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Point House
3 Waterloo Lane
Pembroke HM 08
Bermuda
www.thirdpointre.bm
2018 ANNUAL REPORT
Third Point Re is a specialty property and casualty
reinsurer headquartered in Bermuda. The Company’s
total return business model combines exceptional
underwriting talent with market-leading investment
management, provided by Third Point LLC.
President and Chief Executive Officer
President and Chief Executive Officer
Neil McConachie
Third Point Reinsurance Company Ltd.
EXECUTIVE OFFICES
Co-Founder and former CFO of Fidelis Insurance
Holdings Limited
Mark Parkin
Retired 2013, Deloitte & Touche LLP
Janice R. Weidenborner
Executive Vice President, Group General
Counsel and Secretary
Point House
3 Waterloo Lane
Pembroke HM 08
Bermuda
CORPORATE
INFORMATION
BOARD OF DIRECTORS
J. Robert Bredahl
Joshua L. Targoff (Chairman)
Partner, COO and General Counsel,
Third Point LLC
Rafe de la Gueronniere
Co-Chairman, Continuity Logic
Steven E. Fass
Retired 2008, White Mountains
Insurance Group Ltd.
Gretchen A. Hayes
Venture Partner - Sandbox Insurtech
Venture Fund
Mary R. Hennessy
Independent Consultant to P&C industry
AUDIT COMMITTEE
Mark Parkin (Chairman)
Steven E. Fass
Mary R. Hennessy
Neil McConachie
COMPENSATION COMMITTEE
Gretchen A. Hayes (Chairman)
Steven E. Fass
Mary R. Hennessy
Mark Parkin
GOVERNANCE AND
NOMINATING COMMITTEE
Mary R. Hennessy (Chairman)
Steven E. Fass
Mark Parkin
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EXECUTIVE OFFICERS
J. Robert Bredahl
Justin J. Brenden
Chief Reserving Actuary
Nicholas J. D. Campbell
Chief Risk Officer
Christopher S. Coleman
Chief Financial Officer
Manoj K. Gupta
Head of Investor Relations
Yan Leclerc
Chief Accounting Officer
Daniel V. Malloy
Chief Executive Officer,
President, Third Point Reinsurance (USA) Ltd.;
COMMON SHARE INFORMATION
The Company’s common shares are listed
on the New York Stock Exchange (NYSE).
Trading of the Company’s common shares
began on August 15, 2013, under the
symbol TPRE.
DIVIDENDS
The Company has never declared or paid
cash dividends on its common shares.
The Company intends to retain future
earnings to finance the growth and
development of its business, and does not
anticipate declaring or paying any cash
dividends in the foreseeable future.
TRANSFER AGENT
Computershare Investor Services
462 South 4th St, Suite 1600
Louisville, KY 40202
+1 (877) 373-6374 (U.S., Canada)
+1 (781) 575-2879 (non-U.S.)
THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING
FIRM APPOINTED AS OUR
INDEPENDENT AUDITOR
Ernst & Young Ltd.
3 Bermudiana Road
Hamilton HM 08
Bermuda
TO REQUEST AN ANNUAL
REPORT OR FORM 10-K
Additional copies of this Annual Report or
the Company’s Form 10-K filed with the
Securities and Exchange Commission are
available, without charge, upon request
by contacting Investor Relations at the
address or phone number listed below.
2019 ANNUAL GENERAL MEETING
May 8, 2019
10:00 a.m. Atlantic Daylight Time
Executive Boardroom
The WaterFront Residence
11 Waterloo Lane
Pembroke HM 08
Bermuda
INVESTOR RELATIONS
Requests for information
should be directed to:
Email: investor.relations@thirdpointre.bm
Phone: (441) 542-3333
Web: www.thirdpointre.bm
FOR MORE INFORMATION
For additional information, please visit
our website at www.thirdpointre.bm.
Information as of March 1, 2019
2018 FINANCIAL HIGHLIGHTS
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Selected Statement of Income (Loss) Data:
Gross Premiums Written
Net Premiums Written
Net Premiums Earned
Years ended Dec 31
2018
2017
2016
$ 578,252
$ 641,620
$ 617,374
$ 558,357
$ 639,145
$ 615,049
$ 621,442
$ 547,058
$ 590,190
Net Investment Income (Loss)
$ (251,433)
$ 391,953
Net income (loss) available to Third Point Re
common shareholders
$ (317,692)
$ 277,798
$ 98,825
$ 27,635
Selected Balance Sheet Data:
Total Assets
Total Shareholders’ Equity
Per Common Share Data:
$ 3,086,234
$ 4,671,794
$ 3,895,644
$ 1,204,574
$ 1,661,496
$ 1,449,725
Basic earnings (loss) per share available to Third
Point Re common shareholders
Diluted earnings (loss) per share available to
Third Point Re common shareholders
$ (3.27)
$ 2.71
$ 0.26
$ (3.27)
$ 2.64
$ 0.26
Basic Book Value Per Share (1)
Diluted Book Value Per Share (1)
Selected Ratios:
Loss and Loss Expense Ratio
Acquisition Cost Ratio
Composite Ratio
General and Administrative Expense Ratio
Combined Ratio
Net Investment Return
Return on beginning shareholders’ equity attrib-
utable to Third Point Re common shareholders (1)
$ 13.15
$ 12.98
70.6 %
33.2 %
103.8 %
3.0 %
106.8 %
(10.8) %
(20.0) %
$ 16.33
$ 15.65
67.6 %
34.5 %
102.1 %
5.6 %
107.7 %
17.7 %
20.1 %
$ 13.57
$ 13.16
67.1 %
37.6 %
104.7 %
3.8 %
108.5 %
4.2 %
2.0 %
(1) Basic Book Value Per Share, 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. Please see the disclosure on non-GAAP
Financial Measures included in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in
Form 10-K included in this Annual Report for additional information and reconciliations to the most comparable GAAP measures.
A MESSAGE
FROM THE CEO
Dear Fellow Shareholders,
Third Point Re was created to combine the investment returns of a world-class investment manager
with a flexible and opportunistic underwriting strategy. There have been years during our history
where the results of the model have produced exceptional returns to our shareholders, such as 2017,
when we achieved a market leading 20% return on equity. Unfortunately, 2018 was a disappointing
year on both investment and underwriting, resulting in a negative 20% return on equity. Like any
good organization, we have reflected on what we can do differently to avoid another disappointing
year and have been working with Third Point LLC, our exclusive investment manager, to help find a
solution that we expect will dampen volatility within our investment strategy and ultimately help
improve our returns to shareholders.
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We are pleased to report that Third Point LLC has responded to 2018 by refining its investment
exposures and processes to better anticipate market dislocations and to be a liquidity provider when
they occur. While it is still early, we are encouraged with the results so far in 2019. Additionally, Third
Point LLC and Third Point Re have agreed to allocate a portion of our investment portfolio to credit
strategies that will have a lower expected volatility. We believe these changes to the investment side
of our business model are sound and we are excited about the potential benefits they will bring.
On the underwriting side of the business, we are continuing to expand our platform and to focus
on higher margin lines of business. We have added a small property catastrophe portfolio and are
anticipating writing more specialty lines, lower-layer excess covers, and shorter tail event-type covers.
We believe we can be creative and nimble on the underwriting side of our business and that our strong
team of underwriters can structure transactions that will protect capital and ultimately lead us to
underwriting profitability.
In conclusion, while we are disappointed by our overall performance in 2018, we are proactively taking action and are encouraged by the prospects these initiatives will bring to the overall profitability profile of Third Point Re. We believe that Third Point Re can be the leading provider of reinsurance to companies in need of creative solutions. When combined with the results we expect to achieve from our investments managed by Third Point LLC, we believe that shareholders will once again benefit from our total return model.I thank you for your continued support.J. ROBERT BREDAHL President & CEO REINSURANCE
RESULTS
Gross Premium Written
Since Inception by Line of Business
Reserve Covers 10%
Other Casualty 14%
Multi-Line
21%
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10% Credit & Financial Lines
15% Auto
10% Workers Compensation
3% Other Specialty
17% Property
Total Gross Written Premium
(in millions of U.S. Dollars)
P&C Segment Combined Ratio
$702
$642
$617
$613
$578
102.2%
104.7% 108.5% 107.7% 106.8%
2014
2015
2016
2017
2018
2014
2015
2016
2017 2018
OTHER KEY
PERFORMANCE
INDICATORS
Net Investment Return
17.7%
Return on beginning shareholders’
equity attributable to Third Point Re
common shareholders (1)
20.1%
5.1%
4.2%
3.6%
2.0%
-1.6%
-10.8%
-6.0%
-20.0%
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Diluted Book Value Per Share (1)
$18
15
12
9
6
2014
4Q
2015
1Q
2015
2Q
2015
3Q
2015
4Q
2016
1Q
2016
2Q
2016
3Q
2016
4Q
2017
1Q
2017
2Q
2017
3Q
2017
4Q
2018
1Q
2018
2Q
2018
3Q
2018
4Q
(1) Diluted Book Value Per Share and Return on Beginning Shareholders’ Equity attributable to Third Point Re common shareholders are a non-GAAP financial
measure. Please see the disclosure on non-GAAP Financial Measures included in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations in Form 10-K included in this Annual Report for additional information and reconciliations to the most comparable GAAP measures.
2018
FORM
10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
or
Commission File Number 001-35039
THIRD POINT REINSURANCE LTD.
(Exact name of registrant as specified in its charter)
Bermuda
(State or other jurisdiction of incorporation or organization)
3 Waterloo Lane
Pembroke, Bermuda, HM 08
(Address of principal executive offices and zip code)
98-1039994
(I.R.S. Employer Identification No.)
(441) 542 3300
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, $0.10 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx No¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yesx No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
The aggregate market value of the shares of the voting and non-voting common equity held by non-affiliates of the registrant as of
June 30, 2018 was $963.2 million.
As of February 25, 2019, there were 93,639,610 common shares of the registrant’s common shares outstanding, including 2,013,080
restricted shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information from certain portions of the registrant’s definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the fiscal year ended December 31, 2018.
____________________________________________________________________________________________________________________________________________________________
Third Point Reinsurance Ltd.
INDEX
INTRODUCTORY NOTE ................................................................................................................................................................
PART I ...............................................................................................................................................................................................
Item 1. Business. ............................................................................................................................................................................
Item 1A. Risk Factors ....................................................................................................................................................................
Item 1B. Unresolved Staff Comments ...........................................................................................................................................
Item 2. Properties ...........................................................................................................................................................................
Item 3. Legal Proceedings .............................................................................................................................................................
Item 4. Mine Safety Disclosures ....................................................................................................................................................
PART II ..............................................................................................................................................................................................
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities ........
Item 6. Selected Financial Data .....................................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................................................................
Item 8. Financial Statements and Supplementary Data .................................................................................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...........................................
Item 9A. Controls and Procedures .................................................................................................................................................
Item 9B. Other Information ...........................................................................................................................................................
PART III .............................................................................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance ..............................................................................................
Item 11. Executive Compensation .................................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .......................
Item 13. Certain Relationships and Related Transactions, and Director Independence ................................................................
Item 14. Principal Accounting Fees and Services ..........................................................................................................................
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PART IV ............................................................................................................................................................................................ E-1
Item 15. Exhibits and Financial Statement Schedules ................................................................................................................... E-1
SIGNATURES ............................................................................................................................................................................... E-5
Consolidated Financial Statements ................................................................................................................................................ F-1
INTRODUCTORY NOTE
Unless the context otherwise indicates or requires, as used in this Annual Report on Form 10-K references to “we,”
“our,” “us,” and the “Company,” refer to Third Point Reinsurance Ltd. (“Third Point Re” or “TPRE”) and its directly
and indirectly owned subsidiaries, including Third Point Reinsurance Company Ltd. (“Third Point Re BDA”) and Third
Point Reinsurance (USA) Ltd. (“Third Point Re USA”), as a combined entity, except where otherwise stated or where it
is clear that the terms mean only Third Point Re exclusive of its subsidiaries. We refer to Third Point Re (USA) Holdings,
Inc. as “TPRUSA”, “Fiscal,” when used in reference to any twelve-month period ended December 31, refers to our
fiscal years ended December 31. We also refer to Third Point Enhanced LP as “TP Fund”. Unless otherwise indicated,
information contained in this Annual Report is as of December 31, 2018.
Cautionary Note Regarding Forward-Looking Statements
Certain statements contained or incorporated in this Annual Report include forward-looking statements. These forward-
looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and
expectations concerning our market position, international expansion, future operations, margins, profitability, future
efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When
used in this discussion, the words “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,”
“should,” “assumes,” “continues,” “could,” “will,” “future” and the negative of these or similar terms and phrases are
intended to identify forward-looking statements in this Annual Report on Form 10-K.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These
expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking
statements are reasonable, we can give you no assurance these expectations will prove to have been correct. Some of
these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results
and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties
and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the
following:
•
results of operations fluctuate and may not be indicative of our prospects;
• more established competitors;
losses exceeding reserves;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
highly cyclical property and casualty reinsurance industry;
downgrade or withdrawal of ratings by rating agencies;
significant decrease in our capital or surplus;
dependence on key executives;
dependence on letter of credit facilities that may not be available on commercially acceptable terms;
inability to service our indebtedness;
limited cash flow and liquidity due to our indebtedness;
inability to raise necessary funds to pay principal or interest on debt;
potential lack of availability of capital in the future;
credit risk associated with the use of reinsurance brokers;
future strategic transactions such as acquisitions, dispositions, mergers or joint ventures;
technology breaches or failures, including cyber-attacks;
lack of control over TP Fund;
lack of control over the allocation and performance of TP Fund’s investment portfolio;
dependence on Third Point LLC to implement TP Fund’s investment strategy;
limited ability to withdraw our capital accounts from TP Fund;
decline in revenue due to poor performance of TP Fund’s investment portfolio;
TP Fund’s investment strategy involves risks that are greater than those faced by competitors;
1
termination by Third Point LLC of our or TP Fund’s investment management agreements;
losses resulting from significant investment positions;
credit risk associated with the default on obligations of counterparties;
ineffective investment risk management systems;
fluctuations in the market value of TP Fund’s investment portfolio;
•
• potential conflicts of interest with Third Point LLC;
•
•
•
•
•
•
•
• U.S. and global economic downturns;
•
trading restrictions being placed on TP Fund’s investments;
limited termination provisions in our investment management agreements;
limited liquidity and lack of valuation data on certain TP Fund’s investments;
specific characteristics of investments in mortgage-backed securities and other asset-backed securities, in
securities of issues based outside the U.S., and in special situation or distressed companies;
loss of key employees at Third Point LLC;
suspension or revocation of our reinsurance licenses;
increased regulation or scrutiny of alternative investment advisers affecting our reputation;
•
• Third Point LLC’s compensation arrangements may incentivize investments that are risky or speculative;
•
•
• potentially being deemed an investment company under U.S. federal securities law;
•
failure of reinsurance subsidiaries to meet minimum capital and surplus requirements;
•
changes in Bermuda or other law and regulation that may have an adverse impact on our operations;
• Third Point Re and/or Third Point Re BDA potentially becoming subject to U.S. federal income taxation;
• potential characterization of Third Point Re and/or Third Point Re BDA as a passive foreign investment
company;
subjection of our affiliates to the base erosion and anti-abuse tax;
•
• potentially becoming subject to U.S. withholding and information reporting requirements under the Foreign
Account Tax Compliance Act; and
• other risks and factors listed under “Item 1A. Risk Factors” and elsewhere in this Annual Report.
Any one of these factors or a combination of these factors could materially affect our financial condition or future results
of operations and could influence whether any forward-looking statements contained in this report ultimately prove to be
accurate. Our forward-looking statements are not guarantees of future performance, and you should not place undue
reliance on them. All forward-looking statements speak only as of the date made and we undertake no obligation to
update or revise publicly any forward-looking statements, whether as a result of new information, future events or
otherwise.
In addition, while we do, from time to time, communicate with security analysts, it is against our policy to disclose to
them any material non-public information or other confidential information. Accordingly, shareholders should not
assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or
report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such
reports are not our responsibility.
PART I.
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 superior investment
2
management provided by Third Point LLC, our investment manager and the investment manager of TP Fund. We believe
that our reinsurance and investment strategy differentiates us from our competitors.
Our reinsurance strategy is to be highly opportunistic and disciplined. 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 senior management team has significant senior leadership and underwriting experience in the reinsurance industry.
We believe that our experience and longstanding relationships with our insurance and reinsurance company clients,
senior reinsurance brokers, insurance regulators and rating agencies are an important competitive advantage.
Substantially all of our investable assets are managed by Third Point LLC, which is wholly owned by Daniel S. Loeb,
one of our founding shareholders. Third Point LLC is an SEC-registered investment adviser headquartered in New York,
managing $14.0 billion in assets as of December 31, 2018. Refer to Note 4 to the consolidated financial statements
included in this Form 10-K for details on the investment account structure change that occurred in 2018.
We were incorporated on October 6, 2011 and completed our initial capitalization transaction in December 2011 with
$784.3 million of equity capital, and commenced underwriting business on January 1, 2012. Both of our operating
subsidiaries have an A- (Excellent) financial strength rating from A.M. Best Company, Inc., or A.M. Best.
In August 2012, we established a wholly-owned subsidiary in the United Kingdom, Third Point Re Marketing (UK)
Limited (“TPRUK”). In May 2013, TPRUK was licensed as an insurance intermediary by the UK Financial Conduct
Authority.
In August 2013, we completed an initial public offering (“IPO”) of 24,832,484 common shares. Our common shares are
listed on the New York Stock Exchange (“NYSE”) under the symbol “TPRE”.
In February 2015, we began reinsurance operations in the United States through Third Point Re USA, a Bermuda
company licensed as a Class 4 insurer and a wholly owned operating subsidiary of Third Point Re (USA) Holdings Inc.
(“TPRUSA”). TPRUSA is a wholly owned subsidiary of Third Point Re (UK) Holdings Ltd., a private company limited
by shares organized under the laws of England and Wales and our direct wholly owned subsidiary. Third Point Re USA
provides reinsurance products that are substantially similar to the reinsurance products provided by Third Point Re. Third
Point Re USA’s U.S. presence is a strategic component of our overall growth strategy.
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),
certain general and administrative expenses related to corporate activities, interest expense, foreign exchange (gains)
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. To help lower our expected combined
ratio, we have recently expanded into property catastrophe reinsurance and other higher margin event risk type covers.
The level of volatility in our reinsurance portfolio will be determined by market conditions, but will typically be lower
than that of most other reinsurance companies.
Most of our gross written premium has historically been generated from larger customized reinsurance contracts that
require significant interaction during the course of negotiations between the client, intermediaries and us. In these
situations, we take a lead underwriting position, meaning that we establish the pricing and terms and conditions of the
reinsurance contract. In certain instances, we will follow terms and conditions established by our competitors if we
believe the opportunity meets our return threshold and helps us balance our reinsurance portfolio. In addition, with the
3
recent expansion into property catastrophe and other event risk reinsurance covers, the number of less customized,
syndicated transactions will significantly increase.
We also write reinsurance contracts that provide protection against adverse development on loss reserves where we
provide an incremental amount of additional coverage limit. We typically provide coverage where we agree with the
client’s reserving practices and reserve levels or where we believe there are structural or contractual safeguards against
reserve deterioration in place. While these transactions may be booked at, or slightly above, a 100% composite ratio
(combined ratio before general and administrative expenses) and therefore do not initially generate underwriting income,
they typically produce premiums and/or float equal to the reserves ceded at the inception of the contract. In some
instances, the level of risk in the reserve cover contract or the risk mitigating features within the contract including
limitations on the amount and timing of loss payments require us to account for the contract as a deposit liability
contract. Using the deposit method of accounting, a deposit liability, rather than written premium, is initially recorded
based upon the consideration received less any explicitly identified premiums or fees. In subsequent periods, the deposit
liability is adjusted by calculating the effective yield on the deposit to reflect actual payments to date and future expected
payments.
The majority of our gross written premium is derived from a small number of large contracts and, as a result, individual
renewals, non-renewals, cancellations or new business can have a significant impact on premiums recognized in a period.
In addition, many of our quota share contracts are subject to significant judgment in the amount of premiums that we
expect to recognize. Changes in premium estimates are recorded in the period they are determined and can significantly
alter the expected value of a particular reinsurance contract. We also offer customized solutions to our clients, including
some of the reserve covers, which are considered retroactive reinsurance contracts, on which we will not have a regular
renewal opportunity. Furthermore, we record gross premiums written and earned for reserve covers at the inception of
the contract. Together, these factors can impact the comparability of premiums written and earned from period to period
and year over year. See Note 24 to our consolidated financial statements included elsewhere in this Annual Report for a
breakdown of contracts that individually contributed more than 10% of total gross premiums written.
We intend to manage our book of business by underwriting predominantly a mix of 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. See Note 24 to our consolidated financial statements included elsewhere in
this Annual Report for a breakdown of gross premiums written by domicile of ceding companies.
Many of our clients buy reinsurance from us for capital management purposes, primarily to increase their capacity to
write insurance premium, maintain or improve their credit ratings from rating agencies, or to meet regulatory capital
requirements. Many of our reinsurance contracts include structural and contractual features that limit the amount of risk
assumed by the reinsurer, and therefore carry relatively lower expected margins compared to the excess of loss
reinsurance and other more volatile forms of reinsurance in our portfolio.
We have historically focused on lines of business and forms of reinsurance that have demonstrated more stable return
characteristics and have limited our underwriting of property catastrophe risk. However, we have incrementally
expanded the lines of business and forms of reinsurance on which we focus that have increased risk profiles where we
believe the higher expected margins adequately compensate us for the increased risk. We have begun writing some
excess of loss casualty covers in lines of business where we have historically assumed only quota share exposure. We
also began expanding into new specialty lines of business in 2018 and started writing a modest amount of property
catastrophe business in 2019. We plan to continue to expand into these lines of business and to evaluate and consider
pursuing opportunities in other new lines of reinsurance business in 2019. During 2018, we added experienced senior
underwriters with strong market relationships to our team and we will continue to expand our underwriting team in 2019.
In addition, we may, from time to time, invest in managing general agents or other insurance vehicles 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.
4
The following table provides a breakdown by line and type of business of gross premiums written for the years ended
December 31, 2018, 2017 and 2016:
2018
2017
2016
Amount
Percentage
of Total
Amount
Percentage
of Total
Amount
Percentage
of Total
($ in thousands)
Property
Workers’ Compensation
Auto
Other Casualty
Casualty
Credit & Financial Lines
Multi-line
Other Specialty
Specialty
Total prospective reinsurance contracts
Retroactive reinsurance contracts
Total property and casualty reinsurance
Investment Strategy
$
9,070
36,824
66,492
132,473
235,789
100,576
162,248
(3,651 )
259,173
504,032
74,220
$ 578,252
11.5 %
22.9 %
40.8 %
17.4 %
1.6 % $ 136,999
33,194
6.4 %
43,424
193,141
269,759
34,324
63,665
27,522
125,511
44.8 %
532,269
87.2 %
109,351
12.8 %
100.0 % $ 641,620
28.1 %
(0.7 )%
42.0 %
5.4 %
6.7 %
30.1 %
21.4 % $
5.2 %
98,334
56,069
91,626
65,355
213,050
118,707
187,283
—
305,990
19.6 %
617,374
83.0 %
—
17.0 %
100.0 % $ 617,374
9.9 %
4.3 %
15.9 %
9.1 %
14.8 %
10.6 %
34.5 %
19.2 %
30.4 %
— %
49.6 %
100.0 %
— %
100.0 %
During the period covered by this report, we transitioned to a new investment account structure, as previously disclosed
in our quarterly reports on Form 10-Q for the fiscal quarters ended June 30, 2018 and September 30, 2018. For additional
information, see “Change in Investment Account Structure” below, Item 9B. “Other Information” and Note 4 to the
consolidated financial statements included in this Form 10-K.
We expect our overall investment exposures, returns, fees paid to Third Point LLC and Third Point Advisors LLC (“TP
GP”) to be generally similar under the LPA and TP Fund IMA, each as defined below, compared to what would have
been expected under the separate accounts managed under the JV Agreements, as defined below, assuming similar
underlying investment portfolio returns and exposure levels. However, there can be no assurance of such results.
Our investment strategy, through our investments 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 in our investment accounts 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.
Third Point LLC has historically favored event-driven situations, in which it believes that a catalyst, either intrinsic or
extrinsic, will unlock value or alter the lens through which the greater market values a particular investment. Third Point
5
LLC attempts to apply this event framework to each of its single security investments and this approach informs the
timing and risk of each investment.
Our cash and investment accounts include the collateral assets pertaining to letters of credit and trust accounts securing
our obligations under certain reinsurance contracts. Collateral assets are managed by Third Point LLC under the
investment management agreement (the “Collateral Assets IMA”), as discussed below under “Collateral Assets IMA”.
The collateral assets pertaining to the trusts are invested pursuant to the eligible securities definition of each trust
agreement, but typically limit the type of securities that can be invested to U.S. Treasury securities and highly rated
sovereign debt. The collateral assets pertaining to collateral accounts securing letters of credit issued under secured letter
of credit facilities are required to be held in cash. Refer to Note 13 to our consolidated financial statements included
elsewhere in this Annual Report for further details.
Property and Casualty Reinsurance Segment Products
Our underwriting team has extensive experience in underwriting many forms of property, casualty and specialty
reinsurance products. We offer reinsurance 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.
In the current market for property and casualty reinsurance, which remains highly competitive despite the aggregate
catastrophe losses in recent years, we expect that we will continue to write prospective property, casualty and specialty
reinsurance structured for surplus relief on a proportional basis, as well as opportunistic or higher margin business
written on both a proportional and excess of loss basis.
We also write loss portfolio transfers, reserve covers and other forms of retrospective reserve covers, where we are able
to leverage both our investment and underwriting capabilities. We believe there is less competition for the type of
reserve covers on which we focus. This is a result of the limited willingness of traditional reinsurers, who have
historically experienced lower investment returns on investable assets backing reserves, to pursue these products which
rely heavily on investment return to produce compelling economics. Margins on this business are determined through
bilateral negotiations and comparing the cost of the reserve covers to non-reinsurance solutions such as raising additional
equity or debt capital
We began expanding into new specialty lines of business in 2018 and started writing a portfolio of property catastrophe
reinsurance incepting in 2019. We have expanded the lines of business and forms of reinsurance that we write to
increase our risk-adjusted returns. 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. The majority of our exposure
emanates from the United States of America, 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; and
•
•
•
• potentially offer lines and geographies that are not identified in this Form 10-K.
6
Through December 31, 2018, we wrote reinsurance contracts covering the following product lines:
Property
This line of business primarily consists of homeowners’ and commercial reinsurance coverage. We also provide
proportional and excess of loss reinsurance that has greater potential volatility, but with commensurately larger expected
margins. With respect to risk aggregations, we seek to manage volatility via portfolio construction and client selection.
Homeowners’
Homeowners’ reinsurance coverage combines various personal insurance protections, which can include losses occurring
to one’s home, their contents, loss of use (including additional living expenses), or loss of other personal possessions of
the homeowner, as well as liability insurance for accidents that may happen at covered homes or at the hands of the
homeowners.
Commercial
Commercial property coverage protects physical assets, including building structure and contents, from perils including
fire, explosion, theft and catastrophic risks, such as hurricane, earthquake and flood. Commercial property reinsurance
can include large commercial risks, such as office buildings, small commercial risks such as garden apartments, and
highly technical or engineered risks, such as oil refineries.
We provide property reinsurance in numerous forms covering both homeowners and commercial risks. Our proportional
reinsurance that is structured to provide surplus relief generally covers homeowners and small commercial risks and are
structured on a basis that limits the amount of catastrophic losses that can be recovered.
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. While plans differ among jurisdictions, provisions can be made for payments in place of wages (functioning
as a form of disability insurance), compensation for economic loss (past and future), reimbursement or payment of
medical and like expenses (functioning as a form of health insurance), and benefits payable to dependents of workers
killed during employment (functioning as a form of life insurance). General damages for pain and suffering and punitive
damages for employer negligence are not generally available in workers’ compensation plans. Our approach to workers’
compensation is very selective and targets insurance companies that are very specialized within the workers’
compensation line and geographically focused. We offer both proportional and excess of loss reinsurance covering
workers’ compensation risks and manage the volatility of this line of business by capping our per occurrence exposures.
Auto
Personal automobile insurance is purchased for individually owned or leased cars designed 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. In addition, automobile insurance may offer financial protection against theft or
damage of the vehicle from incidents other than collisions. In the United States, each state has different rules and
regulations in place for compulsory coverage and the specific terms of automobile insurance policies will vary from
company to company. In the United States, we generally focus on providing proportional reinsurance to small, single
state and regional carriers that specialize in minimum financial responsibility limits required by their respective
states. This business is often referred to as “non-standard” automobile business and was historically underserved by
standard markets. More recently, however, standard companies have expanded their appetite for such business and it is
written by a broad range of carriers. Outside of the United States, we also focus on the “non-standard” personal
automobile segment in the United Kingdom. We have also seen an increase in opportunities that use technology
platforms to gain market share in the standard automobile insurance market in the United States. We believe this sector
will continue to grow, but we approach these opportunities with caution as there are often significant start-up operational
risks that can manifest in poor early underwriting results. When we elect to pursue these opportunities, we try to take a
7
leading role in structuring and incorporate features that attempt to limit losses resulting from start-up risk while building
optionality for future reinsurance if, and when, these businesses become successful.
