EDGAR 10-K Filing

Company CIK: 1576018
Filing Year: 2021
Filename: 1576018_10-K_2021_0001576018-21-000026.json

---

ITEM 1. BUSINESS
Item 1. Business
Overview
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.
Our senior management team has significant leadership and underwriting experience in the reinsurance industry. We believe that our experience and longstanding relationships with our insurance and reinsurance company clients, reinsurance brokers, insurance regulators and rating agencies are an important competitive advantage. We offer a broad range of reinsurance products while maintaining a disciplined underwriting approach. During periods of extremely competitive or soft reinsurance market conditions, we intend to be selective with regard to the amount and type of reinsurance we write and conserve our risk-taking capital for periods when market conditions are more favorable to us from a pricing and terms and conditions perspective.
Our common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “TPRE”.
As of December 31, 2020, we had common shareholders’ equity of $1.6 billion, total capital of $1.7 billion and total assets of $3.7 billion.
Sirius Merger
On August 6, 2020, Third Point Re, entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Sirius International Insurance Group, Ltd. (“Sirius”), a Bermuda exempted company limited by shares, and Yoga Merger Sub Limited (“Merger Sub”), a Bermuda exempted company limited by shares and wholly owned subsidiary of the Company. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Sirius (the “Merger”), 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. (“SiriusPoint”) following the Merger.
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.
Segment Information
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.
Reinsurance Strategy
Our current reinsurance strategy is to build a portfolio that generates margins commensurate with the amount of risk assumed, by targeting sub-sectors of the market and specific situations where reinsurance capacity and alternatives may be constrained and/or we can leverage our underwriting and structuring expertise. During 2019, we expanded into property catastrophe reinsurance and other event risk driven reinsurance as part of a shift in our overall underwriting strategy towards higher margin business and to reduce our focus on lower volatility, float generating underwriting strategies.
In 2020, we have incrementally expanded 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 we have commensurately reduced market risk in our investment portfolio. We have also begun writing a limited amount of excess of loss casualty covers in lines of business where we have historically assumed only quota share exposure. We plan to evaluate and consider pursuing opportunities in other new lines of reinsurance business in 2021 based on market conditions and our assessment of the potential underwriting profitability.
We intend to manage our book of business by underwriting predominantly a mix of reinsurance contracts where the underlying insurance exposures are both personal and commercial lines. We intend to increase our geographic spread over time; however, we expect that a majority of our reinsurance business will continue to be comprised of U.S. exposure, with the majority of our non-U.S. exposure derived from our event driven risk in our property catastrophe and specialty catastrophe portfolios. See Note 22 to our consolidated financial statements included elsewhere in this Annual Report for a breakdown of gross premiums written by domicile of ceding companies.
In addition, we may, from time to time, invest in or acquire managing general agents or other insurance entities as part of our ongoing strategy to leverage our underwriting and capital markets expertise to structure and offer capital alternatives in numerous forms and combinations, including equity, debt and reinsurance offerings. We consider these opportunities when we view access to the underlying reinsurance as valuable, and we typically structure long term rights of first refusal on the underlying business as a condition to making a capital commitment.
The following table provides a breakdown by line and type of business of gross premiums written for the years ended December 31, 2020, 2019 and 2018:
2020 2019 2018
Amount Percentage of Total Amount Percentage of Total Amount Percentage of Total
($ in thousands)
Property Catastrophe $ 83,452 14.2 % $ 68,315 10.8 % $ - - %
Other Property 88,878 15.1 % 75,956 12.0 % 9,070 1.6 %
Property 172,330 29.3 % 144,271 22.8 % 9,070 1.6 %
Workers’ Compensation 58,929 10.0 % 27,671 4.4 % 36,824 6.4 %
Auto 37,408 6.4 % 48,381 7.7 % 66,492 11.5 %
Other Casualty 111,676 19.0 % 75,841 11.9 % 132,473 22.9 %
Casualty 208,013 35.4 % 151,893 24.0 % 235,789 40.8 %
Credit & Financial Lines 72,443 12.3 % 44,625 7.1 % 100,576 17.4 %
Multi-line 86,900 14.8 % 191,715 30.3 % 162,248 28.1 %
Other Specialty 19,403 3.3 % 11,704 1.9 % (3,651) (0.7) %
Specialty 178,746 30.4 % 248,044 39.3 % 259,173 44.8 %
Total prospective reinsurance contracts 559,089 95.1 % 544,208 86.1 % 504,032 87.2 %
Retroactive reinsurance contracts 28,946 4.9 % 87,638 13.9 % 74,220 12.8 %
Total property and casualty reinsurance $ 588,035 100.0 % $ 631,846 100.0 % $ 578,252 100.0 %
Property and Casualty Reinsurance Segment Products
Our underwriting team has extensive experience in underwriting many forms of property, casualty and specialty reinsurance products. The majority of our premium is written on a proportional basis where the reinsurer shares liabilities and premiums in a clearly defined proportion with the insurer and pays commissions to cover expenses and share in profitability. We also offer reinsurance on an excess of loss basis, where the reinsurer is paid a premium to cover losses after the insurer has retained a specified deductible.
We began writing a portfolio of property catastrophe reinsurance incepting in 2019 as well as expanding into new specialty lines of business. We have expanded the lines of business and forms of reinsurance that we write as we
seek to increase our risk-adjusted returns and improve our combined ratio to a level where we expect a positive contribution to net income from underwriting in addition to our return on invested assets. We will continue to pursue business opportunities that are syndicated as well as those where we are the sole or primary reinsurer.
While we expect to establish a diversified portfolio, our allocation of risk will vary based on our perception of the opportunities available in each line of business. Geographically, we do most of our business with insurer and reinsurer clients located in the United States of America, Bermuda, United Kingdom and Europe. Moreover, our appetite for certain lines will fluctuate based upon market conditions and we may only offer or underwrite a limited range of lines in any given period. We intend to:
•target markets where capacity and alternatives are underserved or capacity constrained;
•employ strict underwriting discipline, while assembling a portfolio of diversified risks;
•select reinsurance opportunities with expected favorable economics over the life of the contract;
•pursue opportunities that capitalize on our structuring and underwriting expertise; and
•leverage our senior management relationships with client and intermediaries.
The above may potentially lead us to write business in lines, products and geographies that are not identified in this Form 10-K.
Through December 31, 2020, we wrote reinsurance contracts covering the following product lines:
Property Catastrophe
Property catastrophe is comprised of excess of loss and/or proportional coverages to insurance and reinsurance companies and provides protection to an insured for losses from a single catastrophic event or series of events. We carefully monitor and manage our risk aggregations by peril and geography and we seek to manage volatility via portfolio construction and client selection.
Other Property
This line of reinsurance primarily consists of exposure to homeowners’ and commercial lines insurance coverage. We provide structured surplus relief transactions covering property exposures where the expected volatility and reinsurance margins are lower.
Workers’ Compensation
Workers’ compensation catastrophe
Workers' compensation catastrophe cover is reinsurance that an insurance company acquires to protect itself against losses arising from a catastrophe or chain of events that result in injuries to multiple workers.
Other workers’ compensation
Workers’ compensation reinsurance provides wage replacement and medical benefits to employees injured in the course of employment in exchange for the mandatory relinquishment of the employee’s right to sue the employer for negligence.
Auto
This line of reinsurance primarily consists of personal and commercial automobile insurance and is purchased to provide the insured with financial protection against bodily injury or physical damage resulting from traffic accidents and against liability that could arise from such occurrences.
Other Casualty
Our Other Casualty line of business is comprised of casualty contracts exposed to more than one type of casualty risk. We write primarily proportional reinsurance in this sector, though we also provide excess of loss coverage. Typically, Other Casualty includes professional liability, transactional liability and general liability.
Credit & Financial Lines
Credit & Financial Lines business predominantly comprises reinsurance of mortgage insurance. Mortgage insurance is an insurance policy that compensates lenders or investors for losses arising from the default of a mortgage loan. Mortgage insurance can refer to private mortgage insurance, mortgage life insurance, mortgage title insurance or insurance provided under the credit risk sharing transactions from Fannie Mae and Freddie Mac. We assume our mortgage insurance exposure both as reinsurance and by retrocession. In addition to mortgage reinsurance, policies classified as Credit & Financial Lines may include political risk, trade credit, surety, financial guarantee, residual value insurance and title insurance.
Multi-line
Multi-line reinsurance is reinsurance of an underlying portfolio of several different types of insurance or reinsurance risks. We focus on multi-line reinsurance opportunities where we have expertise in the underlying lines of business or where the terms and conditions of the reinsurance contract minimize the volatility of the more difficult to analyze classes of business in the portfolio. Contracts that cover more than one line of business will typically be designated as multi-line even if a portion of the underlying business is covered by one of the lines of business listed above. These opportunities can be structured on both a proportional and excess of loss basis.
Other Specialty
The principal lines of business included in our other specialty line is comprised of cyber, marine, travel insurance and extended warranty insurance.
Retroactive Reinsurance Contracts
Retroactive reinsurance contracts consist of loss portfolio transfers, adverse development covers and other forms of reserve reinsurance providing indemnification of loss and loss adjustment expense reserves with respect to past loss events. These contracts can include one or multiple lines of business and cover the potential for changes in estimates of loss and loss adjustment expense reserves related to loss events that have occurred in the past.
Arcadian
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.
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.
Marketing
The majority of our business is sourced through reinsurance brokers. Broker distribution channels provide us with access to an efficient, variable cost, global distribution system without the significant time and expense that would
be incurred in creating a wholly-owned distribution network. We believe that our financial strength rating, well known and respected management team, and responsive client service enhance our working relationships with clients and brokers.
Our objective is to build long-term relationships across all management levels at reinsurance brokers and with our clients. We meet frequently with brokers, senior representatives of existing clients and prospective clients in order to help distinguish us and to develop mutually beneficial understandings of our respective businesses. As evidenced by rates of submission flow, open dialogue, and successful closing of targeted accounts, we believe we have successfully leveraged the underwriting experience and relationships of our management team. Reinsurance brokers receive a brokerage commission that is usually a percentage of gross premiums written. In non-commodity lines of reinsurance, we seek to become the first choice of brokers and clients by providing:
•creative solutions that address the specific business needs of our clients;
•rapid and substantive responses to structuring and pricing quote requests;
•financial security; and
•clear indication of risks we will and will not underwrite.
See Note 22 to our consolidated financial statements included elsewhere in this Annual Report for a breakdown of our premiums written by source that individually contributed more than 10% of total gross premiums written.
We believe that the number of brokers with whom we do business will continue to expand over time, and by maintaining close working relationships with brokers, we are able to increase our chances of successfully growing and accessing a broader range of potential clients.
Underwriting
We have established a team of senior underwriters and actuaries to develop and manage our reinsurance business. We believe that their experience, industry presence and long-standing relationships allow us to tailor our portfolio to specific market segments. Our approach to underwriting will allow us to deploy our capital in a variety of lines of business and to capitalize on opportunities that we believe offer favorable returns on equity over the long term. Our underwriters and actuaries have expertise in a number of lines of business and we will also look to outside consultants to help us with niche areas of expertise when we deem it appropriate. While our pricing and risk selection decisions are based primarily on our view of underwriting profit, we also consider investment income and collateral costs, where applicable and appropriate, in our underwriting and pricing of business.
We generally apply the following underwriting management principles:
Team Approach
Each submission is assigned to an underwriter. If the program meets our underwriting criteria, the underwriter and pricing actuary evaluate the opportunity, determine the optimal structure where applicable, and price the deal. When capital is committed to any transaction, the underwriting team creates a deal analysis that highlights the key components of the proposed transaction and presents the proposed transaction to a senior group of staff including our senior executives and representatives of the underwriting, actuarial and finance teams. This group must agree that the transaction meets or exceeds our profitability expectations and requirements before we submit a binding proposal.
Actuarial Pricing
We have developed proprietary actuarial models and also use several commercially available tools to assist in pricing our business. Our analysis considers the data and information provided by the potential cedent as well as relevant industry data, where appropriate. We use this cedent specific and industry data to develop our own point estimate of the expected losses under each potential contract. We also use a stochastic model to simulate a distribution of potential loss outcomes and the impact of any contractual features that may exist such as sliding scale ceding commissions or profit commissions.
One key metric that we consider as a result of this process is the expected combined ratio on a particular transaction. We also consider the projected underwriting and economic results, inclusive of the opportunity cost of posting collateral, at various confidence levels with a specific focus on the likelihood and magnitude of adverse outcomes. As part of this process, we also specifically review each transaction to determine if there is sufficient risk transfer to qualify for reinsurance accounting. The results of this pricing process are shared with the underwriter on a contract, and if a deal is bound, summary exhibits are attached to a memo summarizing the actuarial pricing analysis that was performed. On transactions for which there is catastrophic exposure, we also analyze the impact of each risk on our aggregations and monitor such aggregations in accordance with our risk thresholds.
Act as Lead Underwriter
Reinsurers are frequently referred to as “lead” and/or “following” markets. Lead reinsurers are typically involved in developing and negotiating treaty pricing, terms and conditions and formulating their own view of the risks being assumed, whereas following markets often lack specific expertise in a line of business and largely sign on to a share of terms negotiated by others. We believe that acting as a lead underwriter is a critically important factor in achieving long-term success, as lead underwriters have greater control of overall economics of their programs and are often seen more as value-add partners by their cedents for the feedback they provide during the underwriting process. We believe that, as a result, reinsurers that engage in this way are generally solicited for a broader range of business and have greater access to attractive risks. We act as a lead underwriter for the majority of the premium that we underwrite. For much of our excess of loss business, including our property catastrophe portfolio which is relatively small by market premium standards, we write following lines on syndicated terms and conditions. Whether we are the lead underwriter or not on a specific contract, we underwrite all transactions to the same standard.
Alignment of Interests
We seek to ensure that the contracts we underwrite align our interests with our clients’ interests. Specifically, we may seek to:
•require our clients to maintain a meaningful risk position in their business;
•pay our clients a commission based upon their actual expenses and offer an additional commission as an incentive based upon profitability;
•include deficit carry-forward provisions in our multi-year contracts that allows us to potentially offset underwriting losses from one year to the next;
•seek rights of first refusal on future business where we are providing solutions that help to build or grow a business;
•charge the client a premium for reinstatement of the amount of reinsurance coverage to the full amount reduced as a result of a reinsurance loss payment, which we refer to as a reinstatement premium;
•require specific levels of rate increases on the underlying insurance policies; and
•for the limited number of contracts on which we offer an interest credit on funds we hold, we credit interest income on actual cash received into a notional experience account whereby the experience account is credited to the ceding company at the maturity of the contract if underwriting results are realized as initially expected.
We believe these tools help us align our risk with the risk of the client and provide incentive to clients to manage our mutual interests. We also believe that aligning our interests with our client’s interests promotes profitability, accurate reporting of information, timely settling and management of claims, and limits the potential for disputes. Adjustments to profit commissions and other participating features are recorded in our financial statements based on our estimate of losses and the contractual provisions of the reinsurance contract.
Detailed Underwriting Diligence
We employ selective underwriting criteria in the contracts we choose to underwrite and for the contracts we lead or on which we have a material share, we spend a significant amount of time with our clients and brokers to evaluate the risks and appropriately structure the contracts. In the majority of our transactions, as a leading or following
reinsurer, we obtain significant amounts of information from our clients to conduct a thorough analysis. As part of our pricing and underwriting process, we assess among other factors:
•the client’s and industry historical loss and exposure data and current market conditions;
•the business purpose served by a proposed contract;
•the client’s pricing and underwriting strategies;
•the expected duration for claims to fully develop;
•the geographic areas in which the client is doing business and its market share;
•the reputation and financial strength of the client;
•the reputation and expertise of the broker;
•proposed contract terms and conditions; and
•reports provided by independent industry specialists.
Reinsurance Coverage
We consider purchases of reinsurance and retrocessional coverage for one or more of the following reasons: to specifically reduce our property catastrophe exposure in certain reinsurance contracts that we write, to reduce our net liability on individual risks, to obtain additional underwriting capacity and to balance our underwriting portfolio. Additionally, reinsurance and retrocession can be used as a mechanism to share the risks and rewards of business written and therefore can be used as a tool to align our interests with those of our counterparties.
These agreements provide for recovery of a portion of our losses and loss adjustment expenses from our reinsurers. The amount and type of reinsurance that we purchase varies from year to year and is dependent on a variety of factors.
Claims Management
Our claims management process begins upon receipt of periodic contract reports from brokers or clients. These statements are reviewed on an individual basis, evaluated against our expectations and entered in our management system for portfolio analysis and reporting purposes. In addition to analyzing report statements and results, claims audits are performed on specific contracts based on results and management direction to ensure the clients are reporting and reserving their claims accurately and appropriately.
Reserves
On a quarterly basis, our actuaries produce an actuarial central estimate of the gross and net loss reserves for all contracts bound as of the evaluation date. The reserves are calculated on an undiscounted basis with regards to future investment income. The projections also include estimates of loss-sensitive contingent terms such as additional premium features, profit commissions and sliding scale ceding commissions. Calculations are done on a contract-by-contract basis and reflect the most recent premium and loss information provided by our cedents.
In estimating our loss and loss adjustment reserves, it is necessary to project future loss and loss adjustment expense payments. Actual future loss and loss adjustment expenses will not develop exactly as projected and may, in fact, significantly vary from the projections. Further, the projections make no provision for extraordinary future emergence of new classes of losses or types of losses not sufficiently represented in our or the cedent’s historical database or which are not yet quantifiable.
See Note 8 to our consolidated financial statements included elsewhere in this Annual Report for additional information and details on our loss reserve development.
Investment Strategy
Our investment strategy, through our investment in TP Fund, distinguishes us from most other reinsurers, who typically concentrate their investment portfolios on long-only, investment grade, shorter-term, fixed income securities. As implemented by the investment manager of TP Fund, Third Point LLC, TP Fund’s investment strategy
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. Dislocations in capital markets refer to any major movements in prices of the capital markets as a whole, certain segments of the market, or a specific security. If Third Point LLC has what it considers to be a differentiated view from the perceived market sentiment with respect to such movement, Third Point LLC may trade securities based on that differentiated view. If the ultimate market reaction with respect to the event or movement ultimately proves to be closer to Third Point LLC’s original viewpoint, TP Fund may have investment gains as a result of the shift in market sentiment. Through its investment manager, Third Point LLC, TP Fund makes investments globally, in both developed and emerging markets, in all sectors, and in equity, credit, commodity, currency, options and other instruments.
Collateral assets are generally required to be held in cash or cash equivalents, U.S. Treasuries or non-U.S. sovereign debt equivalent and other investment grade assets as determined by the respective reinsurance trusts or as per collateral required under secured letter of credit facilities.
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. We sold out of many of our positions in investment grade bonds initially purchased in the first quarter that recovered strongly in the second quarter of 2020. As of December 31, 2020, the opportunistic credit portfolio was $48.1 million, representing 4.1% of total investments.
Investment Portfolio
The following is a summary of our total net investments managed by Third Point LLC as of December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
($ in thousands)
TP Fund $ 1,055,618 $ 860,630
Collateral and other investment assets (1)
1,822,850 1,729,497
Total net investments managed by Third Point LLC $ 2,878,468 $ 2,590,127
(1)Collateral assets primarily consist of fixed income securities such as U.S. Treasuries, money markets 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.
Investment Account Structure
On July 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the Amended and Restated Exempted Limited Partnership Agreement (the “2018 LPA”) of TP Fund with Third Point Advisors LLC (“TP GP”) and others, effective August 31, 2018.
On February 28, 2019, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the Second Amended and Restated Exempted Limited Partnership Agreement (the “2019 LPA”) of TP Fund, which amended and restated the 2018 LPA, effective January 1, 2019.
On August 6, 2020, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the Third Amended and Restated Exempted Limited Partnership Agreement (“2020 LPA”) of TP Fund, which amended and restated the
2019 LPA (as amended and restated by the 2020 LPA, the "LPA"), which will become effective at the closing of the Merger with Sirius, except for the amendment to the calculation of the loss recovery account which became effective on December 31, 2020. The 2020 LPA updated the terms of the 2019 LPA to reflect adjustments to the loss carryforward terms for the year ended December 31, 2020. The performance of certain fixed income and other investments managed by Third Point LLC will now be considered when calculating the performance fee allocation and loss recovery account amounts under the terms of the 2019 LPA. Other material terms of the 2020 LPA will become effective upon closing of the Merger. See “Limited Partnership Agreement” below for further details on the terms of the LPA.
Pursuant to the investment management agreement between Third Point LLC and TP Fund, dated July 31, 2018, and as amended and restated on February 28, 2019 (the “TP Fund IMA”), Third Point LLC is the investment manager for TP Fund. In addition to serving as the investment manager for TP Fund, Third Point LLC also serves as investment manager for the Company’s collateral and other investment assets, which consist of cash, U.S. Treasuries, sovereign debt, structured and corporate credit fixed income securities. See “Investment Management Agreement” below for further details.
Limited Partnership Agreement
Term
The 2019 LPA has a term ending on December 31, 2021, subject to automatic renewal for additional successive three-year terms unless a party notifies the other parties in writing on or before the June 22 prior to the end of a term that it wishes to terminate such 2019 LPA at the end of such term.
The 2020 LPA has a term ending on the first quarter end date after the 5-year anniversary of the Merger closing date, subject to automatic renewal for additional successive two-year terms unless a party notifies the other parties in writing on or before the date that is one-year prior to term ending date prior to the end of a term that it wishes to terminate such 2020 LPA at the end of such term.
Term and Termination Rights
The LPA shall continue until the first of the following events to occur: (1) at any time, upon the written consent of the TPRE Limited Partners and TP GP, (2) within sixty days of the dissolution, entry of an order for relief or filing of a bankruptcy petition withdrawal of TP GP, unless within such days a successor general partner is elected by a majority interest of the limited partners, or (3) subject to the foregoing, any other event causing the mandatory winding up and dissolution of the partnership under the laws of the Cayman Islands.
We may terminate the LPA upon the death, long-term disability or retirement of Daniel S. Loeb, or the occurrence of other circumstances in which Mr. Loeb is no longer directing the investment program of Third Point LLC or actively involved in the day-to-day management of Third Point LLC.
Withdrawal Rights
Under the 2019 LPA, we may withdraw our capital accounts in TP Fund in full on December 31, 2021 (the “Withdrawal Date”), and each successive three-year anniversary of such date.
We may withdraw our capital accounts in TP Fund under the LPA prior to the Withdrawal Date at any time following the occurrence of a “Cause Event”, which is defined as:
•a violation of applicable law relating to Third Point LLC’s investment related business;
•Third Point LLC’s fraud, gross negligence, willful misconduct or reckless disregard of its obligations under the LPA;
•a material breach by the TP Fund GP of the LPA or Third Point LLC of any material breach of the TP Fund IMA, which, in either case, if such breach is reasonably capable of being cured, is not cured within a 15-day period; a conviction or, a plea of guilty or nolo contendere to in the case of Daniel S. Loeb, a felony or a crime involving moral turpitude and, in the case of certain senior officers of Third Point LLC or the TP
Fund GP, a felony or crime relating to or adversely affecting the investment-related business of the TP Fund GP or Third Point LLC;
•a conviction or, a plea of guilty or nolo contendere to a felony or a crime affecting the investment related business of Third Point LLC by certain senior officers of Third Point LLC or the TP Fund GP;
•any act of fraud, material misappropriation, material dishonesty, embezzlement, or similar conduct by or the TP Fund GP or Third Point LLC relating to the TP Fund GP or Third Point LLC’s investment related business; or
•a formal administrative or other legal proceeding before the SEC, the U.S. Commodity Futures Trading Commission, the FINRA, or any other U.S. or non-U.S. regulatory or self-regulatory organization against Third Point LLC; or certain key personnel which would likely have a material adverse effect on us.
Under the 2020 LPA, we may withdraw our capital accounts in TP Fund in full on the first quarter end date after the 5-year anniversary of the Merger date (the “Withdrawal Date”), and each successive two-year anniversary of such date. We may withdraw our capital accounts in TP Fund under the 2020 LPA prior to the Withdrawal Date within 120 days following the occurrence of a Cause Event, as defined above.
Under the 2020 LPA, the TPRE Limited Partners will have the right to withdraw funds monthly from TP Fund to meet capital adequacy requirements and to satisfy financing obligations.
Performance Allocation
Pursuant to the LPA, TP GP receives a performance fee allocation. The performance fee allocation is equal to 20% of the net investment income allocated to each limited partner’s capital account in TP Fund. The performance fee is included as part of “Investment in related party investment fund” on the Company’s consolidated balance sheet since the fees are charged at the TP Fund level.
The performance fee is subject to a loss carryforward provision pursuant to which TP GP is required to maintain a loss recovery account, which represents the sum of all prior period net loss amounts and not subsequently offset by prior year net profit amounts, and that is allocated to future profit amounts until the loss recovery account has returned to a positive balance. Until such time, no performance fees are payable, provided that the loss recovery account balance shall be reduced proportionately to reflect any withdrawals from TP Fund. The 2019 LPA preserves the loss carryforward attributable to our investment in TP Fund when contributions to TP Fund are made within nine months of certain types of withdrawals from TP Fund.
Pursuant to the 2020 LPA, the performance of certain fixed income and other investments managed by Third Point LLC are now included when calculating the performance fee allocation and loss recovery account amounts under the terms of the 2019 LPA for the year ended December 31, 2020. There are no other changes to the performance fee calculation under the 2020 LPA.
Management Fee
Pursuant to the LPA, Third Point LLC is entitled to receive monthly management fees. As a result of the 2018 LPA, management fees were charged at the TP Fund level and were calculated based on 1.5% of the investment in TP Fund and multiplied by an exposure multiplier computed by dividing the average daily investment exposure leverage of the TP Fund by the average daily investment exposure leverage of the Third Point Offshore Master Fund L.P. (“Offshore Master Fund”). Third Point LLC also serves as the investment manager for the Offshore Master Fund.
The 2019 LPA revised the management fee from 1.5% per annum to 1.25% per annum effective from January 1, 2019.
The 2020 LPA did not amend the management fee rate of the 2019 LPA of 1.25%. The monthly management fees are to be calculated at the TP Fund level and for the avoidance of doubt, such balance shall not include any adjustment for investment exposure leverage as adjusted for under the 2019 LPA.
Most Favored Nation
In the event that Third Point LLC agrees terms with any existing or future investor wherein the asset-based fees or performance-based compensation that are equal to or more favorable to such investor, Third Point Re BDA and Third Point Re USA, will have the right to receive the benefit of such terms (provided Third Point Re BDA and Third Point Re USA agree to be bound by all the terms and conditions associated with such equal or more favorable terms).
Investment Guidelines
In accordance with the investment guidelines under the LPA, the underlying investment portfolio of TP Fund is managed on a basis that is substantially equivalent to Third Point Offshore Master Fund L.P., which is managed by Third Point LLC, but with increased exposures through the use of additional financial leverage. The leverage of TP Fund will be managed based on the terms of the LPA to generally target a “leverage factor” of (a) one and one half times (1.5x) for investments in liquid securities and (b) one time (1x) for investments in illiquid securities and ABS securities, in each case, as determined by TP GP in its sole discretion.
Under the LPA, TP GP is required to cause Third Point LLC to adhere to the following investment guidelines:
•Composition of Investments: at least 60% of the investment portfolio will be held in debt or equity securities (including swaps) of publicly traded companies (or their subsidiaries) and governments of the Organization of Economic Co-operation and Development (“OECD”) high income countries, asset-backed securities, cash, cash equivalents and gold and other precious metals.
•Concentration of Investments: other than cash, cash equivalents and U.S. government obligations, TP Fund’s total exposure to any one issuer or entity will constitute no more than 15% (multiplied by the exposure multiplier, the exposure multiplier will be computed by dividing the average of the daily investment exposure leverage of TP Fund by the average of the daily investment exposure leverage of Third Point Offshore Master Fund L.P.) of the investment portfolio’s total long exposure.
•Net Exposure Limits: the net position (long positions less short positions) may not exceed 2 times net asset value for more than 10 trading days in any 30-trading day period.
Upon written request of Third Point LLC, our senior management may, in exigent circumstances, permit a variation from these guidelines.
See Note 10 to our consolidated financial statements included elsewhere in this Annual Report for detailed information on management and performance fees.
Investment Management Agreement
On July 31, 2018, Third Point Re BDA and Third Point Re USA entered into the Collateral Assets Investment Management Agreement (the “2018 Collateral Assets IMA”) with Third Point LLC effective August 31, 2018, pursuant to which Third Point LLC served as investment manager for the Company’s collateral assets.
On May 24, 2019, Third Point Re BDA and Third Point Re USA entered into the Amended and Restated Collateral Assets Investment Management Agreement (the “Amended Collateral Assets IMA” and, together with the 2018 Collateral IMA, the “Collateral Assets IMA”) with Third Point LLC, effective May 24, 2019, pursuant to which, in addition to serving as the investment manager for the Company’s collateral assets, Third Point LLC served as investment manager of certain investment assets withdrawn from TP Fund. The Amended Collateral Assets IMA will continue in effect until the Company's entry into the TPIPS IMA described below. The Company entered into the Amended Collateral Assets IMA to provide for Third Point LLC's management of a substantial portion of the Company’s assets that were reallocated from TP Fund into cash, U.S. Treasuries and other fixed income investments.
On August 6, 2020, Third Point LLC, Third Point Insurance Portfolio Solutions (“TPIPS”) and the Company entered into an Investment Management Agreement, effective at the closing of the Merger with Sirius (the “TPIPS IMA”), pursuant to which TPIPS serves as investment manager to the Company and provide investment advice with respect
to the investable assets of the Company, other than assets that the Company may withdraw from time to time as working capital. The Collateral Assets IMA will be terminated at the effective time of the TPIPS IMA.
Assets managed by TPIPS under the TPIPS IMA (collectively, the “Account”) not invested in TP Fund are invested in the “Sub-Advisory Portfolio” or the “Non-Sub-Advisory Portfolio.” The Sub-Advisory Portfolio is managed by a sub-advisor, generally recommended by TPIPS and in each case approved by the Company. The Non-Sub-Advisory Portfolio is managed by TPIPS directly in accordance with the Company’s investment guidelines.
Management Fees
Pursuant to the TPIPS IMA, TP Fund will pay Third Point LLC a fixed management fee, payable monthly in advance, equal to 1/12 of 0.06% of the fair value of Account assets (other than assets invested in TP Fund). No performance-based compensation is payable to TPIPS by the Company under the TPIPS IMA.
