The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“Annual Report”).
We are a holding company domiciled in Bermuda. Through our reinsurance subsidiaries, we provide specialty property and casualty reinsurance products to insurance and reinsurance companies on a worldwide basis. Our goal is to deliver attractive equity returns to our shareholders by combining profitable reinsurance underwriting with a differentiated investment strategy.
On August 6, 2020, Third Point Re, entered into a Merger Agreement, by and among the Company, Sirius and Merger Sub. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Sirius, with Sirius continuing as the surviving company in the Merger, as a wholly owned subsidiary of the Company. The Company is to be renamed SiriusPoint Ltd. following the Merger.
Prior to 2019, we focused on lines of business and forms of reinsurance that have demonstrated more stable return characteristics and/or generated insurance float and limited our underwriting of property catastrophe and other event driven risks. Starting in 2019, we began to incrementally expand the lines of business and forms of reinsurance on which we focus where we believe the higher expected margins adequately compensate us for the increased risk and have not renewed contracts and de-emphasized certain lines of business that no longer fit our new underwriting strategy. We have continued to transition our underwriting strategy in 2020 and we expect that our property and casualty reinsurance segment will become a more meaningful contributor to our returns over time as we continue to reorient our underwriting strategy towards generating consistent underwriting profits through prudent risk selection and focus less on lower volatility, float generating contracts and lines of business.
Through December 31, 2020, our investment strategy was implemented by our investment manager, Third Point LLC. Third Point LLC serves as investment manager for TP Fund, as well as for our collateral assets and other fixed income investments.
The following is a summary of our total net investments managed by Third Point LLC as of December 31, 2020 and December 31, 2019:
The TP Fund investment strategy, as implemented by Third Point LLC, is intended to achieve superior risk-adjusted returns by deploying capital in both long and short investments with favorable risk/reward characteristics across select asset classes, sectors and geographies. Third Point LLC identifies investment opportunities via a bottom-up, value oriented approach to single security analysis supplemented by a top-down view of portfolio and risk management. Third Point LLC seeks dislocations in certain areas of the capital markets or in the pricing of particular securities and supplements single security analysis with an approach to portfolio construction that includes sizing each investment based on upside/downside calculations, all with a view towards appropriately positioning and managing overall exposures.
Other investment assets had historically consisted solely of U.S. treasuries and cash equivalents from the time of our withdrawal of $750.0 million from the TP Fund in mid-2019. During the first quarter of 2020, the Company determined it would invest in a more opportunistic credit portfolio to take advantage of dislocations in the credit market brought on by the COVID-19 pandemic. During the first quarter, we invested approximately $220.0 million in corporate debt from liquid, high quality issuers as well as a portfolio of non-investment grade structured credit securities, primarily in residential mortgage-backed securities and consumer loans.
has already sustained material losses resulting from COVID-19, with potentially more to come, which will reduce available capital; and which we expect will help to sustain the upward pricing trend for reinsurers that we were seeing across many lines of business before the impacts of COVID-19. However, the ultimate impact on current business in force as well as risks and potential opportunities on future business remains highly uncertain.
We reacted quickly and decisively to the COVID-19 crisis when we became aware of the potential impact on our business operations. We have continued to monitor and adjust our operations as the global pandemic has unfolded. As local directives required us to transition our operations in each of our locations to remote working arrangements, all functions remain fully operational with all employees having remote access to the Company’s network and IT systems. Each employee is equipped with a laptop and related equipment at their home to ensure access to our network and efficiency. Prior to the COVID-19 crisis we had general remote, work-from-home capabilities and had previously tested those systems. We have experienced no material disruption in our business operations. Our offices have since started to reopen with some employees working from our offices and some employees continuing to work remotely.
The following is a summary of our underwriting outlook by each line of business:
Since the beginning of 2019, the property catastrophe reinsurance market, and in particular the Florida windstorm, California wildfire, Japan windstorm and loss affected retrocession market have been experiencing increases in rate due to significant catastrophe losses in recent years, increases in loss estimates on prior year losses, and in some cases reduced supply. This momentum continued during the first and second quarter 2020 renewals, where we have seen rate increases across most property catastrophe contracts. Property catastrophe reinsurance pricing in regions that have not been impacted by loss has remained broadly flat to slightly up. In addition terms and conditions on property catastrophe contracts have improved in areas that are less quantifiable in terms of impact on pure exposure based rate change.