Like personal automobile insurance, commercial automobile insurance provides the insured with financial protection
against bodily injury or physical damage to the automobile resulting from traffic accidents and against liability that could
arise from such occurrences. It is purchased by businesses and provides financial protection for the insured business’
vehicles and drivers. While we have written minimal amounts of commercial automobile liability reinsurance to date,
we have seen an increase in potential opportunities in the United States due to market dislocation.
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 the following lines of business:
Professional Liability
Professional liability is a form of liability reinsurance that helps protect professional advisors and service-providing
individuals and companies from bearing the full cost of defending against a negligence claim made by a client and
damages awarded in a civil lawsuit. The coverage primarily addresses alleged failure to perform on the part of, financial
loss caused by, and error or omission in the service provided by the policyholder. These are potential causes for legal
action that would not be covered by a basic general liability reinsurance policy, which addresses more direct forms of
harm. The broad category of professional liability reinsurance includes the specific products of errors and omissions
(“E&O”), directors and officers coverage (“D&O”), as well as several other products such as transactional liability
insurance.
E&O coverage protects the insured against liability for committing inadequate work or negligent actions in performance
of their professional duties. Generally, such policies are designed to cover financial losses rather than liability for bodily
injury and property damage. E&O coverage was historically purchased by individuals with professional designations
such as doctors, lawyers, architects, and engineers, but more recently other professions also purchase E&O coverage.
D&O coverage insures the legal liability of the individual directors and officers of the insured company for certain errors
and omissions committed by them. In certain circumstances in which the insured company is not legally permitted to
indemnify its directors or officers for a covered loss, the policy’s D&O coverage provides for insurance payments to be
made directly to the directors or officers. Conversely, if the insured company indemnifies its directors or officers for their
loss, the policy’s D&O coverage reimburses the insured company for those indemnification payments. In this way, the
coverage insures against the insured company’s own “indemnification risk.”
There are two types of coverages available in professional liability insurance: occurrence and claims-made. An
occurrence policy protects the insured from any covered incident that “occurs” during the policy period, regardless of
when a claim is filed. An occurrence policy protects the insured from claims that are made even after the policy has been
canceled, so long as the incident occurred during the period in which coverage was in effect. Claims-made policies
provide coverage for claims only when a claim is reported during the period the policy is actually in force. Claims-made
policies provide coverage so long as the insured continues to pay premiums for the initial policy and any subsequent
renewals. A claims-made policy will cover claims after the coverage period only if the insured purchases extended
reporting period or “tail” coverage.
Professional liability coverage is usually (but not always) written under a claims-made coverage form, and includes a
duty to defend a lawsuit seeking damages covered by the policy.
8
Transactional Liability
Transactional liability coverage provides a solution for lowering risk for specific merger and acquisition transactions.
The most common type of transactional liability insurance is representations and warranties liability insurance. Our
exposure to this line is primarily from proportional reinsurance contracts with market professionals in this segment.
General Liability
General liability insurance policies are issued to business organizations to protect them against liability claims for bodily
injury and property damage arising out of premises, operations, products, and completed operations. The premises and
operations portion of the coverage includes liability for injury or damage arising out of the insured's premises or out of
the insured's business operations while such operations are in progress. The products and completed operations portion of
the coverage includes liability arising out of the insured's products or business operations conducted away from the
insured's premises once those operations have been completed or abandoned. The standard general liability policy also
covers advertising and personal injury liability. These coverages include a duty to defend a lawsuit seeking damages
covered by the policy.
Credit & Financial Lines
Credit & Financial Lines 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 (“PMI”), mortgage life insurance or mortgage title insurance. We focus
on PMI, which is normally required by lenders when a borrower’s down payment or equity is less than 20% of the loan
value. Not all lenders will require PMI but those that follow the Fannie Mae and Freddie Mac guidelines for home loan
approval require PMI. As well as reinsuring private mortgage insurers in the United States, we assume exposure to the
credit risk sharing transactions from Fannie Mae and Freddie Mac both directly and by retrocession. We also write
international mortgage reinsurance. 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.
Other Specialty
The principal lines of business included in our other specialty line is comprised of:
Marine - covers damage to or losses of marine vessels and cargo, third-party liability for marine accidents and physical
loss and liability from principally offshore energy properties. Coverage includes marine liability cover mainly related to
the liabilities of ship-owners and port operators, including reinsurance of Protection and Indemnity Clubs (“P&I Clubs”).
Travel insurance - covers medical expenses, trip cancellation costs, lost luggage, flight accident and other losses incurred
while traveling, either internationally or domestically.
Extended warranty insurance - compensates individuals or businesses for correction or repair necessary as a result of
mechanical or electrical breakdown. Our reinsurance contracts cover motor vehicles, vans, trucks, construction
equipment, consumer electronics, and agricultural equipment, and the coverage varies according to the product, the age
and the usage. We currently write a limited amount of this coverage on a stand-alone basis and most of our exposure to
this line of business emanates from multi-line contracts. The insurance is offered on a multi-year basis, generally with a
maximum period of three years on risk, and can cover either new units after a period of warranty offered by the
manufacturer or used units once the manufacturer’s warranty has expired. To date, all of the extended warranty
insurance business we have written excludes manufacturer defect and product recall.
Multi-line
Multi-line reinsurance is reinsurance of an underlying portfolio of several different types of insurance 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 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.
9
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.
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 with senior individuals at reinsurance brokers and with our clients. We
meet frequently with brokers, senior representatives of existing clients and prospective clients, and encourage clients to
visit our executive offices 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. 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 24 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 will 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, 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 memorandum 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.
10
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.
Act as Lead Underwriter
Typically, one or two reinsurers will act as the lead or co-lead parties in developing and negotiating treaty pricing, terms
and conditions of reinsurance contracts. We act as the lead underwriter for a significant portion of the premium that we
underwrite. We believe that lead underwriting is a critically important factor in achieving long-term success, as lead
underwriters have greater control of overall economics of their programs. In addition, we believe that reinsurers that lead
contracts are generally solicited for a broader range of business and have greater access to attractive risks. However, for
most of our excess of loss business, including our property catastrophe portfolio, which is relatively small by market
premium standards, we generally act as a following reinsurer on syndicated terms and conditions.
Alignment of Interests
We seek to ensure that the contracts we underwrite align our interests with our clients’ interest. 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
11
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 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.
Retrocessional Coverage
Retrocessional coverage consists of reinsurance purchased by a reinsurer from another reinsurer. While our reinsurance
portfolio is focused on reinsurance of insurance companies, we also selectively write retrocessional coverage, the
majority of which is in our property catastrophe portfolio. We have also historically purchased limited amounts of
retrocessional protection to cover a portion of the risks that we reinsure on behalf of our clients. We purchased a small
amount of retrocessional coverage in 2018 on specific accounts, and we may continue to do so in the future. From time
to time, we consider purchases of 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, 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.
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. All 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 9 to our consolidated financial statements included elsewhere in this Annual Report for additional information
and details on our loss reserve development.
12
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, 2018, we have issued letters of credit
totaling $349.2 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.”
In addition, we have $644.8 million of restricted cash and investments held in trust accounts to secure obligations under
certain reinsurance contracts.
See Note 13 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 also monitor
the contractual exposure to catastrophic losses as aggregated across all bound reinsurance contracts.
Ratings
Each of our reinsurance subsidiaries has an A- (Excellent) financial strength rating with a stable outlook from A.M. Best,
which is the fourth highest of 15 ratings. We believe that a strong rating is a critical factor in the marketing of
reinsurance products to clients and brokers. This rating reflects the rating agency’s opinion of our 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 common shares.
Change in 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 TP GP and others, effective August 31,
2018. Pursuant to the investment management agreement between Third Point LLC and TP Fund, dated July 31, 2018 as
amended and restated on February 28, 2019 (the “TP Fund IMA”), Third Point LLC is the investment manager for TP
13
Fund. In addition, on July 31, 2018, Third Point Re BDA and Third Point Re USA, together the “TPRE Limited
Partners” and TP Fund executed a Subscription Agreement pursuant to which the TPRE Limited Partners transferred
certain net investment assets and related liabilities (collectively referred to as the “LP Transaction”) from their separate
accounts to TP Fund, and TP Fund issued limited partner interests to the TPRE Limited Partners proportionate to and
based on the net asset value transferred by each such entity on the applicable transfer date. Certain collateral assets
consisting of debt securities and restricted cash were not transferred to TP Fund but are also managed by Third Point
LLC under a separate investment management agreement, as discussed below under “Collateral Assets IMA”.
Substantially all of the net investment assets were transferred as of September 4, 2018. The Amended and Restated Joint
Venture and Investment Management Agreement dated June 22, 2016 between Third Point Re, Third Point Re BDA,
Third Point LLC and TP GP and the Amended and Restated Joint Venture and Investment Management Agreement dated
June 22, 2016 between Third Point Re USA, Third Point Re (USA) Holdings Inc., Third Point LLC and TP GP (the “JV
Agreements”) will be terminated on the date that all net investment assets have been transferred to TP Fund under the
Subscription Agreement. 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.
On August 30, 2018, Third Point Re BDA and Third Point Re USA entered into a Participation Agreement
(“Participation Agreement”) with TP Fund pursuant to which Third Point Re BDA and Third Point Re USA granted to TP
Fund all of the rights, benefits, liabilities, duties and obligations of all net investment assets that had not yet been
transferred to TP Fund pursuant to the Subscription Agreement as of the effective date. For the net investment assets that
were not transferred on September 4, 2018, the TPRE Limited Partners received limited partnership interests in TP Fund
in exchange for transferring the rights, benefits, liabilities, duties and obligations for those net investment assets to TP
Fund under the Participation Agreement.
As discussed below, on February 28, 2019, we entered into the Second Amended and Restated Exempted Limited
Partnership Agreement of TP Fund (the “Amended LPA”), which amended and restated the 2018 LPA (as amended and
restated by the Amended LPA, the “LPA”), with effect from January 1, 2019. The Amended LPA updated the terms of
the 2018 LPA to reflect (i) a lower management fee, (ii) the right to withdraw specified amounts from TP Fund and
immediately invest such amounts in certain other investment vehicles formed by Third Point LLC and (iii) adjustments
to the loss carryforward terms. All other material terms of the Amended LPA remain consistent with the 2018 LPA.
JV Agreements
As discussed above, the JV Agreements will be terminated on the date that all net investment assets have been
transferred to TP Fund under the Subscription Agreement. Substantially all of the net investment assets have been
transferred. For information regarding our previous investment guidelines related to the JV agreements, see the summary
provided under “Joint Ventures and Investment Management Agreements” in the Company’s Annual Report on Form 10-
K for the year ended December 31, 2017 filed with the SEC on March 1, 2018.
Limited Partnership Agreement
Term
The 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 22nd prior to the end of a term that it
wishes to terminate such 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
14
bankruptcy petition withdrawal of TP GP, unless within such days a successor general parent 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 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 LPA, the TPRE Limited Partners will have the right to withdraw funds weekly from TP Fund to pay claims
and expenses as needed, to meet capital adequacy requirements and to satisfy financing obligations.
In addition, we may withdraw as a participant under the LPA prior to the Withdrawal Date if the net investment
performance of Third Point LLC has (a) (i) incurred a loss in two successive calendar years and (ii) underperformed the
S&P 500 Index by at least 14 percentage points for such two successive calendar years, taken as a whole, or
(b) (i) incurred a cumulative loss of 14% or more during any 24-month period and (ii) underperformed the S&P 500
Index by at least 21 percentage points for such 24-month period. We may not withdraw or terminate the LPA on the basis
of performance other than as provided above.
In addition, pursuant to the Amended LPA, TP GP shall notify us if Third Point LLC or its affiliates (either alone or
together with a third party) form certain investment vehicles that pursue an investment strategy primarily comprised of
debt or other credit-related investments (the “Permitted Funds”). The Amended LPA permits us to withdraw up to
$250.0 million in 2019 and a separate $250.0 million during the period from January 1, 2020 through December 31,
2021 for the purpose of immediately investing such amounts in Permitted Funds.
Performance Allocation
Pursuant to both the JV Agreements and the LPA, TP GP receives a performance fee allocation. Prior to the change in
the Company’s investment account structure, the performance fee allocation was equal to 20% of the net investment
income of the applicable company’s share of the net investment assets managed by Third Point LLC. As a result of the
LPA effective August 31, 2018, the performance fee allocation is equal to 20% of the net investment income allocated to
each limited partner’s capital account in TP Fund.
15
At the end of each fiscal year, the performance allocation will be reallocated to the capital account of TP GP from the
capital account of each limited partner, provided that a performance allocation will not be made with respect to such
capital account until such capital account has recouped the amount of any unrecouped net capital loss in its loss recovery
account (as described below). If a limited partner withdraws all or a portion of its capital other than at the end of a fiscal
year, the performance allocation accrued and attributable to the portion withdrawn will be debited against such limited
partner’s account and credited to TP GP’s capital account at the time of withdrawal.
Pursuant to both the JV Agreements and the 2018 LPA, Third Point LLC is required to maintain a loss recovery account
in respect of each Limited Partner. Thereafter, for any fiscal year, the loss recovery account balance shall be the sum of
all prior year net loss amounts allocated to the limited partner and not subsequently offset by prior year net profit
amounts allocated to such limited partner, provided that the loss recovery account balance shall be reduced
proportionately to reflect any withdrawals made by such Limited Partner. TP GP may waive or reduce the performance
allocation, in its sole discretion. Third Point LLC and TP GP may elect, at the beginning of each fiscal year, to restructure
the performance allocation as a performance fee to Third Point LLC with the same terms as the performance allocation.
The Amended 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.
Management Fee
Pursuant to both the JV Agreements and the LPA, Third Point LLC is entitled to receive monthly management fees. Prior
to the change in the Company’s investment account structure, management fees were calculated based on 1.5%, (2.0% up
to December 22, 2016), of net investments managed by Third Point LLC. As a result of the 2018 LPA effective August
31, 2018, 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”). The Amended LPA revised the management fee from 1.5% per annum to 1.25% per annum
effective from January 1, 2019. Third Point LLC also serves as the investment manager for the Offshore Master Fund.
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 it agrees 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.
16
• Liquidity: the portfolio of TP Fund will be invested in such fashion that the Company have a reasonable
expectation that they can meet any of its liabilities as they become due. We review the liquidity of the portfolio
on a periodic basis.
• 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 11 to our consolidated financial statements included elsewhere in this Annual Report for detailed information
on management and performance fees.
Collateral Assets IMA
On July 31, 2018, Third Point Re BDA and Third Point Re USA entered into the Collateral Assets IMA, effective August
31, 2018, pursuant to which Third Point LLC serves as investment manager of certain collateral assets that will not be
transferred to TP Fund. The Collateral Assets IMA will continue in effect for so long as either Third Point Re BDA or
Third Point Re USA remains a limited partner of TP Fund. The collateral assets are presented in the consolidated balance
sheets within debt securities and restricted cash and are considered as part of total net investments managed by Third
Point LLC.
The Collateral Assets IMA includes provisions limiting liability of Third Point LLC and its affiliates to specified
circumstances and providing for indemnification by Third Point Re BDA and Third Point Re USA for certain losses
incurred by Third Point LLC and its affiliates. Third Point Re BDA and Third Point Re USA will be responsible for any
and all third party expenses incurred by them or on their behalf that are directly attributable to the management of the
collateral assets, other than those borne by Third Point LLC. No asset based or performance-based compensation will be
paid to Third Point LLC by Third Point Re BDA or Third Point Re USA under the Collateral Assets IMA.
Upon three business days’ prior written notice, Third Point Re BDA and Third Point Re USA may withdraw all or a
portion of the collateral assets effective as of any calendar month end or on the close of business on each Wednesday
during a month.
Investments
Investment Strategy
Third Point LLC has the contractual right to manage substantially all of our investable assets until December 31, 2021,
subject to certain extension and termination rights described above, and is required to follow our investment guidelines
described above and to act in a manner that is fair and equitable in allocating investment opportunities to us. However, it
is not otherwise restricted with respect to the nature or timing of making investments for our accounts. We have the
contractual right to withdraw funds from our managed accounts to pay claims and expenses as needed.
17
Investment Portfolio
The following tables present the total long, short and net exposure of our net investments managed by Third Point LLC
as of December 31, 2018 and 2017 by strategy and geography. The tables as of December 31, 2018 include our
investments in TP Fund and collateral assets managed by Third Point LLC. The tables as of December 31, 2017 include
collateral assets managed by Third Point LLC and our investments in the separate accounts in place prior to the change
in the investment account structure described in Note 4 to the consolidated financial statements included in this Form 10-
K.
Long/Short Equity
Consumer
Energy & Utility
Financial
Healthcare
Industries & Commodities
Technology, Media and Telecommunications
Market Hedges
Total Long/Short Equity
Credit
Distressed
Performing
Government
Asset Backed Securities (1)
Total Credit
Other
Risk Arbitrage
Private (2)
Total Other
Long
2018
Short
Net
Long
2017
Short
Net
13 %
2 %
7 %
15 %
12 %
2 %
3 %
54 %
2 %
2 %
5 %
9 %
18 %
2 %
7 %
9 %
81 %
(3 )%
— %
(2 )%
(1 )%
(6 )%
(4 )%
(6 )%
(22 )%
— %
— %
(2 )%
(2 )%
(4 )%
(1 )%
— %
(1 )%
(27 )%
10 %
2 %
5 %
14 %
6 %
(2 )%
(3 )%
32 %
2 %
2 %
3 %
7 %
14 %
1 %
7 %
8 %
54 %
18 %
6 %
15 %
14 %
28 %
14 %
3 %
98 %
2 %
2 %
2 %
10 %
16 %
7 %
3 %
10 %
124 %
(5 )%
(2 )%
(3 )%
(2 )%
(4 )%
— %
(9 )%
(25 )%
— %
(1 )%
— %
(3 )%
(4 )%
(2 )%
— %
(2 )%
(31 )%
13 %
4 %
12 %
12 %
24 %
14 %
(6 )%
73 %
2 %
1 %
2 %
7 %
12 %
5 %
3 %
8 %
93 %
(1) Includes residential mortgage-backed securities, commercial mortgage-backed securities and related indices.
(2) Prior to the change in investment account structure, private included securities approved for purchase by the Investment and Finance Committee in
accordance with the investment guidelines.
Americas
Europe, Middle East and Africa
Asia
Long
2018
Short
70 %
11 %
— %
81 %
(21 )%
(3 )%
(3 )%
(27 )%
Net
Long
49 %
8 %
(3 )%
54 %
93 %
7 %
24 %
124 %
2017
Short
(29 )%
— %
(2 )%
(31 )%
Net
64 %
7 %
22 %
93 %
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
18
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, 2018, 2017 and 2016(1) . 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 described in Note 4 to our consolidated financial statements included elsewhere in this
Annual Report, and our investment in TP Fund and collateral assets managed by Third Point LLC from the date of the
transition.
Equity
Credit
Other
Net investment return on
investments managed by Third
Point LLC
2018
Short
0.1 %
(0.2 )%
0.8 %
Long
(8.7 )%
— %
(2.8 )%
Net
(8.6 )%
(0.2 )%
(2.0 )%
Long
21.5 %
0.7 %
1.8 %
2017
Short
(4.6 )%
(0.6 )%
(1.1 )%
Net
16.9 %
0.1 %
0.7 %
Long
1.5 %
6.4 %
0.5 %
2016
Short
(2.9 )%
(0.4 )%
(0.9 )%
Net
(1.4 )%
6.0 %
(0.4 )%
(11.5 )%
0.7 % (10.8 )%
24.0 %
(6.3 )%
17.7 %
8.4 %
(4.2 )%
4.2 %
S&P 500 Total Return Index
(4.4 )%
21.8 %
12.0 %
(1) Past performance is not necessarily indicative of future results.
See Note 14 to our consolidated financial statements included elsewhere in this Annual Report for detailed information
on net investment income (loss). TP Fund’s investment manager, Third Point LLC, manages several funds and may
manage other client accounts besides our and TP Fund’s accounts, some of which have, or may have, objectives and
investment portfolio compositions similar to our and TP Fund’s accounts. Because of the similarity or potential similarity
of the investment portfolio of TP Fund to other clients of Third Point LLC, and because, as a matter of ordinary course,
Third Point LLC provides its clients, including us and TP Fund, and investors in its main hedge funds with results of
their respective investment portfolios following the last day of each month, those other clients or investors indirectly may
have material nonpublic information regarding the investment portfolio of TP Fund. To address this, and to comply with
Regulation FD, we will continue to post on our website under the heading Investment Portfolio Returns located in the
Investors section of the website, following the close of trading on the New York Stock Exchange on the last business day
of each month, the preliminary monthly investment results of TP Fund for that month, with additional information
regarding the monthly investment results of TP Fund to be posted following the close of trading on the New York Stock
Exchange on the first business day of the following month.
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
19
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.
Regulation
Third Point Re BDA and Third Point Re USA are licensed in Bermuda to write reinsurance and 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.
20
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 time deposits, 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.
21
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 new 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.
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
22
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).
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 recognised 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
recognised 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 recognised 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.
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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.
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.
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 Halifax, 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.
Employees
As of December 31, 2018, we had 31 employees, 20 of whom were based in Bermuda, 10 of whom were based in the
United States and 1 of whom was based in the United Kingdom. We believe that our employee relations are good. None
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of our employees are subject to collective bargaining agreements, and we are not aware of any current efforts to
implement such agreements.
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 27 to our consolidated financial statements
included elsewhere in this Annual Report for additional information regarding TPRUSA.
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.
Risks Related to Our Business
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:
reinsurance contract pricing;
the performance of TP Fund’s investment portfolio;
•
•
• our assessment of the quality of available reinsurance opportunities;
•
•
•
• our ability to assess and integrate our risk management strategy properly.
the volume and mix of reinsurance products we underwrite;
loss experience on our reinsurance liabilities;
low frequency and high severity loss events; and
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.
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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, 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:
the general reputation and perceived financial strength of the reinsurer;
relationships with reinsurance brokers;
terms and conditions of products offered;
• price of reinsurance coverage;
•
•
•
•
•
•
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.
Our competitors include, among others, Alleghany Corporation, Allianz SE, American International Group, AmTrust
Financial Services, Inc., Arch Capital Group Ltd.,Aspen Insurance Holdings Limited, AXIS Capital Holdings Ltd.,
Berkshire Hathaway Inc., Chubb Limited, Enstar Group Limited, Everest Re Group, Ltd., Greenlight Reinsurance Ltd.,
Hamilton Insurance Group Ltd., Hannover Rückversicherung AG, IAT Reinsurance Co Ltd., Markel Bermuda Limited,
Münchener Rückversicherungs-Gesellschaft AG., PartnerRe Ltd., RenaissanceRe Holdings Ltd., SCOR SE, Sirius
International Insurance Group, Ltd., Swiss Re Limited, Tokio Marine Holdings, Inc. and Watford Re Ltd.
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
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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.
As a recently formed reinsurance company, we do not have the benefit of extended loss experience with our cedents.
With additional time, we may determine that our cedents’ loss emergence, incurred and payment patterns are different
from those implied in the original submission data. Consequently, we may experience greater than average deviation in
our loss reserve estimates when compared to our more established competitors.
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.
Catastrophic losses are a function of the insured exposure in the affected area and the severity of the event. Because
accounting standards do not permit reinsurers to reserve for catastrophic events until they occur, claims from catastrophic
events could cause substantial volatility in our financial results for any fiscal quarter or year and could significantly and
negatively affect our financial condition and results of operations.
The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial
condition and results of operations.
Although we seek to mitigate our loss exposure through a variety of methods, property and casualty reinsurance risk is
inherently unpredictable. It is difficult to predict the timing, frequency and severity of loss events with statistical
certainty or estimate the amount of loss any given occurrence will generate. It is not possible to completely eliminate our
exposure to unforecasted or unpredictable events and, to the extent that losses from such risks occur, our financial
condition and results of operations could be materially adversely affected.
We seek to manage reinsurance volatility by focusing on lines of business that have historically demonstrated more
stable return characteristics, such as property quota share, auto, and workers’ compensation. These lines of business are
often characterized as having exposure to higher frequency and lower severity claims activity, although this has not
always been the case. We seek to further manage the volatility of our reinsurance results by writing contracts on a quota
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share basis and through the use of contractual terms and conditions, such as loss ratio caps, within our reinsurance
contracts. However, there can be no assurance that these terms and conditions will be effective in mitigating our
exposure. The failure or ineffectiveness of any of our terms and conditions could have a material adverse effect on our
financial condition and results of operations.
We also write reinsurance contracts that seek to provide protection against adverse development on loss reserves. We
seek to provide this type of coverage only on relatively stable reserves where we agree with the client’s reserving
practices and actuarially determined reserve levels.
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 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 A.M. 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. A.M. 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 A.M. 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. A.M. Best periodically reviews our rating, and may revise it 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:
28
•
•
•
•
•
•
if we change our business practices from our organizational business plan in a manner that no longer supports
A.M. Best’s initial rating;
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 TP Fund’s investment portfolio incurs significant losses; or
if A.M. Best alters its capital adequacy assessment methodology in a manner that would adversely affect the
rating of Third Point Re BDA or Third Point Re USA.
If A.M. Best downgrades the rating of either Third Point Re BDA or Third Point Re USA 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 or require us to transfer premiums on a funds withheld basis if our A- (Excellent) A.M. Best rating is
downgraded.
In February 2015, Third Point Re (USA) Holdings Inc., our wholly owned subsidiary, completed a public offering of
$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 TPRE 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.”
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.
For the year ended December 31, 2018, the decrease in shareholders’ equity attributable to common shareholder’s of
Third Point Re and Third Point Re BDA both exceeded 20%. As a result, termination or collateral rights for some of
Third Point Re BDA’s and Third Point Re USA’s reinsurance contracts can be exercised. To date, we have not been
advised by any client of their intention to exercise these rights; however, they may do so in the future. We cannot predict
whether or how many, if any, of our clients will actually exercise such rights or the extent to which such rights would
have a significant and negative effect on our financial condition, results of operations or future prospects but they could
have a significant adverse effect on our operations and our ability to post sufficient collateral for reinsurance obligations.
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.
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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 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.
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, Third Point Re BDA and Third Point Re
USA. Historically, our cash flows have typically consisted primarily of dividends and other permissible payments from
Third Point Re BDA and Third Point Re USA. 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 guarantee of the Senior Notes issued by TPRUSA in February 2015. 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 USA, as Class 4 insurers, fails to meet its MSM or minimum liquidity ratio on the last day of any
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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, completed a public offering of
$115.0 million in aggregate principal amount of Senior Notes. The Senior Notes are fully and unconditionally guaranteed
by Third Point Re.
The Senior Notes are an obligation of TPRUSA, and the Guarantee is an obligation of TPRE. Each of TPRUSA and
TPRE is a holding company and, accordingly, conduct substantially all operations through their respective operating
subsidiaries. As a result, TPRUSA’s cash flow and its ability to service its debt, as well as TPRE’s ability to satisfy its
obligations pursuant to the Guarantee, depend in part upon the earnings of their respective operating subsidiaries and on
the distribution of earnings, loans or other payments from such subsidiaries to TPRUSA or TPRE, as applicable. See
“Risk Factors-Our ability to pay dividends may be constrained by our holding company structure and certain regulatory
and other factors.”
The operating subsidiaries of TPRUSA and TPRE are separate and distinct legal entities and have no obligation to pay
any amounts due on the Senior Notes or the Guarantee or to provide TPRUSA or TPRE with funds for their 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 TPRUSA’s or
TPRE’s subsidiaries to TPRUSA or TPRE could be subject to statutory or contractual restrictions. Moreover, since
certain of TPRUSA’s and TPRE’s respective subsidiaries are insurance companies, their ability to pay dividends to
TPRUSA or TPRE, as applicable, is subject to regulatory limitations. See “Business - Regulation.”
To the extent that either TPRUSA or TPRE needs funds but its subsidiaries are restricted from making such distributions
under applicable law or regulation, or are otherwise unable to distribute funds, the liquidity and financial condition of
TPRUSA or TPRE, as applicable, would be adversely affected and we would potentially be unable to satisfy our
obligations under the Senior Notes, the Guarantee or any other indebtedness. 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.
The rights of TPRUSA and TPRE to receive any assets of any of their respective subsidiaries upon liquidation or
reorganization of such subsidiaries, and therefore the rights of the holders of the Senior Notes, to participate in those
assets, will be structurally subordinated to the claims of such subsidiary’s creditors. In addition, even if TPRUSA or
TPRE were a creditor of any of their respective subsidiaries, the rights of TPRUSA or TPRE, as applicable, 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. The Senior Notes and the Guarantee would also be structurally subordinated to the rights of the
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holders of any preferred stock or shares issued by the subsidiaries of either TPRUSA or TPRE, as applicable, whether
currently outstanding or issued hereafter. Moreover, the rights of shareholders of TPRE to receive any assets of TPRE
upon liquidation or reorganization of TPRE 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 could in the future incur additional indebtedness in addition to the Senior Notes. 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;
replace capital lost in the event of significant reinsurance losses or adverse reserve developments;
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•
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 completed a public offering of $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, 2018
were: Aon Benfield, JLT Re, Willis Re and Guy Carpenter & Company, LLC, which accounted for 29.4%, 19.0%, 12.6%
and 11.8%, 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
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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.
We face risks arising from future strategic transactions such as acquisitions, dispositions, mergers or joint ventures.
We may pursue strategic transactions in the future, which could involve acquisitions or dispositions of businesses or
assets. Any future 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
future 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.
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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.
Risks Relating to Our Investment Strategy
Under our new 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.
35
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 manger, 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 as Chairman of 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
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•
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, 2018, short exposure in our consolidated investment portfolio was $921.8
million consisting of 175 debt, equity and index positions, including $436.7 million over 82 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, 2018 , the net exposure of our net investments
managed by Third Point LLC, which includes TP Fund and the Collateral Assets Account, was 54% and the largest ten
long and short positions comprised an aggregate of 38% and 10%, respectively, of our consolidated investment portfolio.