Investments
Investment Portfolio
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:
2020 2019
Long
Short
Net
Long Short Net
Long/Short Equity
Consumer 8 % (1) % 7 % 13 % (5) % 8 %
Energy & Utility 5 % (1) % 4 % 1 % - % 1 %
Financial 16 % (2) % 14 % 10 % (3) % 7 %
Healthcare 5 % - % 5 % 10 % (2) % 8 %
Industries & Commodities 7 % (2) % 5 % 7 % (4) % 3 %
Technology, Media and Telecommunications 22 % (5) % 17 % 9 % (4) % 5 %
Market Hedges - % (7) % (7) % - % (4) % (4) %
Total Long/Short Equity 63 % (18) % 45 % 50 % (22) % 28 %
Credit
Distressed 1 % - % 1 % 3 % - % 3 %
Performing 6 % - % 6 % - % - % - %
Government - % - % - % 1 % - % 1 %
Asset Backed Securities (1) 9 % - % 9 % 5 % - % 5 %
Total Credit 16 % - % 16 % 9 % - % 9 %
Other
Risk Arbitrage - % - % - % 3 % (1) % 2 %
Macro 1 % - % 1 % - % (1) % (1) %
Private 3 % - % 3 % 4 % - % 4 %
Total Other 4 % - % 4 % 7 % (2) % 5 %
83 % (18) % 65 % 66 % (24) % 42 %
(1) Includes residential mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities and related indices and assets.
2020 2019
Long Short Net Long Short Net
Americas 67 % (14) % 53 % 47 % (17) % 30 %
Europe, Middle East and Africa 12 % (3) % 9 % 14 % (3) % 11 %
Asia 4 % (1) % 3 % 5 % (4) % 1 %
83 % (18) % 65 % 66 % (24) % 42 %
In managing TP Fund’s 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 TP Fund’s 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. Under this methodology, the exposure for equity swaps and futures contracts are reported at their full notional amount. The notional amount of any derivative contract is the underlying value upon which payment obligations are computed. For an equity total return swap, for example, the notional amount is the number of shares underlying the swap multiplied by the market price of those shares. Options are reported at their delta adjusted basis. The delta of an option is the sensitivity of the option price to the underlying stock price. The delta adjusted basis is the number of shares underlying the option multiplied by the delta and the underlying stock price. Credit derivatives are reported in accordance with their equivalent underlying security exposure. Cash and cash equivalents are excluded from exposure calculations.
Investment Returns
The following is a summary of the net investment return by investment strategy on investments managed by Third Point LLC for the years ended December 31, 2020, 2019 and 2018. The net investment return includes our investment accounts, inclusive of collateral assets managed by Third Point LLC, prior to August 31, 2018, the date of the change in the investment account structure, and our investment in TP Fund, collateral assets, and other investment assets managed by Third Point LLC from the date of the transition.
2020 2019 2018
Long Short Net Long Short Net Long Short Net
Equity 6.7 % (3.7) % 3.0 % 16.6 % (6.1) % 10.5 % (8.7) % 0.1 % (8.6) %
Credit 5.9 % (0.1) % 5.8 % 1.1 % (0.5) % 0.6 % - % (0.2) % (0.2) %
Other 1.3 % 0.5 % 1.8 % 1.7 % - % 1.7 % (2.8) % 0.8 % (2.0) %
Net investment return on investments managed by Third Point LLC 13.9 % (3.3) % 10.6 % 19.4 % (6.6) % 12.8 % (11.5) % 0.7 % (10.8) %
See Note 13 to our consolidated financial statements included elsewhere in this Annual Report for detailed information on net investment income (loss).
Investment Regulatory Concerns and Restrictions
Third Point LLC is involved regularly in trading activities that involve a broad number of U.S. and foreign securities law regimes, including laws governing trading on inside information, market manipulation and a broad number of technical trading requirements that involve fundamental market regulation policies. Violation of such laws could result in severe restrictions on Third Point LLC’s activities and, indirectly, damage to TP Fund’s investment portfolio and our and TP Fund’s reputation as the LPA has limited termination provisions.
Third Point LLC’s failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions. The regulations that Third Point LLC is subject to are designed primarily to ensure the integrity of the financial markets. They are not designed to protect us or, indirectly, you. Even if a sanction imposed against Third Point LLC or one of its personnel by a regulator was for a small monetary amount, the
adverse publicity related to such sanction against Third Point LLC by regulators could harm its reputation and, possibly, ours.
In recent years, there has been debate in both the U.S. and foreign governments about new rules or regulations to be applicable to alternative investment advisers, like Third Point LLC.
In August 2007, the SEC adopted a new rule intended to clarify the SEC’s authority to bring enforcement actions against investment advisers for fraud against investors and prospective investors in their funds (as opposed to fraud against the funds themselves). Although we do not believe the SEC’s rule has directly affected us, Third Point LLC and, accordingly, TP Fund’s investment strategy, may be adversely affected if new or revised legislation or regulations are enacted or by changes to existing rules and regulations of U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets.
It is possible that increased regulation of alternative investment advisers could adversely affect Third Point LLC’s ability to manage TP Fund’s investment portfolio or its ability to manage TP Fund’s portfolio pursuant to our existing investment strategy, which could cause us to alter our existing investment strategy and could significantly and negatively affect our business and results of operations. In addition, adverse publicity regarding alternative investment strategies generally, or Third Point LLC or its affiliates specifically, could negatively affect our business reputation and attractiveness as a counterparty to brokers and clients.
Other Trading Restrictions
Third Point LLC may from time to time place it or its affiliates’ representatives on creditors committees or boards of certain companies in which our portfolio is invested. While such representation may enable Third Point LLC to enhance the value of our and TP Fund’s investments, it may place trading restrictions on certain securities included in TP Fund’s investment portfolio.
Collateral Arrangements and Letter of Credit Facilities
Neither Third Point Re BDA nor Third Point Re USA is licensed or admitted as an insurer in any jurisdiction other than Bermuda. Many jurisdictions, such as the United States, do not permit clients to take credit for reinsurance on their statutory financial statements if such reinsurance is obtained from unlicensed or non-admitted insurers without appropriate collateral or, in some states, unless they have investment grade financial strength ratings from two recognized rating agencies. Furthermore, certain clients may require that we post collateral in order to meet their counterparty security requirements. As a result, we anticipate that all of our U.S. clients and a portion of our non-U.S. clients will require us to provide collateral for the contracts we bind with them. We expect this collateral to take the form of funds withheld, trust arrangements or letters of credit. As of December 31, 2020, we have issued letters of credit totaling $303.4 million in favor of clients. The failure to maintain, replace or increase our letter of credit facilities on commercially acceptable terms may significantly and negatively affect our ability to implement our business strategy. See “Risk Factors - Risks Relating to Our Business - Our failure to obtain sufficient letter of credit facilities or to increase our letter of credit capacity on commercially acceptable terms as we grow could significantly and negatively affect our ability to implement our business strategy.”
The National Association of Insurance Commissioners (“NAIC”) announced on December 10, 2019 that Bermuda had been granted Reciprocal Jurisdiction status effective January 1, 2020. Additionally, the NAIC had completed its five-year re-evaluation of Bermuda and it had approved Bermuda as a Qualified Jurisdiction. The renewed Qualified Jurisdiction status maintains Bermuda-domiciled (re)insurer eligibility for reduced (re)insurance collateral requirements under the NAIC’s Credit for Reinsurance Model Law and Regulations. Once the Model Law is adopted by individual states, we expect to be eligible to seek a reduction in the collateral we post in those states, on a cedent by cedent basis. To date, we have not experienced any change in our collateral requirements as a result of this process.
In addition, we have $968.3 million of restricted cash and investments held in trust accounts to secure obligations under certain reinsurance contracts.
See Note 12 to our consolidated financial statements included elsewhere in this Annual Report for additional information and details on our collateral arrangements and letter of credit facilities.
Competition
The reinsurance industry is highly competitive. We compete with major reinsurers, most of which are well established, have a significant operating history, stronger financial strength ratings, and have developed long-standing client relationships often with a larger breadth of coverage across the property and casualty market in substantially all lines of business. We also compete with smaller companies and other niche reinsurers and a growing number of insurance linked security fund managers. However, we believe that our unique approach to underwriting and extensive relationships allow us to be successful in underwriting transactions against our competitors.
Risk Management
We have developed a comprehensive risk management strategy that is governed by an articulated vision of risk appetite and control that is conveyed throughout the organization and measured in a transparent and consistent manner. Our risk management strategy, metrics and progress are summarized in a report that is presented to the Board of Directors on a quarterly basis. Our internal capital model incorporates statistics from the pricing, reserving and investment processes to produce an estimate of the amount of capital used at set points in time (e.g., each quarter-end) as well as the overall variability in the prospective financial results. We work closely with the risk management personnel of Third Point LLC, our investment manager, to measure and report the variability of results from our investment portfolio. We monitor and measure our contractual exposure to catastrophic losses as aggregated across all bound reinsurance contracts, as well as our exposure to other material risk.
Ratings
On June 4, 2020, AM Best affirmed the financial strength rating of A- (Excellent) of our reinsurance subsidiaries.
On August 7, 2020, following our announcement of the Merger, AM Best placed the financial strength ratings of our reinsurance subsidiaries under review with developing implications. The ratings will remain under review until close of the Merger and a review by AM Best of the post-Merger details.
We believe that a strong rating is a critical factor in the marketing of our reinsurance products to clients and brokers. The credit rating reflects the rating agency’s views regarding our balance sheet strength, operating performance, business profile and enterprise risk management. It is not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our common shares. Our current ratings reflect a balance sheet strength assessment of very strong, supported by the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (“BCAR”).
Regulation
Third Point Re BDA is licensed in Bermuda to write insurance and reinsurance and Third Point Re USA is licensed in Bermuda to write reinsurance. Third Point Re BDA and Third Point Re USA are not admitted to do business in any jurisdiction in the United States or in any country other than Bermuda. The insurance laws of each state of the United States and of many foreign countries regulate the sale of insurance and reinsurance within their jurisdictions by alien insurers and reinsurers, such as Third Point Re BDA and Third Point Re USA.
Third Point Re BDA and Third Point Re USA currently intend to conduct their business so as not to be subject to the licensing requirements of insurance regulators in the United States or elsewhere (other than Bermuda). Many aspects of the activities of Third Point Re BDA and Third Point Re USA are similar to those employed by other non-admitted reinsurers that provide reinsurance to U.S. and other ceding companies. There can be no assurance, however, that insurance regulators in the United States or elsewhere will not review the activities of Third Point Re BDA or Third Point Re USA and claim that Third Point Re BDA or Third Point Re USA is subject to such jurisdiction’s licensing requirements.
The Insurance Act of 1978
The Insurance Act of 1978, as amended, and related regulations of Bermuda (the “Insurance Act”), which regulates the insurance business of Third Point Re BDA and Third Point Re USA, provides that no person shall carry on any insurance business in or from within Bermuda unless registered as an insurer under the Insurance Act by the Bermuda Monetary Authority (“BMA”). Third Point Re BDA and Third Point Re USA are each registered as Class 4 insurers under the Insurance Act. Class 4 insurers are required to maintain fully paid-up share capital of $1,000,000. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.
Annual Financial Statements
As Class 4 insurers, Third Point Re BDA and Third Point Re USA must prepare and submit, on an annual basis, both audited U.S. GAAP and statutory financial statements as prescribed by the Insurance Act.
Declaration of Compliance
Third Point Re BDA and Third Point Re USA, at the time of filing their statutory financial statements, will also be required to deliver to the BMA a declaration of compliance, in such form and with such content as may be prescribed by the BMA.
Annual Statutory Financial Return and Annual Capital and Solvency Return
Third Point Re BDA and Third Point Re USA, as Class 4 insurers, are required to file with the BMA a statutory financial return. The statutory financial return includes, among other matters, the statutory financial statements and the calculations for the Class 4 insurer’s minimum solvency margin and liquidity ratio.
In addition, each year Third Point Re BDA and Third Point Re USA, as Class 4 insurers, are also required to file with the BMA a capital and solvency return along with their annual financial statutory returns. The prescribed form of capital and solvency return comprises the insurer’s Bermuda Solvency Capital Requirement (“BSCR”) model or an approved internal capital model in lieu thereof (more fully described below), various schedules, a statutory economic balance sheet and the opinion of the loss reserve specialist.
Quarterly Financial Statements
Third Point Re BDA and Third Point Re USA, as Class 4 insurers are each required to prepare and file quarterly financial returns with the BMA on or before the last day of the months of May, August and November of each year.
Public Disclosures
Third Point Re BDA and Third Point Re USA, as Class 4, insurers are each required to prepare and file with the BMA, and also publish on their website, a financial condition report. The BMA has discretion to approve modifications and exemptions to the public disclosure rules, on application by the insurer if, among other things, the BMA is satisfied that the disclosure of certain information will result in a competitive disadvantage or compromise confidentiality obligations of the insurer.
Non-insurance Business
Third Point Re BDA and Third Point Re USA, as Class 4 insurers may not engage in non-insurance business unless that non-insurance business is ancillary to their core insurance business.
Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business. As an insurer engaged in general business, Third Point Re BDA and Third Point Re USA are each required to maintain the value of their relevant assets at not less than 75% of the amount of their relevant liabilities. Relevant assets include cash and cash equivalents, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding reinsurers and any other assets which the BMA, on application in any particular case made to it with reasons, accepts in that
case. There are certain categories of assets that, unless specifically permitted by the BMA, do not automatically qualify as relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income taxes and letters of credit, guarantees and other instruments.
Minimum Solvency Margin and Enhanced Capital Requirements
The Insurance Act provides that the value of the statutory assets of an insurer must exceed the value of its statutory liabilities by an amount greater than its prescribed minimum solvency margin (the “MSM”).The MSM that must be maintained by a Class 4 insurer with respect to its general business is the greater of (i) $100 million, or (ii) 50% of net premium written (with a credit for reinsurance ceded not exceeding 25% of gross premiums) or (iii) 15% of net loss and loss expense provisions and other insurance reserves; or (iv) 25% of the ECR (as defined below) as reported at the end of the relevant year.
Class 4 insurers are also required to maintain available statutory economic capital and surplus at a level equal to or in excess of its enhanced capital requirement (“ECR”), which is established by reference to either the BSCR model or an approved internal capital model. The BMA has also implemented the economic balance sheet (“EBS”) framework, which is used as the basis to determine an insurer’s ECR. Under the EBS framework, assets and liabilities are mainly assessed and included on the EBS at fair value, with the insurer’s U.S. GAAP balance sheet serving as a starting point. The model also requires insurers to estimate insurance technical provisions, which consist of the insurer’s insurance related balances valued based on best-estimate cash flows, adjusted to reflect the time value of money using a risk-free discount rate, with the addition of a risk margin to reflect the uncertainty in the underlying cash flows.
The BSCR model is a risk-based capital model which provides a method for determining a Class 4 insurer’s capital requirements (statutory economic capital and surplus) by taking into account the risk characteristics of different aspects of the Class 4 insurer’s business.
While not specifically referred to in the Insurance Act, the BMA has also established a target capital level (“TCL”) for each Class 4 insurer equal to 120% of its ECR. While a Class 4 insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA and failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory oversight.
Eligible Capital
To enable the BMA to better assess the quality of the insurer’s capital resources, a Class 4 insurer is required to disclose the makeup of its capital in accordance with the recently introduced ‘3-tiered capital system’. Under this system, all of the insurer’s capital instruments will be classified as either basic or ancillary capital, which in turn will be classified into one of 3 tiers based on their “loss absorbency” characteristics. Under this regime, up to certain specified percentages of Tier 1, Tier 2 and Tier 3 Capital may be used to support the insurer’s MSM, ECR and TCL.
Insurance Code of Conduct
Every Bermuda registered insurer must comply with the Insurance Code of Conduct, which prescribes duties, standards, procedures and sound business principles to ensure sound corporate governance, risk management and internal controls are implemented by the relevant insurer. The BMA will assess an insurer's compliance with the Insurance Code of Conduct in a proportionate manner relative to the nature, scale and complexity of its business. Failure to comply with the requirements under the Insurance Code of Conduct will be a factor taken into account by the BMA in determining whether an insurer is conducting its business in a sound and prudent manner as prescribed by the Insurance Act. Such failure to comply with the requirements of the Insurance Code of Conduct could result in the BMA exercising its powers of intervention and investigation and will be a factor in calculating the operational risk charge applicable in accordance with the insurer's BSCR model or approved internal model.
The Insurance Amendment Act 2020 (the “2020 Amendment Act”)
The 2020 Amendment Act became operative on August 5, 2020. The 2020 Amendment Act amends the Insurance Act to make provision for enhanced supervisory requirements relating to the reporting of cyber events to apply to insurers, insurance managers and insurance intermediaries in Bermuda. See Insurance Sector Operational Cyber Risk Management Code of Conduct 2020 below.
Insurance Sector Operational Cyber Risk Management Code of Conduct 2020
On December 23, 2019, the BMA released its proposed Cyber Risk Management Code of Conduct (“Cyber Code”) for industry consideration. The Cyber Code was finalized and takes effect from January 1, 2021 with enforcement commencing on June 30, 2021. The Cyber Code will apply to all Bermuda registered insurers, insurance managers and intermediaries. The Cyber Code is designed to promote the stable and secure management of information technology systems of regulated entities. It is deliberately not exhaustive. Registrants must implement their own technology risk programs and determine what their top risks are and decide the appropriate risk response. Registrants should be able to evidence that they maintain adequate board visibility and governance of cyber risk. Failure to comply with the provisions set out in the Cyber Code will be a factor taken into account by the BMA in determining whether a registrant is meeting its ongoing obligations to conduct its business in a sound and prudent manner.
Restrictions on Dividends and Distributions
A Class 4 insurer is prohibited from declaring or paying a dividend if it is in breach of its MSM, ECR or minimum liquidity ratio or if the declaration or payment of such dividend would cause such a breach. Where an insurer fails to meet its MSM or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.
In addition, a Class 4 insurer is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at least seven days before payment of such dividends) with the BMA an affidavit signed by at least two directors (one of whom must be a Bermuda resident director if any of the insurer’s directors are resident in Bermuda) and the principal representative stating that it will continue to meet its solvency margin and minimum liquidity ratio. Where such an affidavit is filed, it shall be available for public inspection at the offices of the BMA.
Reduction of Capital
Neither Third Point Re BDA nor Third Point Re USA, as general business insurers, may reduce its total statutory capital by 15% or more, as set out in their respective previous year’s financial statements, unless it has received the prior approval of the BMA. Total statutory capital consists of the insurer’s paid in share capital, its contributed surplus (sometimes called additional paid in capital) and any other fixed capital designated by the BMA as statutory capital (such as letters of credit).
Insurance Amendment (No. 2) Act 2018
The Insurance Amendment (No. 2) Act 2018 amended the Insurance Act to provide for the prior payment of policyholders’ liabilities ahead of general unsecured creditors in the event of the liquidation or winding up of an insurer. The amendments provide, among other things, that subject to certain statutorily preferred debts, the insurance debts of an insurer must be paid in priority to all other unsecured debts of the insurer. Insurance debt is defined as a debt to which an insurer is or may become liable pursuant to an insurance contract excluding debts owed to an insurer under an insurance contract where the insurer is the person insured.
Fit and Proper Controllers
The BMA maintains supervision over the controllers of all registered insurers in Bermuda. A controller includes (i) the managing director of the registered insurer or its parent company; (ii) the chief executive of the registered insurer or of its parent company; (iii) a shareholder controller; and, (iv) any person in accordance with whose directions or instructions the directors of the registered insurer or of its parent company are accustomed to act.
The definition of shareholder controller is set out in the Insurance Act but generally refers to (i) a person who holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or its parent company, or (ii) a person who is entitled to exercise 10% or more of the voting power at any shareholders’ meeting of such registered insurer or its parent company, or (iii) a person who is able to exercise significant influence over the management of the registered insurer or its parent company by virtue of its shareholding or its entitlement to exercise, or control the exercise of, the voting power at any shareholders’ meeting.
A shareholder controller that owns 10% or more but less than 20% of the shares as described above is defined as a 10% shareholder controller; a shareholder controller that owns 20% or more but less than 33% of the shares as described above is defined as a 20% shareholder controller; a shareholder controller that owns 33% or more but less than 50% of the shares as described above is defined as a 33% shareholder controller; and a shareholder controller that owns 50% or more of the shares as described above is defined as a 50% shareholder controller.
Where the shares of the registered insurer, or the shares of its parent company, are traded on a recognized stock exchange, and such person becomes a 10%, 20%, 33% or 50% shareholder controller of the insurer, that person shall, within 45 days, notify the BMA in writing that he has become such a controller. In addition, a person who is a shareholder controller of a Class 4 insurer whose shares or the shares of its parent company (if any) are traded on a recognized stock exchange must serve on the BMA a notice in writing that he has reduced or disposed of his holding in the insurer where the proportion of voting rights in the insurer held by him will have reached or has fallen below 10%, 20%, 33% or 50% as the case may be, not later than 45 days after such disposal.
Where the shares of an insurer, or the shares of its parent company, are not traded on a recognized stock exchange (i.e., private companies), the Insurance Act prohibits such person from becoming a shareholder controller unless he has first served on the BMA notice in writing stating that he intends to become such a controller and the BMA has either, before the end of 45 days following the date of notification, provided notice to the proposed controller that it does not object to his becoming such a controller or the full 45 days has elapsed without the BMA filing an objection. In addition, a shareholder controller of Third Point Re BDA or Third Point Re USA is not permitted to reduce or dispose of its holdings such that it will cease to be a 50%, 33%, 20% or 10% shareholder unless that shareholder controller notifies the BMA in writing that it intends to do so.
Notification by Registered Person of Change of Controllers and Officers
All registered insurers are required to give written notice to the BMA of the fact that a person has become, or ceased to be, a controller or officer of the registered insurer within 45 days of becoming aware of such fact.
Notification of Material Changes
All registered insurers are required to give notice to the BMA of their intention to effect a material change within the meaning of the Insurance Act. No registered insurer shall take any steps to give effect to a material change unless it has first served notice on the BMA that it intends to effect such material change and before the end of 30 days, either the BMA has notified such company in writing that it has no objection to such change or that period has lapsed without the BMA having issued a notice of objection.
Supervision, Investigation, Intervention and Disclosure
The BMA may, by notice in writing served on an insurer, require the insurer to provide such information and/or documentation as the BMA may reasonably require with respect to matters that are likely to be material to the performance of its supervisory functions under the Insurance Act. In addition, it may require such person’s auditor, underwriter, accountant or any other person with relevant professional skill of such insurer to prepare a report on any aspect pertaining thereto. If it appears to the BMA to be desirable in the interests of the clients of an insurer, the BMA may also exercise these powers in relation to subsidiaries, parent companies and other affiliates of the insurer or designated insurer.
Disclosure of Information
In addition to powers under the Insurance Act to investigate the affairs of an insurer, the BMA may require certain information from an insurer (or certain other persons) to be produced to the BMA. Further, the BMA has been given powers to assist other regulatory authorities, including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies in Bermuda if it is satisfied that the assistance being requested is in connection with the discharge of regulatory responsibilities and that such cooperation is in the public interest.
Economic Substance Act
In December 2018, the Economic Substance Act 2018, as amended (the “ESA”) came into effect in Bermuda. Under the provisions of the ESA, every Bermuda registered entity other than an entity which is resident for tax purposes in certain jurisdictions outside of Bermuda that carries on as a business any one or more “relevant activities” referred to in the ESA must satisfy economic substance requirements by maintaining a substantial economic presence in Bermuda. Under the ESA, insurance or holding entity activities (both as defined in the ESA) are relevant activities. To the extent that the ESA applies to any of our entities registered in Bermuda, we will be required to demonstrate compliance with economic substance requirements by filing an annual economic substance declaration with the Registrar of Companies in Bermuda.
Companies that are licensed to and carry on insurance as a relevant activity are generally considered to operate in Bermuda with adequate substance, with respect to their insurance business, if they comply with the existing provisions of (a) the Companies Act 1981 relating to corporate governance and (b) the Insurance Act relating to the economic substance requirements. The Registrar of Companies will have regard to such companies’ compliance with the Insurance Act (in addition to compliance with the Companies Act 1981) in his assessment of compliance with the economic substance requirements. Such companies are still required to complete and file an annual economic substance declaration, and the Bermuda Registrar of Companies and the Registrar will also have regard to the information provided in that declaration in making his assessment of compliance with the ESA.
In July 2019, the OECD’s Forum on Harmful Tax Practices formally reported its approval of Bermuda’s economic substance legislative framework.
Any entity that must satisfy economic substance requirements but fails to do so could face automatic disclosure to competent authorities in the E.U. of the information filed by the entity with the Bermuda Registrar of Companies in connection with the economic substance requirements and may also face financial penalties, restriction or regulation of its business activities and/or may be struck off as a registered entity in Bermuda.
Certain Other Bermuda Law Considerations
All Bermuda companies must comply with the provisions of the Companies Act regulating the payment of dividends and making distributions from contributed surplus. A company may not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that: (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of the company’s assets would thereby be less than its liabilities.
United States Insurance Regulation
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers are subject to indirect regulatory requirements imposed by jurisdictions in which their ceding companies are licensed through the “credit for reinsurance” mechanism. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the insurer files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for unearned premiums and loss reserves and loss adjustment expense reserves ceded to the reinsurer.
In the United States, many states allow credit for reinsurance ceded to a reinsurer that is domiciled and licensed in another state of the United States and meets certain financial requirements. A few states do not allow credit for
reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited. The great majority of states, however, permit the reduction in statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be offset to the extent that the reinsurer provides a letter of credit or other acceptable security arrangement, and a few states reduce the amount of security to be posted based on a number of factors, including the credit rating given to a reinsurer from a U.S. nationally recognized statistical rating organization.
Upon closing of the Merger with Sirius, we will become subject to increased regulation in various jurisdictions, including Bermuda, United States, Europe and the United Kingdom.
Information Technology
We have a disaster recovery plan with respect to our information technology infrastructure that includes arrangements with an offshore data center. Our off-island location for data systems back-up and recovery is located in Nova Scotia, Canada, providing a remote site that we believe is unlikely to be subject to the same disaster events that might impair our operations in Bermuda. The disaster recovery environment is configured to provide near real-time backup for key systems to minimize the amount of time needed to restore data following a disaster scenario and support the necessary business capabilities of our Bermuda and U.S. operations.
Human Capital Management
As of December 31, 2020, we had 43 employees, 28 of whom were based in Bermuda, 13 of whom were based in the United States and 2 of whom were based in the United Kingdom.
We believe that our employee relations are good. None of our employees are subject to collective bargaining agreements and we are not aware of any current efforts to implement such agreements at any of our subsidiaries.
Some examples of key programs and initiatives that seek to attract, develop and retain our diverse workforce include:
•Workforce compensation and pay equity;
◦Our approach to compensation is to motivate superior performance and strengthen the connection between pay and results by developing compensation programs that reward success at the Company and on individual levels.
◦Our objective is to support a long-term focus for officers and key contributors that aligns with the interests of shareholders; the long-term award providing such focus should appropriately balance retention and alignment needs based on relative level in the organization.
•Development and training;
◦We are dedicated to providing professional development to all employees through internal and external education and training programs designed to increase their knowledge and skills, enhance career development and obtain professional certifications and designations which are job associated.
•Company culture;
◦We value each of our employees and remain committed to ensuring that a respectful workplace and environment is maintained. We believe it is important to be an engaged member of the communities in which we live and work and that corporate social responsibility is good for our communities, employees and business.
•Diversity and inclusion;
◦Our objective is to recruit, hire, train and promote into all job levels the most qualified applicants. We appreciate diversity in the workplace and do not discriminate on the basis of race, color, creed, religion, national origin, ancestry, citizenship status, age, disability, handicap, sex, marital status, sexual orientation, veteran status, genetic information or any other characteristic protected by applicable U.S. federal, U.S. state or local laws.
Upon closing of the Merger with Sirius, our overall headcount is expected to materially increase. We recently announced new senior hires to strengthen our existing leadership team and anticipate further changes/announcements after the Merger has closed.
Available Information
Third Point Re files annual, quarterly and current reports and other information with the SEC. The SEC maintains an Internet website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including us. You may also access, free of charge, our reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) through the “Investors” portion of our Internet website (www.thirdpointre.bm). Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. We also make available, free of charge from our website, our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Governance and Nominating Committee Charter, and Board of Directors Communications Policy. Such information is available to print for any shareholder who sends a request to Third Point Reinsurance Ltd., Attn: Office of the Corporate Secretary, 3 Waterloo Lane, Pembroke, Bermuda, HM08. Our website is included in this Annual Report as an inactive textual reference only. The information found on our website is not part of this or any other report filed with or furnished to the SEC.
Third Point Re has fully and unconditionally guaranteed the debt securities issued by TPRUSA in February 2015; as a result no separate filings are made by TPRUSA with the SEC. See Note 24 to our consolidated financial statements included elsewhere in this Annual Report for additional information regarding TPRUSA.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Annual Report, including our consolidated financial statements and related notes. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. This Annual Report also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.
Summary Risk Factors
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, cash flows and results of operations that you should consider before making a decision to invest in our common shares. These risks include, but are not limited to, the following:
•The proposed Merger with Sirius may not be completed on a timely basis, on anticipated terms, or at all, and there are uncertainties and risks to consummating the Merger;
•Our results of operations fluctuate from period to period as there is inherent uncertainty and unpredictability in our business which may impact our financial results;
•We have incurred losses in the past, and our future losses may exceed our loss reserves, which could significantly and negatively affect our business;
•Our operations may be adversely affected by catastrophes such as global climate change or the ongoing COVID-19 outbreak;
•Loss of key executives or mistakes on the part of our employees or agents could adversely affect our business;
•A downgrade or withdrawal of our financial ratings would significantly and negatively affect our ability to implement our business strategy successfully;
•A decrease in capital, increase in indebtedness or inability to pay our obligations would adversely affect our business;
•Our business relies on third parties such as clients and reinsurance brokers, and the loss of these business relationships could adversely affect our business, financial condition and results of operations;
•Technology breaches or failures could disrupt or otherwise negatively impact our business;
•We do not control TP Fund or Third Point LLC, who invest and manage our capital accounts;
•Third Point LLC’s strategy in managing TP Fund’s investment portfolio, certain investment positions they are allowed to take and the compensation arrangements of Third Point LLC may cause us to face substantially greater investment risks than faced by other reinsurers with whom we compete;
•Conflicts of interest among various members of TP GP, TP Fund, Third Point LLC and Third Point Re may adversely affect us;
•The historical performance of Third Point LLC should not be considered as indicative of the future results and TP Fund may be exposed to material losses in any given year;
•Any suspension or revocation of our subsidiaries’ insurance or reinsurance licenses would materially impact our ability to do business and implement our business strategy;
•We are subject to the risk of becoming an investment company under U.S. federal securities law;
•Our reinsurance subsidiaries are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action;
•Changes in healthcare legislation or insurance regulation in the United States, Bermuda or elsewhere may have an adverse impact on our operations;
•We may be subject to United States federal income taxation;
•Certain persons or organizations who own our shares may be subject to United States federal taxation;
•Change in United States tax laws may be retroactive and could subject us to increased taxes and could adversely affect our operations and financial condition;
•We may be or become subject to base erosion and anti-abuse tax (“BEAT”) and/or Foreign Account Tax Compliance Act (“FATCA”);
•We may become subject to increased taxation due to action by the Organization of Economic Co-operation and Development (“OECD”) or the European Union (“EU”);
•Our share price could fluctuate or decline for reasons unrelated to the performance of our business;
•We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares; and
•Holders of our common shares may have difficulty influencing significant corporate decisions, enforcing judgments against us in the United States and in protecting their interests due to the current concentrated ownership of our common shares, certain provisions of our bye-laws and our status as a Bermuda corporation.
