in cash and cash equivalents and U.S. Treasuries and foreign equivalents, the significant reduction in interest rates for these asset classes will reduce our expected net investment income from this portion of our investment portfolio.
In the third quarter of 2020, equity markets rebounded with technology-oriented stocks leading out-performance globally. Third Point LLC initiated new positions within several growth-oriented stocks that it believed would emerge even stronger in the post-COVID world. These positions contributed to positive performance in the third and fourth quarter of 2020.
Within equities, Third Point LLC remains focused on selectively adding to its portfolio of high-quality, long-term compounders when presented with opportune entry points amidst continued volatility. Within structured credit, Third Point LLC will look to take advantage of new regulatory constraints and its substantial balance sheet to source deals for whole loan portfolios. Over the coming quarters, Third Point LLC expects to focus on credit situations that are fundamentally deteriorating but have capital structure solutions, under-appreciated strengths, or improving trajectories where the market is looking backwards.
We believe that by combining a disciplined and opportunistic approach to reinsurance underwriting with investment results from the active management of our investment portfolio, we will be able to generate attractive returns for our shareholders. The key financial measures that we believe are most meaningful in analyzing our performance are: net underwriting income (loss) for our property and casualty reinsurance segment, combined ratio for our property and casualty reinsurance segment, net investment income, net investment return on investments managed by Third Point LLC, basic book value per share, diluted book value per share, growth in diluted book value per share and return on beginning shareholders’ equity attributable to Third Point Re common shareholders.
(1) See Note 22 to the accompanying consolidated financial statements for a calculation of net underwriting loss and combined ratio.
(2) Basic book value per share, diluted book value per share, 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 reconciliations in “Non-GAAP Financial Measures and Other Financial Metrics”.
Net investment income is an important measure that affects overall profitability. Net investment income is primarily affected by the performance of Third Point LLC as TP Fund’s investment manager and the amount of investable cash generated by our reinsurance operations. Net investment income also includes the investment income on collateral assets and certain other investment assets managed by Third Point LLC. Pursuant to the investment management agreement between TP Fund and Third Point LLC, Third Point LLC is required to manage TP Fund’s investment portfolio on a basis that is substantially equivalent to Third Point Offshore Master Fund L.P., but with increased exposures through the use of additional financial leverage and subject to certain conditions set forth in TP Fund’s investment guidelines. These conditions include a limitation on portfolio leverage, and a limitation on portfolio concentration in individual securities. The 2019 LPA allows us to withdraw cash from the TP Fund at any calendar month end or at the close of business each Wednesday during a month with not less than three days’ notice to pay claims, not less than five days’ notice to pay expenses and with not less than three days’ notice in order to satisfy the requirements of AM Best. Net investment income is net of investment expenses, which include performance and management fees to related parties.
See “Investment Results” below for additional information regarding investment performance and net investment return on investments managed by Third Point LLC.
Basic book value per share and diluted book value per share are non-GAAP financial measures and there are no comparable GAAP measures. See “Non-GAAP Financial Measures and Other Financial Metrics” for reconciliations.
As of December 31, 2020, diluted book value per share was $16.42, representing an increase of $1.38 per share, or 9.2%, from $15.04 per share as of December 31, 2019. The increase was primarily due to net income in the year.
The following table sets forth the key items discussed in the consolidated results of operations section, and the year over year changes, for the years ended December 31, 2020 and 2019:
The following is a summary of our total net investments managed by Third Point LLC as of December 31, 2020 and 2019:
(1)Collateral assets primarily consist of fixed income securities such as U.S. Treasuries, money market funds, and sovereign debt. Other investment assets primarily consist of U.S. Treasuries, structured and corporate credit fixed income securities such as corporate bonds, asset-backed securities and bank debt.
The following tables present the total long, short and net exposure of our total net investments managed by Third Point LLC as of December 31, 2020 and 2019 by strategy and geography:
(1)The Company’s investment manager classifies non-speculative interest rate hedges as cash and cash equivalents and therefore excludes these from the exposure summary.
In managing our investment portfolio, Third Point LLC assigns every investment position a sector, strategy and geographic category. The dollar exposure of each position under each category is aggregated and the exposure percentages listed in the exposure table represent the aggregate market exposure of a given category against the total net asset value of the consolidated account. Long and short exposure percentages represent the aggregate relative value of all long and short positions in a given category, respectively. Net exposure represents the short exposure subtracted from the long exposure in a given category. Third Point LLC reports the composition of our total managed portfolio on a market exposure basis, which it believes is the appropriate manner in which to assess the exposure and profile of investments and is the way in which it manages the portfolio.
The following is a summary of the net investment return for our total net investments managed by Third Point LLC for the years ended December 31, 2020 and 2019:
(1)Refer to “Non-GAAP Financial Measures and Other Financial Metrics” for a description of the net investment return on investments managed by Third Point LLC.
The following is a summary of the net investment income for our total net investments managed by Third Point LLC for the years ended December 31, 2020 and 2019:
(1)Includes foreign exchange gains of $5.9 million for the year ended December 31, 2020 (2019 - $6.4 million) resulting from the revaluation of foreign currency reinsurance collateral held in trust accounts. 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 from the revaluation of foreign currency reinsurance collateral held in trust accounts are offset by corresponding foreign exchange losses from the revaluation of foreign currency loss and loss adjustment expense reserves.
For the year ended December 31, 2020, the net investment results were primarily attributable to long event/fundamental equities, in particular a renewed focus on growth and technology positions. Short equity investments and hedges partially offset overall gains for the equity strategy. Investments in investment grade corporate credit and
Other expenses are comprised of expenses relating to interest crediting features in certain reinsurance and deposit contracts and changes in value of reinsurance contracts that meet the definition of a derivative contract. The decrease in other expenses for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to revised estimates of underlying assumptions in the current year period on certain deposit liability contracts resulting in a decrease in other expenses compared to the prior year period. The decrease in other expenses was also impacted by income on certain reinsurance contracts accounted for as derivative contracts in the current year period.
The foreign exchange losses were primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds to the United States dollar, which weakened in the current year period. For these contracts, 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 losses on loss and loss adjustment expense reserves were offset by corresponding foreign exchange gains included in net investment income resulting from the revaluation of foreign currency reinsurance collateral held in trust accounts.