As of December 31, 2017, prior to the change in the Company’s investment account structure, the net exposure of our
consolidated portfolio was 93% and the largest ten long and short positions comprised an aggregate of 54% and 15%,
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,
37
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, 2018, the gross exposure of TP Fund’s consolidated investment portfolio was 108%. Any event that may
adversely affect the value of positions TP Fund holds could significantly and negatively affect the net asset value 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 Baxter International Inc.,
Hellenic Bank PLC and Sotheby’s, whose securities are publicly traded and 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
38
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, 2018, the fair value of asset-backed securities in TP Fund’s investment portfolio was
$206.7 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”
39
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.
40
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,
41
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.
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 Third Point Re BDA and Third Point Re USA are licensed as reinsurers only in Bermuda and we do not
plan to seek licenses in any other jurisdiction. The suspension or revocation of Third Point Re BDA or Third Point Re
USA’s 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 Third Point Re BDA or Third Point Re
USA 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.
42
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;
•
•
• deliver notification to the BMA of changes in ownership of our common shares beyond and between certain
satisfy solvency standards;
restrict the payment of dividends and distributions;
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
43
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 do not presently expect that we will be admitted to do business in any jurisdiction other than 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.
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 Third Point Re BDA and Third Point Re USA, 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,
44
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.
Because we are a Bermuda company, we are subject to changes in Bermuda law and regulation that may have an
adverse impact on our operations, including through the imposition of increased regulatory supervision.
The Bermuda insurance and reinsurance regulatory framework recently has become subject to substantial change, in part
in order to achieve equivalence under Solvency II, the EU regulatory regime enacted in November 2009 and that imposes
new solvency and governance requirements across all EU Member States.
On November 26, 2015, the European Commission (the “EC”) adopted a Delegated Act that recognizes Bermuda’s
regulatory framework for insurance and reinsurance activities of companies with their head offices in Bermuda, as well
as for supervision of insurance and reinsurance groups, with the exception of captives and special purpose insurers, as
being fully equivalent to regulatory standards applied to European insurance and reinsurance companies and groups in
accordance with the requirements of Solvency II. The Delegated Act was confirmed on March 24, 2016 and was applied
retroactively to January 1, 2016, the date Solvency II came into effect. The EC’s decision followed substantial changes
to Bermuda’s regulatory framework, including the adoption of the Insurance Amendment (No 2) Act 2015 in July 2015
that entered into force on January 1, 2016, the amendment to the Insurance Code of Conduct with effect from July 2015
and the adoption of revised insurance prudential rules by the BMA that entered into force on January 1, 2016. As many
of these changes only came into effect on January 1, 2016, their impact on insurers and reinsurers on companies subject
to Bermudian regulation, such as Third Point Re BDA and Third Point Re USA, is unclear.
While we cannot predict the future impact on our operations of changes in the laws and regulation to which we are or
may become subject, any such changes could have a material adverse effect on our business, financial condition and
results of operations.
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
45
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.
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. This exception for insurance companies 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 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 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 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-US insurer will be treated as a PFIC, even if it actively conducts insurance operations. There remain
significant uncertainties as to the interpretation of the PFIC active insurance exception given the lack of final IRS
regulations. Consequently, although we intend to operate, as practicable, in a manner to avoid being classified as a PFIC,
there can be no assurance that we will be able to satisfy the requirements of the TCJA.
The IRS has notified taxpayers in IRS Notice 2003-34 that it intends to scrutinize the activities of certain insurance
companies located outside of the United States, including reinsurance companies that invest a significant portion of their
assets in alternative investment strategies, to determine whether such companies qualify for the active insurance
company exception in the PFIC rules. Prior to the TCJA, the IRS proposed regulations did not provide a significant
amount of clarity on the requirements for the exception. At this time it is unclear whether final regulations will include a
specific methodology for satisfying the exception and how any such methodology would apply to us. 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 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 exception, and, as discussed above, 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.
46
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,” 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 should not have any United States
10% shareholders and 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.
47
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. The
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 the Company and/or Third Point Re BDA 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. The IRS may terminate the 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 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
48
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 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.
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, 2018, 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, 2018, 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, 2018, there were share options outstanding (subject to vesting) for
8,888,053 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 or 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.
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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.
Third Point Re was incorporated on October 6, 2011. On December 22, 2011, KIA TP Holdings, L.P. and KEP TP
Holdings, L.P., which are affiliates of Kelso & Company (collectively, “Kelso”) and Pine Brook LVR, L.P., an affiliate of
Pine Brook Road Partners, LLC (collectively, “Pine Brook”, and Pine Brook and together with Kelso, the “Lead
Investors” and each individually, a “Lead Investor”), Dowling Capital Partners I, L.P., an affiliate of Dowling Capital
Management, LLC (collectively, “Dowling”), P RE Opportunities Ltd. (“PROL”), Third Point LLC, Daniel S. Loeb and
affiliates associated with Mr. Loeb (collectively, the “Loeb Entities”) and John R. Berger (collectively, the “Founders”),
together with certain members of management, committed $533.0 million to capitalize Third Point Re. As of
December 31, 2018, Kelso, BlackRock, Inc., the Loeb Entities and the Company’s directors and named executive
officers, as defined in the proxy statement, beneficially own approximately 11.5%, 12.0%, 9.5% and 8.2% 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 10,834,938 common shares. As a result, Kelso, BlackRock, Inc.,
the Loeb Entities, our directors and named executive officers 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. These corporate governance
guidelines and Code of Business Conduct and Ethics do not, by themselves, prohibit transactions with our Founders.
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:
changes in our clients’ needs;
industry or general market conditions;
•
• domestic and international economic factors unrelated to our performance;
•
• 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;
50
•
•
•
any announcement by us or our competitors of a significant contract, acquisition, strategic transaction or
expansion into a new line of business;
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
51
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.
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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:
• provide the right of shareholders to act by majority written consent for so long as the Lead Investors and the
Loeb Entities collectively hold at least 35% of our issued and outstanding common shares;
authorize our board to issue “blank cheque” preferred shares;
establish a classified Board of Directors;
require advance notice of shareholders’ proposals in connection with annual general meetings;
•
•
•
• 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 once the Lead
Investors and the Loeb Entities cease to collectively hold at least 35% of our issued and outstanding shares;
allow each of Kelso and Pine Brook to appoint one director for so long as they hold not less than 25% of the
number of shares respectively held as of December 22, 2011;
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 Kelso, Pine Brook and 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.
53
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
None.
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, 2018, refer to Note 23 to the accompanying consolidated financial statements.
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 Disclosures
Not applicable.
PART II
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 25, 2019, the latest practicable date,
the last reported sale price of our common shares was $11.23 per share and there were 53 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.
54
Equity Compensation Plans
The following table presents information concerning the securities authorized for issuance pursuant to our equity
compensation plans as of December 31, 2018:
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
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)
8,888,053 $
—
8,888,053 $
13.43
n/a
13.43
Number of securities
available for future
issuance under equity
compensation plans
(excluding securities
reflected in Column 1) (3)
9,017,930
—
9,017,930
(1) Represents the number of shares associated with options outstanding as of December 31, 2018.
(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, 2013 through to December 31,
2018. The share price performance presented below is not necessarily indicative of future results.
tTPRE
December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018
100.00 $
52.02
72.37 $
$
110.58 $
100.00 $
135.63
$
■S&P 500
147.58
117.51 $
100.00 $
pDow Jones P&C $
1. The above graph assumes that the value of the investment was $100 on December 31, 2013.
78.20 $
111.39 $
109.80 $
62.33 $
121.13 $
135.09 $
79.06 $
144.65 $
155.86 $
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.
55
Issuer Purchases of Equity Securities
The following table summarizes our repurchase of common shares during the three months ended December 31, 2018:
(a) Total number
of shares
purchased
(b) Average
price paid per
share (1)
(c) Total number of
shares purchased as part
of publicly announced
plans or programs
(d) Maximum number
of shares that may yet
be purchased under the
plans or programs (2)
66,620,294
63,792,097
61,295,462
61,295,462
— $
268,228
257,557
525,785 $
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total
(1) Including commissions.
— $
268,228
257,557
525,785 $
—
10.54
9.69
10.13
(2) On February 28, 2018, the Company’s Board of Directors authorized the repurchase of an additional $148.3 million common shares, which,
together with the shares remaining under the share repurchase program previously authorized on May 4, 2016, will allow the Company to
repurchase up to $200.0 million more of the Company’s outstanding common shares in the aggregate.
During the year ended December 31, 2018, the Company repurchased 10,311,123 (December 31, 2017 - 3,300,152) of its
common shares in the open market for an aggregate cost of $138.7 million (December 31, 2017 - $40.9 million) at a
weighted average cost, including commissions, of $13.45 (December 31, 2017 - $12.38) per share. Common shares
repurchased by the Company were not canceled and are classified as treasury shares.
As of December 31, 2018, the Company was authorized to repurchase up to an aggregate of $61.3 million of additional
common shares under its share repurchase program.
56
Item 6. Selected Financial Data.
The following tables set forth certain of our selected financial data as of and for the years ended December 31, 2018,
2017, 2016, 2015 and 2014 and has been derived from our consolidated financial statements. Our historical results are
not necessarily indicative of the results that may be expected for any future period. The selected financial data should be
read in conjunction with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report.
2018
2017
2016
2015
2014
($ in thousands, except share and per share data)
Selected Statement of Income (Loss) Data:
Net premiums written
Net premiums earned
Net investment income (loss)
Loss and loss adjustment expenses incurred, net
Acquisition costs, net
General and administrative expenses
Other expenses
Interest expense
Foreign exchange gains (losses)
Income tax (expense) benefit
Net income (loss)
$
$ 558,357
621,442
(251,433 )
438,414
206,498
36,241
9,610
8,228
7,503
4,010
(317,469 )
$
639,145
547,058
391,953
370,058
188,904
53,103
12,674
8,225
(12,300 )
(11,976 )
281,771
615,049
590,190
98,825
395,932
222,150
39,367
8,387
8,231
19,521
(5,593 )
28,876
$ 700,538
602,824
(28,074 )
415,191
191,216
46,033
8,614
7,236
3,196
2,905
(87,439 )
$ 613,150
444,532
85,582
283,147
137,206
40,008
7,395
—
—
(5,648 )
56,710
Net income (loss) available to Third Point Re
common shareholders
Basic earnings (loss) per share available to
Third Point Re common shareholders
$ (317,692 )
$
277,798
$
27,635
$
(87,390 )
$
50,395
$
(3.27 )
$
2.71
$
0.26
$
(0.84 )
$
0.48
Diluted earnings (loss) per share available to
Third Point Re common shareholders
Property and Casualty Reinsurance Segment - Selected Ratios (1):
Loss ratio
(3.27 )
$
$
Acquisition cost ratio
Composite ratio
General and administrative expense ratio
Combined ratio
2.64
$
0.26
$
(0.84 )
$
0.47
67.6 %
34.5 %
102.1 %
5.6 %
107.7 %
67.1 %
37.6 %
104.7 %
3.8 %
108.5 %
68.9 %
31.7 %
100.6 %
4.1 %
104.7 %
65.5 %
31.5 %
97.0 %
5.2 %
102.2 %
70.6 %
33.2 %
103.8 %
3.0 %
106.8 %
Net investment return on investments managed
by TP LLC (2)
(10.8 )%
17.7 %
4.2 %
(1.6 )%
5.1 %
(1) Underwriting ratios are for the property and casualty reinsurance segment only. See additional information in Note 24 to our consolidated
financial statements included elsewhere in this Annual Report. Underwriting ratios are calculated by dividing the related expense by net
premiums earned.
(2) The net investment return on investments managed by Third Point LLC is the percentage change in value of a dollar invested over the reporting
period on our net investment assets managed by Third Point LLC, net of noncontrolling interests. The stated return is net of withholding taxes,
which were presented as a component of income tax expense (benefit) in our consolidated statements of income (loss) prior to the change in the
investment account structure described in Note 4 to our audited financial statements. In addition, for the year ended December 31, 2018, the
stated return reflect the combined results of net investments managed by Third Point LLC prior to the transition date of August 31, 2018 and the
investment in the Third Point Enhanced LP and collateral assets from the date of transition. Net investment return is the key indicator by which
we measure the performance of Third Point LLC, our investment manager.
57
Selected Balance Sheet Data:
Total investments in securities (1)
Cash and cash equivalents (2)
Restricted cash and cash equivalents
Reinsurance balances receivable, net
Deferred acquisition costs, net
Total assets
Reinsurance balances payable
Deposit liabilities (3)
Unearned premium reserves
Loss and loss adjustment expense reserves
Total liabilities (1)
Shareholders’ equity attributable to Third Point
Re common shareholders
Total shareholders’ equity
Book value per share data:
Basic book value per share (4)
Diluted book value per share (4)
Selected ratios:
Change in diluted book value per share (4)
Return on beginning shareholders’ equity
attributable to Third Point Re common
shareholders (4)
2018
2017
2016
2015
2014
($ in thousands, except per share data)
$ 1,523,728
104,183
609,154
602,448
203,842
3,086,234
69,701
145,342
602,936
937,157
1,881,660
$ 2,995,939
8,197
541,136
476,008
258,793
4,671,794
41,614
129,133
649,518
720,570
2,902,079
$ 2,647,512
9,951
298,940
381,951
221,618
3,895,644
43,171
104,905
557,076
605,129
2,445,919
$ 2,317,244
20,407
330,915
294,313
197,093
3,545,108
24,119
83,955
531,710
466,047
2,149,225
$ 1,830,838
28,734
417,307
303,649
155,901
2,852,580
27,040
145,430
433,809
277,362
1,300,532
1,204,574
$ 1,204,574
1,656,089
$ 1,661,496
1,414,051
$ 1,449,725
1,379,726
$ 1,395,883
1,451,913
$ 1,552,048
$
$
13.15
12.98
$
$
16.33
15.65
$
$
13.57
13.16
$
$
13.23
12.85
$
$
14.04
13.55
(17.1 )%
18.9 %
2.4 %
(5.2 )%
3.3 %
(20.0 )%
20.1 %
2.0 %
(6.0 )%
3.6 %
(1) Effective August 31, 2018, Third Point Re and the TPRE Limited Partners entered into the 2018 LPA to invest in TP Fund, a related party
investment fund. As a result, substantially all assets and related liabilities were transferred from the Company’s separate accounts to TP Fund and
the TPRE Limited Partners received limited partnership interests in TP Fund in exchange. The TPRE Limited Partners no longer directly hold
their invested assets and liabilities but instead, hold an investment in TP Fund. See Notes 4 and 11 to our consolidated financial statements
included elsewhere in this Annual Report for additional information regarding the LPA and TP Fund.
(2) Cash and cash equivalents consists of cash held in banks and other short-term, highly liquid investments with original maturity dates of ninety
days or less.
(3) Using the deposit method of accounting, a deposit liability, rather than written premium, is initially recorded based upon the consideration
received less any explicitly identified premiums or fees. In subsequent periods, the deposit liability is adjusted by calculating the effective yield
on the deposit to reflect actual payments to date and future expected payments.
(4) 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 the
reconciliations under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial
Measures.”
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 Part II, Item 6.
“Selected Financial Data”, and 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, 2018 (“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.
58
Our fiscal year ends December 31 and, unless otherwise noted, references to years or fiscal are for fiscal years ended
December 31.
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 superior investment
management provided by Third Point LLC, our investment manager and the investment manager of TP Fund. We
believe that our reinsurance and investment strategy differentiates us from our competitors.
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, certain
general and administrative expenses related to corporate activities, interest expense, foreign exchange (gains) losses and
income tax (expense) benefit.
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, although the majority of contracts
written to date have been on a 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.
The product lines that we currently underwrite for this operating segment are: property, casualty and specialty. We have
historically focused on lines of business and forms of reinsurance that have demonstrated more stable return
characteristics and have limited our underwriting of property catastrophe risk. However, we have incrementally
expanded the lines of business and forms of reinsurance on which we focus that have increased risk profiles where we
believe the higher expected margins adequately compensate us for the increased risk. We have begun writing some
excess of loss casualty covers in lines of business where we have historically assumed only quota share exposure. We
began expanding into new specialty lines of business in 2018 and started writing a modest amount of property
catastrophe business in 2019.
Insurance float is an important aspect of our property and casualty reinsurance operation. In an insurance or reinsurance
operation, 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 property and casualty reinsurance segment will contribute to our results by both
generating underwriting income as well as generating float. In addition, we hope to grow float over time as our
reinsurance operations expand.
Investment Management
During the period covered by this report, we transitioned to a new investment account structure. Under the new
investment account structure, Third Point LLC serves as investment manager for TP Fund as well as for our collateral
assets. See Item 1. “Business” and Note 4 to the consolidated financial statements included in this Form 10-K for further
information regarding the current investment account structure.
We expect our overall investment exposures, returns, fees paid to Third Point LLC and TP GP as well as the investment
guidelines, liquidity and redemption rights to be generally similar under the new LPA and TP Fund IMA compared to
59
what would have been expected under the separate accounts managed under the JV Agreements, assuming similar
underlying investment portfolio returns and exposure levels. However, there can be no assurance of such results.
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.
Business Outlook
The reinsurance markets in which we operate have historically been cyclical. During periods of excess underwriting
capacity, as defined by the availability of capital, competition can result in lower pricing and less favorable policy terms
and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing and policy terms and
conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been affected
by several factors, including industry losses, the impact of catastrophes, changes in legal and regulatory guidelines, new
entrants and investment results including interest rate levels and the credit ratings and financial strength of competitors.
Although the industry experienced significant losses in 2017 and 2018, there continues to be significant underwriting
capacity available and market conditions remain challenging. While many market participants were hopeful that the
significant catastrophe losses in recent years would lead to improvements in pricing, terms and conditions within the
property catastrophe line of business with the possibility of improvements in other reinsurance lines, improvements have
been modest. Catastrophe pricing on loss impacted programs has improved but pricing on other, non-loss impacted
contracts has remained broadly flat. Outside of property catastrophe reinsurance we are seeing some signs of
improvement in reinsurance terms and conditions and underlying pricing in the capital relief structures on which we have
historically focused. We are cautiously optimistic that we will continue to see similar improvements across our in force
portfolio as well as new business opportunities.
We focus on segments and clients where we believe we benefit from relatively more attractive pricing opportunities due
to the strength of our relationships, the tailored nature of our reinsurance solutions, an acute need for reinsurance capital
as a result of market dislocation, a client’s growth or historically poor performance. However, we have incrementally
expanded the lines of business and forms of reinsurance on which we focus to help drive our combined ratio below
100%. This may include 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. We have begun writing some excess of loss
casualty covers in lines of business where we have historically assumed only quota share exposure. We also began
expanding into new specialty lines of business in 2018 and started writing a modest amount of property catastrophe
business in 2019. We plan to continue to expand into these lines of business and to evaluate and consider pursuing
opportunities in other new lines of reinsurance business in 2019. During 2018, we added experienced senior underwriters
with strong market relationships to our team and we will continue to expand our underwriting team in 2019.
In addition, we may, from time to time, invest in managing general agents or other insurance vehicles 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.
Key Performance Indicators
We believe that by combining a disciplined and opportunistic approach to reinsurance underwriting with investment
results from the active management of TP Fund’s investment portfolio, in which we invest, 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 (loss), net investment return on investments
60
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,
2018, 2017 and 2016:
Key underwriting metrics for Property and Casualty
Reinsurance segment:
Net underwriting loss (1)
Combined ratio (1)
Key investment return metrics:
Net investment income (loss)
2018
2017
2016
($ in thousands, except for per share data and ratios)
$
(42,105 )
$
106.8 %
(42,560 ) $
107.7 %
(50,052 )
108.5 %
$
(251,433 )
$
391,953
$
98,825
Net investment return on investments managed by Third Point LLC
(10.8 )%
17.7 %
4.2 %
Key shareholders’ value creation metrics:
Basic book value per share (2)
Diluted book value per share (2)
Change in diluted book value per share (2)
Return on beginning shareholders’ equity attributable to Third Point
Re common shareholders (2)
$
$
$
$
13.15
12.98
(17.1 )%
$
$
16.33
15.65
18.9 %
(20.0 )%
20.1 %
13.57
13.16
2.4 %
2.0 %
(1) See Note 24 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 (Loss)
Net investment income (loss) is an important measure that affects overall profitability. Net investment income (loss) 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 (loss) also includes the investment
income (loss) on collateral 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., subject to certain conditions set forth in
TP Fund’s investment guidelines. These conditions include limitations on investing in private securities, a limitation on
portfolio leverage, and a limitation on portfolio concentration in individual securities. The 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 A.M. Best. Net investment income (loss) is net of investment fee
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.
61
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, 2018, basic book value per share was $13.15, representing a decrease of $3.18 per share, or 19.5%,
from $16.33 per share as of December 31, 2017. As of December 31, 2017, basic book value per share was $16.33,
representing an increase of $2.76 per share, or 20.3%, from $13.57 per share as of December 31, 2016. The changes were
primarily due to the impact of share repurchases and the net income (loss) in the year.
As of December 31, 2018, diluted book value per share was $12.98, representing a decrease of $2.67 per share, or
17.1%, from $15.65 per share as of December 31, 2017. As of December 31, 2017, diluted book value per share was
$15.65, representing an increase of $2.49 per share, or 18.9%, from $13.16 per share as of December 31, 2016. The
changes were primarily due to the impact of share repurchases and the net income (loss) in the year.
The changes in basic book value per share and diluted book value per share were affected by share activity including
share repurchases and the issuance of performance restricted shares.
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 changes in return on beginning shareholders’ equity attributable to Third Point Re common shareholders for the
years ended December 31, 2018 and December 31, 2017 compared to the years ended December 31, 2017 and December
31, 2016, respectively, were primarily due to net income (loss) during the year.
Consolidated Results of Operations—Years ended December 31, 2018, 2017 and 2016
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, 2018, 2017 and 2016:
2018
2017
Change
2016
Change
Net underwriting income (loss)
Net investment income (loss)
Net investment return on investments managed by
Third Point LLC
Corporate expenses
Other expenses
Interest expense
Foreign exchange gains (losses)
Income tax (expense) benefit
Net income (loss) available to Third Point Re
common shareholders
$ (42,105 )
$
(251,433 )
(42,560 )
391,953
($ in thousands)
$
455
(643,386 )
$
$
(50,052 )
98,825
7,492
293,128
(10.8 )%
17.7 %
(17,606 )
(9,610 )
(8,228 )
7,503
4,010
(22,447 )
(12,674 )
(8,225 )
(12,300 )
(11,976 )
(28.5 )%
4,841
3,064
(3 )
19,803
(15,986 )
4.2 %
13.5 %
(17,207 )
(8,387 )
(8,231 )
19,521
(5,593 )
(5,240 )
(4,287 )
6
(31,821 )
6,383
$ (317,692 )
$ 277,798
$ (595,490 )
$
27,635
$ 250,163
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, we expect volatility in our investment returns and net
investment income and therefore in our consolidated results.
62
Investment Results
Investment Portfolio
The following tables present the total long, short and net exposure of our net investments managed by Third Point LLC
as of December 31, 2018 and 2017 by strategy and geography. The tables as of December 31, 2018 include our
investments in TP Fund and collateral assets managed by Third Point LLC. The tables as of December 31, 2017 include
collateral assets managed by Third Point LLC and our investments in the separate accounts in place prior to the change
in the investment account structure described in Note 4 to the consolidated financial statements included in this Form 10-
K.
Equity
Credit
Other
Americas
Europe, Middle East and Africa
Asia
December 31, 2018
December 31, 2017
Long
Short
Net
Long
Short
Net
54 %
18 %
9 %
81 %
(22 )%
(4 )%
(1 )%
(27 )%
32 %
14 %
8 %
54 %
98 %
16 %
10 %
124 %
(25 )%
(4 )%
(2 )%
(31 )%
73 %
12 %
8 %
93 %
December 31, 2018
December 31, 2017
Long
Short
Net
Long
Short
Net
70 %
11 %
— %
81 %
(21 )%
(3 )%
(3 )%
(27 )%
49 %
8 %
(3 )%
54 %
93 %
7 %
24 %
124 %
(29 )%
— %
(2 )%
(31 )%
64 %
7 %
22 %
93 %
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.
63
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, 2018, 2017 and 2016. 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 described in Note 4 to the consolidated financial statements included in this Form 10-K,
and our investment in TP Fund and collateral assets managed by Third Point LLC from the date of the transition.
Equity
Credit
Other
Net investment return on investments managed by Third Point LLC
S&P 500 Total Return Index
Equity
Credit
Other
Net investment return on investments managed by Third Point LLC
S&P 500 Total Return Index
Equity
Credit
Other
Net investment return on investments managed by Third Point LLC
S&P 500 Total Return Index
Long
(8.7 )%
— %
(2.8 )%
(11.5 )%
2018
Short
0.1 %
(0.2 )%
0.8 %
0.7 %
Net
(8.6 )%
(0.2 )%
(2.0 )%
(10.8 )%
(4.4 )%
Long
2017
Short
Net
21.5 %
0.7 %
1.8 %
24.0 %
(4.6 )%
(0.6 )%
(1.1 )%
(6.3 )%
16.9 %
0.1 %
0.7 %
17.7 %
21.8 %
Long
2016
Short
Net
1.5 %
6.4 %
0.5 %
8.4 %
(2.9 )%
(0.4 )%
(0.9 )%
(4.2 )%
(1.4 )%
6.0 %
(0.4 )%
4.2 %
12.0 %
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. Effective August 31, 2018, we
transitioned from our separately managed account structure to investing in TP Fund. In addition, the Collateral Assets
are managed by Third Point LLC from the effective date. See Note 4 to our consolidated financial statements for
additional information. The net investment return reflects the combined results of investments managed on behalf of
Third Point Re BDA and Third Point Re USA prior to the transition date of August 31, 2018 and the investment in TP
Fund and collateral assets from the date of transition. Prior to the transition date of August 31, 2018, the stated return
was net of noncontrolling interests and net of withholding taxes, which were presented as a component of income tax
expense in our consolidated statements of income. Net investment return is the key indicator by which we measure the
performance of Third Point LLC, TP Fund's investment manager.
For the year ended December 31, 2018, the net investment results were primarily attributable to losses generated by long
equity investments, a merger arbitrage position, and exposure to cyclical sectors negatively impacted by slowing global
growth. Short selling generated positive returns and mitigated further losses in equities. The credit portfolio produced a
modest overall loss. The asset-backed securities portfolio’s gains were reduced by losses in corporate credit.
64
For the year ended December 31, 2017, the net investment results were primarily attributable to the equity portfolio.
Within equities, we experienced positive returns across each long equity sector partially offset by losses from short
positions, primarily from equity market hedges. One large long equity healthcare position was a notable contributor to
the long equity performance for the year. Credit and the macroeconomic and other strategy, including currency and
private investments, also contributed to positive performance with gains from the long exposures partially offset by short
exposures in each strategy.
For the year ended December 31, 2016, the net investment results were primarily driven by positive returns in our credit
strategy. Within credit, profits in corporate and sovereign credit were partially offset by modest losses in structured
credit. Corporate credit was the main driver in the credit strategy and resulted from positive returns on investments in
the energy sector. Within equities, negative performance from two large healthcare positions were partially offset by
positive performance from investments in the financial and industrials sectors. During the year, Third Point LLC
increased exposure to risk arbitrage transactions, which generated positive performance from several merger-related
investments and partially offset losses in the currency and macroeconomic portions of the other portfolio.
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, 2018 compared to the prior year
periods were primarily due to the following:
Corporate Expenses
General and administrative expenses allocated to corporate activities include allocations of payroll and related costs for
certain executives and non-underwriting activities. We also allocate a portion of overhead and other related costs based
on a headcount analysis. The decrease in general and administrative expenses related to corporate activities for the year
ended December 31, 2018 compared to the year ended December 31, 2017 was primarily due to a decrease in our annual
incentive plan compensation expense, partially offset by higher stock compensation expense in the current year. Our
annual incentive plan is based on the Company’s return on average equity and the combined ratio.
The increase for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to
an increase in our annual incentive plan compensation expense where we did not achieve the threshold performance
target in 2016, lower share compensation expense in 2016 due to forfeitures and fewer restricted shares with
performance and service conditions considered probable of vesting, partially offset by separation costs in 2016.
Other Expenses
Other expenses are comprised of expenses relating to interest crediting features in certain reinsurance and deposit
contracts. The decrease in other expenses for the year ended December 31, 2018 compared to the year ended
December 31, 2017 was primarily due to two deposit contracts that were commuted in 2018, resulting in gains
recognized. We also 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 increase in other expenses for the year ended December 31, 2017 compared to the year ended December 31, 2016
was primarily due to revised estimates of underlying assumptions on our deposit liability contracts in the year ended
December 31, 2016 that resulted in a decrease in other expenses.
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 gains 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 had strengthened during the current year
period compared to the prior year period. For these contracts, non-U.S. dollar reinsurance assets, or balances held in trust
65
accounts securing reinsurance liabilities generally offset reinsurance liabilities in the same non-U.S. dollar currencies
resulting in minimal net exposure. As a result, the foreign exchange gains (losses) on loss and loss adjustment expense
reserves in the current year periods were offset by corresponding foreign exchange gains (losses) included in net
investment income (loss) 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
See Note 16 to our consolidated financial statements for additional information regarding income taxes. The decrease in
income tax expense for the year ended December 31, 2018 compared to the year ended December 31, 2017 was
primarily the result of a decrease in taxable income generated by our U.S. subsidiaries.