Risks Related to Our Business
The proposed Merger with Sirius may not be completed on a timely basis, on anticipated terms, or at all, and there are uncertainties and risks to consummating the Merger.
As previously described, on August 6, 2020, we entered into the Merger Agreement with Sirius and Merger Sub, pursuant to which Merger Sub will merge with Sirius. Our obligation to consummate the Merger is subject to satisfaction or waiver, to the extent permitted under applicable law, of a number of conditions and the accuracy of the representations and warranties of Sirius under the Merger Agreement.
Failure to satisfy the required conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause us not to realize some or all of the benefits that we expect to achieve if the Merger is successfully completed within its expected timeframe. Further,
there can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed on the expected timeline or at all.
Even if the Merger were completed, the successful integration of Sirius’s business and operations into those of our own and our ability to realize the expected synergies and benefits of the transaction are subject to a number of risks and uncertainties, many of which are outside of our control. These risks and uncertainties include, among other things:
•Our ability to complete the timely integration of organizations, operations, procedures, policies and technologies, as well as the harmonization of differences in the business cultures of the two companies and retention of key personnel;
•Our ability to minimize the diversion of management attention from ongoing business concerns during the process of integrating the two companies;
•Our inability to establish and maintain integrated risk management systems, underwriting methodologies and controls, which could give rise to excess accumulation or aggregation of risks, underreporting or underrepresentation of exposures or other adverse consequences;
•Our inability to create and enforce uniform financial, compliance and operating controls, procedures, policies and information systems; and
•Our ability to preserve customer and other important relationships of both Third Point Re and Sirius and resolve potential conflicts that may arise;
•Our exposure to underwriting risk on Sirius’s business written during the period prior to closing;
•Potential unknown liabilities and unforeseen increased expenses or delays associated with the Merger; and
•The need for additional capital prior to or following consummation of the Merger.
In addition, the Merger may not be accretive to earnings and could cause dilution to our earnings per share, which may negatively affect the price of our common stock following consummation of the Merger.
If we are unable to complete the proposed Merger, we will have incurred substantial expenses and diverted significant management time and resources from our ongoing business. Even if we consummate the proposed Merger, we will still have incurred substantial expenses but may not realize the anticipated cost synergies and other benefits of the Merger. Given the size and significance of the Merger, we could encounter difficulties in the integration of the operations of the business, which could adversely affect our combined business and financial performance. Any failure to realize the full benefits and synergies of the Merger could adversely impact our business, results of operation and financial condition.
Our results of operations fluctuate from period to period and may not be indicative of our long-term prospects.
The performance of our reinsurance operations and our investment income fluctuate from period to period. Fluctuations result from a variety of factors, including:
•the performance of our investment portfolio, including the results of TP Fund’s portfolio;
•reinsurance contract pricing;
•our assessment of the quality of available reinsurance opportunities;
•the volume and mix of reinsurance products we underwrite;
•seasonality of the insurance and reinsurance business;
•loss experience on our reinsurance liabilities;
•low frequency and high severity loss events; and
•our ability to assess and integrate our risk management strategy effectively.
In particular, we seek to underwrite products and make investments to achieve a favorable return on equity over the long term. In addition, our opportunistic nature and focus on long-term growth in book value will result in fluctuations in total premiums written from period to period as we concentrate on underwriting contracts that we believe will generate better long-term, rather than short-term, results. Accordingly, our short-term results of operations may not be indicative of our long-term prospects.
Established competitors with greater resources may make it difficult for us to effectively market our products or offer our products at a profit.
The reinsurance industry is highly competitive. We compete with major reinsurers, which vary according to the individual market and situation, many of which have substantially greater financial, marketing and management resources than we do, as well as other potential providers of capital willing to assume insurance or reinsurance risk. Competition in the types of business that we underwrite is based on many factors, including:
•price of reinsurance coverage;
•the general reputation and perceived financial strength of the reinsurer;
•relationships with reinsurance brokers;
•terms and conditions of products offered;
•ratings assigned by independent rating agencies;
•speed of claims payment and reputation; and
•the experience and reputation of the members of our underwriting team in the particular lines of reinsurance we seek to underwrite.
We cannot assure you that we will be able to compete successfully in the reinsurance market. Our failure to compete effectively would significantly and negatively affect our financial condition and results of operations and may increase the likelihood that we are deemed to be a passive foreign investment company or an investment company. See “Risks Relating to Insurance and Other Regulation-We are subject to the risk of becoming an investment company under U.S. federal securities law” and “Risks Relating to Taxation-United States persons who own our shares may be subject to United States federal income taxation on our undistributed earnings and may recognize ordinary income upon disposition of shares.”
If actual renewals of our existing contracts do not meet expectations, our premiums written in future years and our future results of operations could be materially adversely affected.
Many of our contracts are written for a one-year term. In our financial forecasting process, we make assumptions about the renewal of certain prior year’s contracts. The insurance and reinsurance industries have historically been cyclical businesses with periods of intense competition, often based on price. If actual renewals do not meet expectations or if we choose not to write on a renewal basis because of pricing conditions, our premiums written in future years and our future operations would be materially adversely affected.
The inherent uncertainty of models and the use of such models as a tool to evaluate risk may have an adverse effect on our financial results.
We make use of quantitative models to evaluate potential reinsurance transactions, to reserve for transactions once they are bound and to assess our risk related to our reinsurance and investment portfolios. These models have been developed internally and in some cases they make use of third party software. For example, we license catastrophe modeling and aggregation software to both assist with monitoring and managing catastrophe aggregations at pricing selection. The construction of these models and the selection of assumptions requires significant actuarial judgment. Furthermore, these models typically rely on either cedent or industry data, both of which may be incomplete or may be subject to errors by employees, failure to document transactions properly, failure to comply with regulatory requirements or information technology failures. Given the inherent uncertainty in these models as well as the underlying assumptions and data, the results of our models may not accurately address the emergence of a variety of matters which might impact certain of our coverages. Accordingly, these models may understate the exposures we are assuming and our financial results may be adversely affected, perhaps significantly. Any such impact could also
be felt across our reinsurance contract portfolio, since similar models and judgment are used in analyzing the majority of our transactions.
Our losses may exceed our loss reserves, which could significantly and negatively affect our business.
Our results of operations and financial condition depends upon our ability to assess accurately the potential losses associated with the risks we reinsure. Reserves are estimates of claims an insurer ultimately expects to pay, based upon facts and circumstances known at the time, predictions of future events, estimates of future trends in claim severity and other variable factors. The inherent uncertainties of estimating loss reserves generally are greater for reinsurance companies as compared to primary insurers, primarily due to:
•the lapse of time from the occurrence of an event to the reporting of the claim and the ultimate resolution or settlement of the claim;
•the diversity of development patterns among different types of reinsurance treaties; and
•heavier reliance on the client for information regarding claims.
Actual losses and loss adjustment expenses paid may deviate substantially from the estimates of our loss reserves, to our detriment. If we determine our loss reserves to be inadequate, we will increase our loss reserves with a corresponding reduction in our net income in the period in which we identify the deficiency. Such a reduction would negatively affect our results of operations. If our losses exceed our loss reserves, our financial condition may be significantly and negatively affected.
Our property catastrophe reinsurance operations will make us vulnerable to losses from catastrophes and may cause our results of operations to vary significantly from period to period.
Our property and catastrophe reinsurance operations expose us to claims arising out of unpredictable catastrophic events, such as hurricanes, hailstorms, tornados, windstorms, earthquakes, floods, fires, explosions, and other natural or man-made disasters. The incidence and severity of catastrophes are inherently unpredictable but the loss experience of property catastrophe reinsurers has been generally characterized as low frequency and high severity. Claims from catastrophic events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year and adversely affect our financial condition. Corresponding reductions in our surplus levels could impact our ability to write new reinsurance policies.
The extent of catastrophe losses is a function of both the severity of the event and total amount of insured exposure affected by the event. Increases in the value and concentration of insured property or insured individuals, the effects of inflation, changes in weather patterns, such as climate change, and increased terrorism could increase the future frequency and/or severity of claims from catastrophic events. Claims from catastrophic events could materially adversely affect our results of operations and financial condition. Our ability to write new reinsurance contracts and insurance policies could also be impacted as a result of corresponding reductions in our capital levels.
Although we attempt to manage our exposure to such events through a multitude of approaches, including geographic diversification, geographic limits, individual policy limits, exclusions or limitations from coverage, purchase of reinsurance and expansion of supportive collateralized capacity, the availability of these management tools may be dependent on market factors and, to the extent available, may not respond in the way that is expected.
The property and casualty reinsurance industry is highly cyclical, and we expect to continue to experience periods characterized by excess underwriting capacity and unfavorable premium rates.
Historically, reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions, including inflation, changes in equity, debt and other investment markets, changes in legislation, case law and prevailing concepts of liability and other factors. In particular, demand for reinsurance is influenced significantly by the underwriting results of primary insurers and prevailing general economic conditions. The supply of reinsurance is related to prevailing prices and levels of surplus capacity that, in turn, may fluctuate in response to changes in rates of return being realized in the reinsurance industry on both the underwriting and investment sides.
As a result, the reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to high levels of available underwriting capacity as well as periods when shortages of capacity have permitted favorable premium levels and changes in terms and conditions. The supply of available reinsurance capital has increased over the past several years and may increase further, either as a result of capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers.
Continued increases in the supply of reinsurance may have consequences for us and for the reinsurance industry generally, including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable policy terms and conditions. As a result, we may be unable to fully execute our reinsurance strategy of selling lower-volatility business. The effects of cyclicality could significantly and negatively affect our financial condition and results of operations and could limit their comparability from period to period and year over year.
The effect of emerging claim and coverage issues on our business is uncertain.
As industry practices and legal, judicial and regulatory conditions change, unexpected issues related to claims and coverage may emerge. Various provisions of our contracts, such as limitations or exclusions from coverage or choice of forum, may be difficult to enforce in the manner we intend, due to, among other things, disputes relating to coverage and choice of legal forum. These issues may adversely affect our business by either extending coverage beyond the period that we intended or by increasing the number or size of claims. In some instances, these changes may not manifest themselves until many years after we have issued insurance or reinsurance contracts that are affected by these changes. As a result, we may not be able to ascertain the full extent of our liabilities under our insurance or reinsurance contracts for many years following the issuance of our contracts. The effects of unforeseen development or substantial government intervention could adversely impact our ability to adhere to our goals.
A downgrade or withdrawal of our AM Best rating would significantly and negatively affect our ability to implement our business strategy successfully.
Companies, insurers and reinsurance brokers use ratings from independent ratings agencies as an important means of assessing the financial strength and quality of reinsurers. AM Best has assigned each of our reinsurance company subsidiaries a financial strength rating of A- (Excellent), which is the fourth highest of 15 ratings that AM Best issues. This rating reflects the rating agency’s opinion of the applicable insurer’s financial strength, operating performance and ability to meet obligations. It is not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our shares. AM Best periodically reviews our rating, and may revise its downward or revoke it at its sole discretion based primarily on its analysis of our balance sheet strength, operating performance and business profile. Factors which may affect such an analysis include:
•if we change our business practices from our organizational business plan in a manner that no longer supports AM Best’s initial rating;
•if we make strategic acquisitions or dispositions;
•if unfavorable financial or market trends impact us;
•if losses exceed loss reserves;
•if we are unable to retain our senior management and other key personnel;
•if our investment portfolio incurs significant losses; or
•if AM Best alters its capital adequacy assessment methodology in a manner that would adversely affect the rating of any of our insurance or reinsurance subsidiaries.
If AM Best downgrades the rating of any of our insurance or reinsurance subsidiaries below A- (Excellent), places either reinsurer on credit watch or withdraws its rating, we could be severely limited or prevented from writing any new reinsurance contracts from the affected reinsurer which would significantly and negatively affect our ability to implement our business strategy. A downgrade may also require us to establish trusts or post letters of credit for ceding company clients. In addition, almost all of our reinsurance contracts provide the client with the right to terminate the agreement on a runoff or cutoff basis, demand additional collateral or require us to transfer premiums on a funds withheld basis if our A- (Excellent) AM Best rating is downgraded. On May 16, 2019, AM Best affirmed
the financial strength rating of A- (Excellent) but, revised the rating outlook of our reinsurance subsidiaries from stable to negative. The negative outlook reflects AM Best’s concerns over the Company’s operating performance due to volatility of results and generating net underwriting losses since inception and business profile due to changes in senior management.
In February 2015, Third Point Re (USA) Holdings Inc., our wholly owned subsidiary, issued $115.0 million in aggregate principal amount of 7.0% senior notes due 2025 (the “Senior Notes”). The Senior Notes are fully and unconditionally guaranteed (the “Guarantee”) by Third Point Re. In certain circumstances, a downgrade of the rating assigned to the Senior Notes would result in an increase in the annual interest rate payable on the Senior Notes or, if a change of control of Third Point Re has also occurred, an obligation for us to make an offer to repurchase the Senior Notes at a premium. Either of these outcomes could require use of cash that we might otherwise use in operating our business. In addition, we may not have sufficient funds to satisfy these obligations, which could result in an event of default under the indenture governing the Senior Notes. See “Inability to service our indebtedness could adversely affect our liquidity and financial condition and could potentially result in a downgrade or withdrawal of our credit ratings, any of which would adversely affect our ability to implement our business strategy.”
In addition, general creditworthiness ratings are used by existing or potential investors to assess the likelihood of repayment on a particular debt issue. Accordingly, the maintenance of an investment grade creditworthiness rating (e.g., "BBB-" or better from Standard & Poor's or Fitch Ratings) is important to our ability to raise new debt with acceptable terms. Strong creditworthiness ratings are important factors that provide better financial flexibility when issuing new debt or restructuring existing debt. Rating agencies periodically evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us. A downgrade, withdrawal or negative watch/outlook of our creditworthiness ratings could limit our ability to raise new debt or could make new debt more costly and/or have more restrictive conditions.
A significant decrease in our capital or surplus could enable certain clients to terminate reinsurance agreements or to require additional collateral.
Certain of our reinsurance contracts contain provisions that permit our clients to cancel the contract or require additional collateral in the event of a downgrade in our ratings below specified levels or a reduction of our capital or surplus below specified levels over the course of the agreement. Whether a client would exercise such cancellation rights would likely depend, among other things, on the reason the provision is triggered, the prevailing market conditions, the degree of unexpired coverage and the pricing and availability of replacement reinsurance coverage.
We are dependent on key executives, the loss of whom could adversely affect our business.
Our future success depends to a significant extent on the efforts of our senior management and our senior underwriting executives to implement our business strategy. We believe there are only a limited number of available and qualified executives with substantial experience in our industry. Accordingly, the loss of the services of one or more of the members of our senior management or other key personnel could delay or prevent us from fully implementing our business strategy and, consequently, significantly and negatively affect our business.
We do not currently maintain key man life insurance with respect to any of our senior management. If any member of senior management dies or becomes incapacitated, or leaves the company, for example, to pursue employment opportunities elsewhere, we would be solely responsible for locating an adequate replacement for such senior management and for bearing any related cost. To the extent that we are unable to locate an adequate replacement or are unable to do so within a reasonable period of time, our business may be significantly and negatively affected.
In addition, our business operations require the services of a number of specialized employees to carry out day-to-day business operations. There can be no assurance that we can attract and retain the necessary employees to conduct our business activities on a timely basis or at all.
We recently announced new senior hires to strengthen our existing leadership team and anticipate further changes/announcements after the Merger has closed.
Our inability to provide collateral to certain counterparties on commercially acceptable terms as we grow could significantly and negatively affect our ability to implement our business strategy.
Neither Third Point Re BDA nor Third Point Re USA is licensed or admitted as a reinsurer in any jurisdiction other than Bermuda. Certain jurisdictions, including in the United States, do not permit insurance companies to take statutory credit for reinsurance obtained from unlicensed or non-admitted insurers unless appropriate security measures are implemented. Consequently, certain clients require us to obtain a letter of credit or provide other collateral through funds withheld or trust arrangements. In connection with obtaining letter of credit facilities, we are typically required to provide customary collateral to the letter of credit provider in order to secure our obligations under the facility. Our ability to provide collateral, and the costs at which we provide collateral, is primarily dependent on the composition of our Collateral Assets.
Typically, both letters of credit and collateral trust agreements are collateralized with cash or fixed-income securities. Banks may be willing to accept our assets as collateral, but on terms that may be less favorable to us than reinsurance companies that invest solely or predominantly in fixed-income securities. The inability to renew, maintain or obtain letters of credit or to source acceptable collateral for letters of credit or collateral trust agreements may significantly limit the amount of reinsurance we can write or require us to modify our investment strategy.
We expect to need additional collateral capacity as we grow, and if we are unable to renew, maintain or increase our collateral capacity or are unable to do so on commercially acceptable terms, such a development could significantly and negatively affect our ability to implement our business strategy.
Our ability to pay dividends may be constrained by our holding company structure and certain regulatory and other factors.
Third Point Re is a holding company that conducts no reinsurance operations of its own. The majority of our reinsurance operations are conducted through our wholly-owned operating subsidiaries. Historically, our cash flows have typically consisted primarily of dividends and other permissible payments from our operating subsidiaries. Third Point Re depends on such payments to receive funds to meet its obligations, including the payment of any dividends and other distributions to our shareholders and any payment obligations in respect of its outstanding indebtedness. See “Inability to service our indebtedness could adversely affect our liquidity and financial condition and could potentially result in a downgrade or withdrawal of our credit ratings, any of which would adversely affect our ability to implement our business strategy.”
In March 2015, Third Point Re and Third Point Re USA entered into a Net Worth Maintenance Agreement, pursuant to which Third Point Re must have committed funds sufficient to, and must continue to, maintain a minimum level of capital at Third Point Re USA of $250.0 million (the “Net Worth Maintenance Agreement”). Failure to maintain the minimum level of capital required by the Net Worth Maintenance Agreement could limit or prevent Third Point Re USA from paying dividends to us.
Third Point Re is indirectly subject to Bermuda regulatory constraints placed on Third Point Re BDA and Third Point Re USA. This affects our ability to pay dividends on the shares and make other payments. Under the Insurance Act, Third Point Re BDA and Third Point Re USA, as Class 4 insurers, are prohibited from declaring or paying a dividend if the relevant insurer is in breach of its minimum solvency margin (“MSM”), enhanced capital ratio (“ECR”) or minimum liquidity ratio or if the declaration or payment of such dividend would cause such a breach. Where either Third Point Re BDA or Third Point Re USA, as Class 4 insurers, fails to meet its MSM or minimum liquidity ratio on the last day of any financial year, they are prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.
In addition, Third Point Re BDA and Third Point Re USA, as Class 4 insurers, are prohibited from declaring or paying in any financial year dividends of more than 25% of their respective total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless they file (at least seven days before payment of such dividends) with the BMA an affidavit signed by at least two directors (one of whom must be a Bermuda resident director if any of the insurer’s directors are resident in Bermuda) and the relevant insurer’s principal representative stating that the relevant insurer will continue to meet its solvency margin and minimum liquidity ratios. Where such an affidavit is filed, it shall be available for public inspection at the offices of the BMA.
In addition, under the Bermuda Companies Act 1981, as amended (the “Companies Act”), Bermuda companies such as Third Point Re, Third Point Re BDA and Third Point Re USA may not declare or pay a dividend if there are reasonable grounds for believing that the relevant Bermuda company is, or would after the payment be, unable to pay its liabilities as they become due or that the realizable value of its assets would thereby be less than its liabilities.
Inability to service our indebtedness could adversely affect our liquidity and financial condition and could potentially result in a downgrade or withdrawal of our credit ratings, any of which would adversely affect our ability to implement our business strategy.
In February 2015, Third Point Re (USA) Holdings Inc., our wholly owned subsidiary, issued $115.0 million in aggregate principal amount of Senior Notes. The Senior Notes are fully and unconditionally guaranteed by Third Point Re.
We are a holding company and, accordingly, conduct substantially all operations through their respective operating subsidiaries. As a result, our cash flow and our ability to service our debt depend in part upon the earnings of our operating subsidiaries and on the distribution of earnings, loans or other payments from such subsidiaries to us. See “Risk Factors-Our ability to pay dividends may be constrained by our holding company structure and certain regulatory and other factors.”
Our operating subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on our indebtedness or preference shares, or to provide us with funds for our respective payment obligations, whether by dividends, distributions, loans or other payments. There can be no assurance that our operating subsidiaries will generate sufficient cash flow from operations, or that future financing sources will be available to us in amounts sufficient to satisfy our obligations under our indebtedness, to refinance our indebtedness on acceptable terms or at all, or to fund our other business needs. In addition to being limited by the financial condition and operating requirements of such subsidiaries, any payment of dividends, distributions, loans or advances by our subsidiaries to us could be subject to statutory or contractual restrictions. Moreover, since certain of our respective subsidiaries are insurance companies, their ability to pay dividends to us, as applicable, is subject to regulatory limitations. See “Business - Regulation.”
To the extent that we need funds but our subsidiaries are restricted from making such distributions under applicable law or regulation, or are otherwise unable to distribute funds, our liquidity and financial condition would be adversely affected and we would potentially be unable to satisfy our obligations under our existing or future indebtedness, preference shares or any of our other obligations, including the securities issued in the Merger. If we cannot service our indebtedness, the implementation of our business strategy would be impeded, and we could be prevented from entering into transactions that would otherwise benefit our business.
Our right to receive any assets of any of our subsidiaries upon liquidation or reorganization of such subsidiaries, and therefore the rights of the holders of our indebtedness or preference shares, to participate in those assets, will be structurally subordinated to the claims of such subsidiary’s creditors. In addition, even if we were a creditor of any of our respective subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of such subsidiaries and any indebtedness of such subsidiaries senior to that held by it. Our indebtedness would also be structurally subordinated to the rights of the holders of any preferred stock or shares issued by our subsidiaries, whether currently outstanding or issued hereafter. Moreover, the rights of shareholders of Third Point Re to receive any assets of Third Point Re upon liquidation or reorganization of Third Point Re would be subordinate to all of the foregoing claims.
Our indebtedness may limit cash flow available to invest in the ongoing needs of our business, and may otherwise place us at a competitive disadvantage compared to our competitors.
We may in the future incur additional indebtedness, in addition to the Senior Notes, which indebtedness may be guaranteed by Third Point Re. The indenture governing the Senior Notes does not limit the amount of additional indebtedness we may incur. Our debt combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:
•requiring us to dedicate a substantial portion of cash flow from operations to the payment of interest on, and principal of, our debt, which will reduce the amounts available to fund working capital, the expansion of our business and other general corporate purposes;
•increasing our vulnerability to adverse changes in general economic, industry and market conditions, and exposing us to the risk of increased interest rates;
•obligating us to additional restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;
•making it more difficult for us to make payments on our existing or future obligations;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
•placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.
In addition, a failure to comply with the covenants under our debt instruments could result in an event of default under those instruments. In the event of an acceleration of amounts due under our debt instruments as a result of an event of default, we may not have sufficient funds and may be unable to arrange for additional financing to repay our indebtedness, and the lenders could seek to enforce security interests in the collateral securing such indebtedness.
We may not have the ability to raise the funds necessary to pay the principal of or interest on the Senior Notes.
At maturity, the entire principal amount of the Senior Notes then outstanding, plus any accrued and unpaid interest, will become due and payable. TPRUSA must pay interest in cash on the Senior Notes semi-annually on February 13 and August 13 of each year. The amount of interest payable on the Senior Notes is subject to increase from time to time in the event of a downgrade of the rating assigned to the Senior Notes or in connection with certain other events. In addition, upon the occurrence of a change of control triggering event described in the indenture governing the Senior Notes, unless we have exercised our right to redeem the Senior Notes in accordance with their terms, each holder of Senior Notes will have the right to require us to repurchase all or any part of such holder’s Senior Notes for a payment in cash described in the indenture governing the Senior Notes.
We may not have enough available cash or be able to obtain sufficient financing at the time we are required to make these payments. Furthermore, our ability to make these payments may be limited by law, by regulatory authority or by agreements governing future indebtedness. Our failure to pay interest when due, if uncured for 30 days, or our failure to pay the principal amount when due, will constitute an event of default under the indenture governing the Senior Notes. A default under the indenture could also lead to a default under agreements governing future indebtedness. If the repayment of that indebtedness is accelerated as a result, then we may not have sufficient funds to repay that indebtedness or to pay the principal of or interest on the Senior Notes.
We may need additional capital in the future in order to operate our business, and such capital may not be available to us or may not be available to us on acceptable terms. Furthermore, additional capital raising could dilute your ownership interest in our company and may cause the value of the shares to decline.
We may need to raise additional capital in the future through offerings of debt or equity securities or otherwise to:
•fund liquidity needs caused by underwriting or investment losses or for acquisitions or other strategic initiatives;
•replace capital lost in the event of significant reinsurance losses or adverse reserve developments;
•satisfy letters of credit, guarantee bond requirements or other capital requirements that may be imposed by our clients or by regulators;
•meet rating agency or regulatory capital requirements; or
•respond to competitive pressures.
In February 2015, we issued $115.0 million in aggregate principal amount of Senior Notes issued by TPRUSA and guaranteed by Third Point Re. These Senior Notes are structurally senior to claims that any holders of our common shares may have on the assets of Third Point Re.
Additional capital may not be available on terms favorable to us, or at all. Further, any additional capital raised through the sale of equity could dilute your ownership interest in our company and may cause the value of our shares to decline. Additional capital raised through the issuance of debt may result in creditors having rights, preferences and privileges senior or otherwise superior to those of the holders of our shares.
We depend on our clients’ evaluations of the risks associated with their insurance underwriting, which may subject us to reinsurance losses.
In most of our quota share reinsurance business we do not separately evaluate each of the original individual risks assumed under these reinsurance contracts. We instead evaluate the underwriting processes and environment at the ceding companies we work with to assess the risks associated with their portfolios. Therefore, we are dependent on the original underwriting decisions made by ceding companies. We are subject to the risk that the clients may not have adequately evaluated the insured risks and that the premiums ceded may not adequately compensate us for the risks we assume. We also do not separately evaluate each of the individual claims made on the underlying insurance contracts. Therefore, we are dependent on the original claims decisions made by our clients. We are subject to the risk that the client may pay invalid claims, which could result in reinsurance losses for us.
The involvement of reinsurance brokers subjects us to their credit risk.
In accordance with industry practice, we frequently pay amounts owed on claims under our policies to reinsurance brokers, and these brokers, in turn, remit these amounts to the ceding companies that have reinsured a portion of their liabilities with us. In some jurisdictions, if a broker fails to make such a payment, we might remain liable to the client for the deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions, when the client pays premiums for policies to reinsurance brokers for payment to us, these premiums are considered to have been paid and the client will no longer be liable to us for these premiums, whether or not we have actually received them. Consequently, we assume a degree of credit risk associated with reinsurance brokers around the world.
The inability to obtain business provided from brokers could adversely affect our business strategy and results of operations.
We market our reinsurance worldwide primarily through reinsurance brokers. Business placed by our reinsurance brokers that each individually contributed more than 10% of total gross premiums written from inception to December 31, 2020 were: Aon Benfield, Guy Carpenter & Company, LLC and Willis Re, which accounted for 29.3%, 28.8% and 14.1%, respectively. Affiliates of several brokers have also co-sponsored the formation of Bermuda reinsurance companies that may compete with us, and these brokers may favor their own reinsurers over other companies. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
We may be unable to purchase reinsurance for the liabilities we reinsure, and if we successfully purchase such reinsurance, we may be unable to collect, which could adversely affect our business, financial condition and results of operations.
We have purchased, and may continue to purchase, retrocessional coverage in order to mitigate the effect of a potential concentration of losses upon our financial condition. The insolvency or inability or refusal of a reinsurer to make payments under the terms of its agreement with us could have an adverse effect on us because we remain liable to our client. From time to time, market conditions have limited, and in some cases have prevented, reinsurers from obtaining the types and amounts of retrocession that they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amounts of retrocessional coverage or negotiate terms that we deem appropriate or acceptable or obtain retrocession from entities with satisfactory creditworthiness. Our failure to establish adequate retrocessional arrangements or the failure of our retrocessional arrangements to protect us from
overly concentrated risk exposure could significantly and negatively affect our business, financial condition and results of operations.
In addition, due to factors such as the price or availability of reinsurance coverage, we sometimes decide to increase the amount of risk retained by purchasing less reinsurance or no reinsurance for a particular geographical region. Such determinations have the effect of increasing our financial exposure to losses associated with such risks and, in the event of significant losses associated with a given risk, could have a material adverse effect on our financial condition and results of operations.
We face risks arising from any strategic transactions such as acquisitions, dispositions, mergers or joint ventures.
We pursue strategic transactions from time to time, which could involve acquisitions or dispositions of businesses or assets. Any strategic transactions could be significant and could have a material adverse impact on our reputation, business, results of operation or financial condition. We face a number of risks arising from these types of transaction, including financial, accounting, tax and regulatory challenges; difficulties with integration, business retention, execution of strategy, unforeseen liabilities or market conditions; and other managerial or operating risks and challenges. Any such transactions could also subject us to risks such as failure to obtain appropriate value, post-closing claims being levied against us and disruption to our other businesses during the negotiation or execution process or thereafter. Accordingly, these risks and difficulties may prevent us from realizing the expected benefits from the strategic transactions we enter into. For example, the businesses that we acquire or our strategic alliances or joint ventures may underperform relative to the price paid or resources committed by us; we may not achieve anticipated cost savings; or we may otherwise be adversely affected by transaction-related charges.
Through our strategic transactions, we may also assume unknown or undisclosed business, operational, tax, regulatory and other liabilities, fail to properly assess known contingent liabilities, or assume businesses with internal control deficiencies. Risk-mitigating provisions that we put in place in the course of negotiating and executing these transactions, such as due diligence efforts and indemnification provisions, may not be sufficient to fully address these liabilities and contingencies.