As a result of changes in market conditions as well as having an established portfolio in place as we entered the 2020 property catastrophe renewals, we re-positioned our property catastrophe portfolio into more attractive sub-segments of the market. We reduced the amount of premium from retrocessional quota share contracts, where we paid a ceding and profit commission and increased the amount of premium from direct reinsurance as well as retrocessional excess of loss contracts. We expect the re-positioning of the property catastrophe portfolio and improvements in pricing to result in improved expected profitability.
We assume casualty exposure through multiple classes of business we write. Even before COVID-19, we were seeing evidence of increasing casualty loss trends across the market, which were beginning to impact both pricing and terms and conditions for select casualty classes of business. While the impact will vary by cedent and line of
We continue to closely monitor both the premium and loss impacts of COVID-19 on all lines of business we write. We expect some of our casualty business to experience premium volume reductions resulting from a combination of reduced employment levels, concentrations by industry and continued reductions in economic activity. We expect the impact on loss experience to vary materially by business segment, with some segments experiencing favorable impacts on loss experience and other segments experiencing a deterioration in results.
Arcadian will start by writing excess casualty and professional liability insurance business and will consider other business lines where strong underwriting relationships exist, which are expected to meet the Company's desired underwriting returns. The underwriting teams employed by Arcadian will have both long-term experience and distribution relationships in the lines of business being pursued.
The vast majority of business is expected to come from the United States, with the majority of distribution originating from large retail brokers. The profile of the portfolio Arcadian will build is expected to be with large corporate accounts, usually where there are professional risk managers on staff at the insured.
There can be no assurance that Arcadian will be able to successfully write the anticipated lines of business or fulfill its expansion plans and our inability to place quota share reinsurance on the portfolio could lead to lower than expected returns and increased expenses, which, in turn, would dilute the Company's earnings per share.
During 2019, we reduced our investment risk by reallocating some of our investments in TP Fund to fixed income investments that were initially invested in U.S. Treasuries. This realignment of our investment strategy with the changes to our underwriting strategy is expected to lower overall investment volatility and may reduce expected investment returns in the future as a result of this investment mix change.
We expect our investment strategy to change significantly following our Merger with Sirius. Following closing of the Merger, our fixed income investments, which will comprise the vast majority of our portfolio, will be outsourced to a diversified range of third-party asset managers. Third Point LLC will continue to manage the majority of our alternative investment allocation, specialty asset classes as well as working with us on tailored asset-liability management strategies. We believe that this will be a strategic differentiator on our returns while also reducing volatility and creating a portfolio mix more in line with peer property/casualty reinsurers.
The table below shows the key performance indicators for our consolidated business for the years ended December 31, 2020 and 2019:
As of December 31, 2020, basic book value per share was $16.88, representing an increase of $1.51 per share, or 9.8%, from $15.37 per share as of December 31, 2019. The increase was primarily due to net income in the year.
The decrease in return on beginning shareholders’ equity attributable to Third Point Re common shareholders for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to a decrease in net income during the current year period.
A key driver of our consolidated results of operations is the performance of our investments managed by Third Point LLC. Given the nature of the underlying investment strategies and current market conditions as a result of COVID-19, we could experience increased volatility in our net investment returns and net investment income and therefore in our consolidated results.
The following is a summary of the net investment return by investment strategy on total net investments managed by Third Point LLC for the years ended December 31, 2020 and 2019:
Net investment return represents the return on our net investments managed by Third Point LLC, net of fees. The net investment return on net investments managed by Third Point LLC is the percentage change in value of a dollar invested over the reporting period on our net investment assets managed by Third Point LLC. The net investment return reflects the combined results of our investments in TP Fund, collateral assets and certain other investment assets managed by Third Point LLC. Net investment return is the key indicator by which we measure the performance of Third Point LLC, our investment manager.
residential mortgage backed securities contributed strong performance in the credit strategy. The other strategy contributed modestly to net gains for the year due to private investments.
For the year ended December 31, 2019, the net investment results were primarily attributable to strong returns in all core activist long equity positions. In credit, profits in the structured credit book were partially offset by losses from one large sovereign credit investment. In the other portfolio, private investments contributed modest gains for the year.
The other key changes in our consolidated results for the years ended December 31, 2020 compared to the prior year period were primarily due to the following:
The increase in corporate expenses for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to an increase in professional fees and regulatory fees associated with the Merger of $16.7 million. The increase was partially offset by separation costs incurred in the prior year and lower payroll related costs in the current year primarily due to lower annual incentive plan compensation expense accruals.