Segment Results—Years ended December 31, 2018, 2017 and 2016
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, 2018, 2017 and 2016:
2018
2017
Change
2016
Change
($ in thousands)
$
(63,368 )
$
Gross premiums written
Gross premiums ceded
Net premiums earned
$
$
578,252
(19,895 )
621,442
641,620
(2,475 )
547,058
Loss and loss adjustment expenses incurred,
net
Acquisition costs, net
General and administrative expenses
Net underwriting income (loss)
$
438,414
206,498
18,635
(42,105 ) $
370,058
188,904
30,656
(42,560 ) $
(17,420 )
74,384
68,356
17,594
(12,021 )
455
$
617,374
(2,325 )
590,190
24,246
(150 )
(43,132 )
395,932
222,150
22,160
(50,052 ) $
(25,874 )
(33,246 )
8,496
7,492
$
Underwriting ratios (1):
Loss ratio
Acquisition cost ratio
Composite ratio
General and administrative expense ratio
Combined ratio
70.6 %
33.2 %
103.8 %
3.0 %
106.8 %
67.6 %
34.5 %
102.1 %
5.6 %
107.7 %
3.0 %
(1.3 )%
1.7 %
(2.6 )%
(0.9 )%
67.1 %
37.6 %
104.7 %
3.8 %
108.5 %
0.5 %
(3.1 )%
(2.6 )%
1.8 %
(0.8 )%
(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;
66
• 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; and
• 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.
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, 2018, 2017 and 2016:
Property
Casualty
Specialty
Total prospective reinsurance contracts
Retroactive reinsurance contracts
2018
2017
2016
$
$
9,070
235,789
259,173
504,032
74,220
578,252
1.6 % $
40.8 %
44.8 %
87.2 %
12.8 %
100.0 % $
($ in thousands)
136,999
269,759
125,511
532,269
109,351
641,620
21.4 % $
42.0 %
19.6 %
83.0 %
17.0 %
100.0 % $
98,334
213,050
305,990
617,374
—
617,374
15.9 %
34.5 %
49.6 %
100.0 %
— %
100.0 %
The decrease in gross premiums written of $63.3 million, or 9.9%, for the year ended December 31, 2018 compared to
the year ended December 31, 2017 was driven by:
Factors resulting in decreases:
• We recognized a net increase in premium of $160.9 million in the year ended December 31, 2018
compared to a net increase of $301.7 million in the twelve months ended December 31, 2017 related to the
net impact of contract extensions, cancellations and contracts renewed with no comparable premium in the
comparable period.
• We recognized $108.5 million of premium in the year ended December 31, 2017 related to contracts that
we did not renew in the year ended December 31, 2018 as a result of underlying pricing, terms and
conditions.
• Changes in renewal premiums for the year ended December 31, 2018 resulted in a net decrease in
premiums of $21.2 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.
•
We recorded net increases in premium estimates relating to prior periods of $12.0 million and $25.6
million the years ended December 31, 2018 and 2017, respectively. The increases in premium estimates for
the year ended December 31, 2018 and 2017 were due to several contracts for which clients provided
updated projections indicating that they expected to write more business than initially estimated.
Factor resulting in an increase:
• For the year ended December 31, 2018, we wrote $220.8 million of new premium, of which $122.8 million
was specialty business, including one multi-line contract covering casualty and specialty risks for $101.1
million, $83.4 million was casualty business and $14.6 million was property business.
67
The increase in gross premiums written of $24.2 million, or 3.9%, for the year ended December 31, 2017 compared to
the year ended December 31, 2016 was driven by:
Factors resulting in increases:
• We wrote $286.4 million of new business for the year ended December 31, 2017, of which $164.0 million
was casualty business, $109.4 million was retroactive reinsurance contracts and $13.0 million was
specialty business.
• Changes in renewal premiums for the year ended December 31, 2017 resulted in a net increase in
premiums of $57.8 million primarily due to changes to one contract renewed in the period to increase our
line size and to change from a one year contract to a two year contract resulting in additional premium
recorded in the 2017 period. 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 decreases:
• We recognized $161.1 million of premium in the year ended December 31, 2016 related to contracts that
we did not renew in the year ended December 31, 2017 due to changes in pricing and/or terms and
conditions.
• We recognized net increases in premium of $148.3 million and $226.2 million in the years ended
December 31, 2017 and 2016, respectively, related to the net impact of contract extensions, cancellations
and contracts written in the prior year with no comparable premium in the current year period.
• We recorded increases in premium estimates relating to prior periods of $25.6 million and $106.6 million
for the years ended December 31, 2017 and 2016, respectively. The increase in premium estimates for the
year ended December 31, 2017 was due to several contracts for which clients provided updated projections
indicating that they expected to write more business than initially estimated. The significant increase in
premium estimates for the year ended December 31, 2016 was primarily due to the following factors:
◦ We wrote one large credit and financial lines quota share, covering primarily mortgage business,
whereby the ceding company significantly increased their writings, which resulted in a $46.9 million
premium estimate increase in 2016 on this contract;
◦ We wrote a multi-line contract for several underwriting years covering commercial auto physical
damage and auto extended warranty. As this was a new and growing program, we initially recorded
the cedent’s estimate of expected written premium at a lower amount than their initial estimate. The
ceding company exceeded their premium projections resulting in an increase of $23.6 million related
to that contract; and
◦ We wrote a general liability quota share contract in 2015 whereby the ceding company increased their
writings, which resulted in a $20.8 million premium estimate increase in 2016 on this contract.
Gross Premiums Ceded
The increase in gross premiums ceded for the year ended December 31, 2018 compared to the year ended December 31,
2017 was primarily due to a new ceded contract covering certain of our 2018 mortgage contracts.
Gross premiums ceded for the year ended December 31, 2017 compared to the year ended December 31, 2016 were
consistent.
Net Premiums Earned
The increase in net premiums earned for the year ended December 31, 2018 compared to the year ended December 31,
2017 was primarily due to a higher in-force underwriting portfolio, partially offset by retroactive exposures in
reinsurance contracts that were written and fully earned in the prior year period of $109.4 million compared to $74.2
million for the year ended December 31, 2018.
68
The decrease in net premiums earned for the year ended December 31, 2017 compared to the year ended December 31,
2016 was primarily due to a lower in-force underwriting portfolio. The decrease was partially offset by $109.4 million
of new retroactive exposures in reinsurance contracts that were written and fully earned in the year ended December 31,
2017 compared to no retroactive reinsurance contracts written in the year ended December 31, 2016.
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 mix of business, a higher in-force
underwriting portfolio, prior years’ reserve development and catastrophe losses in 2018.
In the year ended December 31, 2018, we incurred $18.5 million of catastrophe losses, or 3.0 percentage points on the
combined ratio, related to the California wildfires and other catastrophe events compared to $5.3 million in the year
ended December 31, 2017, or 1.0 percentage point, relating to the 2017 catastrophe events. Although we have not
specifically written property catastrophe contracts in 2018 or in prior years, we were exposed to California wildfire
losses through liability reinsurance of the utilities in California during 2018. As a result, we recorded $11.3 million of
losses relating to the liability exposure from the California utilities. The remainder of the $18.5 million in total
catastrophe losses related to incidental exposure that we had to catastrophic events on two Florida homeowners contracts
(Hurricane Michael) and on two whole account reinsurance contracts.
The following is a summary of the net impact from loss reserve development for the years ended December 31, 2018,
2017 and 2016:
For the year ended December 31, 2018, we recognized $12.9 million, or 2.1 percentage points on the combined ratio, of
net favorable prior years’ reserve development as a result of decreases in loss reserve estimates. The $12.9 million of net
favorable prior years’ reserve development for the year ended December 31, 2018 was accompanied by net increases of
$7.7 million, or 1.2 percentage points on the combined ratio, in acquisition costs resulting in a $5.2 million, or 0.8
percentage points on the combined ratio, improvement in net underwriting results. The improvement in the net
underwriting results was primarily due to the following factors:
• $15.8 million of net favorable underwriting loss development relating to workers’ compensation, multi-line and
credit and financial lines contracts. The favorable development was the result of better than expected loss
experience and was partially offset by;
• $10.5 million of net adverse underwriting loss development primarily relating to our general liability and
homeowners’ contracts, as a result of worse than expected loss experience.
For the year ended December 31, 2017, we incurred $22.3 million, or 4.1 percentage points on the combined ratio, of net
favorable prior years’ reserve development as a result of decreases in loss reserve estimates. The $22.3 million of net
favorable prior years’ reserve development for the year ended December 31, 2017 was accompanied by net increases of
$19.8 million, or 3.6 percentage points on the combined ratio, in acquisition costs, resulting in a $2.5 million, or 0.5
percentage points on the combined ratio, improvement in net underwriting results. The improvement in the net
underwriting results was primarily due to the following factors:
• $5.8 million of net favorable underwriting loss development relating to several workers’ compensation
contracts written from 2012 to 2014, driven by better than expected loss experience; and
• $1.3 million of net favorable underwriting loss development from several other contracts as a result of better
than expected loss experience; partially offset by
• $4.6 million of net adverse underwriting loss development relating to non-standard auto contracts, primarily
due to the inability of cedents to promptly react to increasing frequency and severity trends, resulting in
underpriced business and adverse selection.
For the year ended December 31, 2016, we incurred $10.5 million, or 1.8 percentage points on the combined ratio, of net
adverse prior years’ reserve development as a result of increases in loss reserve estimates. The $10.5 million of net
adverse prior years’ reserve development for the year ended December 31, 2016 was accompanied by net increases of
69
$2.0 million, or 0.3 percentage points on the combined ratio, in acquisition costs, resulting in a net adverse development
of $12.5 million in net underwriting results, or 2.1 percentage points on the combined ratio. The net underwriting results
impact of the adverse loss development was due to:
• $4.8 million of net adverse underwriting loss development relating to one multi-line contract written since
2014. This contract contains underlying commercial auto physical damage and auto extended warranty
exposure. The adverse loss experience was a result of an increase in the number of reported claims and
inadequate pricing in certain segments of the underlying business;
• $4.0 million of net adverse underwriting loss development relating to non-standard auto contracts, primarily
due to the inability of cedents to promptly react to increasing frequency and severity trends, resulting in
underpriced business and adverse selection;
• $3.7 million of net adverse underwriting loss development relating to our Florida homeowners’ contracts
primarily as a result of higher than anticipated water damage claims and an increase in the practice of
assignment of benefits whereby homeowners assign their rights for filing and settling claims to attorneys and
public adjusters, which we believe has led to an increase in the frequency of claims reported as well as the
severity of losses and loss adjustment expenses;
• $3.3 million of net adverse underwriting loss development relating to a workers’ compensation contract written
from 2012 to 2014 under which we have been experiencing higher than expected claims development that led
to an increase in our previous loss assumptions on this contract; and
• $2.1 million of net favorable underwriting loss development from several other contracts.
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.
Many of our contracts have similar expected composite ratios (combined ratio before general and administrative
expenses); therefore, contracts with higher initial loss ratio estimates have lower acquisition cost ratios and contracts
with lower initial loss ratios have higher acquisition cost ratios.
The increase in acquisition costs, net, for the year ended December 31, 2018 was primarily due to a change in mix of
business resulting in a higher acquisition cost expense amount.
The decrease in acquisition costs, net, for the year ended December 31, 2017 was primarily due to a retroactive
reinsurance contracts with a low acquisition cost ratio in the year ended December 31, 2017 compared to no retroactive
reinsurance contracts in the year ended December 31, 2016. Also impacting the difference is lower earned premiums in
the year ended December 31, 2017 resulting in a lower acquisition cost expense amount.
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 and the related general and
administrative expenses ratio for the year ended December 31, 2018 compared to the year ended December 31, 2017 was
the result of lower payroll related costs primarily due to lower annual incentive plan compensation expense accruals,
partially offset by higher stock compensation expense and professional fees. Our annual incentive plan is based on a
formula derived from certain financial performance metrics. Our incentive plan accrual was lower for the year ended
December 31, 2018 compared to the year ended December 31, 2017 to reflect the lower performance of the Company in
the year relative to the incentive plan compensation performance metrics. The higher stock compensation expense is a
70
result of an increase of our accruals for restricted shares with performance conditions reflecting improvement in our
projected underwriting results. The increase in professional fees is primarily due to legal, accounting and consulting fees
incurred in conjunction with the investment restructuring.
The increase in general and administrative expenses related to corporate activities for the year ended December 31, 2017
compared to the year ended December 31, 2016 was primarily due to an increase in our annual incentive plan
compensation expense, partially offset by lower stock compensation expense in 2017 and separation costs in 2016.
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 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. As a result of the change in the Company’s investment account
structure described in Note 4 to the accompanying consolidated financial statements, we no longer calculate investment
income on float.
Non-GAAP Financial Measures
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. Effective August 31, 2018, we
transitioned from our separately managed account structure to investing in TP Fund. In addition, the Collateral Assets
are managed by Third Point LLC from the effective date. See Note 4 to our consolidated financial statements for
additional information. The net investment return reflects the combined results of investments managed on behalf of
Third Point Re BDA and Third Point Re USA prior to the transition date of August 31, 2018 and the investment in TP
Fund and collateral assets from the date of transition. Prior to the transition date of August 31, 2018, the stated return
was net of noncontrolling interests and net of withholding taxes, which were presented as a component of income tax
expense in our consolidated statements of income. Net investment return is the key indicator by which we measure the
performance of Third Point LLC, TP Fund's investment manager.
Basic Book Value Per Share and Diluted Book Value Per Share
Basic book value per share and diluted book value per share are non-GAAP financial measures and there are no
comparable GAAP measures. Basic book value per share, as presented, is a non-GAAP financial measure and is
calculated by dividing shareholders’ equity attributable to Third Point Re common shareholders by the number of
common shares outstanding, excluding the total number of unvested restricted shares, at period end. Diluted book value
per share, as presented, is a non-GAAP financial measure and represents basic book value per share combined with the
impact from dilution of all in-the-money share options issued, warrants and unvested restricted shares outstanding as of
any period end. For unvested restricted shares with a performance condition, we include the unvested restricted shares
for which we consider vesting to be probable. Change in basic book value per share is calculated by taking the change in
basic book value per share divided by the beginning of period book value per share. Change in diluted book value per
share is calculated by taking the change in diluted book value per share divided by the beginning of period diluted book
value per share. We believe that long-term growth in diluted book value per share is the most important measure of our
financial performance because it allows our management and investors to track over time the value created by the
71
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 book value per share, basic book value per share and diluted book
value per share as of December 31, 2018, 2017 and 2016 :
2018
2017
2016
Basic and diluted book value per share numerator:
Shareholders' equity attributable to Third Point Re common shareholders
$
Effect of dilutive warrants issued to founders and an advisor (1)
Effect of dilutive stock options issued to directors and employees (1)
Diluted book value per share numerator:
$
Basic and diluted book value per share denominator:
($ in thousands, except share and per share
amounts)
1,656,089 $
46,512
51,422
1,754,023 $
1,204,574 $
—
—
1,204,574 $
1,414,051
46,512
52,930
1,513,493
Common shares outstanding
Unvested restricted shares
Basic book value per share denominator:
Effect of dilutive warrants issued to founders and an advisor (1)
Effect of dilutive stock options issued to directors and employees (1)
Effect of dilutive restricted shares issued to directors and employees (2)
Diluted book value per share denominator:
Basic book value per share
Diluted book value per share
93,639,610 103,282,427 105,856,531
(2,025,113 )
(1,873,588 )
(1,682,783 )
91,614,497 101,408,839 104,173,748
4,651,163
4,651,163
—
5,274,333
5,123,531
—
1,209,285
878,529
905,412
114,977,773
92,823,782 112,088,945
$
$
13.15 $
12.98 $
16.33 $
15.65 $
13.57
13.16
(1) As a result of the Company’s share price being under the minimum strike price for warrants and options as of December 31, 2018, there was no
dilution from warrants and stock options.
(2) As of December 31, 2018, the effect of dilutive restricted shares issued to directors and employees was comprised of 24,065 restricted shares with
a service condition only and 1,185,220 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 (loss) available to Third Point Re common shareholders by the beginning
shareholders’ equity attributable to Third Point Re common shareholders. We believe that return on beginning
shareholders’ equity attributable to Third Point Re common shareholders is an important measure because it assists our
management and investors in evaluating the Company’s profitability. For the years ended December 31, 2018 and 2017,
we have also adjusted the beginning shareholders’ equity attributable to Third Point Re common shareholders for the
impact of the shares repurchased on a weighted average basis. For a period where there was a loss, this adjustment
decreased the stated returns on beginning shareholders’ equity and for a period where there was a gain, this adjustment
increased the stated returns on beginning shareholders’ equity.
72
Return on beginning shareholders’ equity attributable to Third Point Re common shareholders for the years ended
December 31, 2018, 2017 and 2016 was calculated as follows:
2018
2017
2016
Net income (loss) available to Third Point Re common shareholders
$
(317,692 )
($ in thousands)
277,798
$
$
27,635
Shareholders’ equity attributable to Third Point Re common shareholders -
beginning of year
Impact of weighting related to shareholders’ equity from shares repurchased
1,656,089
1,414,051
1,379,726
(65,120 )
(29,038 )
(4,363 )
Adjusted shareholders’ equity attributable to Third Point Re common
shareholders - beginning of year
Return on beginning shareholders’ equity attributable to Third Point Re
common shareholders
$ 1,590,969
$ 1,385,013
$ 1,375,363
(20.0 )%
20.1 %
2.0 %
Other Financial Metrics
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 24 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 24 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
73
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, 2018, Third Point Re BDA could pay dividends to Third Point Re of approximately $260.8 million
(December 31, 2017 - $357.5 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 ultimately to Third Point Re of approximately $1.4 million as
of December 31, 2018 (December 31, 2017 - $24.3 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 A.M. 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.
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 13 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 17 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 23 to our consolidated
financial statements.
Sources of Liquidity
Historically, our sources of funds have primarily consisted of premiums written, reinsurance recoveries, investment
income and proceeds from sales and redemptions of investments.
See Item 1. “Business” and Note 4 to our consolidated financial statements for information regarding the LPA and
transition of our investment structure from a separate account structure to TP Fund. We expect our overall investment
exposures, returns, fees paid to Third Point LLC and TP GP as well as the investment guidelines, liquidity and
redemption rights to be generally similar under the LPA and TP Fund IMA compared to what would have been expected
under the separate accounts managed under the JV Agreements, assuming similar underlying investment portfolio returns
and exposure levels. However, there can be no assurance of such results.
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 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 A.M.
Best. We believe the liquidity profile of the net investments underlying the TP Fund, the Company’s rights under the
LPA to withdraw from the TP Fund and the operating cash on hand will provide us with sufficient liquidity to manage
our operations.
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
74
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, 2018, 2017 and 2016 were as follows:
Net cash provided by (used in) operating activities
$
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted
cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
$
Operating Activities
2018
2017
2016
($ in thousands)
13,387 $
377,556
(226,939 )
164,004
549,333
713,337 $
(78,536 ) $
265,245
53,733
240,442
308,891
549,333 $
4,771
(85,253 )
38,051
(42,431 )
351,322
308,891
Cash flows from operating activities generally represent net premiums collected less loss and loss adjustment expenses,
acquisition costs and general and administrative expenses paid.
The increase in cash flows from operating activities in the year ended December 31, 2018 compared to the year ended
December 31, 2017 was primarily due to higher net reinsurance receipts, corresponding to premium receipts less losses
paid and acquisition costs paid partially offset by higher general and administrative expenses paid.
The decrease in cash flows from operating activities in the year ended December 31, 2017 compared to the year ended
December 31, 2016 was primarily due to lower net reinsurance receipts from our reinsurance operations.
Excess cash generated from our operating activities is typically then invested by Third Point LLC into either the TP Fund
or collateral assets. The amount of net reinsurance receipt can vary significantly from period to period depending on the
timing, type and size of reinsurance contracts we bind.
75
Investing Activities
Cash flows provided by (used in) investing activities primarily reflects investment activities in our separate account
investment structure prior to the change in investment account structure and the net cash redemptions from TP Fund after
such change. The transfer of the net investment assets and liabilities to TP Fund, as described in Note 4 to our
consolidated financial statements, had limited impact on our liquidity. Cash flows provided by investing activities for the
years ended December 31, 2018 and 2017 primarily relates to net redemptions and the proceeds from the sale and
maturity of certain investments used to fund cash flows from operations and share repurchases of $138.7 million and
$40.9 million, respectively. Cash flows used in investing activities for the years ended December 31, 2016 primarily
reflects the investment of float generated from our reinsurance operations, including the net proceeds from deposit
liability contracts.
Financing Activities
Cash flows used in financing activities for the year ended December 31, 2018 consisted of $138.7 million for shares
repurchased and $98.0 million of net withdrawals from total noncontrolling interests. Cash flows used in financing
activities for the year ended December 31, 2017 consisted of $74.0 million of net contributions from total noncontrolling
interests and contributions received on deposit liability contracts of $19.1 million, partially offset by $40.9 million for
shares repurchased. Cash flows provided by financing activities for the year ended December 31, 2016 consisted of
contributions received on deposit liability contracts and proceeds from the exercise of stock options, partially offset by
$7.4 million of shares repurchased.
For the period from inception until December 31, 2018, 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 decreased by $18.8 million, or 2.2%, to $848.8 million as
of December 31, 2018 from $867.6 million as of December 31, 2017. The decrease was primarily due to the issuance of
letters of credit through our unsecured facility. In addition, we are now investing 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.
Letter of Credit Facilities
See Note 13 to our consolidated financial statements for additional information regarding our letter of credit facilities.
As of December 31, 2018, $349.2 million (December 31, 2017 - $250.5 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, 2018.
76
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, 2018, total cash and cash equivalents with a fair value of $204.0 million (December 31, 2017 - $250.5
million) was pledged as collateral against the letters of credit issued. Prior to the change in the investment account
structure, our ability to post collateral securing letters of credit and certain reinsurance contracts depended in part on our
ability to borrow against certain assets in our investment accounts through prime brokerage arrangements. As a result of
the change in our investment account structure, we no longer borrow from prime brokers to post cash collateral for cash
secured letter of credit agreements but hold sufficient cash to post collateral securing letters of credit and certain
reinsurance contracts outside of our investments in TP Fund. See Note 4 for additional information regarding the impact
of the investment restructuring including the investment of collateral by Third Point LLC under the Collateral IMA.
Unsecured Revolving Credit and Letter of Credit Facility Agreement
On July 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA entered into a one-year, $200.0 million
Unsecured Revolving Credit and letter of Credit Facility Agreement with various financial institutions (the “Credit
Agreement”) to support obligations in connection with our reinsurance business written by Third Point Re BDA and
Third Point Re USA. The Credit Agreement expires on July 30, 2019. The Credit Agreement is fully and unconditionally
guaranteed by Third Point Re.
Financial Condition
Shareholders’ equity
As of December 31, 2018, total shareholders’ equity was $1,204.6 million compared to $1,661.5 million as of
December 31, 2017. The decrease was primarily due to a net loss available to Third Point Re common shareholders of
$317.7 million and share repurchases of $138.7 million.
Investments
As of December 31, 2018, total cash and net investments managed by Third Point LLC was $2,134.1 million, compared
to $2,589.9 million as of December 31, 2017. The decrease was primarily due to the net investment loss on net
investments managed by Third Point LLC of $251.6 million and net redemptions of $197.6 million, primarily to fund
share repurchases and cash flows from operations.
Contractual Obligations
On February 13, 2015, TPRUSA issued Senior Notes in the aggregate principal amount of $115.0 million. The Senior
Notes bear interest at 7.0% and interest is payable semi-annually on February 13 and August 13 of each year. The Senior
Notes are fully and unconditionally guaranteed by Third Point Re, and, in certain circumstances specified in the
indenture governing the Notes, certain existing or future subsidiaries of the Company may be required to guarantee the
Notes, as described in the indenture governing the Notes.
The indenture governing the Senior Notes contains customary events of default, and limits our ability to merge or
consolidate or to transfer or sell all or substantially all of our assets and TPRUSA’s ability to create liens on the voting
securities or profit participating equity interests of Third Point Re USA, its wholly-owned insurance subsidiary. In
certain circumstances specified in the indenture governing the Senior Notes, certain of our existing or future subsidiaries
may be required to guarantee the Senior Notes. Interest on the Notes is subject to adjustment from time to time in the
event of a downgrade or subsequent upgrade of the rating assigned to the Senior Notes or in connection with certain
changes in the ratio of consolidated total long-term indebtedness to capitalization (each as defined in the indenture
governing the Senior Notes). As of December 31, 2018, we were in compliance with all of the covenants under the
indenture governing the Senior Notes, and during the year then ended, no event requiring an increase in the interest rate
applicable to the Senior Notes occurred.
77
Our contractual obligations as of December 31, 2018 by estimated maturity are presented below:
Senior Notes due 2025 (1)
Scheduled interest payments (1)
Subtotal - Debt obligations
Loss and loss adjustment expense reserves (2)
Other operating agreements (3)
Rental leases (4)
Deposit liabilities (5)
Total
Less than 1
year
1-3 years
3-5 years
($ in thousands)
More than 5
years
$
115,000 $
52,325
167,325
937,157
3,027
2,049
145,342
$ 1,254,900 $
— $
8,050
8,050
202,189
995
935
13,198
225,367 $
— $
16,100
16,100
301,310
1,815
1,075
30,088
350,388 $
— $
16,100
16,100
224,925
217
39
33,941
275,222 $
115,000
12,075
127,075
208,733
—
—
68,115
403,923
(1)
See Note 13 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 an undivided 31.25% interest in an aircraft with NetJets Sales Inc. (“NetJets”), which expires on August 31, 2021. The agreement with
NetJets provides for monthly management fees, occupied hourly fees and other fees. We also 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 five year lease expires on November 30, 2020. 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 12 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.
Off-Balance Sheet Commitments and Arrangements
Prior to the change in our investment account structure, the derivatives in our investment portfolio were considered off-
balance sheet arrangements. Refer to Note 4 and Note 8 for additional details. 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, (3) fair value measurements related to our investments, and (4) consolidation of variable
interest entities. 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.
78
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, 2018, we recorded $12.0 million of changes in premium estimates on prior years’
contracts (2017 - $25.6 million and 2016 - $106.6 million). There was a $0.7 million impact on net income of these
changes in premium estimates for the year ended December 31, 2018 (2017 - $(0.8) million and 2016 - $1.0 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 12 to our consolidated financial statements for additional information on deposit contracts entered
into to date.
Loss and Loss Adjustment Expense Reserves
See Note 9 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, 2018. 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.
79
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.
Impact on:
Loss and loss adjustment expense reserves, net
Acquisition costs, net
Increase (decrease) in net underwriting loss
Total shareholders’ equity
Increase (decrease) in shareholders’ equity
Fair value measurements
10% increase in
ultimate loss and
loss adjustment
expenses, net
10% decrease in
ultimate loss and
loss adjustment
expenses, net
($ in thousands)
$
$
134,538
(4,484 )
130,054
1,204,574
$
$
(157,892 )
49,120
(108,772 )
1,204,574
(10.8 )%
9.0 %
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.
Consolidation of variable interest entities
The consolidated financial statements include the accounts of all subsidiaries in which we have a controlling interest and
the accounts of variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary. A VIE is an
entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct
the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity
investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. We
examine specific criteria and use judgment when determining if we are the primary beneficiary of a VIE. Factors
considered in determining whether we are the primary beneficiary may include risk and reward sharing, experience and
financial condition of other parties, voting rights, involvement in day-to-day capital and operating decisions,
representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic
disproportionality between us and the other parties, and other factors. Our accounting policy relating to VIEs is a critical
accounting policy because the determination of whether an entity is a VIE and, if so, whether we are primary beneficiary,
may require us to exercise significant judgment.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements for the year ended December 31, 2018 included in Item 8 of this
Annual Report on Form 10-K for details of recently issued accounting standards.
80
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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;
•
•
•
•
•
•
• political risk.
liquidity risk; and
Change in Investment Account Structure
As described in Note 4 to our consolidated financial statements, effective August 31, 2018, we transitioned from a
separate account investment structure to an investment in the TP Fund, a related party investment fund. In addition,
certain collateral assets held by Third Point Re BDA and Third Point Re USA will continue to be invested and managed
by Third Point LLC. As a result of this transition, we remain exposed to many of the same market risks; however, these
market risks are now risks associated with the investments underlying the TP Fund and no longer related to our direct
holdings in the investments and securities.
For the information disclosed in relation to periods subsequent to the August 31, 2018 effective date of the investment
structure changes, we have estimated the investment risks related to the investment portfolio within our investment in TP
Fund based on information provided by the investment manager of TP Fund, Third Point LLC. For the comparative
information disclosed for periods prior to August 31, 2018, the information relates to the investments and securities held
in our separate accounts.
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, CS/Tremont Event Driven Index, HFRI Event Driven Index, and others.
As of December 31, 2018, 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, 2018, a 10% decline in the value of all equity and equity-linked derivatives
would result in a loss to the Company of $70.3 million, or 3.3% of total net investments.