In addition, as the pace of change in our industry continues to increase, we regularly evaluate our business plans and strategies and may from time to time modify our business and strategic plan, including through strategic transactions or expansion into new lines of reinsurance business. Any such transaction or expansion could be significant and could materially and adversely affect us and our financial condition. Changing plans and strategies requires significant management time and effort, and may divert management’s attention from our core existing operations and competencies. Moreover, modifications we undertake to our operations may not be immediately reflected in our financial statements and, when reflected, may not reflect the achievement of our targeted long-term results and goals. Our failure to carry out our business plans may have an adverse effect on our long-term results of operations and financial condition.
Technology breaches or failures, including those resulting from a malicious cyber-attack on us or our business partners and service providers, could disrupt or otherwise negatively impact our business.
We rely on information technology systems to process, transmit, store and protect the electronic information, financial data and proprietary models that are critical to our business. Furthermore, a significant portion of the communications between our employees and our business, banking and investment partners depends on information technology and electronic information exchange. We have licensed certain systems and data from third parties. We cannot be certain that we will have access to these, or comparable systems, or that our technology or applications will continue to operate as intended. In addition, we cannot be certain that we would be able to replace these systems without slowing our underwriting response time. Like all companies, our information technology systems are vulnerable to data breaches, interruptions or failures due to events that may be beyond our control, including, but not limited to, natural disasters, theft, terrorist attacks, computer viruses, hackers and general technology failures.
We believe that we have established and implemented appropriate security measures, controls and procedures to safeguard our information technology systems and to prevent unauthorized access to such systems and any data processed or stored in such systems, and we periodically evaluate and test the adequacy of such systems, controls and procedures. In addition, we have established a business continuity plan which is designed to ensure that we are
able to maintain all aspects of our key business processes functioning in the midst of certain disruptive events, including any disruptions to or breaches of our information technology systems. Our business continuity plan is routinely tested and evaluated for adequacy. Despite these safeguards, disruptions to and breaches of our information technology systems are possible and may negatively impact our business.
It is possible that insurance policies we have in place with third parties would not entirely protect us in the event that we experienced a breach, interruption or widespread failure of our information technology systems. Furthermore, we have not secured insurance coverage designed to specifically protect us from an economic loss resulting from such events.
Although we have never experienced any known or threatened cases involving unauthorized access to our information technology systems or unauthorized appropriation of the data contained within such systems, we have no assurance that such technology breaches will not occur in the future.
A pandemic or other catastrophic event, such as the ongoing COVID-19 outbreak, may adversely impact our financial condition and results of operations and other aspects of our business.
We face various risks related to pandemics and other catastrophic events, including the recent global outbreak of the novel coronavirus (“COVID-19”). In recent months, the continued spread of COVID-19 has led to disruptions to commerce, reduced economic activity and increased volatility in the global capital markets. The COVID-19 pandemic and its resulting macroeconomic conditions has caused the financial markets to become volatile, and such effects may continue or worsen in the future, amplifying the negative impact on global growth and global financial markets. These conditions could materially and adversely affect our cash flows, as well as the value and liquidity of our invested assets, which could affect our creditworthiness.
Our investment portfolio (and specifically, the valuations of investment assets it holds) may be adversely affected as a result of market developments from COVID-19 and uncertainty regarding its outcome. Moreover, changes in interest rates, adverse credit ratings migration and increased credit defaults, increased equity volatility, reduced liquidity or a continued slowdown in the United States or in global economic conditions may also adversely affect the values and cash flows of these assets. Specifically, lower underlying interest rates may adversely affect the portfolio’s ability to invest at levels sufficient to meet liability cash flows, which in turn could affect our creditworthiness. Negative market conditions may result in a reduction in the volume of premium that our clients write and cede to us, which could lead to a negative effect on our results of operations. Further, extreme market volatility may leave us unable to react to market events in a prudent manner consistent with our historical investment practices in dealing with more orderly markets.
Our companies that are treated as foreign corporations for United States federal income tax purposes have historically intended to operate in a manner that will not cause them to be subject to current U.S. federal income taxation on their net income. Travel restrictions arising as a result of the COVID-19 pandemic, however, limit the ability of certain directors and other personnel to be present outside the United States. While we have implemented contingency plans to mitigate the impact of such travel restrictions, no assurances can be provided that we will not become subject to greater tax liabilities than anticipated as a result of such restrictions.
The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19. In addition, we may experience operational disruptions as a result of the COVID-19 pandemic, including as a result of our employees being unable to work due to illness, travel restrictions, quarantines, government actions or other measures taken in response to COVID-19. These disruptions could have a negative impact on our business and operations. Despite having taken significant steps to avoid disruption and maintain security, an extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
There continue to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the severity of the disease, the duration of the outbreak and actions that may be taken by governmental authorities and
private businesses to attempt to contain the outbreak or to mitigate its impact. We could have unexpected consequences from changes in regulation related to the COVID-19 pandemic and the short time window in which we may have to implement them. We continue to monitor the situation and to assess further possible implications to our business and customers. We cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business. Such events or conditions could result in additional regulation or restrictions affecting the conduct of our business in the future.
Risks Relating to Our Investment Strategy
Under our investment account structure, we do not have control over TP Fund.
Under the LPA, TP GP has exclusive management and control of the business of TP Fund, including the authority to undertake on behalf of TP Fund all actions that, in its sole judgment, are necessary or desirable to carry out its duties and responsibilities. These broad rights of TP GP include the power to delegate its authorities under the LPA. Pursuant to the TP Fund IMA, TP GP delegates to Third Point LLC the authority to direct the investments of TP Fund and other day-to-day business of TP Fund. In addition, TP GP may resign or, subject to its minimum investment requirement, withdraw from TP Fund and may admit new limited partners without our consent, which may cause TP Fund to be deemed an “investment company” under the Investment Company Act of 1940. The TPRE Limited Partners have no right to remove TP GP as general partner of TP Fund and do not have any right to participate in the management and conduct of TP Fund.
TP Fund is not, and is not expected to be, registered as an “investment company” under the Investment Company Act of 1940 or any comparable regulatory requirements. Therefore, investors in TP Fund, including the TPRE Limited Partners, do not and will not have the benefit of the protections afforded by such registration and regulation.
We do not control the allocation and performance of TP Fund’s investment portfolio and its performance depends on the ability of its investment manager, Third Point LLC, to select and manage appropriate investments.
Pursuant to the LPA, TP GP is required to apply certain investment guidelines to TP Fund’s investment portfolio. In addition, the TP Fund IMA contractually obligates Third Point LLC, as TP Fund’s investment manager, to comply with the investment guidelines. However, we cannot assure shareholders as to exactly how assets will be allocated to different investment opportunities, including long and short positions and derivatives trading, which could increase the level of risk in our investment in TP Fund. The performance of our investment in TP Fund depends to a great extent on the ability of Third Point LLC, as TP Fund’s investment manager, to select and manage appropriate investments for TP Fund’s investment portfolio. We cannot assure you that Third Point LLC will be successful in meeting TP Fund’s investment objectives.
The failure of Third Point LLC to perform adequately could significantly and negatively affect the results of our investment in TP Fund and consequently could significantly and negatively affect our business, results of operations and financial condition.
In addition, under the LPA, TP GP has the authority to dismiss from employment any and all agents, managers, consultants, advisors and other persons, including Third Point LLC. If TP GP chooses to dismiss Third Point LLC from employment as TP Fund’s investment manager, there is no assurance that TP GP will find or hire a suitable replacement. If TP GP were to hire a suitable replacement, there is no guarantee that any such replacement would provide TP Fund with comparable or better investment results than those that Third Point LLC may provide to TP Fund or than those that Third Point LLC has provided in the past to us.
TP Fund may be expected to indemnify Third Point LLC under certain circumstances in accordance with the TP Fund IMA. As a result, the capital accounts of TPRE Limited Partners in TP Fund could be reduced, which could have a material and adverse impact on our financial conditions and results of operations.
We have a limited ability to withdraw our capital accounts from TP Fund.
The LPA limits our ability to withdraw our capital accounts from TP Fund. The LPA provides that we may withdraw our capital accounts in TP Fund in full on the Withdrawal Date or any successive three-year anniversary of
such date. It also allows us to withdraw upon the occurrence of certain specified events as described in “Item 1. Withdrawal Rights”.
Additionally, the LPA prohibits us from engaging an investment manager other than Third Point LLC without the written consent of Third Point LLC. As a result, we have limited flexibility to change our investment strategy or manage our investments outside of TP Fund or with a different investment manager, which could have a negative impact on our returns.
TP GP, Third Point LLC and their respective affiliates may have potential conflicts of interest that could adversely affect us.
Neither Third Point LLC nor its principals, including Daniel S. Loeb, who is one of our shareholders, are obligated to devote any specific amount of time, effort or investment opportunities to our or TP Fund’s affairs. Affiliates of Third Point LLC manage, and expect to continue to manage, other client accounts, some of which have objectives similar to ours and TP Fund’s, including collective investment vehicles managed by Third Point LLC’s affiliates and in which Third Point LLC or its affiliates may have an equity interest. Third Point LLC’s interest and the interests of its affiliates, may at times conflict, possibly to Third Point LLC’s detriment, which may potentially adversely affect our and TP Fund’s investment opportunities and returns.
Josh Targoff, who serves on our Board, also serves as a partner, Chief Operating Officer and General Counsel to Third Point LLC. This service to both companies may create, or may create the appearance of, conflicts of interest.
TP GP, Third Point LLC and their respective affiliates may engage in other business ventures and investment opportunities that may not be allocated equitably among us and such other business ventures.
Under the LPA, TP GP and its affiliates have the ability to engage in or possess interests in other business activities, including investing or disposing of securities in which TP Fund may from time to time invest. TP GP or Third Point LLC may organize and manage one or more entities or accounts that may parallel the investment activities of TP Fund. TP GP or Third Point LLC, as the case may be, may allocate investment opportunities among such entities or accounts, other affiliated funds and TP Fund as it deems to be fair and equitable in its sole discretion. However, we cannot be assured that the allocation of investment opportunities between TP Fund and such other entities, accounts or funds will be equitable.
The historical performance of Third Point LLC should not be considered as indicative of the future results of TP Fund’s investment portfolio or of our future results or any returns expected on our common shares.
The historical returns of the funds managed by Third Point LLC are not directly linked to returns on our common shares. As TP Fund’s investment manager, Third Point LLC has agreed to manage TP Fund’s investment portfolio on a basis that is substantially equivalent to Third Point Offshore Master Fund L.P., which is managed by Third Point LLC, but with increased exposures through the use of additional financial leverage. However, results for TP Fund’s investment portfolio could differ from results of the funds managed by Third Point LLC as a result of restrictions imposed by TP Fund’s investment guidelines, and other factors. In addition, even if TP Fund’s investment portfolio generates investment income in a given period, our overall performance could be adversely affected by losses generated by our reinsurance operations or public market dynamics. Poor performance of TP Fund’s investment portfolio would cause a decline in our revenue and would therefore have a negative effect on our financial performance.
Moreover, with respect to the historical performance of funds or accounts managed by Third Point LLC, including our investment portfolio, prior to the recent change in investment account structure:
•the historical performance of funds managed by Third Point LLC should not be considered indicative of the future results that should be expected from TP Fund’s investment portfolio or the Collateral Asset Account; and
•the returns of funds managed by Third Point LLC have benefited historically from investment opportunities and general market conditions that currently may not exist and may not repeat themselves, and there can be
no assurance that Third Point LLC will be able to avail itself of profitable investment opportunities in the future.
The risks associated with Third Point LLC’s strategy in managing TP Fund’s investment portfolio may be substantially greater than the investment risks faced by other reinsurers with whom we compete.
We derive a significant portion of our income from our investment in TP Fund. As a result, our operating results depend in part on the performance of TP Fund’s investment portfolio. TP Fund’s investments are not structured in relation to our anticipated reinsurance liabilities, which could force us to liquidate investments at a significant loss or at prices that are not optimal, which could significantly and adversely affect our financial results.
The risks associated with Third Point LLC’s investment strategy may be substantially greater than the risks associated with traditional fixed-income investment strategies employed by many reinsurers with whom we compete. Third Point LLC makes investments globally, in both developed and emerging markets, in all sectors, and in equity, credit, commodity, currency, option and other instruments. Third Point LLC is opportunistic and often seeks a catalyst, either intrinsic or extrinsic, that will unlock value or alter the lens through which the greater market values a particular investment. Making long equity investments in an up or rising market may increase the risk of not generating profits on these investments and we may incur losses if the market declines. Similarly, making short equity investments in a down or falling market may increase the risk of not generating profits on these investments and we may incur losses if the market rises. Short sales involve unlimited loss potential since the market price of securities sold short may continuously increase. If the market price of the subject security increases considerably, Third Point LLC might have to cover short sales at suboptimal prices. As of December 31, 2020, short exposure in our consolidated investment portfolio was $533.8 million consisting of 59 debt, equity and index positions, including $480.8 million over 47 positions in the equity portfolio.
The termination by Third Point LLC of the TP Fund IMA or the Collateral Asset IMA could materially adversely affect our investment results.
TP Fund depends upon Third Point LLC, its investment manager, to implement its investment strategy. The TP Fund IMA may be terminated by Third Point LLC or TP GP party at any time upon 90 days’ notice. Further, we also depend on Third Point LLC as the investment manager of the Collateral Assets to implement our investment strategy. The Collateral Asset IMA shall continue in effect as long as either of the TPRE Limited Partners remains a limited partner of TP Fund. If either the TP Fund IMA or the Collateral Asset IMA is terminated, there is no assurance that TP Fund or we could find a suitable replacement. If TP Fund or we were to find a replacement, there is no guarantee that any such replacement would provide comparable or better investment results.
TP Fund’s investment portfolio may contain significant positions, which could result in large losses.
TP Fund’s investment portfolio could be subject to significant losses if it holds a relatively large position in a single issuer, industry, market or a particular type of investment that declines in value, and the losses could increase even further if the investments cannot be liquidated without adverse market reaction or are otherwise adversely affected by changes in market conditions or circumstances. As of December 31, 2020 and 2019, the net exposure of our net investments managed by Third Point LLC, which includes TP Fund, collateral assets and other fixed income investments, was 65% and 42%, respectively, and the largest ten long and short positions comprised an aggregate of 28% and 11% and 26% and 8%, respectively, of our consolidated investment portfolio. Since our investment portfolio may not be widely diversified at times, it may be subject to more rapid changes in value than would be the case if its investment portfolio were required to maintain a wide diversification among companies, securities and types of securities.
If Third Point LLC’s risk management systems are ineffective, TP Fund may be exposed to material unanticipated losses.
Third Point LLC continually refines its risk management techniques, strategies and assessment methods. However, its risk management techniques and strategies do not fully mitigate the risk exposure of its funds and managed accounts, including TP Fund’s investment portfolio, in all economic or market environments, or against all types of risk, including risks that they might fail to identify or anticipate. Some of Third Point LLC’s strategies for managing
risk are based upon its use of historical market behavior statistics. Any failures in Third Point LLC’s risk management techniques and strategies to accurately quantify such risk exposure could limit the risk-adjusted returns of TP Fund’s investment portfolio. In addition, any risk management failures could cause losses in the portfolios and accounts managed by Third Point LLC, including TP Fund, to be significantly greater than the historical measures predict. Third Point LLC’s approach to managing those risks could prove insufficient, exposing TP Fund to material unanticipated losses.
In managing TP Fund’s investment portfolio, Third Point LLC may trade on margin and use other forms of financial leverage, which could potentially adversely affect our revenues.
TP Fund’s investment guidelines provide Third Point LLC with the ability to trade on margin and use other forms of financial leverage. Fluctuations in the market value of TP Fund’s investment portfolio could have a disproportionately large effect in relation to our capital. A common metric used to determine financial leverage for accounts such as TP Fund’s investment portfolio is the “gross exposure” of its managed accounts. The “gross exposure” is shown as a percentage of the Net Asset Value (“NAV”) of the account, and represents the market exposure in the account (long and short) versus the NAV. In other words, if the NAV of an account is $100, and the account holds securities “long” with an aggregate market exposure of $100 (100% long), and has sold short securities with an aggregate market exposure of $25 (25% short), then the gross exposure would be 125% (i.e., $125 of investments against $100 of NAV). As of December 31, 2020, the gross exposure of TP Fund’s consolidated investment portfolio was 101%. Any event that may adversely affect the value of positions TP Fund holds could significantly and negatively affect the NAV of TP Fund’s investment portfolio and thus our results of operations.
Third Point LLC’s representatives’ service on boards and committees may place trading restrictions on TP Fund’s investments.
Third Point LLC may from time to time place its or its affiliates’ representatives on creditors’ committees or boards of certain companies in which TP Fund’s portfolio is invested. While such representation may enable Third Point LLC to enhance the sale value of our and TP Fund’s investments, it may also place trading restrictions on such investments.
As of the date hereof, representatives of Third Point LLC sat on the board of directors of Upstart Holdings, Inc., whose securities are publicly traded and are included in TP Fund’s investment portfolio.
Certain of TP Fund’s investments may have limited liquidity and lack valuation data, which could create a conflict of interest.
TP Fund’s investment guidelines provide Third Point LLC, as TP Fund’s investment manager, with the flexibility to invest in certain securities with limited liquidity or no public market. This lack of liquidity may adversely affect the ability of Third Point LLC to execute trade orders at desired prices. To the extent that Third Point LLC invests TP Fund’s investable assets in securities or instruments for which market quotations or other independent pricing sources are not readily available, under the terms of the investment management agreements the valuation of such securities and instruments for purposes of compensation to Third Point LLC will be determined by Third Point LLC, whose determination, subject to audit verification, will be conclusive and binding in the absence of bad faith or manifest error. Because the investment guidelines give Third Point LLC the power to determine the value of securities with no readily discernible market value, and because the calculation of Third Point LLC’s fee is based on the value of the investment account, a conflict of interest may exist or arise.
U.S. and global economic downturns could harm the performance of TP Fund’s investment portfolio, and as a result our liquidity and financial condition and our share price.
Volatility in the United States and other securities markets may adversely affect TP Fund’s investment portfolio. The ability of Third Point LLC to manage TP Fund’s investment portfolio profitably is dependent upon conditions in the global financial markets and economic and geopolitical conditions throughout the world that are outside of TP Fund’s control and difficult to predict. Factors such as equity prices, equity market volatility, asset or market correlations, interest rates, counterparty risks, availability of credit, inflation rates, economic uncertainty, changes in laws or regulation (including laws relating to the financial markets generally or the taxation or regulation of the
hedge fund industry), trade barriers, commodity prices, interest rates, currency exchange rates and controls, and national and international political circumstances (including governmental instability, wars, terrorist acts or security operations) can have a material impact on the value of TP Fund’s investment portfolio.
If Third Point LLC, as TP Fund’s investment manager, fails to react appropriately to difficult market, economic and geopolitical conditions, TP Fund and we, as result of our investment in TP Fund, could incur material losses.
The market price of our common shares may be volatile and the risk of loss may be greater when compared with other reinsurance companies.
Third Point LLC’s use of hedging and derivative transactions in executing trades for TP Fund’s account may not be successful, which could materially adversely affect TP Fund’s and our investment results.
In managing TP Fund’s investment portfolio, Third Point LLC may use various financial instruments both for investment purposes and for risk management purposes in order to protect against possible changes in the market value of TP Fund’s investment portfolio resulting from fluctuations in the securities markets and changes in interest rates, protect unrealized gains in the value of its investment portfolio, facilitate the sale of any such investments, enhance or preserve returns, spreads or gains on any investment in TP Fund’s investment portfolio, hedge the interest rate or currency exchange rate on certain liabilities or assets, protect against any increase in the price of any securities Third Point LLC anticipates purchasing for TP Fund’s account at a later date or for any other reason that Third Point LLC, as TP Fund’s investment manager, deems appropriate. The success of such hedging strategy will be subject to Third Point LLC’s ability to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged. Since the characteristics of many securities change as markets change or time passes, the success of such hedging strategy will also be subject to Third Point LLC’s ability to continually recalculate, readjust and execute hedges in an efficient and timely manner. While Third Point LLC may enter into hedging transactions for TP Fund’s account to seek to reduce risk, such transactions may result in a poorer overall performance for TP Fund’s investment portfolio than if it had not engaged in any such hedging transactions. For a variety of reasons, Third Point LLC may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent Third Point LLC from achieving the intended hedge or expose TP Fund’s investment portfolio to risk of loss.
TP Fund’s investment portfolio may from time to time include investments in mortgage-backed securities and other asset-backed securities, whose investment characteristics differ from corporate debt securities.
TP Fund’s investment portfolio may from time to time be invested in mortgage-backed securities and other asset-backed securities, including securitization of marketplace loans, whose investment characteristics differ from corporate debt securities. As of December 31, 2020, the fair value of asset-backed securities in TP Fund’s investment portfolio was $227.3 million. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. Mortgage-backed securities and asset-backed securities may also be subject to call risk and extension risk. For example, because homeowners have the option to prepay their mortgages, the duration of a security backed by home mortgages can either shorten or lengthen.
In general, if interest rates on new mortgage loans fall sufficiently below the interest rates on existing outstanding mortgage loans, the rate of prepayment would be expected to increase. Conversely, if mortgage loan interest rates rise above the interest rates on existing outstanding mortgage loans, the rate of prepayment would be expected to decrease. In either case, a change in the prepayment rate can result in losses to investors. If TP Fund’s investment portfolio includes securities that are subordinated to other interests in the same mortgage pool, we may only receive payments after the pool’s obligations to other investors have been satisfied. In addition, TP Fund’s investment portfolio may, from time to time, be invested in structures commonly known as “Re-REMICS,” in which case a trust is further split between a senior tranche and a junior tranche. Third Point LLC usually buys the junior tranche for its funds and the accounts it manages in such circumstances. An unexpectedly high rate of default on mortgages held by a mortgage pool may limit substantially the pool’s ability to make payments to holders of such securities, reducing the value of those securities or rendering them worthless. The risk of such defaults is generally higher in the case of
mortgage pools that include “sub-prime” mortgages. Changes in laws and other regulatory developments relating to mortgage loans may impact the investments of TP Fund’s portfolio in mortgage-backed securities in the future.
TP Fund’s investment portfolio may include investments in securities of issuers based outside the United States, including emerging markets, which may be riskier than securities of U.S. issuers.
Under TP Fund’s investment guidelines, Third Point LLC may invest in securities of issuers organized or based outside the United States that may involve heightened risks in comparison to the risks of investing in domestic securities, including unfavorable changes in currency rates and exchange control regulations, reduced and less reliable information about issuers and markets, less stringent accounting standards, illiquidity of securities and markets, higher brokerage commissions, transfer taxes and custody fees, local economic or political instability and greater market risk in general. In particular, investing in securities of issuers located in emerging market countries involves additional risks, such as exposure to economic structures that are generally less diverse and mature than, and to political systems that can be expected to have less stability than, those of developed countries. Other characteristics of emerging market countries that may affect investment in their markets include certain national policies that may restrict investment by foreigners in issuers or industries deemed sensitive to relevant national interests and the absence of developed legal structures governing private and foreign investments and private property. The typically small size of the markets for securities of issuers located in emerging markets and the possibility of a low or nonexistent volume of trading in those securities may also result in a lack of liquidity and in price volatility of those securities. In addition, dividend and interest payments from and capital gains in respect of certain foreign securities may be subject to foreign taxes that may or may not be reclaimable. Finally, many transactions in these markets are executed as a “total return swap” or other derivative transaction with a financial institution counterparty, and as a result TP Fund’s investment portfolio has counterparty credit risk with respect to such counterparty.
Third Point LLC’s role as an engaged investor in special situation and distressed investments may subject TP Fund to increased risks including the incurrence of additional legal or other expenses.
As TP Fund’s investment manager, Third Point LLC may invest a portion of TP Fund’s investment portfolio in special situation companies. This generally involves investments in securities of companies in event-driven special situations such as acquisitions, tender offers, bankruptcies, recapitalizations, spinoffs, corporate and financial restructurings, litigation or other liability impairments, turnarounds, management changes, consolidating industries and other catalyst-oriented situations. Third Point LLC may also invest TP Fund’s portfolio in securities of issuers in weak financial condition, experiencing poor operating results, having substantial financial needs or negative net worth or facing special competitive or product obsolescence issues or that are involved in bankruptcy reorganization proceedings, liquidation or other corporate restructuring. Investments of this type involve substantial financial business risks that can result in substantial or total losses. Among the problems involved in assessing and making investments in troubled issuers is the fact that it frequently may be difficult to obtain information as to the condition of such issuer. The market prices of the securities of such issuers are also subject to abrupt and erratic market movements and above average price volatility and the spread between the bid and asked prices of such securities may be greater than normally expected. It may take a number of years for the market prices of such securities to reflect their intrinsic values, if at all. It is anticipated that some of such securities may not be widely traded, and that a position in such securities may be substantial in relation to the market for such securities.
As a consequence of Third Point LLC’s role as an engaged investor in special situation and distressed investments, TP Fund’s investment portfolio may be subject to increased risk of incurring additional legal, indemnification or other expenses, even if TP Fund is not named in any action. In distressed or special situations litigation often follows when disgruntled shareholders, creditors, and other parties seek to recover losses from poorly performing investments. The enhanced litigation risk for distressed companies is further elevated by the potential that Third Point LLC may have controlling or influential positions in the companies. Some of the claims that can be asserted against Third Point LLC as a distressed investor include: aiding and abetting breach of fiduciary duty; equitable subordination of the investor’s claims; recharacterization of the investor’s claims; and preference or fraudulent transfer claims. Third Point LLC’s use of short-selling for its funds and the accounts it manages has subjected, and may continue to subject Third Point LLC and the short sellers to increased risk of litigation. Lawsuits can be brought
against short sellers of a company’s stock to discourage short selling. Among other claims, these suits may allege libel, conspiracy, and market manipulation.
Third Point LLC’s diminution or loss of service or loss of key employees could materially adversely affect TP Fund’s investment results.
TP Fund depends upon Third Point LLC, as its investment manager, to implement its investment strategy. All investment decisions with respect to its investment portfolio are made by Third Point LLC, subject to its investment guidelines, under the general supervision of Daniel S. Loeb. As a result, the success of its investment strategy depends largely upon the abilities of Mr. Loeb. If Mr. Loeb is no longer an employee of Third Point LLC, no assurance can be given that a suitable replacement for Mr. Loeb could be found. As a result, TP Fund’s and our investment results could be materially adversely affected.
The compensation arrangements of Third Point LLC, as TP Fund’s investment manager, may create an incentive to effect transactions that are risky or speculative.
The LPA provides for the following two forms of compensation to be paid to Third Point LLC and TP GP:
•Third Point LLC is entitled to a monthly management fee equal to 1.25% per annum of the net asset value of TP Fund (determined as of the beginning of the month before the accrual of the performance allocation) multiplied by an exposure multiplier; and
•TP GP is entitled to performance compensation equal to 20% of net profits, subject to the management fee and a loss carryforward provision.
While the performance compensation arrangement provides that losses will be carried forward as an offset against net profits in subsequent periods, Third Point LLC generally will not otherwise be penalized for realized losses or decreases in the value of TP Fund’s portfolio. These performance compensation arrangements may create an incentive for Third Point LLC as TP Fund’s investment manager to engage in transactions that focus on the potential for short-term gains rather than long-term growth or that are particularly risky or speculative.
Increased regulation or scrutiny of alternative investment advisers and certain trading methods such as short selling may affect Third Point LLC’s ability to manage TP Fund’s investment portfolio or affect our business reputation.
The regulatory environment for investment managers is evolving, and changes in the regulation of managers may adversely affect the ability of Third Point LLC to effect transactions in TP Fund’s investment portfolio that utilize leverage or to pursue its trading strategies in managing such investments. Third Point LLC is regularly involved in trading activities that involve a number of U.S. and foreign securities law regimes. Violations of any such law could result in severe restrictions on Third Point LLC’s activities and, indirectly, do damage to TP Fund’s investment portfolio or reputation. In addition, the securities and futures markets are subject to comprehensive statutes, regulations and margin requirements. The SEC, other regulators and self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies. The regulation of derivatives transactions and funds that engage in such transactions is an evolving area of law and is subject to modification by government and judicial action. Any future regulatory change could have a significant negative impact on our financial condition and results of operations.
In addition, a number of states and municipal pension plans have adopted so-called “pay-to-play” laws, regulations or policies that prohibit, restrict or require disclosure of payments to (and/or certain contacts with) state officials by individuals and entities seeking to do business with state entities, including investments by public retirement funds. The SEC also has adopted rules that, among other things, prohibit an investment adviser from providing advisory services for compensation to a government client for a period of up to two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates. If Third Point LLC, its employees or affiliates or any service providers acting on their behalf, including, without limitation, a placement agent, fail to comply with such pay-to-play laws, regulations or policies, such non-compliance could have an adverse effect on Third Point LLC and TP Fund’s investment portfolio.
Third Point LLC routinely engages in short selling for TP Fund’s account in managing its investments. Short sale transactions have been subject to increased regulatory scrutiny, including the imposition of restrictions on short selling certain securities and reporting requirements. Third Point LLC’s ability to execute a short selling strategy in managing TP Fund’s investment portfolio may be materially and adversely impacted by temporary or new permanent rules, interpretations, prohibitions, and restrictions adopted in response to these adverse market events. Temporary restrictions or prohibitions on short selling activity may be imposed by regulatory authorities with little or no advance notice and may impact prior and future trading activities of TP Fund’s investment portfolio. Additionally, the SEC, its non-U.S. counterparts, other governmental authorities or self-regulatory organizations may at any time promulgate permanent rules or interpretations consistent with such temporary restrictions or that impose additional or different permanent or temporary limitations or prohibitions. The SEC might impose different limitations or prohibitions on short selling from those imposed by various non-U.S. regulatory authorities. These different regulations, rules or interpretations might have different effective periods.
Regulatory authorities may, from time to time, impose restrictions that adversely affect our ability to borrow certain securities in connection with short sale transactions. In addition, traditional lenders of securities may be less likely to lend securities under certain market conditions. As a result, Third Point LLC may not be able to effectively pursue a short selling strategy due to a limited supply of securities available for borrowing. We may also incur additional costs in connection with short sale transactions effected in TP Fund’s investment portfolio, including in the event that Third Point LLC is required to enter into a borrowing arrangement for TP Fund’s account in advance of any short sales. Moreover, the ability to continue to borrow a security is not guaranteed and our account will be subject to strict delivery requirements. The inability to deliver securities within the required time frame may subject us to mandatory close out by the executing broker-dealer. A mandatory close out may subject us to unintended costs and losses. Certain action or inaction by third parties, such as executing broker-dealers or clearing broker-dealers, may materially impact our ability to effect short sale transactions in TP Fund’s investment portfolio.
An increase or decrease in Third Point LLC’s assets under management may adversely affect the returns of TP Fund’s investment portfolio.