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, $490.6 million, or 13.2%, were written in currencies other than the U.S. dollar. As of
December 31, 2018, loss and loss adjustment expense reserves included $223.2 million (December 31, 2017 - $177.2
81
million) and net reinsurance balances receivable included $82.4 million (December 31, 2017 - $27.0 million) in foreign
currencies. These foreign currency liability exposures were generally offset by foreign currencies held in trust accounts
of $165.7 million as of December 31, 2018 (December 31, 2017 - $179.9 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 of TP Fund
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, 2018, through our investment in TP Fund,
the Company had total net short exposure to foreign denominated securities representing 11.9% of the Company’s
investment in the TP Fund, including cash and cash equivalents of $254.0 million. As of December 31, 2017, our total
net short exposure to foreign denominated securities represented 26.2% of our investment portfolio including cash and
cash equivalents, of $695.0 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, 2018:
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
$
$
26,751
11,491
(13,529 )
680
25,393
($ in thousands)
1.3 % $
0.5 %
(0.6 )%
— %
1.2 % $
(26,751 )
(11,491 )
13,529
(680 )
(25,393 )
(1.3 )%
(0.5 )%
0.6 %
— %
(1.2 )%
Hong Kong Dollar
Saudi Arabian Riyal
Swiss Franc
Other
Total
Interest Rate Risk
Our net investments managed by Third Point LLC, including investments underlying the TP Fund and Collateral Assets,
includes interest rate sensitive securities, such as 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.
The effect of interest rate movements have historically not had a material impact on the performance of our net
investments as managed by Third Point LLC, including investments underlying the TP Fund and Collateral Assets.
However, Third Point LLC monitors the potential effects of interest rate shifts by performing stress tests against the
portfolio composition using a proprietary in-house risk system.
82
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 and Collateral
Assets, as of December 31, 2018:
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)
$
$
(7,804 )
(2,465 )
(10,269 )
(0.4 )% $
(0.1 )%
(0.5 )% $
9,220
2,478
11,698
0.4 %
0.1 %
0.5 %
U.S. treasuries and sovereign debt
instruments (1)
Asset-backed securities (2)
Net exposure to interest rate risk
(1) Includes interest rate risk associated with investments held as collateral in reinsurance trust accounts.
(2) Includes instruments for which durations are available on December 31, 2018. Includes a convexity adjustment if convexity is
available. Not included are mortgage hedges which would reduce the impact of interest rate changes.
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’ 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, 2018, the TP Fund had de minimis commodity exposure. As of December 31, 2017, we had a de
minimis commodity exposure.
We and Third Point LLC periodically monitor 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 $363.3 million, or 9.8%, of credit
and financial lines premium since inception, of which $100.6 million was written in the year ended December 31, 2018.
The majority of the mortgage insurance premium has been written as quota shares of private mortgage insurers, primarily
in the United States.
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
83
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.
Investments of TP Fund
We are also exposed to credit risk through our net investments managed by Third Point LLC, including investments
underlying the TP Fund. 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.
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.
As of December 31, 2018 and through our investment in TP Fund, and as of December 31, 2017, through our investment
portfolio managed by Third Point LLC, the Company’s holdings in non-investment grade securities, those 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, were as follows:
Assets:
Asset-backed securities
Bank debt
Corporate bonds
Municipal bonds
Sovereign debt
Trade claims
Other debt securities
Liabilities:
Corporate bonds
2018
2017
($ in thousands)
$
$
$
$
180,458 $
24,299
75,131
25,505
3,864
167
—
309,424 $
11,141 $
11,141 $
225,499
14,550
77,086
—
26,134
7,496
5,460
356,225
21,699
21,699
As of December 31, 2018 through our investment in the TP Fund, and as of December 31, 2017, through our investment
portfolio managed by Third Point LLC, 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, 2018 and 2017, the
largest concentration of our ABS holdings were as follows:
Reperforming loans
Market place loans
Other (1)
2018
118,595
51,623
10,240
180,458
($ in thousands)
65.7 % $
28.6 %
5.7 %
100.0 % $
2017
160,354
52,584
12,561
225,499
71.1 %
23.3 %
5.6 %
100.0 %
$
$
(1) Other includes: U.S. Alt-A positions, collateralized debt obligations, commercial mortgage-backed securities, non-U.S. RMBS and aircraft ABS.
84
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 may become illiquid. Disruptions in the credit markets may
materially affect the liquidity of certain investments, including ABS which represent 14.1% (December 31, 2017 - 7.5%)
of total net investments managed by Third Point LLC as of December 31, 2018. 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 A.M. 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, 2018, through our investment in the TP Fund, we had $877.2 million
(December 31, 2017 - $2,202.4 million through our separate accounts) 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 risk exposure in several reinsurance contracts with companies that write political risk
insurance.
Item 8. Financial Statements and Supplementary Data
See our consolidated financial statements and notes thereto and required financial statement schedules commencing on
page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
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, 2018. Based upon this
85
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of December 31, 2018.
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, 2018. 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, 2018, 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.
86
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of 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, 2018, 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,
2018, 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, 2018 and 2017, the related
consolidated statements of income (loss), shareholders’ equity and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15 and our
report dated February 28, 2019 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.
87
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 28, 2019
88
Item 9B. Other Information
On February 28, 2019, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the Amended LPA
with TP GP, which amended and restated the 2018 LPA, with effect from January 1, 2019.
The Amended LPA revised the management fee from 1.5% per annum to 1.25% per annum with effect from January 1,
2019. In addition, pursuant to the Amended LPA, TP GP shall notify us if Third Point LLC or its affiliates (either alone
or together with a third party) form any Permitted Funds. The Amended LPA permits us to withdraw up to $250.0
million in 2019 and a separate $250.0 million during the period from January 1, 2020 through December 31, 2021 for the
purpose of immediately investing such amounts in Permitted Funds.
Furthermore, the Amended LPA adjusted the loss carryforward terms of the LPA, which relate to the calculation of TP
GP’s performance compensation under the LPA, to preserve 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.
The term of the Amended LPA ends December 31, 2021, which is consistent with the term under the 2018 LPA. All other
material terms of the Amended LPA remain consistent with the LPA.
A copy of the Amended LPA is furnished as Exhibit 10.33.1 to this Annual Report on Form 10-K and incorporated by
reference herein. The foregoing description of the Amended LPA does not purport to be complete and is qualified in its
entirety by reference to the full text of such document.
Part III
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, 2018 pursuant to Regulation
14A.
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, 2018 pursuant to Regulation 14A.
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, 2018 pursuant to
Regulation 14A.
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, 2018 pursuant to Regulation
14A.
89
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, 2018 pursuant to Regulation 14A.
90
PART IV
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 F-1.
Exhibits
Exhibit
Number
3.1*
3.1.1
3.1.2
3.3
3.4
4.1*
4.2*
4.3*
4.4*
4.6*
4.7*
4.8*
4.9
4.10
4.11
4.12
Description
Memorandum of Association of Third Point Reinsurance Ltd.
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)
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)
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)
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)
Specimen Common Share Certificate
Registration Rights Agreement, by and among Third Point Reinsurance Ltd. and each of the
Members, dated as of December 22, 2011
Warrant to Purchase Common Shares issued to KEP TP Holdings, L.P., dated as of December 22,
2011
Warrant to Purchase Common Shares issued to KIA TP Holdings, L.P., dated as of December 22,
2011
Warrant to Purchase Common Shares issued to P RE Opportunities Ltd., dated as of December 22,
2011
Warrant Subscription Agreement, by and among Third Point Reinsurance Ltd. and each of the
signatories thereto, dated as of December 22, 2011
Agreement among Members by and among Third Point Reinsurance Ltd. and each of the Members,
dated as of December 22, 2011
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)
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)
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)
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)
E-1
10.1*
10.1.1
10.3.6
10.4*&**
10.4.1**
10.4.2**
10.4.3**
10.4.4**
10.4.5
10.5*&**
10.6*&**
10.6.1**
10.6.2**
10.6.3**
10.6.4**
10.6.4.1
10.6.5**
10.7*&**
10.8**
10.8.1**
10.9**
10.9.1
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)
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)
Employment Agreement between Third Point Reinsurance Ltd. and J. Robert Bredahl, entered into on
March 17, 2017, effective as of March 1, 2017
Employment Agreement between Third Point Reinsurance Ltd. and Daniel Victor Malloy III, dated as
of January 23, 2012
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)
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)
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)
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)
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)
Share Incentive Plan
Form of Restricted Share Award Agreement
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)
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)
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)
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)
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)
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)
Form of Nonqualified Share Option Agreement under the Share Incentive Plan
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)
Schedule of Signatories to the Director Service Agreement
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)
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)
E-2
10.10**
10.11**
10.22*
10.23*
10.24
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)
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)
Trademark License Agreement between Third Point LLC and Third Point Reinsurance Ltd., dated as
of December 22, 2011
Trademark License Agreement between Third Point LLC and Third Point Reinsurance Company
Ltd., dated as of December 22, 2011
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)
Letter Agreement dated as of December 22, 2011
10.26*†
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
10.29
10.30**
10.32**
10.32.1**
10.32.2**
10.32.3**
10.32.4**
10.33
10.33.1
10.34
10.35
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)
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)
Employment Agreement between Third Point Reinsurance Ltd. and Manoj Gupta, dated as of March
27, 2012 (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K
filed with the SEC on February 27, 2015)
Amendment No. 1 to Employment Agreement between Third Point Reinsurance Ltd. and Manoj
Gupta, dated as of February 26, 2015 (incorporated by reference to Exhibit 10.32.1 to the Company’s
Quarterly Report on Form 10-Q filed with the SEC on May 8, 2015)
Amendment No. 2 to Employment Agreement between Third Point Reinsurance Ltd. and Manoj K.
Gupta dated as of April 1, 2016 (incorporated by reference to Exhibit 10.32.2 to the Company’s
Quarterly Report on Form 10-Q filed with the SEC on August 5, 2016)
Amendment No. 3 to Employment Agreement between Third Point Reinsurance Ltd. and Manoj K.
Gupta, entered into on March 17, 2017, effective as of March 1, 2017 (incorporate by reference to
Exhibit 10.32.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 5,
2017)
Amendment No. 4 to Employment Agreement between Third Point Reinsurance Ltd. and Manoj K.
Gupta, entered into as of August 3, 2017 (incorporated by reference to Exhibit 10.32.4 to the
Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2017)
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)
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.
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)
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)
E-3
10.36
10.37
10.38
21.1
23.1
23.2
24.1
31.1
31.2
32.1±
32.2±
99.1
Unsecured Revolving Credit and Letter of Credit Facility Agreement among Third Point Reinsurance
Ltd., Third Point Reinsurance Company Ltd., and Third Point Reinsurance (USA) Ltd., and SunTrust
Bank, SunTrust Robinson Humphrey, Inc., RBC Capital Markets and ING Capital as Joint Lead
Arrangers and Joint Bookrunners, dated as of July 31, 2018 (incorporated by reference to Exhibit
10.36 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2018)
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)
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)
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Third Point Enhanced LP Consent of Independent Registered Public Accounting Firm
Power of Attorney signed by each of the members of the Board of Directors on February 27, 2019
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.
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.
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.
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.
Audited Financial Statements of TP Enhanced Fund LP as of December 31, 2018 and for the period
from September 3, 2018 (Commencement of Operations) to December 31, 2018.
101.INS†† XBRL Instance 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
*
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.
E-4
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in Pembroke, Bermuda, on February 28, 2019.
SIGNATURES
THIRD POINT REI
NSURANCE LTD.
(Registrant)
/s/ J. Robert Bredahl
By:
Name: J. Robert Bredahl
Title: Director, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
*
Title
Date
Joshua L. Targoff
Chairman of the Board
February 28, 2019
Director, President and Chief Executive Officer
(Principal Executive Officer)
February 28, 2019
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) February 28, 2019
/s/ J. Robert Bredahl
J. Robert Bredahl
/s/ Christopher S. Coleman
Christopher S. Coleman
*
Steven E. Fass
*
Rafe de la Gueronniere
*
Director
Director
Gretchen A. Hayes
Director
*
Mary R. Hennessy
*
Director
Neil McConachie
Director
*
Mark Parkin
Director
* By: /s/ Janice Weidenborner
Name:
Title:
Janice Weidenborner
Attorney-in-Fact
E-5
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
THIRD POINT REINSURANCE LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018,
2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
Schedule I - Summary of Investments - Other than Investments in Related Parties
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-81
F-82
F-83
All other schedules and notes specified under Regulation S-X are omitted because they are either not applicable, not
required or the information called for therein appears in response to the items in the Consolidated Financial Statements
and the related Notes to Consolidated Financial Statements of Third Point Reinsurance Ltd. and its subsidiaries listed on
the above index.
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Third Point Reinsurance Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Third Point Reinsurance Ltd. (the Company) as of
December 31, 2018 and 2017, the related consolidated statements of income (loss), shareholders’ equity and cash flows
for each of the three years in the period ended December 31, 2018 and the related notes and financial statement schedules
listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) and our report dated February 28, 2019 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included, evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Ernst & Young Ltd.
We have served as the Company’s auditor since 2012.
Hamilton, Bermuda
February 28, 2019
F-2
THIRD POINT REINSURANCE LTD.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2018 and 2017
(expressed in thousands of U.S. dollars, except per share and share amounts)
December 31,
2018
December 31,
2017
$
Assets
Investment in related party investment fund, at fair value (cost - $1,564,850; 2017 - N/A) (1) $
Equity securities, trading, at fair value (cost - N/A; 2017 - $1,868,735)
Debt securities, trading, at fair value (cost - $252,362; 2017 - $711,322)
Other investments, at fair value
Total investments in securities
Cash and cash equivalents
Restricted cash and cash equivalents
Due from brokers
Derivative assets, at fair value
Interest and dividends receivable
Reinsurance balances receivable
Deferred acquisition costs, net
Unearned premiums ceded
Loss and loss adjustment expenses recoverable
Other assets
Total assets
Liabilities
Accounts payable and accrued expenses
Reinsurance balances payable
Deposit liabilities
Unearned premium reserves
Loss and loss adjustment expense reserves
Securities sold, not yet purchased, at fair value
Securities sold under an agreement to repurchase
Due to brokers
Derivative liabilities, at fair value
Participation agreement with related party investment fund
Interest and dividends payable
Senior notes payable, net of deferred costs
Total liabilities
Commitments and contingent liabilities
Redeemable noncontrolling interests in related party
Shareholders’ equity
Preference shares (par value $0.10; authorized, 30,000,000; none issued)
Common shares (Issued: 2018 - 93,639,610; 2017 - 107,227,347; Outstanding: 2018 -
93,639,610; 2017 - 103,282,427)
Treasury shares (2018 - 0; 2017 - 3,944,920)
Additional paid-in capital
Retained earnings
Shareholders’ equity attributable to Third Point Re common shareholders
Noncontrolling interests in related party
Total shareholders' equity
Total liabilities, noncontrolling interests and shareholders’ equity
$
$
1,284,004 $
—
239,640
84
1,523,728
104,183
609,154
1,411
—
1,316
602,448
203,842
17,552
2,031
20,569
3,086,234 $
7,261 $
69,701
145,342
602,936
937,157
—
—
—
—
2,297
3,055
113,911
1,881,660
—
—
9,364
—
918,882
276,328
1,204,574
—
1,204,574
3,086,234 $
—
2,283,050
675,158
37,731
2,995,939
8,197
541,136
305,093
73,372
3,774
476,008
258,793
1,049
1,113
7,320
4,671,794
34,632
41,614
129,133
649,518
720,570
394,278
29,618
770,205
14,503
—
4,275
113,733
2,902,079
108,219
—
10,723
(48,253 )
1,099,599
594,020
1,656,089
5,407
1,661,496
4,671,794
The accompanying Notes to the Consolidated Financial Statements are
an integral part of the Consolidated Financial Statements.
(1) Effective August 31, 2018, Third Point Re and the TPRE Limited Partners entered into the 2018 LPA to invest in TP Fund, a related party investment fund. As a result,
substantially all assets and related liabilities were transferred from the Company’s separate accounts to TP Fund and the TPRE Limited Partners received limited partnership
interests in TP Fund in exchange. The TPRE Limited Partners no longer directly hold their invested assets and liabilities but instead, hold an investment in TP Fund. See
Notes 4 and 11 for additional information regarding the LPA and TP Fund.
F-3
THIRD POINT REINSURANCE LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended December 31, 2018, 2017 and 2016
(expressed in thousands of U.S. dollars, except per share and share amounts)
Revenues
Gross premiums written
Gross premiums ceded
Net premiums written
$
Change in net unearned premium reserves
Net premiums earned
Net investment loss from investment in related party investment fund (1)
Net investment income before management and performance fees to
related parties
Management and performance fees to related parties
Net investment income (loss)
Total revenues
Expenses
Loss and loss adjustment expenses incurred, net
Acquisition costs, net
General and administrative expenses
Other expenses
Interest expense
Foreign exchange (gains) losses
Total expenses
Income (loss) before income tax (expense) benefit
Income tax (expense) benefit
Net income (loss)
Net income attributable to noncontrolling interests in related party
Net income (loss) available to Third Point Re common shareholders
$
2018
2017
2016
578,252 $
(19,895 )
558,357
63,085
621,442
(280,847 )
59,259
(29,845 )
(251,433 )
370,009
438,414
206,498
36,241
9,610
8,228
(7,503 )
691,488
(321,479 )
4,010
(317,469 )
(223 )
(317,692 ) $
641,620 $
(2,475 )
639,145
(92,087 )
547,058
—
522,664
(130,711 )
391,953
939,011
370,058
188,904
53,103
12,674
8,225
12,300
645,264
293,747
(11,976 )
281,771
(3,973 )
277,798 $
617,374
(2,325 )
615,049
(24,859 )
590,190
—
158,532
(59,707 )
98,825
689,015
395,932
222,150
39,367
8,387
8,231
(19,521 )
654,546
34,469
(5,593 )
28,876
(1,241 )
27,635
Earnings (loss) per share available to Third Point Re common
shareholders
Basic earnings (loss) per share available to Third Point Re common
shareholders
Diluted earnings (loss) per share available to Third Point Re common
shareholders
Weighted average number of common shares used in the
determination of earnings (loss) per share
Basic
Diluted
$
$
(3.27 ) $
(3.27 ) $
2.71
$
2.64
$
0.26
0.26
97,054,315
97,054,315
102,264,094
105,227,038
104,060,052
105,563,784
The accompanying Notes to the Consolidated Financial Statements are
an integral part of the Consolidated Financial Statements.
(1) See Notes 4 and 11 for additional information regarding the 2018 LPA and related management and performance fees. As a result of the 2018 LPA,
the management and performance fees are presented within net investment income from investment in related party investment fund from the effective
date of the LPA. Management and performance fees incurred prior to the effective date of the LPA are reflected in management and performance fees
to related parties.
F-4
THIRD POINT REINSURANCE LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2018, 2017 and 2016
(expressed in thousands of U.S. dollars)
2018
2017
2016
Common shares
Balance, beginning of year
Issuance of common shares, net
Common shares repurchased and retired
Balance, end of year
Treasury shares
Balance, beginning of year
Repurchase of common shares
Retirement of treasury shares
Balance, end of year
Additional paid-in capital
Balance, beginning of year
Issuance of common shares, net
Share compensation expense
Common shares repurchased and retired
Balance, end of year
Retained earnings
Balance, beginning of year
Net income (loss)
Net income attributable to noncontrolling interests in related party
Balance, end of year
Shareholders’ equity attributable to Third Point Re common
shareholders
Noncontrolling interests in related party
$
10,723 $
67
(1,426 )
9,364
10,650 $
73
—
10,723
(7,389 )
(40,864 )
—
(48,253 )
1,094,568
1,432
3,599
—
1,099,599
316,222
281,771
(3,973 )
594,020
(48,253 )
—
48,253
—
1,099,599
(141 )
4,956
(185,532 )
918,882
594,020
(317,469 )
(223 )
276,328
1,204,574
—
10,548
102
—
10,650
—
(7,389 )
—
(7,389 )
1,080,591
5,039
8,938
—
1,094,568
288,587
28,876
(1,241 )
316,222
Total shareholders’ equity
$
1,204,574 $
1,656,089
5,407
1,661,496 $
1,414,051
35,674
1,449,725
The accompanying Notes to the Consolidated Financial Statements are
an integral part of the Consolidated Financial Statements.
F-5
THIRD POINT REINSURANCE LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2018, 2017 and 2016
(expressed in thousands of U.S. dollars, except per share and share amounts)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Share compensation expense
Net interest expense (income) on deposit liabilities
Net realized and unrealized gain on investments and derivatives
Net realized and unrealized loss on investment in related party investment fund (1)
Net foreign exchange (gains) losses
Amortization of premium and accretion of discount, net
Changes in assets and liabilities:
Reinsurance balances receivable
Deferred acquisition costs, net
Unearned premiums ceded
Loss and loss adjustment expenses recoverable
Other assets
Interest and dividends receivable, net
Unearned premium reserves
Loss and loss adjustment expense reserves
Accounts payable and accrued expenses
Reinsurance balances payable
Net cash provided by (used in) operating activities
Investing activities
Net redemptions from related party investment fund (1)
Change in participation agreement with related party investment fund (1)
Purchases of investments
Proceeds from sales and maturities of investments
Purchases of investments to cover short sales
Proceeds from short sales of investments
Change in due to/from brokers, net
Increase (decrease) in securities sold under an agreement to repurchase
Net cash provided by (used in) investing activities
Financing activities
Proceeds from issuance of Third Point Re common shares, net of costs
Taxes paid on withholding shares
Purchases of Third Point Re common shares under share repurchase program
Increase in deposit liabilities, net
Change in total noncontrolling interests in related party, net
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Supplementary information
Interest paid in cash
Income taxes paid in cash
Non-cash transfer of net investment assets to the related party investment fund (1)
2018
2017
2016
$
(317,469 ) $
281,771 $
28,876
4,956
(1,273 )
(34,145 )
280,847
(7,503 )
4,134
(120,620 )
54,951
(16,503 )
(918 )
(13,486 )
(2,716 )
(46,582 )
225,670
(24,684 )
28,728
13,387
6,342
(20,852 )
(3,483,319 )
3,475,515
(853,798 )
800,508
482,778
(29,618 )
377,556
—
(74 )
(138,705 )
9,790
(97,950 )
(226,939 )
164,004
549,333
713,337 $
25,578 $
7,274 $
1,571,191 $
3,599
2,800
(480,045 )
—
12,300
473
(86,606 )
(37,175 )
(354 )
(1,112 )
9,137
3,563
92,442
97,922
24,212
(1,463 )
(78,536 )
—
—
(3,099,525 )
3,228,251
(791,753 )
1,048,552
(149,898 )
29,618
265,245
1,505
—
(40,864 )
19,113
73,979
53,733
240,442
308,891
549,333 $
21,394 $
7,810 $
— $
8,938
(164 )
(105,262 )
—
(19,521 )
5,118
(86,612 )
(24,525 )
(508 )
124
(4,619 )
3,225
25,366
156,644
(2,095 )
19,786
4,771
—
—
(3,729,944 )
3,504,598
(1,264,404 )
1,046,422
367,019
(8,944 )
(85,253 )
5,141
—
(7,389 )
22,023
18,276
38,051
(42,431 )
351,322
308,891
23,027
5,950
—
$
$
$
$
The accompanying Notes to the Consolidated Financial Statements are
an integral part of the Consolidated Financial Statements.
(1) Effective August 31, 2018, Third Point Re entered into the 2018 LPA to invest in TP Fund, a related party investment fund. See Note 4 for additional
information regarding the non-cash transfer of net investment assets.
F-6
Third Point Reinsurance Ltd.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
1. Organization
Third Point Reinsurance Ltd. (together with its consolidated subsidiaries, “Third Point Re” or the “Company”) was
incorporated under the laws of Bermuda on October 6, 2011. Through its reinsurance subsidiaries, the Company is a
provider of global specialty property and casualty reinsurance products. The Company operates through two licensed
reinsurance subsidiaries, Third Point Reinsurance Company Ltd. (“Third Point Re BDA”), a Bermuda reinsurance
company that commenced operations in January 2012, and Third Point Reinsurance (USA) Ltd. (“Third Point Re USA”).
Third Point Re USA is a Bermuda reinsurance company that was incorporated on November 21, 2014 and commenced
operations in February 2015. Third Point Re USA made an election under Section 953(d) of the U.S. Internal Revenue
Code of 1986, as amended, to be taxed as a U.S. entity. Third Point Re USA prices and underwrites U.S. domiciled
reinsurance business from an office in the United States. Third Point Re USA is a wholly owned subsidiary of Third
Point Re (USA) Holdings, Inc. (“TPRUSA”), an intermediate holding company based in the U.S., which is a wholly
owned subsidiary of Third Point Re (UK) Holdings Ltd. (“Third Point Re UK”), an intermediate holding company based
in the United Kingdom. Third Point Re UK is a wholly owned subsidiary of Third Point Re.
In August 2012, the Company established a wholly-owned subsidiary in the United Kingdom, Third Point Re Marketing
(UK) Limited (“TPRUK”). In May 2013, TPRUK was licensed as an insurance intermediary by the UK Financial
Conduct Authority.
These consolidated financial statements include the results of the Company and have been prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany accounts
and transactions have been eliminated.
Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2. Significant accounting policies
The following is a summary of the significant accounting and reporting policies adopted by the Company:
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. The major estimates reflected
in the Company’s consolidated financial statements include, but are not limited to, the loss and loss adjustment expense
reserves, estimates of written and earned premiums and fair value of financial instruments.
Cash, cash equivalents and restricted cash
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.
Restricted cash and cash equivalents consist of cash held in trust accounts securing obligations under certain reinsurance
contracts and cash held with brokers and in trust accounts securing letters of credit issued under credit facilities.
Premium revenue recognition
To the extent that the amount of written premium is estimable, the Company estimates the ultimate premiums for the
entire contract period and records this estimate at the inception of the contract. For contracts where the full written
premium is not estimable at inception, the Company records written premium for the portion of the contract period for
F-7
which the amount is estimable. These estimates are based primarily on information in the underlying contracts as well as
information provided by clients and/or brokers.
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. Any subsequent
adjustments arising on such estimates are recorded in the period in which they are determined.
Premiums written are earned over the exposure period in proportion to the period of risk covered. Unearned premiums
represent the portion of premiums written that relate to the remaining term of the underlying policies in force.
Premiums for retroactive exposures in reinsurance contracts are earned at the inception of the contract, as all of the
underlying loss events covered by these exposures occurred in the past. If the estimated loss and loss adjustment
expense reserve differs from the premium received at inception of a retroactive reinsurance contract, the resulting
difference is deferred and recognized over the estimated claim payment period of the related contract with the periodic
amortization reflected in earnings as a component of loss and loss adjustment expenses incurred.
Reinsurance premiums ceded
From time to time, the Company reduces the risk of losses on business written by reinsuring certain risks and exposures
with other reinsurers. The Company remains liable to the extent that any retrocessionaire fails to meet its obligations and
to the extent that the Company does not hold sufficient security for their unpaid obligations. Ceded premiums are
written during the period in which the risks incept and are earned over the contract period in proportion to the period of
risk covered. Unearned premiums ceded consist of the unexpired portion of reinsurance ceded.
Reinsurance
Reinsurance recoverables include claims we paid and estimates of unpaid losses and loss adjustment expenses that are
subject to reimbursement under reinsurance and retrocessional contracts. The method for determining reinsurance
recoverables for unpaid losses and loss adjustment expenses involves reviewing actuarial estimates of gross unpaid
losses and loss adjustment expenses to determine our ability to cede unpaid losses and loss adjustment expenses under
our existing reinsurance contracts. This method is continually reviewed and updated and any resulting adjustments are
reflected in earnings in the period identified. Reinsurance premiums, commissions and expense reimbursements are
accounted for on a basis consistent with those used in accounting for the original policies issued and the term of the
reinsurance contracts. Amounts recoverable from reinsurers for losses and loss adjustment expenses for which the
Company has not been relieved of its legal obligations to the policyholder are reported as assets.
Deferred acquisition costs
Acquisition costs consist of commissions, brokerage and excise taxes that are related directly to the successful
acquisition of new or renewal reinsurance contracts. These costs are deferred and amortized over the period in which the
related premiums are earned. The Company evaluates the recoverability of deferred acquisition costs by determining if
the sum of future earned premiums and anticipated investment income is greater than expected future loss and loss
adjustment expenses and acquisition costs. If a loss is probable on the unexpired portion of contracts in force, a premium
deficiency loss is recognized. As of December 31, 2018, deferred acquisition costs are considered to be fully
recoverable and no premium deficiency has been recorded.
Acquisition costs also include profit commissions that are expensed when incurred. Profit commissions are calculated
and accrued based on the expected loss experience for contracts and recorded when the current loss estimate indicates
that a profit commission is probable under the contract terms.
Loss and loss adjustment expense reserves
The Company’s loss and loss adjustment expense reserves include case reserves, reserves for losses incurred but not yet
reported (“IBNR reserves”) and deferred gains on retroactive reinsurance contracts. Case reserves are established for
losses that have been reported, but not yet paid. IBNR reserves represent the estimated loss and loss adjustment
expenses that have been incurred by insureds and reinsureds but not yet reported to the insurer or reinsurer, including
unknown future development on loss and loss adjustment expenses that are known to the insurer or reinsurer. IBNR
F-8
reserves are established by management based on actuarially determined estimates of ultimate loss and loss adjustment
expenses. Deferred gains represent the underwriting profit related to retroactive exposures in reinsurance contracts at
inception and are deferred and amortized over the estimated future settlement period of the contract. Deferred gains are
included in loss and loss adjustment expense reserves. If the premium received is lower than the estimated loss and loss
adjustment expense reserves assumed at inception of a retroactive reinsurance contract, the resulting difference is
deferred and recorded in other assets. This difference is also amortized over the estimated future settlement period of the
contract.
Inherent in the estimate of ultimate loss and loss adjustment expenses are expected trends in claim severity and
frequency and other factors that may vary significantly as claims are settled. Accordingly, ultimate loss and loss
adjustment expenses may differ materially from the amounts recorded in the consolidated financial statements. These
estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are recorded in the consolidated statements of income (loss) in the period
in which they become known.
Deposit liabilities
Certain contracts do not transfer sufficient insurance risk to be deemed reinsurance contracts and are accounted for using
the deposit method of accounting. Management exercises judgment in determining whether contracts transfer sufficient
risk to be accounted for as reinsurance contracts. Using the deposit method of accounting, a deposit liability, rather than
written premium, is initially recorded based upon the consideration received less any explicitly identified premiums or
fees. In subsequent periods, the deposit liability is adjusted by calculating the effective yield on the deposit to reflect
actual payments to date and future expected payments. In some cases, the effective yield on the contract may be
negative, which will result in the recognition of other income.
Fair value measurement
The Company determines the fair value of financial instruments in accordance with current accounting guidance, which
defines fair value and establishes a three level fair value hierarchy based upon the transparency of inputs used in the
valuation of an asset or liability. Fair value is defined as the price that the Company would receive to sell an asset or
would pay to transfer a liability in an orderly transaction between market participants at the measurement date. The
Company determines the estimated fair value of each individual security utilizing the highest level inputs available.
The fair value of the Company’s assets and liabilities, which qualify as financial instruments, approximates the carrying
amounts presented in the consolidated balance sheets.
U.S. GAAP disclosure requirements establish a framework for measuring fair value, including a three-level hierarchy for
fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. The three-level
hierarchy of inputs is summarized below:
• Level 1 – Quoted prices available in active markets/exchanges for identical investments as of the reporting date.
• Level 2 – Observable inputs to the valuation methodology other than unadjusted quoted market prices for
identical assets or liabilities in active markets. Level 2 inputs include, but are not limited to, prices quoted for
similar assets or liabilities in active markets/exchanges, prices quoted for identical or similar assets or liabilities
in markets that are not active and fair values determined through the use of models or other valuation
methodologies.
• Level 3 – Pricing inputs unobservable for the investment and include activities where there is little, if any,
market activity for the investment. The inputs applied in the determination of fair value require significant
management judgment and estimation.
Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk. For example, the risk inherent in a particular valuation technique used to measure fair value
including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable
or unobservable.
F-9
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability
based on market data obtained from sources other than those of the reporting entity. Unobservable inputs are inputs that
reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the circumstances.
In certain cases, the inputs used to measure fair value 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. 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.
Investments
Investments - Trading
The Company’s investments are classified as “trading securities” and are carried at fair value with changes in fair value
included in earnings in the consolidated statements of income (loss).
The fair value of the Company’s investments are based on quoted market prices, or when such prices are not available,
by reference to broker or underwriter bid indications, industry recognized pricing vendors, and/or internal pricing
valuation techniques. Investment transactions are recorded on a trade date basis with balances pending settlement
included in due to/from brokers in the consolidated balance sheets.
Realized gains and losses are determined using cost calculated on a specific identification basis. Dividends are recorded
on the ex-dividend date. Income and expenses are recorded on the accrual basis including interest and premiums
amortized and discounts accreted.
Investment in related party investment fund
The Company invests in TP Fund, a related party investment fund. The Company’s investment in TP Fund is stated at its
fair value, that generally represents the Company’s proportionate interest in TP Fund as reported by the fund based on the
net asset value (“NAV”) provided by the fund administrator. Increases or decreases in such fair value are recorded within
net investment income from investment in related party investment fund in the Company’s consolidated statements of
income. Realized gains or losses upon any redemptions of investments in TP Fund are calculated using the weighted
average method. The Company records contributions and withdrawals related to its investments in TP Fund on the
transaction date.
Derivatives
Investments
Derivative instruments within our investment assets managed by our investment manager, Third Point LLC, are recorded
in the consolidated balance sheets at fair value, with changes in fair values and realized gains and losses recognized in
net investment income (loss) in the consolidated statements of income (loss).
Derivatives serve as a key component of the Company’s investment strategy and are utilized primarily to structure the
portfolio, or individual investments, and to economically match the investment objectives of the Company. The
Company’s derivatives do not qualify as hedges for financial reporting purposes and are recorded in the consolidated
balance sheets on a gross basis and not offset against any collateral pledged or received. Pursuant to the International
Swaps and Derivatives Association (“ISDA”) master agreements, securities lending agreements and other derivatives
agreements, the Company and its counterparties typically have the ability to net certain payments owed to each other in
specified circumstances. In addition, in the event a party to one of the ISDA master agreements, securities lending
agreements or other derivatives agreements defaults, or a transaction is otherwise subject to termination, the non-
defaulting party generally has the right to set off against payments owed to the defaulting party or collateral held by the
non defaulting party.
The Company enters into derivative contracts to manage credit risk, interest rate risk, currency exchange risk and other
exposure risks. The Company uses derivatives in connection with its risk-management activities to economically hedge
F-10
certain risks and to gain exposure to certain investments. The utilization of derivative contracts also allows for an
efficient means by which to trade certain asset classes.
Fair values of derivatives are determined by using quoted market prices, industry recognized pricing vendors and
counterparty quotes when available; otherwise fair values are based on pricing models that consider the time value of
money, volatility and the current market and contractual prices of underlying financial instruments.
Embedded derivatives
Certain of the Company’s reinsurance contracts contain interest crediting features that vary based on the net investment
return on investments managed by Third Point LLC. These contractual features are considered embedded derivatives in
accordance with U.S. GAAP. We include the estimated fair value of these embedded derivatives in the consolidated
balance sheets with the host contract in order to reflect the expected settlement of these features with the host contract.
The change in estimated fair value of these embedded derivatives are recorded in other expenses in the consolidated
statements of income (loss).
Share-based compensation
The Company accounts for its share-based compensation transactions using the fair value of the award at the grant date
and accounts for forfeitures when they occur. Determining the fair value of share purchase options at the grant date
requires estimation and judgment. The Company uses an option-pricing model (Black-Scholes) to calculate the fair value
of share purchase options.
For share purchase options or restricted share awards granted that contain both a service and performance condition, the
Company recognizes share compensation expense only for the portion of the options or restricted share awards that are
considered probable of vesting. Share compensation for share purchase options or restricted share awards considered
probable of vesting are expensed over the service (vesting) period on a graded vesting basis. The probability of share
purchase options or restricted share awards vesting is evaluated at each reporting period. When the share purchase
options or restricted share awards are considered probable of vesting, the Company records a true up of share
compensation expense from the grant date (service inception date) to the current reporting period end based on the fair
value of the options or restricted share awards at the grant date.
The Company measures grant date fair value for restricted share awards, with a service condition only, based on the price
of its common shares at the grant date and the expense is recognized on a straight-line basis over the vesting period.
Warrants
The Company accounts for warrant contracts issued to certain of its founding investors (“Founders”) in conjunction with
the initial capitalization of the Company by using either the physical settlement or net-share settlement methods. The fair
value of these warrants was recorded in equity as additional paid-in capital. The fair value of warrants issued are
estimated on the grant date using the Black-Scholes option-pricing model.
The Company accounts for certain warrant contracts issued to an advisor, where services have been received by the
Company, in part, in exchange for equity instruments, based on the fair value of such services. The associated cost of
these warrants has been recorded as capital raise costs and is included in additional paid in capital in the consolidated
statements of shareholders’ equity.
Debt offering costs
Costs incurred in issuing debt, which includes underwriters’ fees, legal and accounting fees, printing and other fees are
capitalized and presented as a direct deduction from the principal amount of senior notes payable in the consolidated
balance sheets. These costs are amortized over the term of the debt and are included in interest expense in the
consolidated statements of income (loss).
F-11
Other expenses
Other expenses are comprised of expenses relating to interest crediting features in certain reinsurance and deposit
contracts as well as changes in value of embedded derivatives in reinsurance contracts and deposit liability contracts that
have variable interest crediting features. Variable and fixed interest crediting features are calculated on funds transferred
to the Company where interest is credited based on actual cash received into a notional experience account. The ceding
company can typically elect to commute at specific points in time in exchange for the amounts held in the notional
experience account. For those contracts that contain variable interest crediting features, actual investment returns realized
by the Company are included in the calculation, which can increase the overall effective interest crediting rate on those
contracts. Variable interest credit features are accounted for as embedded derivatives. Fixed interest credits on
reinsurance contracts and deposit liability contracts and changes in value of embedded derivative are included other
expenses in the consolidated statements of income (loss).
Foreign currency transactions
The Company’s functional currency is the U.S. dollar. Transactions involving monetary assets and liabilities
denominated in foreign currencies have been converted into U.S. dollars at the exchange rate in effect on the balance
sheet date, and the related revenues and expenses are converted using specific rates for the period, as appropriate. Net
foreign currency transaction gains and losses arising from these activities are reported in the consolidated statements of
income (loss) in the period in which they arise.
Prior to the change in the investment account structure, certain of the Company's investments were denominated in
foreign currencies and thus, were subject to the risk associated with foreign currency fluctuations. These investments
were translated into U.S. dollar amounts at the date of valuation. Purchases and sales of investments and income and
expenses denominated in foreign currencies were translated in U.S. dollar amounts on the respective dates of such
transactions. The Company did not isolate the portion of the net investment income (loss) resulting from changes in
foreign exchange rates on investments, dividends and interest from the fluctuations arising from changes in fair values of
securities and derivatives held within the total net investments managed by Third Point LLC. Periodic payments received
or paid on swap agreements were recorded as realized gain or loss on investment transactions. Such fluctuations are
included within net investment income (loss) in the consolidated statements of income (loss).
Income taxes, withholding taxes and uncertain tax positions
The Company provides for income taxes for its operations in income tax paying jurisdictions. The Company’s provision
relies on estimates and interpretations of currently enacted tax laws. The Company recognizes deferred tax assets and
liabilities based on the temporary differences between the financial statement carrying amounts and the tax bases of
assets and liabilities. Such temporary differences are primarily due to tax basis discounts on loss and loss adjustment
expense reserves and unearned premiums, deferred acquisition costs and unrealized gains (losses) on investments. A
valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the
benefits related to deferred tax assets will not be realized. Any adjustments to deferred income taxes are accounted for as
changes in estimates and are reflected in the consolidated statements of income (loss) in the year in which they are
made. Adjustments could be material and could significantly impact earnings in the year they are recorded.
The Company is subject to withholding tax obligations related to dividends, capital gains and interest on certain
investments. These withholding taxes are recorded when they become payable and are included in income tax expense
(benefit) in the Company’s consolidated statements of income (loss).
The Company recognized uncertain tax positions related to certain investment transactions in foreign jurisdictions. The
Company records its uncertain tax positions based on an estimate of the potential liability, including potential interests
and penalties, arising from its investment transactions conducted in foreign countries. The changes in the Company’s
uncertain tax position is included in income tax expense (benefit) in the Company’s consolidated statements of income
(loss).
F-12
Variable interest entities
The Company accounts for variable interest entities (“VIEs”) in accordance with FASB ASC Topic 810 Consolidation,
which requires the consolidation of all VIEs by the primary beneficiary, that being the investor that has the power to
direct the activities of the VIE and that will absorb a portion of the VIE’s expected losses or residual returns that could
potentially be significant to the VIE. For VIEs the Company determines it has a variable interest in, it determines
whether it is the primary beneficiary of a VIE by performing an analysis that principally considers: (i) the VIE’s purpose
and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (ii) the
VIE’s capital structure; (iii) the terms between the VIE and its variable interest holders and other parties involved with
the VIE; (iv) which variable interest holders have the power to direct the activities of the VIE that most significantly
impact the VIE’s economic performance; (v) which variable interest holders have the obligation to absorb losses or the
right to receive benefits from the VIE that could potentially be significant to the VIE; and (vi) related party relationships.
The Company reassesses its initial determination of whether the Company is the primary beneficiary of a VIE upon
changes in facts and circumstances that could potentially alter the Company’s assessment.
Noncontrolling interests in related party
The Company consolidates the results of entities in which it has a controlling financial interest. Redeemable
noncontrolling interests with redemption features that are not solely within the Company’s control are presented as a
mezzanine item, between liabilities and shareholders’ equity, in the Company’s consolidated balance sheets and non-
redeemable noncontrolling interests are presented as a separate line within shareholders’ equity in the consolidated
balance sheets. The Company records the portion of net (income) loss attributable to noncontrolling interests in related
party as a separate line within the consolidated statements of income (loss).
Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted average number of common shares and participating securities
outstanding during the period. The weighted average number of common shares excludes any dilutive effect of
outstanding warrants, options and unvested restricted shares. Diluted earnings (loss) per share is based on the weighted
average number of common shares and participating securities outstanding and includes any dilutive effects of warrants,
options and unvested restricted shares under share plans and are determined using the treasury stock method. U.S. GAAP
requires that unvested share awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid
or unpaid (referred to as “participating securities”), be treated in the same manner as outstanding shares for earnings per
share calculations. The Company treats certain of its unvested restricted shares as participating securities. In the event of
a net loss, all participating securities, outstanding warrants, options and restricted shares are excluded from both basic
and diluted loss per share since their inclusion would be anti-dilutive.
Leases
Leases in which substantially all of the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized
in the consolidated statements of income (loss) on a straight-line basis over the term of the lease.
Comprehensive income
The Company has no comprehensive income other than net income disclosed in the consolidated statements of income
(loss).
Segment information
Under U.S. GAAP, operating segments are based on the internal information that management uses for allocating
resources and assessing performance of the Company. The Company manages its 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, certain general and administrative expenses related to corporate
activities, interest expense, foreign exchange (gains) losses and income tax (expense) benefit.
F-13
Treasury shares
Common shares repurchased by the Company and not canceled are classified as treasury shares. Treasury shares are
recorded at cost, which results in a reduction of shareholders’ equity in the consolidated balance sheets. When shares are
reissued from treasury, the Company uses the average cost method to determine the cost of the reissued shares. Gains on
sales of treasury shares are credited to additional paid-in capital, while losses are charged to additional paid-in capital to
the extent that previous net gains from sales of treasury shares are included therein; otherwise, losses are charged to
retained earnings.
Transfer of Financial Assets
The Company accounts for transfers of financial assets as sales when it has surrendered control over the related assets.
Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and
an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Gains and
losses stemming from transfers reported as sales, if any, would be included as realized gains (losses) within net
investment income in the accompanying consolidated statements of income.
In instances where a transfer of financial assets does not qualify for sale accounting, the accounting guidance requires
that the transaction be accounted for as a collateralized borrowing. Accordingly, the related assets remain on the
Company’s consolidated balance sheets and continue to be reported and accounted for as if the transfer had not occurred.
Cash proceeds from these transfers are reported as liabilities, with attributable interest expense recognized over the life
of the related transactions.
Prior year changes in the presentation of consolidated financial statements
The Company had previously included unearned premium ceded and loss and loss adjustment expenses recoverable in
other assets in the consolidated balance sheets and changes in these balances in the consolidated statements of cash
flows. These balances have grown and are now disclosed as separate line items in the consolidated balance sheets and
changes in these balances in the consolidated statements of cash flows.
Recent accounting pronouncements
Adoption of New Accounting Standards
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU
2014-09). ASU 2014-09 provides a framework, through a five-step process, for recognizing revenue from customers,
improves comparability and consistency of recognizing revenue across entities, industries, jurisdictions and capital
markets, and requires enhanced disclosures. Certain contracts with customers are specifically excluded from the scope of
ASU 2014-09, including amongst others, insurance contracts accounted for under Accounting Standard Codification 944,
Financial Services - Insurance. ASU 2014-09 is effective for public business entities for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years, with retrospective adoption required for the
comparative periods. Insurance contracts are specifically excluded from ASU 2014-09 and we do not currently have any
other revenue generating activities for which this standard would be applicable. As a result, this new pronouncement did
not have a material impact on the Company’s consolidated financial statements.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities (ASU 2016-01). ASU 2016-01 is intended to provide users of financial statements with more useful
information on the recognition, measurement, presentation and disclosure of financial instruments. The new standard
affects all entities that hold financial assets or owe financial liabilities. ASU 2016-01 is effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This new
accounting standard did not have a material impact on the Company’s consolidated financial statements since all of the
Company’s investments are measured at fair market value as the Company's investments are classified as “trading
securities” and therefore the change in unrealized gains (losses) are included in the consolidated statement of income
(loss).
F-14
In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 is intended to reduce
diversity in practice and addresses eight specific issues in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. To date, the Company has not entered into any of the eight types of
transactions addressed in ASU 2016-15. As a result, the adoption of this standard did not have a material impact on the
Company’s consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash (ASU 2016-18). ASU 2016-18 clarifies guidance on the classification and presentation of restricted cash
in the statement of cash flows. Specifically, the Company should include in its cash and cash-equivalent balances in the
statement of cash flows those amounts that are deemed to be restricted cash and cash equivalents. An entity with a
material balance of amounts generally described as restricted cash and cash equivalents must disclose information about
the nature of the restrictions. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim
periods therein. As a result of the adoption of ASU 2016-18, the Company retrospectively classified its restricted cash
and cash equivalents within the consolidated statement of cash flows and has included additional disclosures in
accordance with ASU 2016-18 in its consolidated financial statements. Prior to adoption, changes in restricted cash had
been presented within cash flow from investing activities. Consequently, the consolidated statement of cash flows for the
years ended December 31, 2017 and 2016 include adjustments to increase (decrease) net cash provided by investing
activities by $242.2 million and $(32.0) million, respectively.
In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation — Stock Compensation (Topic
718): Scope of Modification Accounting (ASU 2017-09). ASU 2017-09 is intended to reduce diversity in practice and
subsequent to its adoption, an entity will not apply modification accounting as a result of changes to terms and conditions
of a share-based payment award if certain conditions are met. The amendments in ASU 2017-09 are effective for all
entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. This
new accounting standard did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842): Section A - Leases,
Section B - Conforming Amendments Related to Leases and Section C - Background Information and Basis for
Conclusions (ASU 2016-02). ASU 2016-02 intends to improve financial reporting related to leasing transactions. The
new standard affects all entities that lease assets such as real estate, airplanes and manufacturing equipment. ASU 2016-
02 will require entities that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and
liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for public business entities for
fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has
evaluated the impact of this guidance; it is not expected to have a material impact on the Company’s consolidated
financial statements as a result of the limited number of leases the Company currently has in place.
In July 2018, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases
(ASU 2018-10) and Accounting Standards Update 2018-11, Leases (Topic 842): Targeted improvements (ASU 2018-11).
These updates make improvements to clarify or to correct unintended application of guidance in ASC 842. Those items
generally are not expected to have a significant effect on the Company. ASU 2018-10 and ASU 2018-11 will be effective
when the Company adopts ASU 2016-02 in 2019.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends the guidance on
the impairment of financial instruments. Under the new guidance, an entity recognizes as an allowance its estimate of
expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is
effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company
is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU
F-15
2018-13 is intended to improve the effectiveness of fair value measurement disclosure requirements. The amendments
are effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the
impact of this guidance on the Company’s consolidated financial statements.
In October 2018, the FASB issued Accounting Standards Update 2018-17, Consolidation (Topic 810): Targeted
Improvements to Related Party Guidance for Variable Interest Entities (ASU 2018-17). The amendments in ASU 2018-
17 for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect
interests held through related parties under common control on a proportional basis rather than as the equivalent of a
direct interest in its entirety. ASU 2018-17 is effective for public business entities for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. This new pronouncement is not expected to have a
material impact on the Company’s consolidated financial statements.
3. Cash, cash equivalents, restricted cash and restricted investments
The following table provides a summary of cash and cash equivalents, restricted cash and restricted investments as
of December 31, 2018 and 2017:
Cash and cash equivalents
Restricted cash securing letter of credit facilities (1)
Restricted cash securing reinsurance contracts (2)
Total cash, cash equivalents and restricted cash (3)
Restricted investments securing reinsurance contracts (2)
Total cash, cash equivalents, restricted cash and restricted investments
2018
2017
104,183 $
203,953
405,201
713,337
239,640
952,977 $
8,197
250,487
290,649
549,333
326,429
875,762
$
$
(1) Restricted cash securing letter of credit facilities primarily pertains to letters of credit issued to clients and cash securing these obligations that the
Company will not be released from until the underlying reserves have been settled. The time period for which the Company expects these letters of
credit to be in place varies from contract to contract, but can last several years.
(2) Restricted cash and restricted investments securing other reinsurance contracts pertain to trust accounts securing the Company’s contractual
obligations under certain reinsurance contracts that the Company will not be released from until all underlying risks have expired or have been
settled. Restricted investments include certain investments in debt securities including U.S. Treasury securities and sovereign debt. The time period
for which the Company expects these trust accounts to be in place varies from contract to contract, but can last several years.
(3) Cash, cash equivalents and restricted cash as reported in the Company’s consolidated statements of cash flows.
4. Investments
On July 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA (the “TPRE Limited Partners”) 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. In accordance with the 2018 LPA, TP GP serves as the
general partner of TP Fund. TP GP is beneficially owned by Daniel S. Loeb, a founder of the Company, and certain
members of his family. Pursuant to the investment management agreement between Third Point LLC and TP Fund, dated
July 31, 2018 (the “TP Fund IMA”), Third Point LLC is the investment manager for TP Fund (the “Investment
Manager”). In addition, on July 31, 2018, the TPRE Limited Partners, and TP Fund executed a Subscription Agreement
pursuant to which the TPRE Limited Partners transferred certain net investment assets and related liabilities (collectively
referred to as the “LP Transaction”) from their separate accounts to TP Fund, and TP Fund issued limited partner interests
to the TPRE Limited Partners proportionate to and based on the net asset value transferred by each such entity on the
applicable transfer date. Certain collateral assets consisting of debt securities and restricted cash were not transferred to
TP Fund but are also managed by Third Point LLC under the Collateral Assets IMA, as defined below. Substantially all
of the net investment assets were transferred as of September 4, 2018. The JV Agreements will be terminated on the date
that all net investment assets have been transferred to TP Fund under the Subscription Agreement. 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
F-16
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.
On July 31, 2018, Third Point Re BDA and Third Point Re USA entered into an investment management agreement with
Third Point LLC (the “Collateral Assets IMA”), effective August 31, 2018, pursuant to which Third Point LLC serves as
investment manager of certain collateral assets that will not be transferred to TP Fund (the “Collateral Assets”). The
Collateral Assets IMA will continue in effect for so long as either Third Point Re BDA or Third Point Re USA remains a
limited partner of TP Fund. The Collateral Assets are presented in the consolidated balance sheets within debt securities
and restricted cash and are considered as part of total net investments managed by Third Point LLC.
On August 30, 2018, Third Point Re BDA and Third Point Re USA entered into a Participation Agreement with TP Fund
(“the Participation Agreement”) pursuant to which Third Point Re BDA and Third Point Re USA granted to TP Fund all
of the rights, benefits, liabilities, duties and obligations of all net investment assets that had not yet been transferred to TP
Fund pursuant to the Subscription Agreement as of the effective date. For the net investment assets that were not
transferred on September 4, 2018, the TPRE Limited Partners received limited partnership interests in TP Fund in
exchange for transferring the rights, benefits, liabilities, duties and obligations for those net investment assets to TP Fund
under the Participation Agreement. Third Point Re BDA and Third Point Re USA are obligated to transfer any remaining
net investment assets to TP Fund and a liability corresponding to the estimated fair value of net investment assets not
transferred at September 30, 2018 has been recorded in the Company’s consolidated balance sheet. For the period from
September 4, 2018 to December 31, 2018, $2.8 million of net investment loss in the Company’s separate accounts was
subject to the Participation Agreement and as a result, is included in net investment loss from investment in related party
investment fund in the Company’s consolidated statements of income. As of December 31, 2018, the Company had $2.3
million of net investment assets that it had agreed to transfer pursuant to the Subscription Agreement but that had not
been transferred to TP Fund, primarily consisting of cash and balances due from brokers.
Prior to transferring the financial assets and liabilities from the joint ventures to the TP Fund, the Company directly
owned the investments held in its separate accounts that were managed by Third Point LLC. In addition, the joint
ventures created through the JV Agreements were consolidated and the Company presented all of the underlying assets
and liabilities held in the Company’s name on the Company’s consolidated balance sheets and relevant footnote
disclosures.
As a result of the changes described above, the Company’s investment in TP Fund has been presented on the
consolidated balance sheets as an investment in a related party investment fund. The transfer of the net investment assets
was accounted for as a sale in accordance with the Company’s accounting policy for transfers of financial assets. Third
Point Re BDA and Third Point Re USA received limited partnership interests in TP Fund corresponding to the fair value
of the net investment assets transferred. The Company does not have continuing involvement with the transferred assets.
There were no net gains or losses resulting from the transfer of net investment assets. For the year ended December 31,
2018, $1.6 billion of net investment assets was transferred from the Company’s separate investment accounts to TP Fund
in exchange for limited partnership interests of the same amount, resulting in no gains or losses.
F-17
The following is a summary of the net investments managed by Third Point LLC as of December 31, 2018 and 2017:
Assets
Total investments in securities, including investment in related party investment fund
$
Cash and cash equivalents
Restricted cash and cash equivalents
Due from brokers
Derivative assets, at fair value
Interest and dividends receivable
Total assets
Liabilities and noncontrolling interests in related party
Accounts payable and accrued expenses
Securities sold, not yet purchased
Securities sold under an agreement to repurchase
Due to brokers
Derivative liabilities, at fair value
Participation agreement with related party investment fund
Interest and dividends payable
Total noncontrolling interests in related party (1)
Total liabilities and noncontrolling interests in related party
Total net investments managed by Third Point LLC
$
(1) See Note 19 for additional information.
5. Fair value measurements
2018
2017
1,523,644 $
1,017
609,154
1,411
—
1,316
2,136,542
114
—
—
—
—
2,297
—
—
2,411
2,134,131 $
2,995,097
8
541,136
305,093
73,372
3,774
3,918,480
5,137
394,278
29,618
770,205
14,503
—
1,218
113,626
1,328,585
2,589,895
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of
December 31, 2018:
December 31, 2018
Quoted prices in
active markets
Significant other
observable
inputs
Significant
unobservable
inputs
(Level 1)
(Level 2)
(Level 3)
Total
$
$
$
$
— $
—
— $
— $
— $
197,312 $
42,328
239,640 $
— $
— $
— $
—
—
$
22 $
22 $
197,312
42,328
239,640
1,284,088
1,523,728
22
22
Assets
U.S. Treasury securities
Sovereign debt
Total debt securities
Investments in funds valued at NAV
Total assets
Liabilities
Derivative liabilities (embedded)
Total liabilities
Debt securities
U.S. Treasury securities and sovereign debt securities are primarily priced by obtaining broker dealer quotes and other
market information including actual trade volumes, when available. When evaluating these securities, the pricing
services gather information from market sources and integrate other observations from markets and sector news. The fair
value of each security is individually computed using analytical models which incorporate option adjusted spreads and
F-18
other daily interest rate data. As the significant inputs used to price these securities are observable, the fair values of
these investments are classified as Level 2.
Investments in funds valued at NAV
The Company values its investments in limited partnerships, including its investment in related party investment fund, at
fair value. The Company has elected the practical expedient for fair value for these investments which is estimated based
on the Company’s share of the net asset value (“NAV”) of the limited partnerships, as provided by the independent fund
administrator, as the Company believes it represents the most meaningful measurement basis for the investment assets
and liabilities. The NAV represents the Company’s proportionate interest in the members’ equity of the limited
partnerships. The resulting net gains or net losses are reflected in the consolidated statements of income (loss). These
investments are included in investment in funds valued at NAV and excluded from the presentation of investments
categorized by the level of the fair value hierarchy.
In order to assess the reasonableness of the NAVs, the Company performs a number of monitoring procedures on a
monthly, quarterly and annual basis, to assess the quality of the information provided by the Investment Manager and
fund administrator underlying the preparation of the NAV. These procedures include, but are not limited to, regular
review and discussion of the fund’s performance with the investment manager. However, the Company often does not
have access to financial information relating to the underlying securities held within the TP Fund. Therefore,
management is often unable to corroborate the fair values placed on the securities underlying the asset valuations
provided by the Investment Manager or fund administrator.
In 2015, the Company made a $25.0 million investment in the Kiskadee Diversified Fund Ltd. (the “Kiskadee Fund”), a
fund vehicle managed by Hiscox Insurance Company (Bermuda) Limited. The Kiskadee Fund invests in property
catastrophe exposures through collateralized reinsurance transactions and other insurance-linked investments. During the
year ended December 31, 2018, the Company redeemed $0.7 million (2017 - $26.7 million). The Company has elected
the fair value option for this investment. This investment is included in investment in funds valued at NAV and is
excluded from the presentation of investments categorized by level in the fair value hierarchy. The fair value is estimated
based on the Company’s share of the NAV in the Kiskadee Fund, as provided by the investment manager, and was $0.1
million as of December 31, 2018 (December 31, 2017 - $0.8 million). The resulting net gains or losses are reflected in
the consolidated statements of income (loss).
Embedded derivatives
The Company has derivatives embedded in non-derivative host contracts that are required to be separated from the host
contracts and accounted for at fair value with changes in fair value of the embedded derivative reported in other
expenses. The Company’s embedded derivatives relate to interest crediting features in certain reinsurance and deposit
contracts that vary based on the returns on the Company’s investments managed by Third Point LLC. The Company
determines the fair value of the embedded derivatives using models developed by the Company. As the significant inputs
used to price embedded derivatives are unobservable, these are classified as level 3.
Prior to the change in the investment account structure described above, the Company held other types of asset classes.