It is possible that if the amount of assets Third Point LLC manages for us, TP Fund and for other accounts it manages were to increase materially, it could be more difficult for Third Point LLC to invest profitably for those accounts because of the difficulty of trading larger positions without adversely affecting prices and managing risks associated with larger positions. In addition, there can be no assurance that there will be appropriate investment opportunities to accommodate future increase in assets under management, which may force Third Point LLC to modify its investment decisions for the accounts it manages because it cannot deploy all the assets in a manner it desires. Furthermore, due to the overlap of strategies and investments across many of the portfolios managed by Third Point LLC, including its hedge funds, the accounts may be adversely affected in the event of rapid or large liquidations of investment positions held by the accounts due to a lack of liquidity resulting from large position sizes in the same investments held by the other accounts.
Alternatively, if the amount of assets Third Point LLC manages for us, TP Fund and for other accounts it manages were to decrease materially, it could negatively impact Third Point LLC’s ability to execute its intended investment strategy, including with respect to obtaining certain larger positions. Such changes could force Third Point LLC to modify its investment decisions for the accounts it manages, which could impact the returns of TP Fund’s investment portfolio.
We have reallocated a portion of our investment portfolio to fixed-income securities which could impact our investment results and could materially and adversely affect our business, financial condition and results of operations.
On May 24, 2019, we entered into the Amended Collateral Assets IMA with Third Point LLC. We have reallocated a portion of our assets from TP Fund to fixed-income investments. The market value of our fixed-income investments is subject to fluctuation depending on changes in various factors, including prevailing interest rates and widening credit spreads. Increases in interest rates could cause the market value of our fixed-income investment portfolio to decrease, perhaps substantially. Conversely, a decline in interest rates could reduce our investment yield, which would reduce our overall profitability. Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Any measures we take that are intended to manage the risks of operating in a changing interest rate environment may not effectively mitigate such interest rate sensitivity.
Risks Relating to Insurance and Other Regulations
Any suspension or revocation of our subsidiaries’ reinsurance licenses would materially impact our ability to do business and implement our business strategy.
Our subsidiaries are licensed as reinsurers only in Bermuda and we do not plan to seek licenses in any other jurisdiction. The suspension or revocation of any of our subsidiaries license to do business as a reinsurance company in Bermuda for any reason would mean that we would not be able to enter into any new reinsurance contracts until the suspension ended or until that entity became licensed in another jurisdiction. Any such suspension or revocation of our license would negatively impact our reputation in the reinsurance marketplace and could have a material adverse effect on our results of operations.
If we become subject to insurance statutes and regulations in jurisdictions other than Bermuda or there is a change to Bermuda law or regulations or application of Bermuda law or regulations, there could be a significant and negative impact on our business.
Third Point Re BDA and Third Point Re USA, our wholly owned operating subsidiaries, are registered Bermuda Class 4 insurers. As such, they are subject to regulation and supervision in Bermuda. Bermuda insurance statutes, regulations and policies of the BMA require each of Third Point Re BDA and Third Point Re USA, among other things, to:
•maintain a minimum level of capital, surplus and liquidity;
•satisfy solvency standards;
•restrict the payment of dividends and distributions;
•deliver notification to the BMA of changes in ownership of our common shares beyond and between certain thresholds specified in the Insurance Act;
•maintain a principal office and appoint and maintain a principal representative in Bermuda; and
•provide for the performance of certain periodic examinations of Third Point Re BDA and Third Point Re USA and their financial condition.
These statutes and regulations may, in effect, restrict our ability to write reinsurance policies, to distribute funds and to pursue our investment strategy.
The process of obtaining licenses is very time consuming and costly, and we may not be able to become licensed in a jurisdiction other than Bermuda even in the event we choose to do so. The modification of the conduct of our business resulting from our becoming licensed in certain jurisdictions could significantly and negatively affect our business. In addition, our inability to comply with insurance statutes and regulations of any particular jurisdiction could significantly and adversely affect our business by limiting our ability to conduct business in that jurisdiction and by subjecting us to penalties and fines.
In addition, the BMA could revoke or suspend Third Point Re BDA or Third Point Re USA’s license in certain circumstances, including circumstances in which (i) it is shown that false, misleading or inaccurate information has been supplied to the BMA by Third Point Re BDA or Third Point Re USA or on their behalf for the purposes of any provision of the Insurance Act; (ii) Third Point Re BDA and Third Point Re USA has ceased to carry on business; (iii) Third Point Re BDA or Third Point Re USA has persistently failed to pay fees due under the Insurance Act; (iv) Third Point Re BDA or Third Point Re USA has been shown to have not complied with a condition attached to its registration or with a requirement made of them under the Insurance Act or any related regulations and insurance accounting rules; (v) we are convicted of an offense against a provision of the Insurance Act or related regulations; (vi) Third Point Re BDA or Third Point Re USA is, in the opinion of the BMA, found not to have been carrying on business in accordance with sound insurance principles; or (vii) if any of the minimum criteria for registration under the Insurance Act is not or will not have been fulfilled. If the BMA were to suspend or revoke Third Point Re BDA
or Third Point Re USA’s licenses we could lose our exception under the U.S. Investment Company Act of 1940, as amended, or the “Investment Company Act”. See “We are subject to the risk of becoming an investment company under U.S. federal securities law.”
We are subject to the risk of becoming an investment company under U.S. federal securities law.
The Investment Company Act, regulates certain companies that invest in or trade securities. We rely on an exception under the Investment Company Act that is available to a company organized and regulated as a foreign insurance company which is engaged primarily and predominantly in the reinsurance of risks on insurance agreements. The law in this area has not been well developed and there is a lack of guidance as to the meaning of “primarily and predominantly” under the relevant exception under the Investment Company Act. For example, there is no standard for the amount of premiums that need be written relative to the level of a company’s capital in order to qualify for the exception. If this exception were deemed inapplicable to us, we would have to seek to register under the Investment Company Act as an investment company, which, under the Investment Company Act, would require an order from the SEC. Our inability to obtain such an order could have a significant adverse impact on our business.
Assuming that we were permitted to register as an investment company, registered investment companies are subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, our ability to raise additional debt and equity securities or issue stock options or warrants (which could impact our ability to compensate key employees), financial leverage, dividends, board of director composition and transactions with affiliates. Accordingly, if we were required to register as an investment company we would not be able to operate our business as it is currently conducted, nor would we be permitted to have many of the relationships that we have with our affiliated companies. Accordingly, we likely would not be permitted to engage Third Point LLC as the investment manager of our Collateral Asset Account or other investment accounts, unless we obtained the board and shareholder approvals required under the Investment Company Act. Our ability to engage in transactions with Third Point LLC or its affiliates would likely also be significantly restricted. If Third Point LLC were not our investment manager, we would potentially be required to liquidate our Collateral Asset Account and we would seek to identify and retain another investment manager with a similar investment philosophy. Pursuant to the LPA, other than in certain specified circumstances, we cannot engage another investment manager without Third Point LLC’s consent. If we could not identify or retain such an advisor, we would be required to make substantial modifications to our investment strategy. Any such changes to our investment strategy could significantly and negatively impact our investment results, financial condition and our ability to implement our business strategy.
If at any time it were established that we had been operating as an investment company in violation of the Investment Company Act, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, that we could be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions undertaken during the period in which it was established that we were an unregistered investment company. If, subsequently, we were not permitted or were unable to register as an investment company, it is likely that we would be forced to cease operations.
To the extent that the laws and regulations change in the future so that contracts we write are deemed not to be reinsurance contracts, we will be at greater risk of not qualifying for the Investment Company Act exception. Additionally, it is possible that our classification as an investment company would result in the suspension or revocation of our reinsurance license.
Insurance regulators in the United States or elsewhere may review our activities and claim that we are subject to additional licensing requirements.
We are incorporated in Bermuda and certain of our operating companies are domiciled in Bermuda. In general, Bermuda insurance statutes, regulations and the policies of the BMA are less restrictive than United States state insurance statutes and regulations. We conduct business in the United States through our indirect subsidiary, Third Point Re USA. We do not believe that our U.S.-based operations subject us to licensing requirements in any state in which we operate. However, we cannot assure you that insurance regulators in the United States or elsewhere will not review our activities and claim that we are subject to such jurisdiction’s licensing requirements. In addition, we
will be subject to indirect regulatory requirements imposed by jurisdictions that may limit our ability to provide reinsurance. For example, our ability to write reinsurance may be subject, in certain cases, to arrangements satisfactory to applicable regulatory bodies and proposed legislation and regulations may have the effect of imposing additional requirements upon, or restricting the market for, non-U.S. reinsurers such as us.
If in the future we were to become subject to regulation under the laws of any state in the United States or the laws of the United States or of any other country, we may consider various alternatives to our operations. If we attempt to become licensed in another jurisdiction, for instance, we may not be able to do so and the modification of the conduct of our business or the non-compliance with insurance statutes and regulations could significantly and negatively affect our business.
If we complete the Merger, the regulatory framework under which we operate and potential changes thereto could have a material adverse effect on our business.
Upon completion of the merger, our activities will be subject to extensive regulation under the laws and regulations of the U.S., the U.K., Bermuda, Sweden and the EU and its member states and the other jurisdictions in which we operate.
We will devote a significant amount of time and resources to comply with various regulatory requirements imposed in Bermuda, Sweden, the U.S. and the U.K. and various other jurisdictions around the globe. There remains significant uncertainty as to the impact that these various regulations and legislation will have on us. Such impacts could include constraints on our ability to move capital between subsidiaries or requirements that additional capital be provided to subsidiaries in certain jurisdictions, which may adversely impact our profitability. In addition, while we currently expect to have excess capital and surplus under applicable capital adequacy requirements, following completion of the Merger, such requirements or similar regulations, in their current form or as they may be amended in the future, may have a material adverse effect on our business, financial condition or results of operations.
Our reinsurance subsidiaries are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.
In 2008, the BMA introduced risk-based capital standards for insurance companies as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. The amended Bermuda insurance statutes and regulations pursuant to the risk-based supervisory approach required additional filings by insurers to be made to the BMA. The required statutory capital and surplus of our Bermuda-based operating subsidiaries increased under the Bermuda Solvency Capital Requirement model. While our subsidiaries, as they currently operate, currently have excess capital and surplus under these new requirements, there can be no assurance that such requirement or similar regulations, in their current form or as may be amended in the future, will not have a material adverse effect on our business, financial condition or results of operations. Any failure to meet applicable requirements or minimum statutory capital requirements could subject us to further examination or corrective action by regulators, including restrictions on dividend payments, limitations on our writing of additional business or engaging in finance activities, supervision or liquidation. Further, any changes in existing risk based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels, which we might be unable to do.
Bermuda insurance laws regarding the change of control of insurance companies may limit the acquisition of our shares.
Under Bermuda law, for so long as we have an insurance subsidiary registered under the Insurance Act, the BMA may at any time, by written notice, object to a person holding 10% or more of our common shares if it appears to the BMA that the person is not or is no longer fit and proper to be such a holder. In such a case, the BMA may require the shareholder to reduce its holding of our common shares and direct, among other things, that such shareholder’s voting rights attaching to the common shares shall not be exercisable. A person who does not comply with such a notice or direction from the BMA will be guilty of an offense. This may discourage potential acquisition proposals and may delay, deter or prevent a change of control of our company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might consider to be desirable.
Risks Relating to Taxation
In addition to the risk factors discussed below, we advise you to read “Certain Tax Considerations” and to consult your own tax advisor regarding the tax consequences to you of your investment in our shares.
We may be subject to United States federal income taxation.
We are incorporated under the laws of Bermuda and we believe that our activities, as currently conducted (including through our U.S.-based subsidiary, Third Point Re USA) and as contemplated, will not cause us to be treated as engaging in a United States trade or business and will not cause us to be subject to current United States federal income taxation on our net income, except with respect to Third Point Re USA, which is treated as a domestic corporation for U.S. federal income tax purposes. However, because there are no definitive standards provided by the Internal Revenue Code of 1986 as amended or the Code, regulations or court decisions as to the specific activities that constitute being engaged in the conduct of a trade or business within the United States, and as any such determination is essentially factual in nature and must be made annually, we cannot assure you that the United States Internal Revenue Service, or the IRS, will not successfully assert that we are engaged in a trade or business in the United States or, if applicable under the income tax treaty between the U.S. and Bermuda (the “Bermuda Treaty”), engaged in a trade or business in the United States through a permanent establishment, and thus are subject to current United States federal income taxation. If we were deemed to be engaged in a trade or business in the United States (and, if applicable under the Bermuda Treaty, were deemed to be so engaged through a permanent establishment), Third Point Re BDA generally would become subject to United States federal income tax on its income “effectively connected” (or treated as effectively connected) with the U.S. trade or business, and would become subject to the “branch profits” tax on its earnings and profits that are both effectively connected with the U.S. trade or business and deemed repatriated out of the United States. Any such federal tax liability could materially and adversely affect our operations and financial condition.
We could become subject to income tax in one or more countries, including the United States., as a result of activities performed by us, adverse developments or changes in law, contrary conclusions by the relevant tax authorities or other causes. The imposition of any of these income taxes could materially and adversely affect our operations and financial condition.
United States persons who own our shares may be subject to United States federal income taxation on our undistributed earnings and may recognize ordinary income upon disposition of shares.
Passive Foreign Investment Company (“PFIC”). Significant potential adverse U.S. federal income tax consequences generally apply to any United States person who owns shares in a PFIC. In general, either we and/or Third Point Re BDA would be a PFIC for a taxable year if 75% or more of its income constitutes “passive income” or 50% or more of its assets were held to produce “passive income.” Passive income generally includes interest, dividends and other investment income, but does not include income derived in the active conduct of an insurance business by a corporation predominantly engaged in an insurance business (the insurance company exception). The insurance company exception is intended to ensure that a bona fide insurance company’s income is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. However, there is very little authority currently in effect as to what constitutes the active conduct of an insurance business for purposes of the PFIC rules.
The “Tax Cuts and Jobs Act,” P.L. 115-97 (the “TCJA”), modified the insurance company exception to apply to a company only if (i) the company would be taxed as an insurance company were it a U.S. corporation and (ii) either (A) loss and loss adjustment expenses and certain reserves constitute more than 25% of the company’s gross assets for the relevant year (the applicable insurance liabilities test) or (B) a specified exception applies. By adding an additional “bright line” test to the existing PFIC requirements, the TCJA significantly increases the risk that a non-U.S. insurer will be treated as a PFIC, even if it actively conducts insurance operations.
The IRS recently released proposed and final regulations relating to the insurance company exception, including with respect to the TCJA requirements. Under the proposed regulations, investment income will not qualify for the insurance company exception if the expenses (including compensation) paid by a non-U.S. insurer for services of its own officers and employees with respect to core functions (other than investment activities) are not at least 50% of
the total expenses for all services with respect to core functions (other than investment activities). Alternatively, a non-U.S. insurer may qualify if based on all facts and circumstances its officers and employees perform the core functions of the business. The final regulations also provide additional rules regarding the insurance company exception and the applicable insurance liabilities test, including rules governing the manner in which the assets and liabilities of subsidiary entities are taken into account. The proposed regulations will be effective if issued in final form.
We believe that our financial reserves are consistent with industry standards and are not in excess of the reasonable needs of our insurance business, that we are actively engaged in insurance activities that involve sufficient transfer of risk, that our employees and officers provide substantial managerial and operational services and that under current law we will have a sufficient proportion of qualifying insurance liabilities. However, we cannot assure you the IRS will agree with our position and will not successfully assert that we do not qualify for the insurance company exception. In addition, no assurance can be given that we will be able to operate in a manner to satisfy the additional requirements imposed by the TCJA in any given year. Moreover, our expectation with respect to any taxable year is based on the amount of risk that we expect to underwrite and the amount of insurance-related liabilities we expect to incur during that year. If we are unable to underwrite a sufficient amount of risk or have sufficient insurance-related liabilities for any taxable year, we and/or Third Point Re BDA might be treated as a PFIC. Furthermore, in certain circumstances, we may seek to manage the volatility of our reinsurance results by writing policies that contain certain contractual terms and conditions (such as loss ratio caps), which may cause the IRS to assert that such policies lack sufficient risk transfer to constitute insurance for United States federal income tax purposes, increasing the risk that we and/or Third Point Re BDA may be treated as a PFIC. Counsel to the Company and its subsidiaries (the “Group”) have never provided an opinion regarding the Group’s PFIC status due to the absence of applicable authority regarding the active insurance company exception and the dependence of the Group’s PFIC status on the actual operational results and other relevant facts for each taxable year. Readers are urged to consult their own tax advisors to assess their tolerance of this risk.
If a “United States person” holds our shares as “capital assets” within the meaning of section 1221 of the Code during any taxable year in which we and/or Third Point Re BDA are treated as PFICs, such shares will generally be treated as stock in a PFIC for all subsequent years. Certain elections designed to mitigate the adverse consequences of owning shares in a PFIC, including a “Protective QEF Election,” may be available. If you are a United States person, we advise you to consult your own tax advisor concerning the potential tax consequences to you under the PFIC rules, the advisability of making one of these elections and to assess your tolerance of this risk.
Controlled Foreign Corporations (“CFC”). United States persons who, directly or indirectly or through attribution rules, own 10% or more of the voting power or, under the TCJA, the value, of our shares, which we refer to as United States 10% shareholders, may be subject to the CFC rules. Under the CFC rules, each United States 10% shareholder must annually include its pro rata share of the CFC’s “subpart F income” and global intangible low-taxed income, even if no distributions are made. In general (subject to the special rules applicable to “related person insurance income” described below), a foreign insurance company will be treated as a CFC only if United States 10% shareholders collectively own more than 25% of the total combined voting power or total value of the company’s shares at any time during any year. If you are a United States person we strongly urge you to consult your own tax advisor concerning the controlled foreign corporation rules.
Related Person Insurance Income. If (a) our gross income attributable to insurance or reinsurance policies pursuant to which the direct or indirect insureds or our direct or indirect United States shareholders or persons related to such United States shareholders equals or exceeds 20% of our gross insurance income in any taxable year; and (b) direct or indirect insureds and persons related to such insureds own directly or indirectly 20% or more of the voting power or value of our shares, a United States. person who owns any shares directly or indirectly on the last day of the taxable year would most likely be required to include its allocable share of our related person insurance income for the taxable year in its income, even if no distributions are made. We do not expect that it is likely that either or both of the 20% gross insurance income threshold or the 20% direct or indirect ownership threshold will be met. However, we cannot assure you that this will be the case. Consequently, we cannot assure you that a person who is a direct or indirect United States shareholder will not be required to include amounts in its income in respect of related person insurance income in any taxable year.
Dispositions of Our Shares. If a United States shareholder is treated as disposing of shares in a CFC of which it is a United States 10% shareholder, or of shares in a foreign insurance corporation that has related person insurance income and in which United States persons collectively own 25% or more of the voting power or value of the company’s share capital, any gain from the disposition will generally be treated as a dividend to the extent of the United States shareholder’s portion of the corporation’s undistributed earnings and profits, as the case may be, that were accumulated during the period that the U.S. shareholder owned the shares. In addition, the shareholder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the direct or indirect United States shareholder. Although not free from doubt, we believe it would be reasonable for a United States person to take the position that these rules should not apply to dispositions of our shares because we will not be directly engaged in the insurance business. We cannot assure you, however, that the IRS will interpret the proposed regulations potentially applicable to such dispositions in this manner or that the proposed regulations will not be promulgated in final form in a manner that would cause these rules to apply to dispositions of our shares.
United States tax-exempt organizations who own our shares may recognize unrelated business taxable income.
A United States tax-exempt organization may recognize unrelated business taxable income if a portion of our subpart F insurance income is allocated to it. In general, subpart F insurance income will be allocated to a tax-exempt organization owning (or treated as owning) our shares if we are a CFC as discussed above and it is a United States 10% shareholder or we earn related person insurance income and the exceptions described above do not apply. We cannot assure you that United States persons holding our shares (directly or indirectly) will not be allocated subpart F insurance income. United States tax-exempt organizations should consult their own tax advisors regarding the risk of recognizing unrelated business taxable income as a result of the ownership of our shares.
Change in United States tax laws may be retroactive and could subject us to increased taxes and/or United States persons who own our shares to United States income taxation on our undistributed earnings and could adversely affect our operations and financial condition.
New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future.
The tax laws and interpretations thereof regarding whether a company is engaged in a United States trade or business, is a CFC, has related party insurance income or is a PFIC are subject to change, possibly on a retroactive basis. Certain regulations regarding the application of the passive foreign investment company rules to an insurance company and regarding related party insurance income are in proposed form. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming from the IRS. We are not able to predict if, when or in what form such guidance will be provided and whether such guidance will have a retroactive effect.
Our affiliate transactions may be subject to the base erosion and anti-abuse tax (“BEAT”).
The TCJA imposes a minimum tax (the “BEAT”) on certain payments by United States corporations to a related foreign corporation, which could impose material incremental taxes on reinsurance transactions between Third Point Re USA and Third Point Re BDA, unless Third Point Re USA qualifies for exceptions for taxpayers whose gross receipts or affiliate payments fall under specified thresholds. Although we presently expect that Third Point Re USA would qualify for one of the exceptions, there can be no assurance that the BEAT will not apply to Third Point Re USA.
We may become subject to U.S. withholding and information reporting requirements under the Foreign Account Tax Compliance Act (“FATCA”) provisions.
Under the Foreign Account Tax Compliance Act provisions of the Code and related U.S. Treasury guidance (“FATCA”), a withholding tax of 30% will be imposed in certain circumstances on (i) payments of certain U.S. source income (including interest and dividends) (“withholdable payments”) and (ii) payments made two or more years after the date on which the final U.S. Treasury regulations that define “foreign passthru payments” are published by certain foreign financial institutions (such as banks, brokers, investment funds or certain holding companies) (“FFIs”) that are “attributable” to withholdable payments (“foreign passthru payments”). It is uncertain at present when payments will be treated as “attributable” to withholdable payments.
On December 19, 2013, the Bermuda Government entered into a “Model 2” intergovernmental agreement (“IGA”) with the United States to implement FATCA. If we and/or Third Point Re BDA are treated as FFIs for the purposes of FATCA, under the Model 2 IGA, we and/or Third Point Re BDA will be directed to register with the IRS and required to comply with the requirements of FATCA, including due diligence, reporting and withholding. Assuming registration and compliance with the terms of an agreement with the IRS (an “FFI Agreement”) pursuant to a Model 2 IGA, an FFI would be treated as FATCA compliant and not subject to withholding. An FFI that satisfies the eligibility, information reporting and other requirements of the IGA will not be subject to the regular FATCA reporting and withholding obligations discussed below.
If the Company and/or Third Point Re BDA are treated as FFIs for purposes of FATCA, withholdable payments and foreign passthru payments made to the Company and/or Third Point Re BDA will be subject to a 30% withholding tax unless an FFI Agreement is in effect, pursuant to which such entities would be required to provide information regarding its U.S. direct or indirect owners and to comply with other reporting, verification, due diligence and other procedures established by the IRS, including a requirement to seek waivers of non-U.S. laws that would prevent the reporting of such information, unless otherwise required by an applicable IGA. The IRS may terminate an FFI Agreement if the IRS notifies the Company and/or Third Point Re BDA that it is out of compliance with the FFI Agreement and the Company and/or Third Point Re BDA does not remediate the compliance failure. Even if the Company and/or Third Point Re BDA are subject to an FFI Agreement, distributions to an investor that are treated as foreign passthru payments generally will be subject to a 30% withholding tax (a) if the investor fails to provide information or take other actions required for the Company and/or Third Point Re BDA to comply with the FFI Agreement including, in the case of a non-U.S. investor, providing information regarding certain U.S. direct and indirect owners of the investor (and, in certain circumstances, obtaining waivers of non-U.S. law to permit such reporting), or (b) if the investor is an FFI, unless the investor (i) is subject to an FFI Agreement, (ii) establishes that an exemption applies or (iii) is required to comply with FATCA under an applicable IGA.
Under the regulations implementing FATCA, a foreign insurance company (or foreign holding company of an insurance company) that issues or is obligated to make payments with respect to an account is a foreign financial institution. For this purpose, insurance contracts treated as having “cash value” and annuity contracts issued or maintained by a financial institution are considered accounts, and certain term life insurance contracts are not considered accounts. Insurance companies that issue only property and casualty insurance contracts, or that only issue life insurance contracts lacking cash value (or that provide for limited cash value) generally would not be considered FFIs under the final regulations. However, a holding company may be treated as an FFI if it is formed in connection with or availed of by a collective investment vehicle, mutual fund, exchange traded fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. Moreover, a company may be treated as an FFI if its gross income is primarily attributable to investing, reinvesting, or trading in financial assets and the entity is managed by an FFI, or the entity functions or holds itself out as an investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. Even if the Company and/or Third Point Re BDA are not treated as FFIs, then depending on whether the shares of the Company are treated as “regularly traded on one or more established securities markets” under the FATCA rules and whether the income and assets of Third Point Re BDA meet the requirements for the treatment of Third Point Re BDA as an “active NFFE,” withholdable payments to the Company and/or Third Point Re BDA may be subject to a 30% withholding tax unless the Company and/or Third Point Re BDA provide information regarding its U.S. direct or indirect owners.
There can be no certainty as to whether the Company and/or Third Point Re BDA will be subject to the requirements imposed on FFIs under FACTA. We will use reasonable efforts to avoid the imposition of a withholding tax under FACTA, which may include the entering into of an FFI Agreement.
We may become subject to increased taxation in Bermuda and other countries as a result of the OECD's various proposals or as a result of being listed on the EU list of non-cooperative jurisdictions for tax purposes.
The Organisation for Economic Cooperation and Development (“OECD”), with the support of the Group of Twenty (“G20”), initiated the "base erosion and profit shifting" (“BEPS”) project in 2013 in response to concerns that international tax standards have not kept pace with changes in global business practices and that changes are needed to international tax laws to address situations where multinational enterprises may pay little or no tax in certain
jurisdictions by shifting profits away from jurisdictions where the activities creating those profits may take place. In October 2015, the OECD issued “final reports” in connection with the BEPS project. The final reports were approved for adoption by the G20 finance ministers in November 2015 and provide the basis for international standards for corporate taxation, which are designed to prevent, among other things, treaty-shopping, the artificial shifting of income to tax havens and low-tax jurisdictions, the erosion of the tax base through interest deductions on intercompany debt and the artificial avoidance of permanent establishments (i.e., tax nexus with a jurisdiction). Action 6 (treaty abuse) led to the development of a global multilateral instrument to incorporate and facilitate changes to tax treaties, which was signed on June 7, 2017. Legislation to adopt these standards has been enacted or is currently under consideration in a number of jurisdictions, including country-by-country reporting.
More recently, the OECD also published a “Programme of Work” (organized as two “pillars”) and follow-on reports intended to address the tax challenges created by an increasingly digitalized economy. Pillar One focuses on global profit allocation and includes proposals for new profit allocation and nexus methodologies. In January 2020, the OECD published a statement suggesting that financial services businesses with commercial customers (including insurance) will be outside the scope of Pillar One. Pillar Two addresses remaining BEPS issues by introducing a global minimum tax and a new tax on base eroding payments. The OECD has announced that it intends to obtain consensus by its participating members during 2020, which could give rise to their respective countries enacting new tax legislation and/or amending tax treaties.
As a result of changes in applicable tax law emanating from the developments discussed above, our earnings may be subject to income tax, or intercompany payments may be subject to withholding tax, in jurisdictions where they are not currently taxed or at higher rates of tax than currently taxed. The applicable tax authorities could also attempt to apply such taxes to past earnings and payments. Any such additional taxes could materially increase our effective tax rate. Also, the adoption of these standards may increase the complexity and costs associated with tax compliance and adversely affect our financial position and results of operation.
On March 12, 2019, the Council of the European Union added Bermuda to the list of non-cooperative jurisdictions for tax purposes. On May 17, 2019, Bermuda was removed from this list and was listed as a cooperative tax jurisdiction that was subject to certain commitments. The Council of European Union has stated that Bermuda has taken positive steps to comply with their requirements but that further technical changes need to be made to address economic substance concerns. Bermuda had until the end of 2019 to address these concerns. If Bermuda is unable to satisfy the EU’s concerns then it risks being returned to the list of non-cooperative jurisdictions for tax purposes. On February 18, 2020, Bermuda was completely removed from the list. Therefore, we do not currently expect any material adverse effects from these developments. If Bermuda is added back to this list, we may be subject to certain adverse tax and non-tax consequences, which may depend in part on future changes in tax laws and/or administration of relevant EU countries.
Our operations may be affected by the introduction of EU mandatory disclosure rules under DAC 6.
The EU has introduced new rules requiring companies and their respective advisors to disclose information to tax authorities regarding certain cross-border arrangements which satisfy certain conditions, as part of a new Directive widely referred to as “DAC 6”. The scope of the arrangements and conditions which may trigger disclosure is very wide, and not limited to aggressive tax planning or indeed (for certain of the conditions) to arrangements which have any tax motive. Although first disclosures are not required until August 2020, the rules will apply retrospectively to any arrangements put in place or made available for implementation on or after June 25, 2018. The obligation to file disclosures under DAC 6 will fall on persons acting as intermediaries, which in many cases may require our advisers and other service providers to file disclosures relating to arrangements we are party to, in the first instance.
We intend to operate in compliance with DAC 6 mandatory disclosure rules. Achieving and maintaining compliance is likely to entail some cost to us, and any inadvertent failure to comply with our obligations may lead to fines and penalties, which would have an adverse effect on our results. Our shareholders and their respective intermediaries could also be subject to certain disclosure obligations in relation to their investment in us, and should seek guidance from their own advisors in respect of the potential application of DAC 6 to them.
The impact of Bermuda's letter of commitment to the OECD to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.
The OECD has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. According to the OECD, Bermuda is a jurisdiction that has substantially implemented the internationally agreed tax standard and as such is listed on the OECD “white list”. However, we are unable to predict whether any changes will be made to this classification or whether any such changes will subject us or our Bermuda operations to additional taxes.
Risks Relating to Our Common Shares
Future sales of shares by existing shareholders could cause our share price to decline, even if our business is performing well.
Sales of substantial amounts of our common shares in the public market could occur at any time. These sales, or the perception that these sales could occur, could cause the market price of our common shares to decline.
A significant number of our common shares are currently restricted as a result of applicable securities laws, but are eligible for sale subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. As of December 31, 2020, we also had reserved for issuance common shares underlying certain warrants to purchase, in the aggregate, up to 3,494,979 common shares. In addition, certain of our significant shareholders may distribute shares that they hold to their investors who themselves may then sell into the public market. Such sales may not be subject to the volume, manner of sale, holding period and other limitations of Rule 144. As resale restrictions end, the market price of our common shares could decline if the holders of those shares sell them or are perceived by the market as intending to sell them.
Certain existing holders of our common shares also have registration rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other shareholders in the future. In the event that we register the common shares for the holders of registration rights, they can be freely sold in the public market upon issuance, subject to certain limitations applicable to affiliates.
As of December 31, 2020, a total of 22,252,206 common shares were reserved for issuance under our current share incentive plans and in connection with restricted share award agreements entered into between us and certain of our employees and directors. As of December 31, 2020, there were share options outstanding (subject to vesting) for 8,306,658 common shares. We have registered on a Form S-8 registration statement these shares and all common shares that we may in future issue under our equity compensation plans. As a result, these shares can be freely sold in the public market upon issuance, subject to certain limitations applicable to affiliates.
In the future, we may issue additional common shares or other equity or debt securities convertible into common shares in connection with a financing, acquisition, litigation settlement, employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing shareholders and could cause the trading price of our common shares to decline.
If securities analysts or industry analysts downgrade our common shares, publish negative research or reports or fail to publish reports about our business, our share price and trading volume could decline.
The trading market for our common shares is influenced by the research and reports that industry or securities analysts publish about us, our business and our market. If one or more analysts adversely changes their recommendation regarding our stock or our competitors’ stock, our share price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets which in turn could cause our share price or trading volume to decline.
If the ownership of our common shares continues to be concentrated, it could prevent you and other shareholders from influencing significant corporate decisions.
As of December 31, 2020, BlackRock, Inc. and Third Point LLC, Daniel S. Loeb and affiliates associated with Mr. Loeb (collectively, the “Loeb Entities”) beneficially own approximately 13.2% and 9.5% of our issued and outstanding common shares, respectively, on an as converted basis after giving effect to the issuance of vested warrants and options representing the right to purchase 5,820,557 common shares. As a result, BlackRock, Inc. and the Loeb Entities could exercise influence over matters requiring shareholder approval, including approval of significant corporate transactions, which may reduce the market price of our common shares.
The interests of the shareholders specified above may conflict with the interests of our other shareholders. Our Board of Directors has adopted corporate governance guidelines that, among other things, address potential conflicts between a director’s interests and our interests. In addition, we have adopted a Code of Business Conduct and Ethics that, among other things, require our employees to avoid actions or relationships that might conflict or appear to conflict with their job responsibilities or our interests and to disclose their outside activities, financial interests or relationships that may present a possible conflict of interest or the appearance of a conflict to our General Counsel.
Following completion of the Merger, CM Bermuda Ltd., will own more than 35% of our outstanding common shares with a 9.9% voting interest, which may exacerbate the risks described above, reduce liquidity in the market and provide CM Bermuda Ltd. with significant influence over matters requiring shareholder approval. If CM Bermuda Ltd. were to sell its common shares following expiration of the agreed lock-up period, it may increase the volatility of our common share price or put downward pressure on the price of our common shares.
The market price of our common shares may fluctuate significantly.
The market price of our common shares may fluctuate significantly. Among the factors that could affect our share price are:
•industry or general market conditions;
•domestic and international economic factors unrelated to our performance;
•changes in our clients’ needs;
•new regulatory pronouncements and changes in regulatory guidelines;
•lawsuits, enforcement actions and other claims by third parties or governmental authorities;
•actual or anticipated fluctuations in our quarterly operating results;
•changes in securities analysts' estimates of our financial performance or lack of research and reports by industry analysts;
•action by institutional shareholders or other large shareholders (including the Founders), including future sales;
•speculation in the press or investment community;
•investor perception of us and our industry;
•changes in market valuations or earnings of similar companies;
•any announcement by us or our competitors of a significant contract, acquisition, strategic transaction or expansion into a new line of business;
•our ability to successfully integrate Sirius following the Merger;
•any future sales of our common shares or other securities; and
•additions or departures of key personnel.
The stock markets have experienced volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common shares. In the past, following periods of volatility in the market price of a company's securities, class action litigation has often been instituted against such company. Any litigation of this type brought against us could result in substantial
costs and a diversion of management's attention and resources, which would harm our business, operating results and financial condition.
We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common shares.
We do not intend to declare and pay dividends on our share capital for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common shares for the foreseeable future and the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares.
We may repurchase our common shares without our shareholders’ consent.
Under our bye-laws and subject to Bermuda law, we have the option, but not the obligation, to require a shareholder to sell to us at fair market value the minimum number of common shares that is necessary to avoid or cure any adverse tax consequences or materially adverse legal or regulatory treatment to us, our subsidiaries or our shareholders if our Board of Directors reasonably determines, in good faith, that failure to exercise our option would result in such adverse consequences or treatment.
Holders of our shares may have difficulty effecting service of process on us or enforcing judgments against us in the United States.
We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of our assets are located in jurisdictions outside the United States. As such, we have been advised that there is doubt as to whether:
•a holder of our shares would be able to enforce, in the courts of Bermuda, judgments of United States courts against persons who reside in Bermuda based upon the civil liability provisions of the United States federal securities laws;
•a holder of our shares would be able to enforce, in the courts of Bermuda, judgments of United States courts based upon the civil liability provisions of the United States federal securities laws;
•a holder of our shares would be able to bring an original action in the Bermuda courts to enforce liabilities against us or our directors and officers who reside outside the United States based solely upon United States federal securities laws.
Further, we have been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of United States courts, and there are grounds upon which Bermuda courts may not enforce judgments of United States courts. Because judgments of United States courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments.
U.S. persons who own our shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.
The Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Companies Act and our bye-laws which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders.
Interested Directors: Bermuda law provides that we cannot void any transaction we enter into in which a director has an interest, nor can such director be liable to us for any profit realized pursuant to such transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of directors, or in writing, to the directors. Under Delaware law such transaction would not be voidable if:
•the material facts as to such interested director’s relationship or interests were disclosed or were known to the Board of Directors and the Board of Directors had in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors;
•such material facts were disclosed or were known to the shareholders entitled to vote on such transaction and the transaction were specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or
•the transaction were fair as to the corporation as of the time it was authorized, approved or ratified. Under Delaware law, the interested director could be held liable for a transaction in which the director derived an improper personal benefit.
Business Combinations with Large Shareholders or Affiliates: As a Bermuda company, we may enter into business combinations with our large shareholders or affiliates, including mergers, asset sales and other transactions in which a large shareholder or affiliate receives, or could receive, a financial benefit that is greater than that received, or to be received, by other shareholders, without obtaining prior approval from our Board of Directors or from our shareholders. If we were a Delaware corporation, we would need prior approval from our Board of Directors or a super-majority of our shareholders to enter into a business combination with an interested shareholder for a period of three years from the time the person became an interested shareholder, unless we opted out of the relevant Delaware statute. Our bye-laws include a provision restricting business combinations with interested shareholders consistent with the corresponding Delaware statute.
Shareholders’ Suits: The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many United States jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of the company to remedy a wrong done to the company where an act is alleged to be beyond the corporate power of the company, is illegal or would result in the violation of our memorandum of association or bye-laws. Furthermore, a court would consider acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action. Our bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in the right of the company, against any director or officer for any act or failure to act in the performance of such director’s or officer’s duties, except with respect to any fraud or dishonesty of such director or officer. Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.
Indemnification of Directors: We have entered into indemnification agreements with our directors. The indemnification agreements provide that we will indemnify our directors or officers or any person appointed to any committee by the Board of Directors acting in their capacity as such in relation to any of our affairs for any loss arising or liability attaching to them by virtue of any rule of law in respect of any negligence, default, breach of duty or breach of trust of which such person may be guilty in relation to the company other than in respect of his own fraud or dishonesty. Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if such director or officer acted in good faith and in a manner he or she reasonably believed to be in or not be opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his or her conduct was unlawful.
Provisions in our bye-laws may reduce or increase the voting rights of our shares.
In general, and except as provided under our bye-laws and as described below, the common shareholders have one vote for each common share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, if, and so long as, the shares of a shareholder are treated as “controlled shares” (as determined pursuant to sections 957 and 958 of the Code of any United States person (that owns shares directly or
indirectly through non-U.S. entities) and such controlled shares constitute 9.5% or more of the votes conferred by our issued shares, the voting rights with respect to the controlled shares owned by such United States person will be limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in our bye-laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. shareholders has been reduced to less than 9.5%. In addition, our Board of Directors may limit a shareholder’s voting rights when it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. shareholder; and (ii) avoid certain material adverse tax, legal or regulatory consequences to us, any of our subsidiaries or any direct or indirect shareholder or its affiliates. “Controlled shares” include, among other things, all shares that a United States person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). The amount of any reduction of votes that occurs by operation of the above limitations will generally be reallocated proportionately among our other shareholders whose shares were not “controlled shares” of the 9.5% U.S. shareholder so long as such reallocation does not cause any person to become a 9.5% U.S. Shareholder.
Under these provisions, certain shareholders may have their voting rights limited, while other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership.
We are authorized under our bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the bye-laws. If any holder fails to respond to this request or submits incomplete or inaccurate information, we may, in our sole discretion, eliminate the shareholder’s voting rights. Any shareholder must give notice to us within ten days following the date it owns 9.5% of our common shares.
Our bye-laws contain provisions that could discourage takeovers and business combinations that our shareholders might consider in their best interests.
Our bye-laws include certain provisions that could have the effect of delaying, deterring, preventing or rendering more difficult a change in control of us that our shareholders might consider in their best interests.
For example, our bye-laws:
•establish a classified Board of Directors;
•require advance notice of shareholders’ proposals in connection with annual general meetings;
•authorize our board to issue “blank cheque” preferred shares;
•prohibit us from engaging in a business combination with a person who acquires at least 15% of our common shares for a period of three years from the date such person acquired such common shares unless board and shareholder approval is obtained prior to the acquisition;
•require that directors only be removed from office for cause by majority shareholder vote;
•require a supermajority vote of shareholders to effect certain amendments to our memorandum of association and bye-laws; and
•provide a consent right on the part of Daniel S. Loeb to any amendments to our bye-laws or memorandum of association which would have a material adverse effect on their rights for so long as they hold not less than 25% of the number of shares respectively held as of December 22, 2011.
Any such provision could prevent our shareholders from receiving the benefit from any premium to the market price of our common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of any of these provisions could adversely affect the prevailing market price of our common shares if they were viewed as discouraging takeover attempts in the future.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

---

ITEM 2. PROPERTIES
Item 2. Properties
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.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are not currently involved in any litigation or arbitration. We anticipate that, similar to the rest of the reinsurance industry, we will be subject to litigation and arbitration from time to time in the ordinary course of business.
If we are subject to disputes in the ordinary course of our business we anticipate engaging in discussions with the parties to the applicable contract to seek to resolve the matter. If such discussions are unsuccessful, we anticipate invoking the dispute resolution provisions of the relevant contract, which typically provide for the parties to submit to arbitration or litigation, as applicable, to resolve the dispute.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are listed on the NYSE under the symbol “TPRE”. On February 19, 2021, the latest practicable date, the last reported sale price of our common shares was $10.08 per share and there were 65 holders of record of our common shares. This number does not include shareholders for whom our shares were held in “street” name.
Dividends
We do not currently expect to declare or pay dividends on our common shares for the foreseeable future. Instead, we intend to retain earnings to finance the growth and development of our business and for working capital and general corporate purposes. Any payment of dividends will be at the discretion of our Board of Directors and will depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that our Board of Directors may deem relevant. In addition, under the Companies Act, we may not declare or pay a dividend if there are reasonable grounds for believing that we are, or would after the payment be, unable to pay our liabilities as they become due or that the realized value of our assets would thereafter be less than our liabilities.
Equity Compensation Plans
The following table presents information concerning the securities authorized for issuance pursuant to our equity compensation plans as of December 31, 2020:
Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)
Weighted-average exercise price of outstanding options, warrants and rights (2)
Number of securities available for future issuance under equity compensation plans (excluding securities reflected in Column 1) (3)
Equity compensation plans approved by shareholders 8,306,658 $ 13.45 7,617,210
Equity compensation plans not approved by shareholders - n/a -
Total 8,306,658 $ 13.45 7,617,210
(1) Represents the number of shares associated with options outstanding as of December 31, 2020.
(2) Represents the weighted average exercise price of options disclosed.
(3) Represents the number of shares remaining available for issuance with respect to future awards under our Omnibus Equity Incentive Plan.
Performance
The following graph compares the cumulative total shareholder return on our common shares as compared to the cumulative total return of (1) S&P 500 Composite Stock Index (“S&P 500”) and (2) the Dow Jones Property & Casualty Insurance Index (“Dow Jones P&C”) for the five year period commencing December 31, 2015 through to December 31, 2020. The share price performance presented below is not necessarily indicative of future results.
December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020
tTPRE
$ 100.00 $ 86.13 $ 109.25 $ 71.89 $ 78.45 $ 70.99
■S&P 500 $ 100.00 $ 109.54 $ 130.81 $ 122.65 $ 158.07 $ 183.77
pDow Jones P&C
$ 100.00 $ 114.96 $ 132.64 $ 125.59 $ 156.54 $ 158.03
1.The above graph assumes that the value of the investment was $100 on December 31, 2015.
2.This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933 or the Securities and Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Issuer Purchases of Equity Securities
During the years ended December 31, 2020 and 2019, the Company did not repurchase any of its common shares.
During the year ended December 31, 2018, the Company repurchased 10,311,123 of its common shares in the open market for an aggregate cost of $138.7 million at a weighted average cost, including commissions, of $13.45 per
share. Common shares repurchased by the Company during the year ended December 31, 2018 were retired. In addition, the Company also retired all shares previously held in treasury.
As of December 31, 2020, the Company was authorized to repurchase up to an aggregate of $61.3 million of additional common shares under its share repurchase program.

---

ITEM 6. SELECTED FINANCIAL DATA

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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”).
The statements in this discussion regarding business outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to our Introductory Note to this Annual Report and the risks and uncertainties described in Part I, Item 1A “Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Our fiscal year ends December 31 and, unless otherwise noted, references to years or fiscal are for fiscal years ended December 31.
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.
Overview
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.
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.
Sirius Merger
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.
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
position SiriusPoint to capitalize on market opportunities with a proven management team to focus on underwriting profitability. SiriusPoint will reposition its investment portfolio to better align with its underwriting strategy, while leveraging its strategic partnership with Third Point LLC. We believe that this repositioning will result in lower volatility, while taking advantage of opportunities to improve risk-adjusted returns across asset classes.
Property and Casualty Reinsurance
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.
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.
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.
Arcadian
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 $19.0 million of professional and general liability business.
Investment Management
Through December 31, 2020, our investment strategy was implemented by our investment manager, Third Point LLC. Third Point LLC serves as investment manager for TP Fund, as well as for our collateral assets and other fixed income investments.
The following is a summary of our total net investments managed by Third Point LLC as of December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
($ in thousands)
TP Fund $ 1,055,618 $ 860,630
Collateral and other investment assets (1)
1,822,850 1,729,497
Total net investments managed by Third Point LLC $ 2,878,468 $ 2,590,127
(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 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.
Collateral assets are generally required to be held in cash or cash equivalents, U.S. Treasuries or non-U.S. sovereign debt equivalent and other investment grade assets as determined by the respective reinsurance trusts or as per collateral required under secured letter of credit facilities.
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.
In the final weeks of the first quarter and carrying into the second quarter, markets responded positively and retraced some of the spread widening during the first quarter, underscoring the importance of timing this allocation to credit. We sold out of many of our positions in investment grade bonds initially purchased in the first quarter that recovered strongly in the second quarter of 2020.
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.
Business Outlook
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
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.
Impact of COVID-19 on Business Operations
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.
COVID-19 has not slowed our continued expansion of the lines of business and forms of reinsurance on which we focus. This expansion includes lines of business and forms of reinsurance with increased risk profiles, where we believe the higher expected margins adequately compensate us for the increased risk. As we expand our underwriting focus into higher expected margin property and specialty lines of reinsurance business as well as excess casualty and professional liability insurance, we expect to deliver attractive equity returns to our shareholders with a more balanced contribution to net income from underwriting and investments with lower volatility of our results.
Underwriting Outlook
The following is a summary of our underwriting outlook by each line of business:
Property
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.
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.
Casualty
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
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 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.
Specialty
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.
Strategic Reinsurance Investments
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.
Arcadian
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.
Investment Outlook
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.
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.
During the first quarter of 2020, the rapid spread of COVID-19 around the globe resulted in significant volatility in the financial markets unseen since the 2008 financial crisis. During March 2020, credit markets experienced their biggest dislocation since 2008 as investment grade spreads widened significantly. As a result, we determined we would invest in a more opportunistic credit portfolio to take advantage of these dislocations in the credit market brought on by the COVID-19 pandemic. During the first quarter, we invested approximately $220 million into 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.
In the final weeks of the first quarter and carrying into the second quarter, markets responded positively and retraced some of the spread widening during the first quarter, underscoring the importance of timing this allocation to credit. We sold out of many of our positions in investment grade bonds initially purchased in the first quarter that recovered strongly in the second quarter of 2020.
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 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.
Key Performance Indicators
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.
The table below shows the key performance indicators for our consolidated business for the years ended December 31, 2020 and 2019:
2020 2019
Key underwriting metrics for Property and Casualty Reinsurance segment: ($ in thousands, except for per share data and ratios)
Net underwriting loss (1)
$ (63,185) $ (22,349)
Combined ratio (1)
110.3 % 103.2 %
Key investment return metrics:
Net investment income $ 278,938 $ 282,560
Net investment return on investments managed by Third Point LLC 10.6 % 12.8 %
Key shareholders’ value creation metrics:
Basic book value per share (2)
$ 16.88 $ 15.37
Diluted book value per share (2)
$ 16.42 $ 15.04
Change in diluted book value per share (2)
9.2 % 15.9 %
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders (2)
10.1 % 16.7 %
(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”.
Key Underwriting Metrics for Property and Casualty Reinsurance segment
See “Segment Results - Property and Casualty Reinsurance” below for additional details.
Key Investment Return Metrics
Net investment income
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.
Net Investment Return on Investments Managed by Third Point LLC
See “Investment Results” below for additional information regarding investment performance and net investment return on investments managed by Third Point LLC.
Key Shareholders’ Value Creation Metrics
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. See “Non-GAAP Financial Measures and Other Financial Metrics” for reconciliations.
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.
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 $15.04 per share as of December 31, 2019. The increase was primarily due to net income in the year.
Return on Beginning Shareholders’ Equity Attributable to Third Point Re Common Shareholders
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders as presented is a non-GAAP financial measure. See “Non-GAAP Financial Measures and Other Financial Metrics” for reconciliation.
The decrease in return on beginning shareholders’ equity attributable to Third Point Re common shareholders for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to a decrease in net income during the current year period.
Consolidated Results of Operations-Years ended December 31, 2020 and 2019
The following table sets forth the key items discussed in the consolidated results of operations section, and the year over year changes, for the years ended December 31, 2020 and 2019:
2020 2019 Change
($ in thousands)
Net underwriting loss $ (63,185) $ (22,349) $ (40,836)
Net investment income 278,938 282,560 (3,622)
Net investment return on investments managed by Third Point LLC 10.6 % 12.8 % (2.2) %
Corporate expenses (39,765) (30,397) (9,368)
Other expenses (10,573) (16,619) 6,046
Interest expense (8,230) (8,228) (2)
Foreign exchange losses (5,219) (3,635) (1,584)
Income tax expense (8,108) (713) (7,395)
Net income available to Third Point Re common shareholders $ 143,517 $ 200,619 $ (57,102)
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.
Investment Results
Investment Portfolio
The following is a summary of our total net investments managed by Third Point LLC as of December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
($ in thousands)
TP Fund $ 1,055,618 $ 860,630
Collateral and other investment assets (1)
1,822,850 1,729,497
Total net investments managed by Third Point LLC $ 2,878,468 $ 2,590,127
(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:
December 31, 2020 December 31, 2019
Long
Short
Net
Long Short Net
Equity 63 % (18) % 45 % 50 % (22) % 28 %
Credit 16 % - % 16 % 9 % - % 9 %
Other 4 % - % 4 % 7 % (2) % 5 %
83 % (18) % 65 % 66 % (24) % 42 %
December 31, 2020 December 31, 2019
Long Short Net Long Short Net
Americas 67 % (14) % 53 % 47 % (17) % 30 %
Europe, Middle East and Africa 12 % (3) % 9 % 14 % (3) % 11 %
Asia 4 % (1) % 3 % 5 % (4) % 1 %
83 % (18) % 65 % 66 % (24) % 42 %
(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.
Investment Returns
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:
2020 2019
TP Fund 22.7 % 22.9 %
Collateral and other investments 4.9 % 2.3 %
Net investment return on investments managed by Third Point LLC (1)
10.6 % 12.8 %
(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:
2020 2019
($ in thousands)
TP Fund $ 194,988 $ 249,626
Collateral and other investments (1)
83,301 30,902
Net investment income on investments managed by Third Point LLC (2)
$ 278,289 $ 280,528
(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.
(2)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 return by investment strategy on total net investments managed by Third Point LLC for the years ended December 31, 2020 and 2019:
Long Short Net
Equity 6.7 % (3.7) % 3.0 %
Credit 5.9 % (0.1) % 5.8 %
Other 1.3 % 0.5 % 1.8 %
Net investment return on investments managed by Third Point LLC 13.9 % (3.3) % 10.6 %
Long Short Net
Equity 16.6 % (6.1) % 10.5 %
Credit 1.1 % (0.5) % 0.6 %
Other 1.7 % - % 1.7 %
Net investment return on investments managed by Third Point LLC 19.4 % (6.6) % 12.8 %
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.
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
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.
Refer to “ITEM 3. Quantitative and Qualitative Disclosures about Market Risks” for a list of risks and factors that could adversely impact our investments results.
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:
Corporate Expenses
General and administrative expenses allocated to corporate expenses include allocations of payroll and related costs for certain employees for non-underwriting activities. We also allocate a portion of overhead and other related costs based on a headcount analysis.
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.
Other Expenses
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.
Interest Expense
In February 2015, TPRUSA issued $115.0 million of senior notes bearing 7.0% interest. As a result, our consolidated results of operations include interest expense related to the senior notes.
Foreign Exchange Gains (Losses)
The foreign exchange losses were primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds to the United States dollar, which weakened in the current year period. For these contracts, non U.S. dollar reinsurance assets, or balances held in trust accounts securing reinsurance liabilities generally offset reinsurance liabilities in the same non-U.S. dollar currencies resulting in minimal net exposure. As a result, the foreign exchange losses on loss and loss adjustment expense reserves were offset by corresponding foreign exchange gains included in net investment income resulting from the revaluation of foreign currency reinsurance collateral held in trust accounts.
Refer to “ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks” for further discussion on foreign currency risk related to our reinsurance contracts.
Income Taxes
The increase in income tax expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily the result of an increase in taxable income generated by our U.S. subsidiaries.
See Note 15 to our consolidated financial statements for additional information regarding our income taxes.
Segment Results - Years ended December 31, 2020 and 2019
The determination of our reportable segments is based on the manner in which management monitors the performance of our operations. For the periods presented, our business comprises one operating segment, Property and Casualty Reinsurance.
Property and Casualty Reinsurance
The following table sets forth net underwriting results and ratios, and the year over year changes for the Property and Casualty Reinsurance segment for the years ended December 31, 2020 and 2019:
2020 2019 Change
($ in thousands)
Gross premiums written $ 588,035 $ 631,846 $ (43,811)
Gross premiums ceded (39,717) (9,265) (30,452)
Net premiums earned 610,852 700,142 (89,290)
Loss and loss adjustment expenses incurred, net 465,298 403,499 61,799
Acquisition costs, net 187,062 295,626 (108,564)
General and administrative expenses 21,677 23,366 (1,689)
Net underwriting loss $ (63,185) $ (22,349) $ (40,836)
Underwriting ratios (1):
Loss ratio 76.2 % 57.6 % 18.6 %
Acquisition cost ratio 30.6 % 42.2 % (11.6) %
Composite ratio 106.8 % 99.8 % 7.0 %
General and administrative expense ratio 3.5 % 3.4 % 0.1 %
Combined ratio 110.3 % 103.2 % 7.1 %
(1) Underwriting ratios are calculated by dividing the related expense by net premiums earned.
Gross Premiums Written
The amount of gross premiums written and earned that we recognize can vary significantly from period to period due to several reasons, which include:
•The majority of our gross written premium is derived from a small number of large contracts; therefore individual renewals or new business can have a significant impact on premiums recognized in a period;
•We offer customized solutions to our clients, including reserve covers, on which we may not have a regular renewal opportunity;
•We record gross premiums written and earned for reserve covers, which are considered retroactive reinsurance contracts, at the inception of the contract;
•We write multi-year contracts that will not necessarily renew in a comparable period;
•We may extend and/or amend contracts resulting in premium that will not necessarily renew in a comparable period;
•Our reinsurance contracts often contain commutation and/or cancellation provisions;
•Our quota share reinsurance contracts are subject to significant judgment in the amount of premiums that we expect to recognize and changes in premium estimates are recorded in the period they are determined; and
•The impact of COVID-19 and resulting economic downturn on our clients may result in a reduction in the volume of premium that they write and cede to us.
As a result of these factors, we may experience volatility in the amount of gross premiums written and net premiums earned and period to period comparisons may not be meaningful.
The following table provides a breakdown of our Property and Casualty Reinsurance segment’s gross premiums written by line of business for the years ended December 31, 2020 and 2019:
2020 2019
($ in thousands)
Property $ 172,330 29.3 % $ 144,271 22.8 %
Casualty 208,013 35.4 % 151,893 24.0 %
Specialty 178,746 30.4 % 248,044 39.3 %
Total prospective reinsurance contracts 559,089 95.1 % 544,208 86.1 %
Retroactive reinsurance contracts 28,946 4.9 % 87,638 13.9 %
$ 588,035 100.0 % $ 631,846 100.0 %
The decrease in gross premiums written of $43.8 million, or 6.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 was driven by:
Factors resulting in decreases:
•We recognized $202.7 million of premium in the year ended December 31, 2019 related to contracts that we did not renew in the year ended December 31, 2020, including one multi-line contract for $96.3 million, which no longer fit our underwriting criteria following our shift in underwriting strategy.
•We recognized a net increase in premium of $46.4 million in the year ended December 31, 2020 compared to a net increase of $102.8 million in the year ended December 31, 2019 related to the net impact of contract extensions, cancellations and contracts renewed with no comparable premium in the comparable period.
•Changes in renewal premiums for the year ended December 31, 2020 resulted in a net decrease in premiums of $0.7 million. Premiums can change on renewals of contracts due to a number of factors, including: changes in our line size or participation, changes in the underlying premium volume and pricing trends of the client’s program as well as other contractual terms and conditions.
Factors resulting in increases:
•For the year ended December 31, 2020, we wrote $182.7 million of new premium, of which $108.7 million was casualty business, $57.0 million was property business and $17.0 million was specialty business.
•We recorded net increases in premium estimates relating to prior periods of $67.9 million and $34.6 million for the years ended December 31, 2020 and 2019, respectively. The increase in premium estimates for the year ended December 31, 2020 was due to several contracts for which clients provided updated projections indicating that they expected to write more business than initially estimated. This increase was partially offset by a reduction in premium estimates arising from the impact of COVID-19.
Gross Premiums Ceded
The increase in gross premiums ceded for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to one fronted reinsurance treaty, a small number of property catastrophe retro purchases for the purposes of portfolio management and gross premiums ceded of $9.5 million relating to Arcadian.
Net Premiums Earned
The decrease in net premiums earned for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to a lower in-force underwriting portfolio and retroactive exposures in reinsurance contracts that were written and fully earned in the current year period of $28.1 million compared to $85.1 million for the year ended December 31, 2019.
Net Loss and Loss Adjustment Expenses
The reinsurance contracts we write have a wide range of initial loss ratio estimates. As a result, our net loss and loss expense ratio can vary significantly from period to period depending on the mix of business. The change in our net loss and loss adjustment expenses and related ratio was primarily affected by changes in the mix of business, including property catastrophe and specialty business written at a lower expected loss ratio, but was negatively impacted in the current year periods from higher catastrophe losses and the global outbreak of the COVID-19 pandemic.
For the year ended December 31, 2020, we incurred net catastrophe losses of $36.6 million, net of reinstatement premiums and profit commission adjustments, related to Hurricane Laura and other 2020 catastrophe events. This resulted in an increase in the combined ratio of 6.0 percentage points for the year ended December 31, 2020.
For the year ended December 31, 2019, we incurred net catastrophe losses of $29.0 million, net of reinstatement premiums and profit commission adjustments, related to Hurricane Dorian, Typhoons Faxai and Hagibis and other 2019 catastrophe events. This resulted in an increase in the combined ratio of 4.1 percentage points for the year ended December 31, 2019.
The COVID-19 outbreak is causing unprecedented social disruption, global economic volatility, reduced liquidity of capital markets and intervention by various governments around the world. For the year ended December 31, 2020, we recognized net losses of $46.7 million, net of additional premiums, or 7.6 percentage points, on the combined ratio, relating to COVID-19. These losses were driven primarily by event cancellation, property business interruption, and certain casualty and multi-line quota share contracts.
The economic impact of the ongoing pandemic will continue to create uncertainty around the ultimate scope of claims and potential for additional insurance losses. Our estimates are based on currently available information provided by cedents. These estimates include losses only related to our estimate of claims incurred as of December 31, 2020. It is also possible that changes in economic conditions and the various economic stimulus deployed by governments across the world in response to COVID-19 could lead to higher or lower inflation than we had anticipated, which could in turn lead to an increase or decrease in loss costs and the need to strengthen or reduce claims and claim adjustment expense reserves.
The following is a summary of the net impact from loss reserve development for the years ended December 31, 2020 and 2019:
For the year ended December 31, 2020, we recognized $15.0 million, or 2.5 percentage points on the combined ratio, of net adverse prior years’ reserve development as a result of increases in loss reserve estimates. The $15.0 million of net adverse prior years’ reserve development for the year ended December 31, 2020 was accompanied by net increases of $11.8 million, or 1.9 percentage points on the combined ratio, in acquisition costs and net decreases of $7.8 million in earned premium, or 1.3 percentage points on the combined ratio, resulting in a $34.6 million increase in net underwriting loss, or 5.7 percentage points on the combined ratio. The increase in net underwriting loss was primarily due to the following factors:
•$19.9 million and $18.9 million of net adverse underwriting loss development relating to our general liability and multi-line contracts, respectively, as a result of worse than expected loss experience. The adverse underwriting loss development is a result of accumulated loss experience and cedent reserving increases, indicating that underlying casualty loss trends are higher than initial pricing and reserving, consistent with the industry impact of social inflation. In addition, the current elevated level of uncertainty
makes historical data less applicable for future projections, and has contributed to an increase in the estimate of ultimate losses on certain accounts; partially offset by
•$7.6 million of improvement in net underwriting loss development relating to our workers’ compensation contracts as a result of better than expected loss experience; and
•$2.4 million of improvement in net underwriting loss development relating to one retroactive reinsurance contract as a result of better than expected loss experience. This retroactive reinsurance contract had profit commission terms such that the net favorable prior years’ reserve development of $21.6 million associated with this contract was offset by an increase in acquisition costs of $19.2 million.