F-19
The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of
December 31, 2017:
Assets
Equity securities
Private common equity securities
Private preferred equity securities
Total equities
Asset-backed securities
Bank debt
Corporate bonds
U.S. Treasury securities
Sovereign debt
Other debt securities
Total debt securities
Options
Rights and warrants
Real estate
Trade claims
Total other investments
Derivative assets (free standing)
Investments in funds valued at NAV
Total assets
Liabilities
Equity securities
Corporate bonds
Options
Total securities sold, not yet purchased
Derivative liabilities (free standing)
Derivative liabilities (embedded)
Total liabilities
December 31, 2017
Quoted prices in
active markets
Significant other
observable
inputs
Significant
unobservable
inputs
(Level 1)
(Level 2)
(Level 3)
Total
$
$
$
$
2,200,379 $
—
—
2,200,379
—
—
—
—
—
—
—
1,973
—
—
—
1,973
—
2,202,352 $
364,215 $
—
2,668
366,883
—
—
366,883 $
20,751 $
—
—
20,751
198,191
14,550
67,218
249,994
102,569
4,747
637,269
2,978
168
—
7,496
10,642
73,372
742,034 $
— $
21,699
5,696
27,395
12,418
—
39,813 $
— $
4,794
57,126
61,920
27,308
—
9,868
—
—
713
37,889
—
435
6,831
—
7,266
—
107,075
$
— $
—
—
—
2,085
171
2,256 $
2,221,130
4,794
57,126
2,283,050
225,499
14,550
77,086
249,994
102,569
5,460
675,158
4,951
603
6,831
7,496
19,881
73,372
3,051,461
17,850
3,069,311
364,215
21,699
8,364
394,278
14,503
171
408,952
During the years ended December 31, 2018 and 2017, the Company made $nil reclassifications of assets or liabilities
between Levels 1 and 2.
As the Company’s investment manager under the prior investment structure, Third Point LLC had a formal valuation
policy that set forth the pricing methodology for investments to be used in determining the fair value of each security in
the Company’s portfolio. The valuation policy was updated and approved at least on an annual basis by Third Point
LLC’s valuation committee (the “Committee”). The Committee met monthly and was comprised of officers and
employees who were senior business management personnel of Third Point LLC. The Committee’s role was to review
and verify the propriety and consistency of the valuation methodology to determine the fair value of investments. The
Committee also reviewed any due diligence performed and approved any changes to current or potential external pricing
vendors.
F-20
Equity securities
Securities listed on a national securities exchange or quoted on NASDAQ were valued at their last sales price as of the
last business day of the period. Listed securities with no reported sales on such date and over-the-counter (“OTC”)
securities were valued at their last closing bid price if held long by the Company, and last closing ask price if held short
by the Company. As of December 31, 2017, securities valued at $234.4 million, representing 7.6% of investments in
securities and derivative assets, and $2.1 million, representing 0.5% of securities sold, not yet purchased and derivative
liabilities, were valued based on broker quotes.
As of December 31, 2017, the Company had $83.4 million of investments fair valued by Third Point LLC, representing
approximately 2.7% of total investments in securities and derivative assets. As a result of the inherent uncertainty of
valuation for private securities, the estimated fair value may differ materially from the value that would have been used
had a ready market existed for these investments.The actual value at which these securities could be sold or settled with a
willing buyer or seller may differ from the Company’s estimated fair values depending on a number of factors including,
but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market
and the availability of a willing buyer or seller.
Debt securities
The key inputs for corporate, government and sovereign bond valuation were coupon frequency, coupon rate and
underlying bond spreads. The key inputs for asset-backed securities (“ABS”) were yield, probability of default, loss
severity and prepayment.
Other investments
Private securities, real estate and related debt investments are those not registered for public sale and were carried at an
estimated fair value at the end of the period, as determined by Third Point LLC. Valuation techniques used by Third
Point LLC included market approach, last transaction analysis, liquidation analysis and/or using discounted cash flow
models where the significant inputs could include but were not limited to additional rounds of equity financing, financial
metrics such as revenue multiples or price-earnings ratio, discount rates and other factors. In addition, third party
valuation firms may be employed to conduct investment valuations of such private securities and would provide written
reports documenting their recommended valuation as of the determination date for the specified investments.
Free standing derivatives
The Company’s free standing derivatives were recorded at fair value, and were included in the consolidated balance
sheets in derivative assets and derivative liabilities. Third Point LLC valued exchange-traded derivatives at their last
sales price on the exchange where they were primarily traded. OTC derivatives, which include swap, option, swaption,
forward, future and contract for differences, were valued by an industry recognized third party valuation vendor when
available; otherwise, fair values were obtained from broker quotes that were based on pricing models that consider the
time value of money, volatility, and the current market and contractual prices of the underlying financial instruments.
Key inputs for OTC valuations varied based on the type of underlying security on which the contract was written:
• The key inputs for most OTC option contracts included notional, strike price, maturity, payout structure, current
foreign exchange forward and spot rates, current market price of the underlying security and volatility of the
underlying security.
• The key inputs for most forward contracts included notional, maturity, forward rate, spot rate, various interest
rate curves and discount factor.
• The key inputs for swap valuation varied based on the type of underlying security on which the contract was
written. Generally, the key inputs for most swap contracts included notional, swap period, fixed rate, credit or
interest rate curves, current market or spot price of the underlying security and the volatility of the underlying
security.
F-21
The total change in unrealized gains (losses) on equity and debt securities held at the year ended December 31, 2018
were $nil and $(6.7) million, respectively (2017 - $330.4 million and $(12.4) million, and 2016 - $106.2 million and
$16.9 million, respectively).
The following table presents the reconciliation of all investments measured at fair value using Level 3 inputs for the
years ended December 31, 2018 and 2017:
January 1,
2018
Transfers in
to (out of)
Level 3
Purchases
Sales (1)
Realized and
Unrealized
Gains(Losses) (2)
December 31,
2018
Assets
Private common equity securities $
Private preferred equity securities
Asset-backed securities
Corporate bonds
Other debt securities
Rights and warrants
Real estate
Total assets
Liabilities
Derivative liabilities (free
standing)
Derivative liabilities (embedded)
Total liabilities
$
$
$
4,794 $
57,126
27,308
9,868
713
435
6,831
107,075 $
(2,085 ) $
(171 )
(2,256 ) $
— $
—
—
—
—
—
—
— $
$
—
—
— $
567 $
38,376
35,905
1,372
—
753
—
76,973 $
(4,726 ) $
(91,065 )
(60,906 )
(11,763 )
(913 )
(1,380 )
(6,817 )
(177,570 ) $
$
—
—
— $
1,797
$
—
1,797 $
(635 ) $
(4,437 )
(2,307 )
523
200
192
(14 )
(6,478 ) $
$
288
149
437 $
—
—
—
—
—
—
—
—
—
(22 )
(22 )
January 1,
2017
Transfers in
to (out of)
Level 3
Purchases
Sales
Realized and
Unrealized
Gains(Losses)(2)
December 31,
2017
Assets
Private common equity securities $
Private preferred equity securities
Asset-backed securities
Bank debt
Corporate bonds
Other debt securities
Rights and warrants
Real estate
Total assets
Liabilities
Derivative liabilities (free
standing)
Derivative liabilities (embedded)
Total liabilities
$
$
$
4,799 $
48,834
17,628
8,350
9,255
—
—
—
88,866 $
(1,326 ) $
(92 )
(1,418 ) $
— $
—
25,836
—
—
—
—
—
25,836 $
— $
4,777
72,758
4
1,577
637
—
6,770
86,523 $
— $
(2,102 )
(75,666 )
(12,009 )
(1,001 )
—
—
—
(90,778 ) $
(5 ) $
5,617
(13,248 )
3,655
37
76
435
61
(3,372 ) $
4,794
57,126
27,308
—
9,868
713
435
6,831
107,075
$
—
—
— $
$
—
—
— $
(44 ) $
—
(44 ) $
(715 ) $
(79 )
(794 ) $
(2,085 )
(171 )
(2,256 )
(1) Sales of investments measured at fair value using Level 3 inputs include the impact of the LP Transaction as described in Note 4.
(2) Total change in realized and unrealized gains (losses) recorded on Level 3 financial instruments is included in net investment income
(loss) in the consolidated statements of income (loss).
Total change in unrealized gains (losses) on fair value of assets using significant unobservable inputs (Level 3) held at
the year ended December 31, 2018 was $nil (2017 - $(9.5) million and 2016 - $1.0 million).
For assets and liabilities that were transferred into Level 3 during the period, gains (losses) are presented as if the assets
or liabilities had been transferred into Level 3 at the beginning of the period; similarly, for assets and liabilities that were
F-22
transferred out of Level 3 during the year, gains (losses) are presented as if the assets or liabilities had been transferred
out of Level 3 at the beginning of the year.
Prior to the change in the Company’s investment account structure, the Company used the following significant
unobservable inputs in determining the fair value of the Level 3 investments held by the Company as of December 31,
2017. Level 3 investments not presented in the table below were insignificant or do not have any unobservable inputs to
disclose, as they were valued primarily using dealer quotes or at cost.
Assets
Fair value
Valuation technique
Unobservable input
Range
December 31, 2017
Private equity investments
$
37,507 Market approach
Real estate
6,831 Discounted cash flow
Other debt securities
Rights and warrants
713 Discounted cash flow
433 Discounted cash flow
Market approach
Volatility
Time to exit
Multiple
Discount rate
Capitalization rate
Capitalization rate
Discount rate
Time to exit
Multiple
35.0% - 65.0%
0.5 - 1.8 years
7.8 - 24.4x
9.5 %
6.5% - 10.0%
10.0 %
13.5 %
5.0 years
3.8 - 4.6x
For the year ended December 31, 2017, there were no changes in the valuation techniques as they relate to the above.
6. Securities sold under an agreement to repurchase
Prior to the change in the Company’s investment account structure described in Note 4, the Company had entered into
repurchase and reverse repurchase agreements with financial institutions in which the financial institution agreed to resell
or repurchase securities and the Company agreed to repurchase or resell such securities at a mutually agreed price upon
maturity. These agreements were generally collateralized by corporate or government bonds or asset-backed securities.
As the Company held only repurchase agreements as of December 31, 2017, these positions were not impacted by
counterparty netting agreements. Interest payable and receivable related to these transactions were included in interest
payable and receivable in the consolidated balance sheets. Generally, repurchase and reverse repurchase agreements
matured within 30 to 90 days. The Company may lend securities for securities lending transactions or pledged securities
and/or cash for securities borrowed transactions. The value of any securities loaned was reflected in investments in
securities. Any collateral received was reflected in due to brokers in the consolidated balance sheets as of December 31,
2017.
As a result of the investment account structure change, there were no repurchase and reverse repurchase agreements
directly held by the Company as of December 31, 2018. The following table presents the contractual maturity of the
repurchase agreements by class of collateral pledged as of December 31, 2017:
December 31, 2017
Repurchase agreements
Overnights and
continuous
Up to 30 days
30 - 90 days
Greater than 90
days
Total
Asset-backed securities
$
— $
10,774 $
18,844 $
— $
29,618
F-23
7. Due from/to brokers
Prior to the change in the Company’s investment account structure described in Note 4, the Company held substantially
all of its investments through prime brokers pursuant to agreements between the Company and each prime broker. As of
December 31, 2018, a net balance of $1.4 million was not transferred to TP Fund and as a result, remains on the
Company’s consolidated balance sheet and is subject to the Participation Agreement as described in Note 4.
The brokerage arrangements differed from broker to broker, but generally cash and investments in securities were
available as collateral against investments in securities sold, not yet purchased and derivative positions, if required. As of
December 31, 2018 and 2017, the Company’s due from/to brokers were comprised of the following:
Due from brokers
Cash held at brokers
Receivable from unsettled trades (1)
Due to brokers
Borrowing from prime brokers
Payable from unsettled trades
2018
2017
48 $
1,363
1,411 $
— $
—
— $
295,467
9,626
305,093
759,267
10,938
770,205
$
$
$
$
(1) Receivables relating to securities sold by the Company were recorded as receivable from unsettled trades in due from brokers in
the Company’s consolidated balance sheets.
Due from/to brokers included cash balances maintained with the Company’s prime brokers, receivables and payables
from unsettled trades and proceeds from securities sold, not yet purchased. In addition, due from/to brokers included
cash collateral received and posted from OTC and repurchase agreement counterparties. As of December 31, 2017, the
Company’s borrowing from prime brokers included a total non-U.S. currency balance of $70.1 million.
Prior to the investment account structure change, the Company used prime brokerage borrowing arrangements to provide
collateral for its letter of credit facilities and to fund trust accounts securing certain reinsurance contracts. As of
December 31, 2017, the Company had $867.6 million of restricted cash and investments securing letter of credit facilities
and certain reinsurance contracts. Margin debt balances were collateralized by cash held by the broker and certain of the
Company’s securities. Margin interest was paid either at the daily broker call rate or based on London Inter-bank Offered
Rate. Amounts were borrowed through committed facilities with terms of up to 90 days, secured by assets of the
Company held by the prime broker, and incurred interest based on the Company’s negotiated rates. This interest expense
was reflected in net investment income (loss) in the consolidated statements of income (loss).
8. Derivatives
As of December 31, 2018, the Company only held embedded derivatives in reinsurance contracts. The following table
identifies the currency, fair value and notional amounts of embedded derivative instruments included in the consolidated
balance sheets as of December 31, 2018.
Derivative Liabilities by Primary Underlying Risk
Embedded derivative liabilities in reinsurance contracts (3)
USD
Total Derivative Liabilities (embedded)
$
$
22 $
22 $
20,000
20,000
As of December 31, 2018
Listing currency (1)
Fair Value
Notional Amounts (2)
F-24
Prior to the change in the Company’s investment account structure described in Note 4, the Company entered into
derivative contracts. The following tables identify the listing currency, fair value and notional amounts of derivative
instruments included in the consolidated balance sheets as of December 31, 2017, categorized by primary underlying
risk. Balances are presented on a gross basis.
Derivative Assets by Primary Underlying Risk
Credit
Credit Default Swaps - Protection Purchased
Total Return Swaps - Long Contracts
Equity Price
Contracts for Differences - Long Contracts
Contracts for Differences - Short Contracts
Total Return Swaps - Long Contracts
Total Return Swaps - Short Contracts
Interest Rates
Interest Rate Swaptions
Foreign Currency Exchange Rates
Foreign Currency Forward Contracts
Total Derivative Assets
Derivative Liabilities by Primary Underlying Risk
Credit
Credit Default Swaps - Protection Purchased
Credit Default Swaps - Protection Sold
Equity Price
Contracts for Differences - Long Contracts
Contracts for Differences - Short Contracts
Total Return Swaps - Long Contracts
Total Return Swaps - Short Contracts
Interest Rates
Interest Rate Swaptions
Foreign Currency Exchange Rates
Foreign Currency Forward Contracts
Total Derivative Liabilities (free standing)
Embedded derivative liabilities in reinsurance contracts (3)
Total Derivative Liabilities (embedded)
As of December 31, 2017
Listing currency (1)
Fair Value
Notional Amounts (2)
$
$
$
USD
EGP
BRL/CHF/EUR/USD
DKK/NOK/SEK/USD
BRL/USD
USD
JPY
HKD /JPY
Listing currency (1)
USD
USD
BRL/EUR/USD
DKK/EUR/USD
BRL/USD
USD
JPY
BRL/CHF/CNH/EUR/HKD/SAR
$
$
$
USD
8,205 $
25,245
17,298
4,384
15,936
1
539
1,764
73,372 $
50,593
25,245
163,868
31,992
96,388
—
64,950
511,937
944,973
Fair Value
Notional Amounts (2)
1,250 $
2,085
2,200
776
73
1,885
70
6,164
14,503 $
171 $
171 $
19,418
2,351
93,200
8,483
50,858
52,657
64,482
573,498
864,947
20,000
20,000
(1)
BRL = Brazilian Real, CHF = Swiss Franc, CNH = Chinese Yuan, DKK = Danish Krone, EGP = Egyptian Pound, EUR = Euro, HKD =
Hong Kong Dollar, JPY = Japanese Yen, NOK = Norwegian Krone, SAR = Saudi Arabian Riyal, SEK = Swedish Krona, USD = US Dollar.
(2) The absolute notional exposure represents the Company’s derivative activity as of December 31, 2018 and 2017, which is representative of the
volume of derivatives held during the period.
(3) The fair value of embedded derivatives in reinsurance contracts is included in reinsurance balances payable in the consolidated balance
sheets.
F-25
The following table sets forth, by major risk type, the Company’s realized and unrealized gains (losses) relating to
derivatives for the years ended December 31, 2018, 2017 and 2016. Realized and unrealized gains (losses) for the year
ended December 31, 2018 includes activity in the separate accounts up to the date of change in the investment account
structure described in Note 4. Realized and unrealized gains (losses) related to free standing derivatives are included in
net investment income (loss) in the consolidated statements of income (loss). Realized and unrealized gains (losses)
related to embedded derivatives are included in other expenses in the consolidated statements of income (loss).
Free standing Derivatives - Primary
Underlying Risk
Realized
Gain (Loss)
Unrealized
Gain (Loss)
Realized
Gain (Loss)
Unrealized
Gain (Loss)*
Realized
Gain (Loss)
Unrealized
Gain (Loss)*
Commodity Price
Commodity Future Options - Purchased
$
— $
— $
— $
— $
651 $
—
2018
2017
2016
Credit
Credit Default Swaps - Protection
Purchased
Credit Default Swaps - Protection Sold
Total Return Swaps - Long Contracts
Equity Price
Contracts for Differences - Long Contracts
Contracts for Differences - Short Contracts
Total Return Swaps - Long Contracts
Total Return Swaps - Short Contracts
Interest Rates
Commodities Futures - Short Contracts
Fixed Income Swap - Short Contracts
Interest Rate Swaps
Interest Rate Swaptions
Sovereign Future Options - Long Contracts
Sovereign Future Options - Short Contracts
Sovereign Futures - Long Contracts
Sovereign Futures - Short Contracts
Total Return Swaps - Long Contracts
Foreign Currency Exchange Rates
Foreign Currency Forward Contracts
Foreign Currency Future Options -
Purchased
Foreign Currency Options - Purchased
Foreign Currency Options - Sold
Embedded Derivatives
Embedded derivatives in reinsurance
contracts
Total Derivative Liabilities (embedded)
$
$
$
(3,557 )
(333 )
3,486
32,460
4,568
16,792
(17,329 )
—
—
—
(1,819 )
403
50
639
(1,166 )
(7,569 )
(2,849 )
(108 )
5,138
(771 )
28,035 $
921
744
(2,000 )
(15,098 )
(3,608 )
(15,864 )
1,883
—
—
—
1,228
—
—
—
—
—
4,403
(3,462 )
605
72
58,047
2,608
16,863
(15,892 )
—
—
(3,104 )
(354 )
—
—
—
(7,798 )
—
(978 )
(720 )
2,000
13,334
4,715
16,923
(765 )
—
—
(1,740 )
(2,056 )
—
—
—
647
—
4,311
(4,009 )
—
(4,123 )
(253 )
(6,835 )
(4,812 )
(281 )
(94 )
205
(340 )
—
—
—
10,519
—
(10,470 )
(3,048 )
(2,747 )
—
—
—
(27,391 ) $
—
(6,716 )
2,183
32,582 $
—
1,164
(80 )
29,396 $
—
(2,338 )
617
(9,529 ) $
(6,841 )
4,149
—
2,245
(3,579 )
1,957
(1,198 )
(52 )
—
1,740
869
—
—
—
(647 )
—
(2,261 )
—
(2,229 )
(103 )
(5,950 )
$
—
— $
$
149
149 $
$
—
— $
(79 ) $
(79 ) $
$
—
— $
260
260
*Unrealized gain (loss) relates to derivatives still held at reporting date.
The Company’s derivative contracts were subject to International Swaps and Derivatives Association (“ISDA”) Master
Agreements and other similar agreements that contained provisions setting forth events of default and/or termination
events (“credit-risk-related contingent features”), including but not limited to provisions setting forth maximum
permissible declines in the Company’s net asset value. Upon the occurrence of a termination event with respect to an
ISDA Agreement, the Company’s counterparty could elect to terminate the derivative contracts governed by such
agreement, resulting in the realization of any net gains or losses with respect to such derivative contracts and the return
of collateral held by such party.
F-26
The Company obtained/provided collateral from/to various counterparties for OTC derivative and futures contracts in
accordance with bilateral collateral agreements. During the period ended December 31, 2017, no termination events were
triggered under the ISDA Master Agreements. As of December 31, 2017, the aggregate fair value of all derivative
instruments with credit-risk-related contingent features that were in a net liability position was $3.6 million for which the
Company posted collateral in the form of cash of $103.0 million in the normal course of business. Similarly, the
Company held collateral in cash from certain counterparties as of December 31, 2017. If the credit-risk-related
contingent features underlying these instruments had been triggered as of December 31, 2017 and the Company had to
settle these instruments immediately, no additional amounts would be required to be posted that would exceed the
settlement amounts of open derivative contracts or in the case of cross margining relationships, the assets in the
Company’s prime brokerage accounts were sufficient to offset the derivative liabilities.
The Company’s derivatives did not qualify as hedges for financial reporting purposes and were recorded in the
consolidated financial statements on a gross basis and not offset against any collateral pledged or received. Pursuant to
ISDA master agreements and other counterparty agreements, the Company and its counterparties typically had the ability
to net certain payments owed to each other in specified circumstances. In addition, in the event a party to one of the
ISDA master agreements or other derivatives agreements defaults, or a transaction is otherwise subject to termination,
the non-defaulting party generally had the right to offset against payments owed to the defaulting party or collateral held
by the non-defaulting party.
The Company had pledged cash collateral to counterparties to support the current value of amounts due to the
counterparties based on the value of the underlying security. As of December 31, 2017, the gross and net amounts of
derivative instruments and repurchase agreements that were subject to enforceable master netting arrangements or
similar agreements were as follows:
December 31, 2017
Derivative Contracts
Gross Amount (1)
Financial
Instruments
Cash Collateral
Received
Net Amount
Amounts not Offset in the Consolidated Balance Sheet
Financial assets, derivative assets and collateral
received
Counterparty 1
Counterparty 2
Counterparty 3
Counterparty 4
Counterparty 5
Counterparty 6
Counterparty 7
Counterparty 8
Counterparty 9
$
$
167 $
1,343
37,313
2,683
14,798
5,338
1,377
12,628
703
76,350 $
167 $
706
2,705
2,683
6,647
9
—
2,963
703
16,583 $
— $
—
—
—
—
2,122
1,100
—
—
3,222 $
—
637
34,608
—
8,151
3,207
277
9,665
—
56,545
F-27
December 31, 2017
Derivative Contracts
Gross Amount (2)
Financial
Instruments
Cash Collateral
Pledged
Net Amount
Amounts not Offset in the Consolidated Balance Sheet
Financial liabilities, derivative liabilities and
collateral pledged
Counterparty 1
Counterparty 2
Counterparty 3
Counterparty 4
Counterparty 5
Counterparty 6
Counterparty 8
Counterparty 9
Counterparty 15
Securities sold under an agreement to
repurchase
Counterparty 4
$
$
$
$
1,340 $
706
2,705
3,812
6,647
9
2,963
1,181
836
20,199 $
167 $
706
2,705
2,683
6,647
9
2,963
703
—
16,583 $
1,173 $
—
—
1,129
—
—
—
478
732
3,512 $
29,618 $
29,618 $
29,618 $
29,618 $
— $
— $
—
—
—
—
—
—
—
—
104
104
—
—
(1)
(2)
The gross amounts of assets presented in the consolidated balance sheets presented above includes the fair value of derivative contract assets as
well as gross OTC option contract assets of $3.0 million included in other investments in the consolidated balance sheets.
The gross amounts of liabilities presented in the consolidated balance sheets presented above includes the fair value of derivative contract
liabilities as well as gross OTC option contract liabilities of $5.7 million included in securities sold, not yet purchased in the consolidated
balance sheets.
9. Loss and loss adjustment expense reserves
As of December 31, 2018 and 2017, loss and loss adjustment expense reserves in the consolidated balance sheets was
comprised of the following:
Case loss and loss adjustment expense reserves
Incurred but not reported loss and loss adjustment expense reserves
Deferred gains on retroactive reinsurance contracts
2018
2017
125,456 $
811,280
421
937,157 $
115,622
604,260
688
720,570
$
$
Reserving methodologies
The Company’s methodology for reserving for its reinsurance contracts and determining its loss and loss adjustment
expense reserves, including incurred but not reported reserves, is as follows:
The Company’s actuaries perform an actuarial projection of the Company’s reserves quarterly and have a third-party
actuarial review performed periodically. All reserves are estimated on an individual contract basis; there is no
aggregation of contracts for projection of ultimate loss or reserves. The Company typically initially reserves individual
contracts to the expected loss and loss expense ratio in its pricing analysis. As loss information is received from cedents,
the Company incorporates other actuarial methods into its projection of ultimate losses and, hence, reserves.
In the Company’s pricing analysis, there is a significant amount of information unique to the individual client and, when
necessary, the analysis is supplemented with industry data. Industry data primarily takes the form of paid and incurred
development patterns from statutory financial statements and statistical agencies. For the Company’s actuarial reserve
F-28
projections, the relevant information received from clients includes premium estimates, paid loss and loss adjustment
expenses and case reserves. The Company’s actuaries review the data for reasonableness and research any noted
anomalies. On each contract, the Company’s actuaries compare the expected paid and incurred amounts at each quarter-
end with actual amounts reported. The Company’s actuaries also compare premiums received with projected premium
receipts at each quarter end.
There is a time lag between when a covered loss event occurs and when it is reported to the Company’s cedents. There is
also a time lag between when clients pay claims, establish case reserves and re-estimate their reserves, and when they
notify the Company of the payments and/or new or revised case reserves. This reporting lag is typically 60 to 90 days
after the end of a reporting period, but can be longer in some cases. The Company’s actuaries use techniques that adjust
for this reporting lag. While it would be unusual to have lags that extend beyond 90 days, the Company’s actuarial
techniques are designed to adjust for such a circumstance.
The principal actuarial methods (and associated key assumptions) used to perform the Company’s quarterly loss reserve
analysis may include one or more of the following methods:
A priori loss ratio method
To estimate ultimate losses using the a priori loss ratio method, the Company multiplies earned premiums by an expected
loss ratio. The expected loss ratio is selected as part of the pricing and utilizes individual client data, supplemented by
industry data where necessary. This method is often useful when there is limited historical data due to few losses being
incurred.
Paid loss development method
This method estimates ultimate losses by calculating past paid loss development factors and applying them to exposure
periods with further expected paid loss development. The paid loss development method assumes that losses are paid at a
rate consistent with the historical rate of payment. It provides an objective test of reported loss projections because paid
losses contain no case reserve estimates. For some lines of business, claim payments are made slowly and it may take
many years for claims to be fully reported and settled.
Incurred loss development method
This method estimates ultimate losses by using past incurred loss development factors and applying them to exposure
periods with further expected incurred loss development. Since incurred losses include payments and case reserves,
changes in both of these amounts are incorporated in this method. This approach provides a larger volume of data to
estimate ultimate losses than paid loss methods. Thus, incurred loss patterns may be less varied than paid loss patterns,
especially for coverages that have historically been paid out over a long period of time but for which claims are incurred
relatively early and case loss reserve estimates are established.
Bornhuetter-Ferguson paid and incurred loss methods
These methods are a weighted average of the a priori loss ratio method and the relevant development method. The
weighting between the two methods depends on the maturity of the business. This means that for the more recent years a
greater weight is placed on the a priori loss ratio method, while for the more mature years a greater weight is placed on
the development methods. These methods avoid some of the distortions that could result from a large development factor
being applied to a small base of paid or incurred losses to calculate ultimate losses. This method will react slowly if
actual paid or incurred loss experience develops differently than historical paid or incurred loss experience because of
major changes in rate levels, retentions or deductibles, the forms and conditions of coverage, the types of risks covered
or a variety of other factors.
IBNR to outstanding ratio method
This method is used in selected cases typically for very mature years that still have open claims. This method assumes
that the estimated future loss development is indicated by the current level of case reserves.
F-29
Key to the projection of ultimate loss is the amount of credibility or weight assigned to each actuarial method. Each
method has advantages and disadvantages, and those can change depending on numerous factors including the reliability
of the underlying data. The selection and weighting of the projection methods is a highly subjective process. In order to
achieve a desirable amount of consistency from study to study and between contracts, the Company’s actuaries have
implemented a weighting scheme that incorporates numerous “rules” for the weighting of actuarial methods. These rules
attempt to effectively standardize the process used for selecting weights for the various methods. There are numerous
circumstances where the rules would be modified for specific reinsurance contracts; examples would include a large
market event or new information on historical years that may cause us to increase our a priori loss ratio.
As part of the Company’s quarterly reserving process, loss-sensitive contingent expenses (e.g., profit commissions,
sliding-scale ceding commissions, etc.) are calculated on an individual contract basis. These expense calculations are
based on the updated ultimate loss estimates derived from the Company's quarterly reserving process.
The Company’s reserving methodologies use a loss reserving model that calculates a point estimate for the Company’s
ultimate losses. Although the Company believes that its assumptions and methodologies are reasonable, the ultimate
payments may vary, potentially materially, from the estimates that the Company has made.
There were no significant changes made to the Company’s methodology for calculating loss and loss adjustment reserves
for the year ended December 31, 2018.