For the year ended December 31, 2019, we recognized $98.5 million, or 14.1 percentage points on the combined ratio, of net favorable prior years’ reserve development as a result of decreases in loss reserve estimates. The $98.5 million of net favorable prior years’ reserve development for the year ended December 31, 2019 was accompanied by net increases of $100.9 million, or 14.4 percentage points on the combined ratio, in acquisition costs and net increases of $7.8 million in earned premium, or 1.1 percentage points on the combined ratio, resulting in a $5.4 million improvement in the net underwriting results, or 0.8 percentage points improvement on the combined ratio. The improvement in the net underwriting results was primarily due to the following factors:
•$14.9 million of improvement in net underwriting loss development relating to our workers’ compensation contracts as a result of better than expected loss experience;
•$3.5 million of improvement in net underwriting loss development relating to our non-standard auto contracts as a result of better than expected loss experience;
•$0.5 million of improvement in net underwriting loss development relating to one retroactive reinsurance contract as a result of better than expected loss experience. This retroactive reinsurance contract had profit commission terms such that the net favorable reserve development associated with this contract of $69.4 million was offset by an increase in acquisition costs of $68.9 million; partially offset by
•$8.8 million of net adverse underwriting loss development relating to our general liability contracts, as a result of worse than expected loss experience; and
•$8.1 million of net adverse underwriting loss development relating to our multi-line contracts as a result of worse than expected loss experience.
Acquisition Costs
Acquisition costs include commissions, brokerage and excise taxes. Acquisition costs are presented net of commissions on reinsurance ceded. The reinsurance contracts we write have a wide range of acquisition cost ratios. As a result, our acquisition cost ratio can vary significantly from period to period depending on the mix of business. Furthermore, a number of our contracts have a sliding scale commission or profit commission feature that will vary depending on the expected loss expense for the contract. As a result, changes in estimates of loss and loss adjustment expenses on a contract can result in changes in the sliding scale commissions or profit commissions and a contract’s overall acquisition cost ratio.
The decrease in acquisition costs, net, and the related acquisition cost ratio for the year ended December 31, 2020 was impacted by a change in mix of business, including an increase in property catastrophe excess of loss contracts with lower acquisition costs, a decrease in earned premium volume and profit commission adjustments.
The decrease in acquisition costs, net, for the year ended December 31, 2020 compared to the year ended December 31, 2019 was impacted by lower profit commission adjustments arising from favorable loss development on retroactive reinsurance contracts compared to the prior year period. For the year ended December 31, 2020, we recognized $19.2 million, or 3.1 percentage points, of profit commission adjustments arising from favorable loss development on one retroactive reinsurance contract, compared to $68.9 million, or 9.8 percentage points, of profit commission adjustments for the year ended December 31, 2019.
See additional information in Net Loss and Loss Adjustment Expenses section above.
General and Administrative Expenses
The decrease in general and administrative expenses allocated to underwriting activities for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily the result of lower annual incentive plan compensation expense accruals, lower credit facility fees and lower travel expenses. The decrease was partially offset by higher stock compensation expense as a result of more restricted shares with performance and service conditions considered probable of vesting, higher annual compensation expense from new employees and due to an increase in expenses associated with the new managing general agent, Arcadian.
Our incentive plan accrual was lower for the year ended December 31, 2020 compared to the year ended December 31, 2019 to reflect the performance of the Company in the respective periods relative to the incentive plan compensation performance metrics, primarily driven by the impact of the combined ratio relative to target performance.
Non-GAAP Financial Measures and Other Financial Metrics
We have included certain financial measures that are not calculated under standards or rules that comprise GAAP. Such measures, including 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 referred to as non-GAAP financial measures. These non-GAAP financial measures may be defined or calculated differently by other companies. We believe these measures allow for a more complete understanding of our underlying business. These measures are used by management to monitor our results and should not be viewed as a substitute for those determined in accordance with GAAP. Reconciliations of non-GAAP measures to the most comparable GAAP figures are included below.
In addition, we refer to certain financial metrics such as net investment return on investments managed by Third Point LLC, which is an important metric to measure the performance of TP Fund’s investment manager, Third Point LLC. A more detailed description of this financial metric is included below. We also refer to other generic performance metrics which are described and explained in this subsection.
Non-GAAP Financial 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 is calculated using the treasury stock method. Under the treasury stock method, we assume that proceeds received from in-the-money options and/or warrants exercised are used to repurchase common shares in the market. 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 difference in basic book value per share for the periods presented divided by the beginning of period book value per share. Change in diluted book value per share is calculated by taking the difference in diluted book value per share for the periods presented 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.
The following table sets forth the computation of basic and diluted book value per share as of December 31, 2020 and 2019:
2020 2019
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 $ 1,563,925 $ 1,414,074
Basic and diluted book value per share denominator:
Common shares outstanding 95,582,733 94,225,498
Unvested restricted shares (2,933,993) (2,231,296)
Basic book value per share denominator: 92,648,740 91,994,202
Effect of dilutive warrants issued to founders and an advisor (1) - 172,756
Effect of dilutive stock options issued to directors and employees (1) - 225,666
Effect of dilutive restricted shares issued to directors and employees (2) 2,573,638 1,654,803
Diluted book value per share denominator: 95,222,378 94,047,427
Basic book value per share $ 16.88 $ 15.37
Diluted book value per share $ 16.42 $ 15.04
(1) As of December 31, 2020, there was no dilution as a result of the Company’s share price being under the lowest exercise price for warrants and options.
(2) As of December 31, 2020, the effect of dilutive restricted shares issued to directors and employees was comprised of 1,171,058 restricted shares with a service condition only and 1,402,580 restricted shares with a service and performance condition that were considered probable of vesting.
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 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. When we repurchase our common shares, we also adjust 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.
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders for the years ended December 31, 2020 and 2019 was calculated as follows:
2020 2019
($ in thousands)
Net income available to Third Point Re common shareholders $ 143,517 $ 200,619
Shareholders’ equity attributable to Third Point Re common shareholders - beginning of year 1,414,074 1,204,574
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders 10.1 % 16.7 %
Other Financial Metrics
Net Investment Return on Investments Managed by Third Point LLC
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.
Net Underwriting Income (Loss) for Property and Casualty Reinsurance Segment
One way that we evaluate the performance of our property and casualty reinsurance results is by measuring net underwriting income (loss). We do not measure performance based on the amount of gross premiums written. Net underwriting income or loss is calculated from net premiums earned, less net loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities. See additional information in Note 22 to our consolidated financial statements.
Combined Ratio for Property and Casualty Reinsurance Segment
Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net, acquisition costs, net and general and administrative expenses related to underwriting activities by net premiums earned. This ratio is a key indicator of a reinsurance company’s underwriting profitability. A combined ratio of greater than 100% means that loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities exceeded net premiums earned. See additional information in Note 22 to our consolidated financial statements.
Liquidity and Capital Resources
Liquidity Requirements
Third Point Re is a holding company and has no substantial operations of its own. Its cash needs primarily consist of the payment of corporate expenses. Its assets consist primarily of its investments in subsidiaries. Third Point Re’s ability to pay expenses or dividends or return capital to shareholders will depend upon the availability of dividends or other statutorily permissible distributions from those subsidiaries. Cash at the subsidiaries is used primarily to pay loss and loss adjustment expenses, reinsurance premiums, acquisition costs, interest expense, taxes, general and administrative expenses and to purchase investments.
We and our Bermuda subsidiaries are subject to Bermuda regulatory constraints that affect our ability to pay dividends. Under the Companies Act, as amended, a Bermuda company may declare or pay a dividend out of distributable reserves only if it has reasonable grounds for believing that it is, or would after the payment, be able to pay its liabilities as they become due and if the realizable value of its assets would thereby not be less than its liabilities. Under the Insurance Act, Third Point Re BDA and Third Point Re USA, as Class 4 insurers, are prohibited from declaring or paying a dividend if they are in breach of their respective minimum solvency margin (“MSM”), enhanced capital requirement (“ECR”) or minimum liquidity ratio or if the declaration or payment of such dividend would cause such a breach. Where either Third Point Re BDA or Third Point Re USA, as Class 4 insurers, fails to meet its MSM or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.
In addition, each of Third Point Re BDA and Third Point Re USA, as Class 4 insurers, is prohibited from declaring or paying in any financial year dividends of more than 25% of its respective total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at least seven days before payment of such dividend) with the BMA an affidavit signed by at least two directors (one of whom must be a Bermuda resident director if any of the insurer’s directors are resident in Bermuda) and the principal representative stating that it will continue to meet its solvency margin and minimum liquidity ratio.
As of December 31, 2020, Third Point Re BDA could pay dividends to Third Point Re of approximately $316.7 million (December 31, 2019 - $314.5 million). Third Point Re USA has also entered into a Net Worth Maintenance Agreement that further restricts the amount of capital and surplus it has available for the payment of dividends. In order to comply with the Net Worth Maintenance Agreement, we have committed to ensuring that Third Point Re USA will maintain a minimum level of capital of $250.0 million. Failure of Third Point Re USA to maintain the minimum level of capital required by the Net Worth Maintenance Agreement could limit or prevent Third Point Re
USA from paying dividends to us. As a result, Third Point Re USA could pay dividends to Third Point Re of approximately $47.4 million as of December 31, 2020 (December 31, 2019 - $21.6 million).
In addition to the regulatory and other contractual constraints to paying dividends, we manage the capital of the group and each of our operating subsidiaries to support our current ratings from AM Best. This could further reduce the ability and amount of dividends that could be paid from Third Point Re BDA or Third Point Re USA to Third Point Re.
To date, COVID-19 has not impacted our ability to meet the liquidity requirements of our business and has also not affected our ability to meet regulatory or rating agency capital requirements or our ability to meet other contractual commitments.
Other Liquidity Requirements
Third Point Re fully and unconditionally guarantees the $115.0 million of debt obligations issued by TPRUSA, a wholly owned subsidiary. See Note 12 to our consolidated financial statements for detailed information on our Senior Notes.
Third Point Re may also require cash to fund share repurchases. See Note 16 to our consolidated financial statements for detailed information on our share repurchases.
For additional commitments and contingencies that may affect our liquidity requirements see Note 21 to our consolidated financial statements.
Sources of Liquidity
Our sources of funds have primarily consisted of premiums written, reinsurance recoveries, investment income and proceeds from sales and redemptions of investments.
TP Fund’s investment portfolio is concentrated in tradeable securities and is marked to market each day. Pursuant to the investment guidelines as specified in the 2019 LPA, at least 60% of our portfolio must be invested in securities of publicly traded companies and governments of Organization of Economic Co-operation and Development high income countries, asset-backed securities, cash, cash equivalents and gold and other precious metals. We may withdraw all or a portion of our capital account balance from TP Fund at any calendar month end or at the close of business on each Wednesday during a month, with not less than three days’ notice to pay claims on our reinsurance contracts, and with not less than five days’ notice to pay for expenses, and on not less than three days’ notice in order to satisfy a requirement of AM Best. We believe the liquidity profile of the net investments underlying the TP Fund, the Company’s rights under the 2019 LPA to withdraw from the TP Fund and the operating cash on hand will provide us with sufficient liquidity to manage our operations.
As of December 31, 2020 and 2019, the total net investments managed by Third Point LLC consisted of:
December 31, 2020 December 31, 2019
($ in thousands)
TP Fund $ 1,055,618 $ 860,630
Collateral and other investment assets (1)
1,822,850 1,729,497
Total net investments managed by Third Point LLC $ 2,878,468 $ 2,590,127
(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.
In addition, we expect that our cash and cash equivalents on the balance sheet and cash flow from operations will provide us with the financial flexibility to execute our strategic objectives. Our ability to generate cash, however, is subject to our performance, general economic conditions, industry trends and other factors. To the extent cash and cash equivalents on the balance sheet, investment returns and cash flow from operations are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt
financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing shareholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business. There is no assurance that we would be able to raise the additional funds on favorable terms or at all. There are regulatory and contractual restrictions and rating agency considerations that might impact the ability of our reinsurance subsidiaries to pay dividends to their respective parent companies, including for purposes of servicing TPRUSA’s debt obligations.
We do not believe that inflation has had a material effect on our consolidated results of operations to date. The effects of inflation are considered implicitly in pricing our reinsurance contracts. Loss reserves are established to recognize likely loss settlements at the date payment is made. Those reserves inherently recognize the effects of inflation. However, the actual effects of inflation on our results cannot be accurately known until claims are ultimately resolved.
Cash Flows
Our cash flows from operations generally represent the difference between: (l) premiums collected and investment earnings realized and (2) loss and loss expenses paid, reinsurance purchased, underwriting and other expenses paid. Cash flows from operations may differ substantially from net income (loss) and may be volatile from period to period depending on the underwriting opportunities available to us and other factors. Due to the nature of our underwriting portfolio, claim payments can be unpredictable and may need to be made within relatively short periods of time. Claim payments can also be required several months or years after premiums are collected.
Operating, investing and financing cash flows for the years ended December 31, 2020 and 2019 were as follows:
2020 2019
($ in thousands)
Net cash provided by operating activities $ 73,356 $ 141,112
Net cash provided by investing activities 6,109 786,857
Net cash provided by (used in) financing activities (19,484) 12,652
Net increase in cash, cash equivalents and restricted cash 59,981 940,621
Cash, cash equivalents and restricted cash at beginning of year 1,653,958 713,337
Cash, cash equivalents and restricted cash at end of year $ 1,713,939 $ 1,653,958
Operating Activities
Cash flows provided by operating activities generally represent net premiums collected less loss and loss adjustment expenses, acquisition costs and general and administrative expenses paid.
The decrease in cash flows from operating activities in the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to lower net reinsurance receipts and higher expenses in the current year period.
Excess cash generated from our operating activities is typically then invested by Third Point LLC into either the TP Fund or other fixed income investments. The amount of net reinsurance receipts can vary significantly from period to period depending on the timing, type and size of reinsurance contracts we bind.
Investing Activities
Cash flows provided by investing activities primarily reflects investment activities related to our investment in TP Fund, fixed income investments and collateral assets.
Cash flows provided by investing activities for the year ended December 31, 2020 primarily relates to investment activity from the opportunistic credit portfolio. Cash flows provided by investing activities for the years ended December 31, 2019 primarily relates to net redemptions of $673.0 million from TP Fund.
Financing Activities
Cash flows used in financing activities for the year ended December 31, 2020 consisted of $20.2 million from payments on deposit liability contracts. Cash flows provided by financing activities for the year ended December 31, 2019 consisted of $10.8 million from receipts on deposit liability contracts.
For the period from inception until December 31, 2020, we have had sufficient cash flow from the proceeds of our initial capitalization and IPO, the issuance of Notes in February 2015, and from our operations to meet our liquidity requirements. We expect that projected operating and capital expenditure requirements and debt service requirements for at least the next twelve months will be met by our balance of cash, cash flows generated from operating activities and investment income. We may incur additional indebtedness in the future if we determine that it would be an efficient part of our capital structure.
Cash, Restricted Cash and Cash Equivalents and Restricted Investments
Cash and cash equivalents consist of cash held in banks and other short-term, highly liquid investments with original maturity dates of ninety days or less.
See Note 3 to our consolidated financial statements for additional information on restricted cash, cash equivalents and investments.
Restricted cash and cash equivalents and restricted investments increased by $117.1 million, or 10.1%, to $1,274.3 million as of December 31, 2020 from $1,157.2 million as of December 31, 2019. The increase was primarily due to an increase in the number of reinsurance contracts that required collateral.
We invest a portion of the collateral securing certain reinsurance contracts in U.S. treasury securities and sovereign debt. This portion of the collateral is included in debt securities in the consolidated balance sheets and is disclosed as part of restricted investments. In addition, restricted investments also pertain to limited partnership interests in TP Fund securing the Company’s contractual obligations under certain reinsurance contracts that the Company will not be released from until the underlying risks have expired or have been settled.
Letter of Credit Facilities
See Note 12 to our consolidated financial statements for additional information regarding our letter of credit facilities.
As of December 31, 2020, $303.4 million (December 31, 2019 - $251.8 million) of letters of credit had been issued. Each of the facilities contain customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements and a minimum rating from rating agencies. Each restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, in any of the letter of credit facilities, we could be prohibited from paying dividends. We were in compliance with all of the covenants under the aforementioned facilities as of December 31, 2020.
Cash Secured Letter of Credit Agreements
Under the cash secured letter of credit facilities, we provide collateral that consists of cash and cash equivalents. As of December 31, 2020, total cash and cash equivalents with a fair value of $306.0 million (December 31, 2019 - $254.2 million) was pledged as collateral against the letters of credit issued.
We believe that we have adequate capacity between our existing cash secured letter of credit agreements as well as available investments to post in reinsurance trusts to meet our collateral obligations under our existing and future reinsurance business.
Impact of Sirius Merger on Liquidity and Capital Resources
We have received all required regulatory approvals, and we expect the Merger to close on February 26, 2021. There can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed on the expected timeline or at all.
The total deal consideration was estimated at the time of announcement as $788.0 million, which comprises stock, cash, and other contingent value components, each in an amount to be determined as set forth in the Merger Agreement. We anticipate funding the cash consideration to be paid by Third Point Re from available cash resources.
We incurred $16.7 million of professional fees and regulatory fees associated with the Merger in the year ended December 31, 2020. We expect to incur additional costs and expenses associated with the Merger in 2021. These additional one-time costs may be significant, and it is possible that our ultimate costs will exceed our current estimates.
Upon closing of the Merger, we anticipate that our operating subsidiaries will have adequate capital resources and sufficient cash flows to meet their expected claims payments and operational expenses, and that we will have adequate capital resources, or access to capital resources, to meet our obligations, including dividend payments, interest payments on our senior notes and other liabilities, as they come due.
Refer to “Overview - Sirius Merger” for additional information on the Merger.
Revolving Credit Facility
On November 2, 2020, the Company entered into a three-year, $300.0 million senior unsecured revolving credit facility (the “Facility”) with JPMorgan Chase Bank, N.A. as administrative agent. The Facility includes an option, subject to satisfaction of certain conditions including agreement of lenders representing greater than a majority of commitments, for the Company to request an extension by such lenders of the maturity date of the Facility by an additional 12 months. The Facility provides access to loans for working capital and general corporate purposes, and letters of credit to support obligations under insurance and reinsurance agreements, retrocessional agreements and for general corporate purposes. Loans and letters of credit under the Facility will become available, subject to customary conditions precedent, upon the consummation of the merger (the date such loans and letters of credit are first made available, the “Closing Date”). Prior to the Closing Date, the Facility is guaranteed solely by Third Point Re (USA) Holdings Inc. On and after the Closing Date, the Facility will be required to be guaranteed by Sirius International Group, Ltd., Sirius International Holdings Ltd., Sirius International Insurance Group, Ltd., and subject to customary exceptions certain other material subsidiaries of the Company.
All borrowings under the Facility bear interest at a rate per annum equal to, at the option of the Company, (i) adjusted LIBOR plus an applicable margin ranging from 1.25% to 2.25%, or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 1.25%, in each case with the applicable margin determined based upon the Company’s credit rating. The Facility is subject to an unused line fee on or after the Closing Date on the average daily undrawn commitments under the Facility, payable quarterly in arrears, of 0.20% to 0.40% per annum based upon the Company’s credit rating.
The Facility is subject to customary representations and warranties, affirmative and negative covenants and events of default (including a change of control provision) that the Company considers customary for similar facilities. The Facility also includes financial covenants, including a minimum consolidated tangible net worth test, a maximum consolidated indebtedness to total consolidated capitalization ratio and a financial strength rating test.
Financial Condition
The COVID-19 pandemic has had, and will continue to have, a significant impact on the reinsurance industry and although it is too early to determine the ultimate impact it will have on us, we continue to maintain a strong capital
position. We will continue to prudently assess the reinsurance and investment opportunities presented to us, and believe that we are well positioned to continue to deploy our capital efficiently.
Shareholders’ equity
As of December 31, 2020, total shareholders’ equity was $1,565.3 million compared to $1,414.1 million as of December 31, 2019. The increase was primarily due to net income available to Third Point Re common shareholders of $143.5 million.
Investments
As of December 31, 2020, total cash and net investments managed by Third Point LLC was $2,878.5 million, compared to $2,590.1 million as of December 31, 2019. The increase was due to net investment income on investments managed by Third Point LLC of $278.3 million and net contributions of $10.1 million.
Contractual Obligations
On February 13, 2015, TPRUSA issued Senior Notes in the aggregate principal amount of $115.0 million. The Senior Notes bear interest at 7.0% and interest is payable semi-annually on February 13 and August 13 of each year. The Senior Notes are fully and unconditionally guaranteed by Third Point Re, and, in certain circumstances specified in the indenture governing the Notes, certain existing or future subsidiaries of the Company may be required to guarantee the Notes, as described in the indenture governing the Notes.
The indenture governing the Senior Notes contains customary events of default, and limits our ability to merge or consolidate or to transfer or sell all or substantially all of our assets and TPRUSA’s ability to create liens on the voting securities or profit participating equity interests of Third Point Re USA, its wholly-owned insurance subsidiary. In certain circumstances specified in the indenture governing the Senior Notes, certain of our existing or future subsidiaries may be required to guarantee the Senior Notes. Interest on the Notes is subject to adjustment from time to time in the event of a downgrade or subsequent upgrade of the rating assigned to the Senior Notes or in connection with certain changes in the ratio of consolidated total long-term indebtedness to capitalization (each as defined in the indenture governing the Senior Notes). As of December 31, 2020, we were in compliance with all of the covenants under the indenture governing the Senior Notes, and during the year then ended, no event requiring an increase in the interest rate applicable to the Senior Notes occurred.
Our contractual obligations as of December 31, 2020 by estimated maturity are presented below:
Total Less than
1 year 1-3 years 3-5 years More than
5 years
($ in thousands)
Senior Notes due 2025 (1)
$ 115,000 $ - $ - $ 115,000 $ -
Scheduled interest payments (1)
36,225 8,050 16,100 12,075 -
Subtotal - Debt obligations 151,225 8,050 16,100 127,075 -
Loss and loss adjustment expense reserves (2)
1,310,068 287,291 462,048 266,112 294,617
Other operating agreements (3)
790 499 291 - -
Rental leases (4)
881 842 39 - -
Deposit liabilities (5)
152,961 23,815 39,090 32,189 57,867
$ 1,615,925 $ 320,497 $ 517,568 $ 425,376 $ 352,484
(1) See Note 12 to our consolidated financial statements for detailed information on our Senior Notes.
(2) We have estimated the expected payout pattern of the loss and loss adjustment expense reserves by applying estimated payout patterns by contract. The amount and timing of actual loss payments could differ materially from the estimated payouts in the table above. Refer to “Critical Policies and Accounting Estimates - Loss and Loss Adjustment Expense Reserves” for additional information.
(3) We have service agreements for information technology support services that expire on December 31, 2021 and December 31, 2023.
(4) We lease office space at Point House in Pembroke, Bermuda. This one year lease expires on November 30, 2021. We also lease office space in Jersey City, New Jersey, U.S.A. This three year lease expires on February 28, 2022.
(5) See Note 11 to our consolidated financial statements for detailed information on deposit liability contracts. For purposes of this contractual obligations table, we have included estimates of future interest accruals and the amount we expect the deposit liability contracts would settle for at their probable settlement dates.
Definitive Agreement with Sirius
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. Refer to “Overview - Sirius Merger” for additional information on the Merger. We have received all required regulatory approvals, and we expect the Merger to close on February 26, 2021.
Debt Commitment Letter
In connection with entering into the Merger Agreement, the Company has entered into a commitment letter (the “Debt Commitment Letter”), dated as of August 6, 2020, with JPMorgan Chase Bank, N.A. (“JPMorgan”), pursuant to which JPMorgan has committed to provide a bridge facility up to $125.0 million to finance the Merger.
On September 25, 2020, the Company terminated the Debt Commitment Letter. The Company terminated the Debt Commitment Letter because, in light of the Company’s agreement with the Sirius Series B preference shareholders, funds committed by JPMorgan to be provided under the Bridge Facility are no longer anticipated to be necessary to consummate the Merger.
Off-Balance Sheet Commitments and Arrangements
We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Critical Accounting Policies and Estimates
See Note 2 to our notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of our significant accounting and reporting policies.
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions. We believe that the accounting policies that require the most significant judgments and estimations by management are: (1) premium revenue recognition including evaluation of risk transfer, (2) loss and loss adjustment expense reserves and (3) fair value measurements related to our investments. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.
Premium Revenue Recognition Including Evaluation of Risk Transfer
For each contract that we write, we estimate the ultimate premium for the entire contract period and record this estimate at the inception of the contract, to the extent the amount of written premium is estimable. For contracts where the full written premium is not estimable at inception, we record written premium for the portion of the contract period for which the amount is estimable. These estimates are based primarily on information in the underlying contracts as well as information provided by our clients and/or brokers. See Note 2 to our consolidated financial statements for additional information on premium revenue recognition.
Changes in premium estimates are expected and may result in adjustments in any reporting period. These estimates change over time as additional information regarding the underlying business volume is obtained. Along with uncertainty regarding the underlying business volume, our contracts also contain a number of contractual features that can significantly impact the amount of premium that we ultimately recognize. These include commutation provisions, multi-year contracts with cancellation provisions and provisions to return premium at the expiration of the contract in certain circumstances. In certain contracts, these provisions can be exercised by the client, in some cases provisions can be exercised by us and in other cases by mutual consent. In addition, we write a small number of large contracts and the majority of our property and casualty reinsurance segment premiums written to date has
been quota share business. As a result, we may be subject to greater volatility around our premium estimates compared to other property and casualty companies. We regularly monitor the premium estimates for each of our contracts considering the cash premiums received, reported premiums, discussions with our clients regarding their premium projections as well as evaluating the potential impact of contractual features. Any subsequent adjustments arising on such estimates are recorded in the period in which they are determined.
Changes in premium estimates may not result in a direct impact to net income or shareholders’ equity since changes in premium estimates do not necessarily impact the amount of net premiums earned at the time of the premium estimate change and would generally be offset by proportional changes in acquisition costs and net loss and loss adjustment expenses.
During the year ended December 31, 2020, we recorded $67.9 million of changes in premium estimates on prior years’ contracts (2019 - $34.6 million). There was a $(1.8) million impact on net income of these changes in premium estimates for the year ended December 31, 2020 (2019 - $0.7 million). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Property and Casualty Reinsurance” for additional information on changes in premium estimates.
Determining whether or not a reinsurance contract meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to recognizing premiums written and is based, in part, on the use of actuarial pricing models and assumptions and evaluating contractual features that could impact the determination of whether a contract meets risk transfer. If we determine that a reinsurance contract does not transfer sufficient risk, we use deposit accounting. See Note 11 to our consolidated financial statements for additional information on deposit contracts entered into to date.
Loss and Loss Adjustment Expense Reserves
See Note 8 to our notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding loss and loss adjustment expense reserves including reserving methodologies and additional information on loss development.
Sensitivity Analysis
The table below shows the impact of reasonably likely changes to our actuarial estimates of our client’s ceded loss on the following: loss and loss adjustment expense reserves, net; acquisition costs, net; net underwriting loss and shareholders’ equity as of and for the year ended December 31, 2020. Since many contracts that we write have sliding scale commissions, profit commissions, loss corridors or other loss mitigating features that adjust with or offset the loss and loss adjustment expenses incurred, we consider these contractual features to be important in understanding the sensitivity of our results to changes in loss ratio assumptions.
The following table illustrates the aggregate impact of a ten percent increase and decrease applied to the subject ultimate loss and loss adjustment expenses, net for each in-force contract in the property and casualty reinsurance segment. In cases where a loss corridor applies, a 10% increase (or decrease) in our estimate of the subject ultimate loss and loss adjustment expenses, net, may not translate to an increase (or decrease) in the assumed loss and loss adjustment expenses, net. In cases where a sliding scale ceding commission or profit commission applies, a 10% increase (or decrease) in our estimate of the subject ultimate loss and loss adjustment expenses, net, does translate to an increase (or decrease) in the assumed loss and loss adjustment expenses, but that increase (or decrease) may be offset by a decrease (or increase) in the acquisition costs, net.
As a result of the contractual features mentioned above, many of our reinsurance contracts provide for a maximum margin. Consequently, our upside potential on these contracts is limited. In these cases, the relative impact of the adverse development scenario is greater than the impact of the favorable development scenario.
These increases and decreases are only applied to contracts where there is still material uncertainty of the outcome. In general, we treat contracts for which the assumed reporting pattern is less than 90% reported as having material uncertainty in the outcome. Assumed ultimate losses and loss adjustment expenses incurred, net, represents the sum we would be obligated to pay for fully developed claims (i.e., paid losses plus outstanding reported losses and IBNR
losses). The impact to shareholder’s equity does not consider the cash flow, and thus, investment income considerations associated with an increase or decrease in subject ultimate loss and loss adjustment expenses, net.
10% increase in ultimate loss and loss adjustment expenses, net 10% decrease in ultimate loss and loss adjustment expenses, net
($ in thousands)
Impact on:
Loss and loss adjustment expense reserves, net $ 152,757 $ (150,325)
Acquisition costs, net (4,123) 24,956
Increase (decrease) in net underwriting loss 148,634 (125,369)
Total shareholders’ equity $ 1,565,286 $ 1,565,286
Increase (decrease) in shareholders’ equity (9.5) % 8.0 %
Fair value measurements
During the year ended December 31, 2020, the Company began investing in structured credit and corporate credit securities such as corporate bonds, asset-backed securities and bank debt.
The inputs used to measure the fair value of these securities may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and considers factors specific to the investment.
See Note 5 to our consolidated financial statements for additional information on the framework for measuring fair value established by U.S. GAAP disclosure requirements. In addition to the framework discussed in Note 5, we perform several processes to ascertain the reasonableness of the valuation of all of our investments comprising our investment portfolio. These processes include (i) obtaining and reviewing weekly and monthly investment portfolio reports from Third Point LLC, (ii) obtaining and reviewing monthly NAV and investment return reports received directly from the Company’s third-party fund administrator, which are compared to the reports noted in (i), and (iii) monthly update discussions with Third Point LLC regarding the investment portfolio, including, their process for reviewing and validating pricing obtained from third party service providers.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements for the year ended December 31, 2020 included in Item 8 of this Annual Report on Form 10-K for details of recently issued accounting standards.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We face various risks related to pandemics and other catastrophic events, including the recent global outbreak of the novel COVID-19. In recent months, the continued spread of COVID-19 has led to disruptions to commerce, reduced economic activity and increased volatility in the global capital markets. The COVID-19 pandemic and its resulting macroeconomic conditions has caused the financial markets to decline sharply and to become volatile, and such effects may continue or worsen in the future, amplifying the negative impact on global growth and global financial markets.
We believe we are principally exposed to the following types of market risk:
▪equity price risk;
▪foreign currency risk;
▪interest rate risk;
▪commodity price risk;
▪credit risk;
▪liquidity risk; and
▪political risk.
Equity Price Risk
The investment manager of TP Fund, Third Point LLC, tracks the performance and exposures of the TP Fund, each strategy and sector, and selective individual securities. A particular focus is placed on “beta” exposure, which is the portion of the portfolio that is directly correlated to risks and movements of the equity market as a whole (usually represented by the S&P 500 index) as opposed to idiosyncratic risks and factors associated with a specific position. Further, the performance of our investment portfolio has historically been compared to several market indices, including the S&P 500, MSCI World, CS/Tremont Event Driven Index, HFRI Event Driven Index, and others.
Through our investment in TP Fund, and specifically, the valuations of the equity securities it holds, we may be adversely impacted by the market volatility and uncertainties resulting from the development of COVID-19.
As of December 31, 2020, net investments managed by Third Point LLC, including investments underlying the TP Fund, included long and short equity securities, along with certain equity-based derivative instruments, the carrying values of which are primarily based on quoted market prices. Generally, market prices of common equity securities are subject to fluctuation, which could cause the amount to be realized upon the closing of the position to differ significantly from their current reported value. This risk is partly mitigated by the presence of both long and short equity securities in TP Fund’s investment portfolio. As of December 31, 2020, a 10% decline in the value of all equity and equity-linked derivatives would result in a loss to the Company of $134.6 million, or 4.7% (December 31, 2019 - $49.7 million, or 2.0%) of total net investments managed by Third Point LLC.
Computations of the prospective effects of hypothetical equity price changes are based on numerous assumptions, including the maintenance of the existing level and composition of investment securities and should not be relied on as indicative of future results.
Foreign Currency Risk
Reinsurance Contracts
We have foreign currency exposure related to non-U.S. dollar denominated reinsurance contracts. Of our gross premiums written from inception, $666.3 million, or 13.5%, were written in currencies other than the U.S. dollar. As of December 31, 2020, loss and loss adjustment expense reserves included $189.1 million (December 31, 2019 - $171.5 million) and net reinsurance balances receivable included $20.5 million (December 31, 2019 - $10.9 million) in foreign currencies. These foreign currency liability exposures were generally offset by foreign currencies held in trust accounts of $178.5 million as of December 31, 2020 (December 31, 2019 - $170.2 million). The foreign currency cash and cash equivalents and investments held in reinsurance trust accounts are included in net investments managed by Third Point LLC. The exposure to foreign currency collateral held in trust accounts is excluded from the foreign currency investment exposure table below.
Investments
Third Point LLC continually measures foreign currency exposures in the TP Fund and compares current exposures to historical movement within the relevant currencies. Within the ordinary course of business, Third Point LLC may decide to hedge foreign currency risk within TP Fund investment portfolio by using short-term forward contracts; however, from time to time Third Point LLC may determine not to hedge based on its views of the likely movements of the underlying currency.
We are exposed within the TP Fund to foreign currency risk through cash, forwards, options and investments in securities denominated in foreign currencies. Foreign currency exchange rate risk is the potential for adverse changes in the U.S. dollar value of investments (long and short) and foreign currency derivative instruments, which we employ from both a speculative and risk management perspective, due to a change in the exchange rate of the foreign currency in which cash and financial instruments are denominated. As of December 31, 2020, through our investment in TP Fund, the Company had total net long exposure to foreign denominated securities representing
1.5% (December 31, 2019 - 3.2%) of the Company’s investment in the TP Fund, including cash and cash equivalents of $43.3 million (December 31, 2019 - $87.1 million).
The following table summarizes the net impact that a 10% increase and decrease in the value of the U.S. dollar against select foreign currencies would have had on the value of the TP Fund as of December 31, 2020:
10% increase in U.S. dollar 10% decrease in U.S. dollar
Change in fair value Change in fair value as % of investment portfolio Change in fair value Change in fair value as % of investment portfolio
($ in thousands)
British Pounds $ (2,341) (0.1) % $ 2,341 0.1 %
Japanese Yen (1,416) (0.1) % 1,416 0.1 %
Canadian Dollar (530) - % 530 - %
Total $ (4,287) (0.2) % $ 4,287 0.2 %
Interest Rate Risk
Our net investments managed by Third Point LLC, including investments underlying the TP Fund, collateral assets and other fixed income investments, include interest rate sensitive securities, such as corporate bonds, U.S. treasury securities and sovereign debt instruments, asset-backed securities (“ABS”), and interest rate options and derivatives. One key market risk exposure for any debt instrument is interest rate risk. As interest rates rise, the fair value of our long fixed-income portfolio falls, and the opposite is also true as interest rates fall. Additionally, some of our sovereign debt instruments, ABS and derivative investments may also be credit sensitive and their value may indirectly fluctuate with changes in interest rates.
Third Point LLC monitors the potential effects of interest rate shifts by performing stress tests against the portfolio composition using both third-party and in-house risk systems.
In response to COVID-19, the Federal Reserve reduced the Federal Funds Rate to zero percent in March 2020. The outlook for 2021 is uncertain, and there is a possibility that the Federal Reserve keeps interest rates low or even uses negative interest rates if economic conditions warrant. Changes in interest rates or a continued slowdown in the United States or in global economic conditions may adversely affect the values and cash flows of these assets.
The following table summarizes the impact that a 100 basis point increase or decrease in interest rates would have on the value of our net investments managed by Third Point LLC, including investments underlying the TP Fund, collateral assets and other fixed income investments, as of December 31, 2020:
100 basis point increase in interest rates 100 basis point decrease in interest rates
Change in fair value Change in fair value as % of investment portfolio Change in fair value Change in fair value as % of investment portfolio
($ in thousands)
Corporate bonds, U.S. treasuries and sovereign debt instruments (1) $ (9,607) (0.3) % $ 10,939 0.4 %
Asset-backed securities (2) (3,713) (0.1) % 3,800 0.1 %
Interest rate swaps and derivatives 76 - % (76) - %
Net exposure to interest rate risk $ (13,244) (0.4) % $ 14,663 0.5 %
(1)Includes interest rate risk associated with investments held as collateral in reinsurance trust accounts and other instruments underlying the TP Fund.
(2)Includes instruments for which durations are available on December 31, 2020. Includes a convexity adjustment if convexity is available.
For the purposes of the above table, the hypothetical impact of changes in interest rates on debt instruments, ABS and interest rate options was determined based on the interest rates and credit spreads applicable to each instrument individually. We and Third Point LLC periodically monitor TP Fund’s, and our collateral assets and other short-term investments net exposure to interest rate risk and generally do not expect changes in interest rates to have a materially adverse impact on our operations.
Commodity Price Risk
In managing the TP Fund, Third Point LLC periodically monitors and actively trades to take advantage of, and/or seeks to minimize any losses from, fluctuations in commodity prices. As TP Fund’s investment manager, Third Point LLC may choose to opportunistically make a long or short investment in a commodity or in a security directly affected by the price of a commodity as a response to market developments. From time to time, we expect TP Fund will invest in commodities or commodities exposures in the form of derivative contracts from both a speculative and risk management perspective. Generally, market prices of commodities are subject to fluctuation.
As of December 31, 2020, the TP Fund had de minimis (December 31, 2019 - de minimis) commodity exposure.
We and Third Point LLC periodically monitor the TP Fund’s exposure to commodity price fluctuations and generally do not expect changes in commodity prices to have a material adverse impact on our operations.
Credit Risk
Reinsurance Contracts
We have exposure to credit risk through reinsurance contracts with companies that write credit risk insurance. Our portfolio of risk is predominantly U.S. mortgage insurance and mortgage credit risk transfer. We provide our clients in these lines of business with reinsurance protection against credit deterioration, defaults or other types of financial non-performance. Loss experience in these lines of business has been very good but is cyclical and is affected by the state of the general economic environment. We seek to proactively manage the risks associated with these credit-sensitive lines of business by closely monitoring its risk aggregation and by diversifying the underlying risks where possible. We have bought some retrocessional coverage against a subset of these risks. We have written $498.6 million, or 10.1%, of credit and financial lines premium since inception, of which $72.4 million was written in the year ended December 31, 2020. The majority of the mortgage insurance premium has been written as quota shares of private mortgage insurers, primarily in the United States.
Our portfolio of credit risk reinsurance is susceptible to the potential effects of COVID-19. These effects are unlikely to be the direct consequence of the pandemic itself but will more likely be a result of the economic impact of the pandemic and the steps that governments and others around the world have taken in an attempt to control its spread and the corresponding loss of life and health. With that in mind, the ultimate result for our book of business will be determined by the length and depth of the ensuing recession and heightened levels of unemployment.
We have exposure to credit risk as it relates to its business written through brokers, if any of our brokers are unable to fulfill their contractual obligations with respect to payments to us. In addition, in some jurisdictions, if the broker fails to make payments to the insured under our policy, we may remain liable to the insured for the deficiency. Our exposure to such credit risk is somewhat mitigated in certain jurisdictions by contractual terms.
We are exposed to credit risk relating to balances receivable under our reinsurance contracts, including premiums receivable, and the possibility that counterparties may default on their obligations to us. The risk of counterparty default is partially mitigated by the fact that any amount owed to us from a reinsurance counterparty would be netted against any losses we would pay in the future. We monitor the collectability of these balances on a regular basis.
To date, the events surrounding COVID-19 have not caused us to have heightened concern about our ability to collect on payments due from our brokers or under our reinsurance contracts.
Investments
We are also exposed to credit risk through our net investments managed by Third Point LLC, including investments underlying the TP Fund and other fixed income investments. Third Point LLC typically performs intensive fundamental analysis on the broader markets, credit spreads, security-specific information, and the underlying issuers of debt securities that are contained in TP Fund’s investment portfolio and the Company’s other fixed income investments.
In addition, the securities and cash in the TP Fund are held with several prime brokers, subjecting us to the related credit risk from the possibility that one or more of them may default on their obligations to us. Third Point LLC closely and regularly monitors the concentration of credit risk with each broker and if necessary, transfers cash or securities among brokers to diversify and mitigate TP Fund’s credit risk.
Our investment portfolio, and specifically, the valuations of investment assets it holds, may be adversely affected as a result of market developments from COVID-19 and uncertainty regarding its outcome.
As of December 31, 2020 and 2019, through our investment in TP Fund and other fixed income investments, the Company was exposed to non-investment grade securities. Non-investment grade securities consist of securities having a rating lower than BBB- as determined by Standard & Poor's or Fitch Ratings, Baa3 by Moody's Investor Services and securities not rated by any rating agency, and were as follows:
2020 2019
($ in thousands)
Assets:
Asset-backed securities $ 192,391 $ 133,326
Bank debt 1,955 11,786
Corporate bonds 71,980 79,178
Sovereign debt 121 1,250
Trade claims 48 102
$ 266,495 $ 225,642
Liabilities:
Corporate bonds $ 3,703 $ 2,849
$ 3,703 $ 2,849
As of December 31, 2020 and 2019, through our investment in TP Fund and other fixed income investments, ABS holdings were private-label issued, non-investment grade securities, and none of these securities were guaranteed by a government sponsored entity. As of December 31, 2020 and 2019, the largest concentration of our ABS holdings were as follows:
2020 2019
($ in thousands)
Reperforming loans $ 156,853 76.3 % $ 101,587 75.9 %
Subprime and non-qualified residential mortgage-backed securities 23,319 11.3 % - - %
Market place loans 12,274 6.0 % 22,979 17.2 %
Consumer 6,281 3.1 % - - %
Other (1) 6,848 3.3 % 9,241 6.9 %
$ 205,575 100.0 % $ 133,807 100.0 %
(1) Other includes: collateralized loan obligations, commercial mortgage-backed securities and aircraft ABS.
The TP Fund may also be exposed to non-investment grade securities held within certain investments in limited partnerships and derivatives. As a result of its investment in this type of ABS and certain other non-investment grade securities, our investment portfolio is exposed to credit risk of underlying borrowers, which may not be able to make
timely payments on loans or which may default on their loans. All of these classes of ABS and certain other non-investment grade securities are sensitive to changes in interest rates and any resulting change in the rate at which borrowers sell their properties (in the case of mortgage backed securities), refinance or otherwise pre-pay loans. As an investor in these classes of ABS and certain other non-investment grade securities, the TP Fund may be exposed to the credit risk of underlying borrowers not being able to make timely payments on loans or the likelihood of borrowers defaulting on their loans. In addition, the TP Fund may be exposed to significant market and liquidity risks.
Liquidity Risk
Certain of the investments underlying the TP Fund and the Company’s fixed income investments may become illiquid. Disruptions in the credit markets may materially affect the liquidity of certain investments, including ABS which represent 11.2% (December 31, 2019 - 12.0%) of total net investments managed by Third Point LLC as of December 31, 2020. If we require significant amounts of cash on short notice in excess of normal cash requirements, which could include the payment of claims expenses or to satisfy a requirement of AM Best, in a period of market illiquidity, certain investments underlying the TP Fund may be difficult to sell in a timely manner and may have to be disposed of for less than what may otherwise have been possible under normal conditions. As of December 31, 2020, through our investment in the TP Fund and fixed income investments, we had $1,386.1 million (December 31, 2019 - $1,022.9 million) of unrestricted, liquid investment assets, defined as unrestricted cash and investments and securities with quoted prices available in active markets/exchanges.
Political Risk
Investments
We are exposed to political risk to the extent TP Fund’s investment manager trades securities that are listed on various U.S. and foreign exchanges and markets. The governments in any of these jurisdictions could impose restrictions, regulations or other measures, which may have a material impact on our investment strategy and underwriting operations.
In managing the TP Fund, Third Point LLC routinely monitors and assesses relative levels of risk associated with local political and market conditions and focuses its investments primarily in countries in which it believes the rule of law is respected and followed, thereby affording more predictable outcomes of investments in that country.
Reinsurance Contracts
We also have limited political violence exposure in several reinsurance contracts with companies that write political risk insurance and reinsurance. Extended lockdowns in many locations around the world and the potential for severe economic hardship may present increased risk of losses to this book of business arising from strikes, riots or civil commotion.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
See our consolidated financial statements and notes thereto and required financial statement schedules commencing on page.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2020. Based upon
this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Changes in Internal Control over Financial Reporting
There have been no material changes to our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on its assessment, management concluded that, as of December 31, 2020, our internal control over financial reporting is effective based on those criteria.
Ernst & Young Ltd., an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Annual Report on Form 10-K, has issued its written attestation report on its assessment of our internal control over financial reporting, which follows this report.
Report of Independent Registered Public Accounting Firm
The Shareholders and the Board of Directors
Third Point Reinsurance Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Third Point Reinsurance Ltd.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Third Point Reinsurance Ltd. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15 and our report dated February 23, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young Ltd.
Hamilton, Bermuda
February 23, 2021

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not applicable.
Part III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item relating to our directors, executive officers and corporate governance is incorporated by reference to the definitive proxy statement that will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31, 2020 pursuant to Regulation 14A.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item relating to executive compensation is incorporated by reference to the definitive proxy statement that will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31, 2020 pursuant to Regulation 14A.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Certain information relating to this Item is set forth in this Annual Report under the caption “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities - Equity Compensation Plan Information”.
The balance of the information required by this Item relating to security ownership of certain beneficial owners and management is incorporated by reference to the definitive proxy statement that will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31, 2020 pursuant to Regulation 14A.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item relating to certain relationships and related transactions and director independence is incorporated by reference to the definitive proxy statement that will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31, 2020 pursuant to Regulation 14A.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this Item relating to principal accounting fees and services is incorporated by reference to the definitive proxy statement that will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31, 2020 pursuant to Regulation 14A.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
Financial Statements, Financial Statement Schedules and Exhibits
Financial Statements and Financial Statement Schedules
See the Index to Consolidated Financial Statements and Supplemental Data on page.
Exhibits
Exhibit Number Description
2.1††† Agreement and Plan of Merger, dated as of August 6, 2020, by and among Third Point Reinsurance Ltd., Yoga Merger Sub Limited and Sirius International Insurance Group, Ltd. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 7, 2020).
3.1* Memorandum of Association of Third Point Reinsurance Ltd.
3.1.1 Certificate of Deposit of Memorandum of Increase of Share Capital of Third Point Reinsurance Ltd. (incorporated by reference to Exhibit 3.1.1 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2014).
3.1.2 Amended and Restated Bye-laws of Third Point Reinsurance Ltd. (incorporated by reference to Exhibit 3.2.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on July 31, 2018).
3.3 Certificate of Incorporation of Third Point Re (USA) Holdings Inc. (incorporated by reference to Certificate of Incorporation of Third Point Re (USA) Holdings Inc. (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed on February 27, 2015) 3.3 to the Company’s Annual Report on Form 10-K filed on February 27, 2015).
3.4 Bylaws of Third Point Re (USA) Holdings Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 20, 2015)
4.1* Specimen Common Share Certificate.
4.2* Registration Rights Agreement, by and among Third Point Reinsurance Ltd. and each of the Members, dated as of December 22, 2011
4.3* Warrant to Purchase Common Shares issued to KEP TP Holdings, L.P., dated as of December 22, 2011.
4.4* Warrant to Purchase Common Shares issued to KIA TP Holdings, L.P., dated as of December 22, 2011.
4.6* Warrant to Purchase Common Shares issued to P RE Opportunities Ltd., dated as of December 22, 2011.
4.7* Warrant Subscription Agreement, by and among Third Point Reinsurance Ltd. and each of the signatories thereto, dated as of December 22, 2011
4.8* Agreement among Members by and among Third Point Reinsurance Ltd. and each of the Members, dated as of December 22, 2011.
4.9 Amended and Restated Founders Agreement, by and among Third Point Reinsurance Company Ltd., Third Point Reinsurance (USA) Ltd., KEP TP Bermuda Ltd., KIA TP Bermuda Ltd., Pine Brook LVR, L.P., P RE Opportunities Ltd. and Dowling Capital Partners I, L.P. dated as of February 25, 2015 (incorporated by reference to Exhibit 4.9 to the Company’s Annual Report on Form 10-K filed on February 27, 2015).
4.10 Senior Indenture, dated as of February 13, 2015, among Third Point Re (USA) Holdings Inc., as issuer, Third Point Reinsurance Ltd., as guarantor, and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 13, 2015).
E-1
4.11 First Supplemental Indenture, dated as of February 13, 2015, among Third Point Re (USA) Holdings Inc., as issuer, Third Point Reinsurance Ltd., as guarantor, and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on From 8-K filed with the SEC on February 13, 2015).
4.12 7.00% Senior Note due 2025 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on From 8-K filed with the SEC on February 13, 2015)
4.13 Description of Share Capital.
10.1* Amended and Restated Joint Venture and Investment Management Agreement, dated as of June 22, 2016, by and among Third Point Reinsurance Ltd., Third Point Reinsurance Company, Ltd., Third Point Advisors LLC and Third Point LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
10.1.1 Amended and Restated Joint Venture and Investment Management Agreement, dated as of June 22, 2016, by and among Third Point Reinsurance (USA) Ltd., Third Point Re (USA) Holdings Inc., Third Point LLC and Third Point Advisors LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
10.3.6 ** Employment Agreement between Third Point Reinsurance Ltd. and J. Robert Bredahl, entered into on March 17, 2017, effective as of March 1, 2017.
10.3.6.1 ** Amendment No. 1 to Employment Agreement between Third Point Reinsurance Ltd. and J. Robert Bredahl, entered into as of April 24, 2019 (incorporated by reference to Exhibit 10.3.6.1 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2019)
10.3.6.2 ** Separation Agreement and Release between Third Point Reinsurance Ltd. and J. Robert Bredahl, dated as of May 8, 2019 (incorporated by reference to Exhibit 10.3.6.2 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2019).
10.4*&**
Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III, dated as of January 23, 2012
10.4.1** Amendment No. 1 to Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III, dated as of April 1, 2015 (incorporated by reference to Exhibit 10.4.1 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2015).
10.4.2** Amendment No. 2 to Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III dated as of May 4, 2016 (incorporated by reference to Exhibit 10.4.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016)
10.4.3** Amendment No. 3 to Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III, entered into on March 17, 2017, effective as of March 1, 2017 (incorporated by reference to Exhibit 10.4.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2017).
10.4.4** Amendment No. 4 to Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III, entered into as of August 3, 2017 (incorporated by reference to Exhibit 10.4.4 to the to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2017)
10.4.5 ** Amendment No. 5 to Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III, entered into as of April 1, 2018 (incorporated by reference to Exhibit 10.4.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on July 31, 2018).
10.4.6 ** Amendment No. 6 to Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III, entered into as of May 8, 2019 (incorporated by reference to Exhibit 10.4.6 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2019)
10.5*&**
Share Incentive Plan.
10.6*&**
Form of Restricted Share Award Agreement.
10.6.1** Form of Director Service Restricted Share Award Agreement (incorporated by reference to Exhibit 10.6.1 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2014).
E-2
10.6.2** Form of Employee Restricted Share Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on January 6, 2015)
10.6.3** Form of Employee Performance Restricted Shares Agreement (incorporated by reference to Exhibit 10.6.3 to the Company’s Annual Report on Form 10-K filed on February 27, 2015).
10.6.4** Amendment to Form of Employee Performance Restricted Shares Agreement (incorporated by reference to Exhibit 10.6.4 to the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2016).
10.6.4.1 Form of Employee Performance Restricted Shares Agreement (incorporated by referenced to Exhibit 10.6.4.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2018).
10.6.5** Form of Employee Performance Restricted Shares Agreement (incorporated by reference to Exhibit 10.6.5 to the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2016).
10.6.6** Form of Employee Restricted Shares Agreement (incorporated by reference to Exhibit 10.6.6 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2019).
10.7*&**
Form of Nonqualified Share Option Agreement under the Share Incentive Plan.
10.8** Form of Director Service Agreement (Adopted November 2013) (incorporated by reference to Exhibit 10.8.1 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2014).
10.8.1** Schedule of Signatories to the Director Service Agreement as of December 31, 2020.
10.9** Employment agreement between Third Point Reinsurance Ltd. and Nicholas Campbell, dated as of December 13, 2013 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2018)
10.9.1 Amendment No. 1 to Employment Agreement between Third Point Reinsurance Ltd. and Nicholas Campbell, entered into as of April 1, 2018.(incorporated by reference to Exhibit 10.9.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on July 31, 2018).
10.10** Third Point Reinsurance Ltd. 2013 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2017)
10.11** Third Point Reinsurance Ltd. Annual Incentive Plan (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2017).
10.22* Trademark License Agreement between Third Point LLC and Third Point Reinsurance Ltd., dated as of December 22, 2011.
10.23* Trademark License Agreement between Third Point LLC and Third Point Reinsurance Company Ltd., dated as of December 22, 2011
10.24 Trademark License Agreement - Joinder Agreement between Third Point LLC, Third Point Reinsurance Company Ltd., Third Point Re (USA) Holdings Inc. and Third Point Reinsurance (USA) Ltd. dated as of February 17, 2016. (incorporated by reference to Exhibit 10.8.1 to the Company’s Annual Report on Form 10-K filed on February 26, 2016).
10.26*† Letter Agreement dated as of December 22, 2011
10.27*&**
Section 409A Specified Employee Policy.
10.28*&**
Director and Officer Indemnification Agreement
10.28.1** Schedule of Signatories to the Director and Officer Indemnification Agreement as of December 31, 2020.
10.29 Amended and Restated Director Compensation Policy dated May 9, 2018 Amended and Restated Director Compensation Policy (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2018).
E-3
10.30** Amended and Restated Employment Agreement between Third Point Reinsurance Ltd. and Christopher S. Coleman, dated as of November 10, 2014 (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2015).
10.33 Amended and Restated Exempted Limited Partnership Agreement of Third Point Enhanced LP, between Third Point Advisors LLC, as General Partner, Third Point Reinsurance Ltd., Third Point Reinsurance Company Ltd., Third Point Reinsurance (USA) Ltd., and the initial limited partner, dated as of July 31, 2018 (incorporated by reference to Exhibit 10.33 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2018).
10.33.1 Second Amended and Restated Exempted Limited Partnership Agreement of Third Point Enhanced LP, by and among Third Point Advisors LLC, as General Partner, Third Point Reinsurance Company Ltd. and Third Point Reinsurance (USA) Ltd., as Limited Partners, and Third Point Reinsurance Ltd., dated as of February 28, 2019 (incorporated by reference to Exhibit 99.1 to the Company’s Annual Report on Form 10-K filed on February 28, 2019).
10.33.2 Third Amended and Restated Exempted Limited Partnership Agreement of Third Point Enhanced LP, dated August 6, 2020, between Third Point Advisors LLC, as General Partner, Third Point Reinsurance Ltd., Third Point Reinsurance Company Ltd., Third Point Reinsurance (USA) Ltd., and the initial limited partner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 6, 2020).
10.34 Subscription Agreement among Third Point Enhanced LP, Third Point Reinsurance Company Ltd., and Third Point Reinsurance (USA) Ltd., dated as of July 31, 2018 (incorporated by reference to Exhibit 10.34 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2018)
10.35 Collateral Assets Investment Management Agreement among Third Point LLC, Third Point Reinsurance Company Ltd., and Third Point Reinsurance (USA) Ltd., dated as of July 31, 2018 (incorporated by reference to Exhibit 10.35 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2018).
10.36 Investment Management Agreement, among Third Point LLC and Third Point Reinsurance Company Ltd., dated as of August 6, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 7, 2020).
10.37 Termination Agreement among Third Point Reinsurance Company Ltd., Third Point Reinsurance Ltd., Third Point LLC and Third Point Advisors LLC, dated July 31, 2018 (incorporated by reference to Exhibit 10.37 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2018)
10.38 Termination Agreement among Third Point Re (USA) Holdings Inc., Third Point Reinsurance (USA) Ltd., Third Point LLC and Third Point Advisors LLC, dated as of July 31, 2018 (incorporated by reference to Exhibit 10.38 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2018).
10.39 Amended and Restated Collateral Assets Investment Management Agreement dated May 24, 2019 (incorporated by reference to Exhibit 10.39 to the Company’s Current Report on Form 8-K filed with the SEC on May 28, 2019).
10.40 Employment agreement between Third Point Reinsurance Ltd. and Janice R. Weidenborner, dated as of September 21, 2015 (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed on February 28, 2020)
10.41 Employment Agreement between Third Point Reinsurance (USA) Ltd. and David E. Govrin dated as of March 22, 2017 (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed on February 28, 2020).
10.41.1 Amendment No. 1 to Employment Agreement between Third Point Reinsurance (USA) Ltd. and David E. Govrin dated as of April 1, 2019 (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed on February 28, 2020).
10.41.2 Amendment No. 2 to Employment Agreement between Third Point Reinsurance (USA) Ltd. and David E. Govrin dated as of May 10, 2019 (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed on February 28, 2020).
E-4
10.42 Voting and Support Agreement, dated as of August 6, 2020, by and among CM Bermuda Limited, CMIG International Holding Pte. Ltd., Sirius International Insurance Group, Ltd. and Third Point Reinsurance Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 7, 2020).
10.43 Voting and Support Agreement, dated as of August 6, 2020, by and among Daniel S. Loeb, The 2010 Loeb Family Trust, Third Point Advisors LLC, Third Point Opportunities Master Fund L.P., The 2011 Loeb Family GST Trust, Sirius International Insurance Group, Ltd. and Third Point Reinsurance Ltd. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 7, 2020).
10.44 Voting and Support Agreement, dated as of August 6, 2020, by and among Joshua L. Targoff, Joseph L. Dowling III, Rafe de la Gueronniere, Gretchen A. Hayes, Daniel V. Malloy, Mark Parkin, Sid Sankaran, Sirius International Insurance Group, Ltd. and Third Point Reinsurance Ltd. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on August 7, 2020).
10.45 Debt Commitment Letter, dated as of August 6, 2020, by and between Third Point Reinsurance Ltd. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on August 7, 2020).
10.46 Equity Commitment Letter, dated as of August 6, 2020, by and between Third Point Reinsurance Ltd., Third Point Opportunities Master Fund Ltd. and Daniel S. Loeb (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on August 7, 2020).
10.47 Director Compensation Policy of Third Point Reinsurance Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2020)
10.48** Employment Agreement between Third Point Reinsurance Ltd. and Sid Sankaran dated as of August 6, 2020 (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2020).
10.49** Employee Restricted Share Award Agreement, dated as of August 6, 2020, by and between Third Point Reinsurance Ltd. and Sid Sankaran (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2020)
10.50 Transaction Agreement, dated September 4, 2020, by and among Third Point Reinsurance Ltd., Bain Capital Special Situations Asia, L.P., CCOF Master, L.P., Centerbridge Credit Partners Master, LP, and Centerbridge Special Credit Partners III, LP, and GPC Partners Investments (Canis) LP (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 11, 2020).
10.51** Letter Agreement, dated as of September 23, 2020, by and between Third Point Reinsurance Ltd. and David W. Junius (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2020)
10.52** Employee Restricted Share Award Agreement, dated as of October 1, 2020, by and between Third Point Reinsurance Ltd. and David W. Junius (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2020).
10.53 Credit Agreement, dated as of November 2, 2020, by and among Third Point Reinsurance Ltd., the other subsidiaries of Third Point Reinsurance Ltd. from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2020).
21.1 List of Subsidiaries as of December 31, 2020.
22.1 List of Subsidiary Issuers or Guarantors as of December 31, 2020.
23.1 Consent of Independent Auditors.
23.2 Third Point Enhanced LP Consent of Independent Auditors.
24.1 Power of Attorney signed by each of the members of the Board of Directors on February 23, 2021.
E-5
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1± Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2± Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Audited Financial Statements of Third Point Enhanced LP as of and for the year ended December 31, 2020
101.INS†† XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH†† XBRL Taxonomy Extension Schema Document
101.CAL†† XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB†† XBRL Taxonomy Extension Labels Linkbase Document
101.PRE†† XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF†† XBRL Taxonomy Extension Definition Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)
* Incorporated by reference to the exhibit of the same number filed as part of the Company’s registration statement on Form S-1 (File No. 333-189960) which was declared effective by the Securities and Exchange Commission on August 14, 2013.
** Management contracts or compensatory plans or arrangements
± This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.
† Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment under Rule 406 promulgated under the Securities Act of 1933, as amended (Securities Act).
†† In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.
††† Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments to the Merger Agreement have been omitted. Third Point Re hereby agrees to furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
E-6