Roll forward of loss and loss adjustment expense reserves
The following table represents the activity in the loss and loss adjustment expense reserves for the years ended
December 31, 2018, 2017 and 2016:
Gross reserves for loss and loss adjustment expenses, beginning of year
$
Less: loss and loss adjustment expenses recoverable, beginning of year
Net reserves for loss and loss adjustment expenses, beginning of year
Increase (decrease) in net loss and loss adjustment expenses incurred in respect
of losses occurring in:
Current year
Prior years (1)
Total incurred loss and loss adjustment expenses
Net loss and loss adjustment expenses paid in respect of losses occurring in:
Current year
Prior years
Total net paid losses
Foreign currency translation
Net reserves for loss and loss adjustment expenses, end of year
Plus: loss and loss adjustment expenses recoverable, end of year
Plus: deferred charges on retroactive reinsurance contracts
Gross reserves for loss and loss adjustment expenses, end of year
$
2018
720,570 $
(1,113 )
719,457
2017
605,129 $
(1 )
605,128
2016
466,047
(125 )
465,922
434,276
4,138
438,414
422,801
(52,743 )
370,058
(85,173 )
(132,336 )
(217,509 )
(9,083 )
931,279
2,031
3,847
937,157 $
(110,799 )
(162,447 )
(273,246 )
17,517
719,457
1,113
—
720,570 $
372,002
23,930
395,932
(105,921 )
(133,241 )
(239,162 )
(17,564 )
605,128
1
—
605,129
(1)
In the year ended December 31, 2018, the Company started including the amortization of deferred gains on retroactive reinsurance contracts in
prior year loss development. This line item was previously presented separately in the loss reserves roll forward presented above. The prior year
presentation has been adjusted to conform to the current year presentation. For the year ended December 31, 2018, net loss and loss adjustment
expenses incurred in respect of prior years include a decrease of $3.4 million relating to the amortization deferred gains/charges (2017 - $1.5
million and 2016 - $1.0 million).
Changes in the Company’s loss and loss adjustment expense reserves result from re-estimating loss reserves and from
changes in premium earnings estimates. Furthermore, many of the Company’s contracts have sliding scale or profit
commissions whereby loss reserve development can be offset by changes in acquisition costs that vary inversely with
loss experience. In some instances, the Company can have loss reserve development on contracts where there is no
F-30
sliding scale or profit commission or where the loss ratio falls outside of the loss ratio range to which the sliding scale or
profit commission applies.
The $4.1 million net increase in prior years’ reserves for the year ended December 31, 2018 includes $12.9 million of net
favorable reserve development related to decreases in loss reserve estimates and $17.0 million increase in loss reserves
resulting from increases in premium earnings estimates on certain contracts. The net increase in loss reserves as well as
the impact of any offsetting changes in acquisition costs as a result of sliding scale or profit commissions is explained as
follows:
• The $12.9 million of net favorable prior years’ reserve development for the year ended December 31, 2018 was
accompanied by net increases of $7.7 million in acquisition costs, resulting in a $5.2 million improvement in
the net underwriting results, primarily due to:
• $15.8 million of net favorable underwriting loss development relating to workers’ compensation,
multi-line and credit and financial lines contracts. The favorable development was the result of better
than expected loss experience and was partially offset by;
• $10.5 million of net adverse underwriting loss development primarily relating to our general liability
and homeowners’ contracts, as a result of worse than expected loss experience.
• The $17.0 million net increase in loss and loss adjustment expenses incurred resulting from increases in
premium earnings estimates was accompanied by a $5.4 million increase in acquisition costs, for a total of
$22.4 million increase in loss and loss adjustment expenses incurred and acquisition costs. The increase in loss
and loss adjustment expenses incurred and acquisition costs was due to an increase in prior period earned
premium of $23.4 million. The increase in prior period earned premium was the result of changes in ultimate
premium and earning pattern estimates. The net impact was a $1.0 million improvement in the net underwriting
results for the year ended December 31, 2018.
•
In total, the change in net underwriting loss for prior periods due to loss reserve development and adjustments
to premium earnings estimates resulted in a $6.2 million improvement in the net underwriting results for the
year ended December 31, 2018.
The $52.7 million net decrease in prior years’ reserves, which includes amortization of deferred gains, for the year ended
December 31, 2017 includes $22.3 million of net favorable reserve development related to decreases in loss reserve
estimates and $30.4 million decrease in loss reserves resulting from decreases in premium earnings estimates on certain
contracts. The net decrease in loss reserves as well as the impact of any offsetting changes in acquisition costs as a result
of sliding scale or profit commissions is explained as follows:
• The $22.3 million of net favorable prior years’ reserve development for the year ended December 31, 2017 was
accompanied by net increases of $19.8 million in acquisition costs, resulting in a $2.5 million improvement in
the net underwriting results, primarily due to:
• $5.8 million of net favorable underwriting loss development relating to several workers’ compensation
contracts written from 2012 to 2014, driven by better than expected loss experience;
• $1.3 million of net favorable underwriting loss development from several other contracts as a result of
better than expected loss experience; partially offset by
• $4.6 million of net adverse underwriting loss development relating to non-standard auto contracts,
primarily due to the inability of cedents to promptly react to increasing frequency and severity trends,
resulting in underpriced business and adverse selection.
• The $30.4 million net decrease in loss and loss adjustment expenses incurred resulting from decreases in
premium earnings estimates on certain contracts was accompanied by a $21.7 million decrease in acquisition
costs, for a total of $52.1 million decrease in loss and loss adjustment expenses incurred and acquisition costs.
The decrease in loss and loss adjustment expenses incurred and acquisition costs was due to a decrease in prior
period earned premium of $50.0 million. The decrease in prior period earned premium was the result of changes
F-31
in ultimate premium and earning pattern estimates. The net impact was a $2.1 million improvement in the net
underwriting results for the year ended December 31, 2017.
•
In total, the change in net underwriting loss for prior periods due to loss reserve development and adjustments
to premium earnings estimates resulted in a $4.6 million improvement in the net underwriting results for the
year ended December 31, 2017.
The $23.9 million net increase in prior years’ reserves, which includes amortization of deferred gains, for the year ended
December 31, 2016 includes $10.5 million of net adverse reserve development related to increases in loss reserve
estimates and $13.4 million of additional loss reserves resulting from increases in premium earnings estimates on certain
contracts. The net increase in loss reserves as well as the impact of any offsetting changes in acquisition costs as a result
of sliding scale or profit commissions is explained as follows:
• The $10.5 million of net adverse prior years’ reserve development for the year ended December 31, 2016 was
accompanied by net increases of $2.0 million in acquisition costs, resulting in a net increase of $12.5 million in
net underwriting loss, primarily due to:
• $4.8 million of net adverse underwriting loss development relating to one multi-line contract written
since 2014. This contract contains underlying commercial auto physical damage and auto extended
warranty exposure. The adverse loss experience is a result of an increase in the number of reported
claims and inadequate pricing in certain segments of the underlying business;
• $4.0 million of net adverse underwriting loss development relating to non-standard auto contracts,
primarily due to the inability of cedents to promptly react to increasing frequency and severity trends,
resulting in underpriced business and adverse selection;
• $3.7 million of net adverse underwriting loss development relating to our Florida homeowners’
reinsurance contracts primarily as a result of higher than anticipated water damage claims and an
increase in the practice of assignment of benefits whereby homeowners assign their rights for filing and
settling claims to attorneys and public adjusters, which has led to increases in the frequency of claims
reported as well as the severity of losses and loss adjustment expenses. Contracts for which we
experienced this adverse loss development have not been renewed;
• $3.3 million of net adverse underwriting loss development relating to a workers’ compensation contract
written from 2012 to 2014 under which we have been experiencing higher than expected reported
claims development that led to an increase in our previous loss assumptions on this contract; and
• $2.1 million of net favorable underwriting loss development from several other contracts.
• The $13.4 million net increase in loss and loss adjustment expenses incurred resulting from increases in
premium earnings estimates on certain contracts was accompanied by a $6.4 million increase in acquisition
costs, for a total of $19.8 million increase in loss and loss adjustment expenses incurred and acquisition costs.
The increase in loss and loss adjustment expenses incurred and acquisition costs was due to an increase in prior
period earned premium of $19.5 million. The increase in prior period earned premium was the result of changes
in ultimate premium and earning pattern estimates. The net impact was a $0.3 million increase to the net
underwriting loss for the year ended December 31, 2016.
•
In total, the change in net underwriting loss for prior periods due to loss reserve development and adjustments
to premium earnings estimates for prior years was an increase in net underwriting loss of $12.8 million for the
year ended December 31, 2016.
F-32
Incurred and paid development tables by accident year
The Company manages its business on the basis of one operating segment, property and casualty reinsurance. The
Company has disaggregated its loss information presented in the tables below by prospective and retroactive reinsurance.
For its prospective reinsurance business, the Company further disaggregated by the different lines of business included in
this segment. The Company’s retroactive reinsurance contracts have been presented by year of inception. The Company’s
retroactive reinsurance contracts within each inception year share similar characteristics and as a result, have not been
disaggregated further. The Company has presented the below development tables for all accident years shown using
exchange rates as at December 31, 2018. All accident years prior to the current year have been restated and presented
using the current year exchange rate.
The Company’s loss reserve analysis is based primarily on underwriting year data. The preparation of accident year
development tables requires an allocation of underwriting year data to the corresponding accident years. For instance, a
contract written in one particular underwriting year may have exposure to losses from two or more accident years. These
allocations are done using accident year loss payment and reporting patterns, along with premium earnings patterns.
These patterns are derived from either company-specific or industry historical loss data, depending on availability and
applicability. The Company believes that its allocations are reasonable; however, to the extent that the Company’s
allocation procedure for loss and loss adjustment expenses incurred differs from actual historical development, the actual
loss development may differ materially from the loss development presented.
As described in the roll forward of loss and loss adjustment expense reserves section above, changes in the Company’s
loss and loss adjustment expense reserves result from both re-estimating loss reserves as well as changes in premium
estimates. In addition, many of the Company’s contracts have sliding scale or profit commissions whereby loss reserve
development can be offset by changes in acquisition costs. See additional disclosure above on the net impact on
underwriting income after considering the impact of changes in premium estimates and the impact of acquisition costs
for the years ended December 31, 2018, 2017 and 2016.
F-33
Property and Casualty Reinsurance - Prospective Reinsurance Contracts
The following tables provide a breakdown of the Company’s loss and loss adjustment expenses incurred, net and net loss
and loss adjustment expenses paid by accident year by line of business for the Company’s prospective reinsurance
contracts for the years ended December 31, 2018 and 2017. The information related to loss and loss adjustment expenses
incurred, net and net loss and loss adjustment expenses paid for the years ended December 31, 2012 through 2017 is
presented as supplementary information and is unaudited:
Property
Loss and loss adjustment expenses incurred, net
Accident year
2012
2013
2014
2015
2016
2017
2018
<--------------------------------------------- Unaudited --------------------------------------------->
9,375 $
24,980
40,256
—
—
—
—
8,672 $
27,765
—
—
—
—
—
9,416 $
25,882
41,336
52,533
45,415
—
—
10,917 $
—
—
—
—
—
—
9,353 $
25,766
40,920
50,330
—
—
—
9,472 $
25,785
44,627
54,635
43,038
41,237
—
IBNR loss
and LAE
reserves,
net
17
287
1,434
3,055
4,758
5,560
23,819
38,930
9,501 $
26,170
46,500
56,313
43,799
41,833
54,084
$ 278,200 $
Cumulative net losses and loss adjustment expenses paid
Accident year
2012
2013
2014
2015
2016
2017
2018
<--------------------------------------------- Unaudited --------------------------------------------->
9,075 $
22,229
19,420
—
—
—
—
8,381 $
14,635
—
—
—
—
—
9,352 $
25,167
38,448
43,382
21,593
—
—
9,186 $
24,023
34,381
22,706
—
—
—
4,656 $
—
—
—
—
—
—
9,400 $
25,406
42,775
48,360
31,871
24,713
—
9,482
25,815
44,533
51,783
37,044
33,436
26,458
$ 228,551
2012 $
2013
2014
2015
2016
2017
2018
Total
2012 $
2013
2014
2015
2016
2017
2018
Total
Property - net reserves for loss and loss adjustment expenses, end of year $
49,649
F-34
Workers’ Compensation
Loss and loss adjustment expenses incurred, net
Accident year
2012
2013
2014
2015
2016
2017
2018
<--------------------------------------------- Unaudited --------------------------------------------->
5,066 $
28,616
40,247
—
—
—
—
4,534 $
27,449
—
—
—
—
—
5,715 $
33,449
47,200
37,138
40,433
—
—
5,596 $
33,365
46,568
35,749
—
—
—
4,037 $
—
—
—
—
—
—
5,720 $
33,252
43,470
34,800
39,205
41,075
—
IBNR loss
and LAE
reserves,
net
126
954
3,327
5,104
10,129
18,055
19,516
57,211
5,874 $
33,067
42,037
32,529
36,475
40,459
27,753
$ 218,194 $
Cumulative net losses and loss adjustment expenses paid
Accident year
2012
2013
2014
2015
2016
2017
2018
2012 $
2013
2014
2015
2016
2017
2018
Total
2012 $
2013
2014
2015
2016
2017
2018
Total
<--------------------------------------------- Unaudited --------------------------------------------->
3,017 $
9,142
4,073
—
—
—
—
4,969 $
22,826
24,280
10,755
3,985
—
—
4,280 $
16,840
15,947
2,669
—
—
—
624 $
2,587
—
—
—
—
—
93 $
—
—
—
—
—
—
4,796 $
26,956
29,573
17,001
13,236
4,586
—
5,110
29,082
34,112
22,432
18,346
11,868
2,552
$ 123,502
Workers’ Compensation - net reserves for loss and loss adjustment expenses, end of year $
94,692
F-35
Auto
Loss and loss adjustment expenses incurred, net
Accident year
2012
2013
2014
2015
2016
2017
2018
<--------------------------------------------- Unaudited --------------------------------------------->
13,247 $
—
—
—
—
—
—
12,264 $
20,830
—
—
—
—
—
11,777 $
19,990
104,896
—
—
—
—
11,534 $
19,472
103,473
82,677
—
—
—
11,433 $
19,338
103,568
88,705
77,785
—
—
11,333 $
19,483
103,661
89,550
85,903
48,569
—
11,356 $
19,534
103,822
89,459
86,434
50,681
45,145
$ 406,431 $
IBNR loss
and LAE
reserves,
net
6
47
239
326
1,542
2,330
12,797
17,287
Cumulative net losses and loss adjustment expenses paid
Accident year
2012
2013
2014
2015
2016
2017
2018
<--------------------------------------------- Unaudited --------------------------------------------->
5,619 $
—
—
—
—
—
—
9,989 $
8,673
—
—
—
—
—
11,387 $
17,244
45,766
—
—
—
—
11,450 $
18,686
97,651
42,451
—
—
—
11,382 $
19,066
101,626
80,765
38,059
—
—
11,318 $
19,363
102,868
86,100
77,511
23,546
—
11,348
19,463
103,379
88,168
82,556
45,084
21,182
$ 371,180
2012 $
2013
2014
2015
2016
2017
2018
Total
2012 $
2013
2014
2015
2016
2017
2018
Total
Auto - net reserves for loss and loss adjustment expenses, end of year $
35,251
F-36
Other Casualty
Accident
year
Loss and loss adjustment expenses incurred, net
2012
2013
2014
2015
2016
2017
2018
IBNR loss
and LAE
reserves,
net
<--------------------------------------------- Unaudited --------------------------------------------->
— $
—
5,480
—
—
—
—
— $
—
7,519
45,558
—
—
—
— $
—
7,316
48,315
63,082
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
4,903
33,396
52,118
70,162
—
2012 $
2013
2014
2015
2016
2017
2018
Total
— $
—
5,584
37,113
54,990
71,084
120,503
—
—
1,502
12,313
27,981
54,957
114,789
$ 289,274 $ 211,542
Accident
year
2012
2013
2014
2015
2016
2017
2018
Cumulative net losses and loss adjustment expenses paid
2012 $
2013
2014
2015
2016
2017
2018
Total
<--------------------------------------------- Unaudited --------------------------------------------->
— $
—
16
—
—
—
—
— $
—
1,390
3,612
621
—
—
— $
—
340
310
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
2,226
9,053
6,165
1,418
—
$
—
—
3,104
15,781
13,467
6,231
1,673
40,256
Other Casualty - net reserves for loss and loss adjustment expenses, end of year $ 249,018
F-37
Credit & Financial Lines
Loss and loss adjustment expenses incurred, net
Accident
year
2012
2013
2014
2015
2016
2017
2018
IBNR loss
and LAE
reserves,
net
2012 $
2013
2014
2015
2016
2017
2018
Total
<--------------------------------------------- Unaudited --------------------------------------------->
— $
408
5,846
—
—
—
—
— $
107
2,419
5,035
10,731
—
—
— $
113
2,646
5,237
—
—
—
— $
364
—
—
—
—
—
— $
—
—
—
—
—
—
— $
99
2,203
4,754
10,723
13,748
—
$
— $
77
1,384
4,009
10,819
13,779
17,725
47,793 $
—
1
54
1,259
6,368
10,139
16,321
34,142
Accident
year
2012
2013
2014
2015
2016
2017
2018
Cumulative net losses and loss adjustment expenses paid
<--------------------------------------------- Unaudited --------------------------------------------->
— $
11
42
—
—
—
—
— $
74
1,038
1,128
1,013
—
—
— $
66
784
402
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
2012 $
2013
2014
2015
2016
2017
2018
Total
— $
78
1,318
2,045
2,326
1,100
—
$
—
77
1,322
2,328
3,419
2,332
897
10,375
37,418
Credit & Financial Lines - net reserves for loss and loss adjustment expenses, end of year $
F-38
Multi-line
Accident
year
Loss and loss adjustment expenses incurred, net
2012
2013
2014
2015
2016
2017
2018
IBNR loss
and LAE
reserves,
net
<--------------------------------------------- Unaudited --------------------------------------------->
— $
4,272
42,787
—
—
—
—
— $
4,564
28,445
47,906
—
—
—
— $
23,282
—
—
—
—
—
— $
4,564
36,489
88,105
84,312
—
—
— $
4,564
35,570
106,307
120,032
99,702
—
— $
—
—
—
—
—
—
— $
4,564
37,350
106,460
115,840
106,817
90,156
—
—
16,913
29,597
30,246
29,281
55,443
$ 461,187 $ 161,480
Accident
year
2012
2013
2014
2015
2016
2017
2018
Cumulative net losses and loss adjustment expenses paid
<--------------------------------------------- Unaudited --------------------------------------------->
— $
1,243
1,245
—
—
—
—
— $
4,563
10,409
13,208
—
—
—
— $
4,563
20,526
64,581
30,026
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
4,563
18,614
73,107
75,288
53,334
—
—
4,563
20,338
75,694
83,088
73,449
30,228
$ 287,360
2012 $
2013
2014
2015
2016
2017
2018
Total
2012 $
2013
2014
2015
2016
2017
2018
Total
Multi-line - net reserves for loss and loss adjustment expenses, end of year $ 173,827
F-39
2012 $
2013
2014
2015
2016
2017
2018
Total
2012 $
2013
2014
2015
2016
2017
2018
Total
Other Specialty
Accident
year
Loss and loss adjustment expenses incurred, net
2012
2013
2014
2015
2016
2017
2018
IBNR loss
and LAE
reserves,
net
<--------------------------------------------- Unaudited --------------------------------------------->
52,105 $
—
—
—
—
—
—
49,942 $
2,308
—
—
—
—
—
50,055 $
24,274
—
—
—
—
—
50,055 $
23,450
—
—
—
—
—
50,065 $
23,138
—
—
—
—
—
50,104 $
23,135
—
—
—
4,033
—
$
50,104 $
23,138
—
—
812
3,544
6,213
83,811 $
1
1
—
—
812
3,283
5,256
9,353
Accident
year
2012
2013
2014
2015
2016
2017
2018
Cumulative net losses and loss adjustment expenses paid
<--------------------------------------------- Unaudited --------------------------------------------->
2,666 $
—
—
—
—
—
—
48,455 $
—
—
—
—
—
—
50,024 $
22,232
—
—
—
—
—
50,025 $
23,138
—
—
—
—
—
50,067 $
23,134
—
—
—
—
—
50,103 $
23,135
—
—
—
4
—
$
50,103
23,137
—
—
—
261
957
74,458
9,353
Other Specialty - net reserves for loss and loss adjustment expenses, end of year $
Property and Casualty Reinsurance - Retroactive Reinsurance Contracts
The Company writes reinsurance contracts that provide limited protection against adverse development on loss
originating from multiple accident years. The Company has other retroactive exposure within contracts that provide
primarily prospective coverage. These contracts are included in the prospective reinsurance tables above. These contracts
are typically part of prospective reinsurance contracts with a small portion of retroactive exposure resulting from the
delay between the dates when the relevant contract was bound and the dates on which each incepted. The information
below includes loss and loss adjustment expenses incurred, net and loss and loss adjustment expenses paid, net, by
accident year for the Company's retroactive reinsurance contracts presented by year of inception of the retroactive
reinsurance contracts.
The Company's estimate for loss and loss adjustment expenses incurred, net, at inception of all retroactive reinsurance
contracts entered into to date was the same when the contract incepted and at the relevant year end position. As a result,
there was no development in the year of inception for any of the Company's retroactive reinsurance contracts written to
date. In addition, there were no loss and loss adjustment expenses paid, net, at inception of the Company's retroactive
reinsurance contracts. The information related to loss and loss adjustment expenses incurred, net and net loss and loss
adjustment expenses paid for the years ended December 31, 2012 through 2017 is presented as supplementary
information and is unaudited.
Retroactive contracts incepting in the year ended December 31, 2012
The Company did not enter into any retroactive reinsurance contracts during the year ended December 31, 2012.
F-40
Retroactive contracts incepting in the year ended December 31, 2013
Loss and loss adjustment expenses incurred, net
Accident year
2013
2014
2015
2016
2017
2018
IBNR loss
and LAE
reserves, net
<------------------------------------- Unaudited ------------------------------------->
— $
704
4,173
7,853
3,779
—
—
—
—
—
16,509 $
—
—
—
—
—
—
—
—
—
—
—
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
— $
914
5,419
10,197
4,908
—
—
—
—
— —
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
— $
—
—
—
—
—
—
—
—
— —
— $
704
4,173
7,853
3,779
—
—
—
—
—
— $
279
1,654
3,113
1,498
—
—
—
—
—
— $
704
4,173
7,853
3,779
—
—
—
—
—
— $
704
4,173
7,853
3,779
—
—
—
—
—
— $
704
4,173
7,853
3,779
—
—
—
—
—
— $
704
4,173
7,853
3,779
—
—
—
—
— —
— $
704
4,173
7,853
3,779
—
—
—
—
—
$
— $
704
4,173
7,853
3,779
—
—
—
—
—
$
Accident year
2013
2014
2015
2016
2017
2018
Cumulative net loss and loss adjustment expenses paid
<------------------------------------- Unaudited ------------------------------------->
Net reserves for loss and loss adjustment expenses from 2009 to 2018
Net reserves for loss and loss adjustment expenses prior to 2009
Retroactive contracts incepting in the year ended December 31, 2013 - net reserves for loss and
loss adjustment expenses, end of year $
F-41
—
704
4,173
7,853
3,779
—
—
—
—
—
16,509
—
11,425
11,425
Retroactive contracts incepting in the year ended December 31, 2014
Loss and loss adjustment expenses incurred, net
Accident year
2014
2015
2016
2017
2018
IBNR loss
and LAE
reserves, net
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
<--------------------------- Unaudited --------------------------->
— $
—
3,455
10,794
16,929
9,590
—
—
—
—
— $
—
3,057
9,553
14,982
8,487
—
—
—
—
382 $
444
4,239
12,173
18,907
10,700
—
—
—
— —
— $
—
3,252
10,162
15,938
9,028
—
—
—
—
$
— $
—
2,884
9,011
14,132
8,005
—
—
—
—
34,032 $
—
—
2,884
9,011
14,132
8,005
—
—
—
—
34,032
Accident year
2014
2015
2016
2017
2018
Cumulative net loss and loss adjustment expenses paid
—
—
—
—
—
—
—
—
—
—
—
34,032
—
34,032
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
<--------------------------- Unaudited --------------------------->
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
— —
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
$
Net reserves for loss and loss adjustment expenses from 2009 to 2018
Net reserves for loss and loss adjustment expenses prior to 2009
Retroactive contracts incepting in the year ended December 31, 2014 - net reserves for loss and
loss adjustment expenses, end of year $
F-42
Retroactive contracts incepting in the year ended December 31, 2015
Loss and loss adjustment expenses incurred, net
Accident year
2015
2016
2017
2018
IBNR loss
and LAE
reserves, net
<---------------- Unaudited ---------------->
1,349
3,484
7,115
10,793
13,355
30,084
1,393
—
—
—
67,573
1,349 $
3,484
7,115
10,793
13,355
30,084
1,393
—
—
—
67,573 $
2018
—
—
—
—
—
—
—
—
—
—
—
67,573
1,336
68,909
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
2,510 $
5,273
10,029
14,726
18,152
39,978
2,596
—
—
— —
2,510 $
5,263
10,003
14,682
18,097
39,847
2,596
—
—
—
1,729 $
3,856
7,500
11,131
13,738
30,486
1,788
—
—
—
$
Cumulative net loss and loss adjustment expenses paid
2015
2017
2016
<---------------- Unaudited ---------------->
Accident year
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
$
Net reserves for loss and loss adjustment expenses from 2009 to 2018
Net reserves for loss and loss adjustment expenses prior to 2009
Retroactive contracts incepting in the year ended December 31, 2015 - net reserves for loss and
loss adjustment expenses, end of year $
F-43
Retroactive contracts incepting in the year ended December 31, 2016
The Company did not enter into any retroactive reinsurance contracts during the year ended December 31, 2016.
2018
IBNR loss
and LAE
reserves, net
247 $
365
1,496
2,007
3,101
8,952
11,748
22,349
46,165
—
96,430 $
247
365
1,496
2,007
3,101
8,952
11,748
22,349
46,165
—
96,430
2018
—
—
—
—
—
—
—
—
—
—
—
96,430
143
96,573
Retroactive contracts incepting in the year ended December 31, 2017
Loss and loss adjustment expenses incurred, net
Accident year
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Cumulative net loss and loss adjustment expenses paid
Accident year
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
2017
Unaudited
317 $
438
1,605
2,123
3,260
9,281
12,205
23,090
47,235
—
$
2017
Unaudited
— $
—
—
—
—
—
—
—
—
—
$
Net reserves for loss and loss adjustment expenses from 2009 to 2018
Net reserves for loss and loss adjustment expenses prior to 2009
Retroactive contracts incepting in the year ended December 31, 2017 - net reserves for loss and
loss adjustment expenses, end of year $
F-44
IBNR loss
and LAE
reserves, net
202
221
199
432
2,161
5,623
12,334
18,783
16,679
14,375
71,009
202 $
221
199
432
2,161
5,623
12,334
18,783
16,679
14,375
71,009 $
2018
—
—
—
—
—
—
—
—
—
—
—
71,009
123
71,132
Retroactive contracts incepting in the year ended December 31, 2018
Loss and loss adjustment expenses incurred, net
Accident year
2018
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
Accident year
Cumulative net loss and loss adjustment expenses paid
2009 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
Net reserves for loss and loss adjustment expenses from 2009 to 2018
Net reserves for loss and loss adjustment expenses prior to 2009
Retroactive contracts incepting in the year ended December 31, 2018 - net reserves for loss and
loss adjustment expenses, end of year $
F-45
Reconciliation of loss development information to loss and loss adjustment expense reserves
The following table provides a reconciliation of the Company's loss and loss expense reserves as of December 31, 2018:
Prospective reinsurance contracts
Property
Workers’ Compensation
Auto
Other Casualty
Credit & Financial Lines
Multi-line
Other Specialty
Retroactive reinsurance contracts
Retroactive contracts incepting in the year ended December 31, 2012
Retroactive contracts incepting in the year ended December 31, 2013
Retroactive contracts incepting in the year ended December 31, 2014
Retroactive contracts incepting in the year ended December 31, 2015
Retroactive contracts incepting in the year ended December 31, 2016
Retroactive contracts incepting in the year ended December 31, 2017
Retroactive contracts incepting in the year ended December 31, 2018
Net reserves for loss and loss adjustment expenses, end of year
Loss and loss adjustment expenses recoverable
Property
Deferred charges on retroactive reinsurance contracts
Gross reserves for loss and loss adjustment expenses, end of year
Cumulative claims frequency
2018
49,649
94,692
35,251
249,018
37,418
173,827
9,353
—
11,425
34,032
68,909
—
96,573
71,132
931,279
2,031
3,847
937,157
$
$
The Company determined that the disclosure of claim frequency analysis was impracticable. As a result, no claims
frequency information has been disclosed. The Company’s business is primarily comprised of reinsurance contracts
written on a quota share or aggregate loss basis and the underlying claim count information is not provided for most
contracts. Furthermore, even if claim counts were made available by the Company’s cedents, the quota share cession
percentage varies for each contract, resulting in the cedent claim counts not being a meaningful measure of the
Company’s loss exposure.
F-46
Claims duration
The following table is presented as supplementary information and presents the Company’s historical average annual
percentage payout of loss and loss adjustment expenses incurred, net by age, as of December 31, 2018:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
(Unaudited)
Prospective reinsurance contracts
Property
Workers’ Compensation
Auto
Other Casualty
Credit & Financial Lines
Multi-line
Other Specialty
Retroactive reinsurance contracts
Retroactive contracts incepting in the year ended
December 31, 2012
Retroactive contracts incepting in the year ended
December 31, 2013
Retroactive contracts incepting in the year ended
December 31, 2014
Retroactive contracts incepting in the year ended
December 31, 2015
Retroactive contracts incepting in the year ended
December 31, 2016
Retroactive contracts incepting in the year ended
December 31, 2017
Retroactive contracts incepting in the year ended
December 31, 2018
5.2 %
1.0 %
1.7 %
0.5 % — %
n/a
7.9 % 15.6 % 16.5 % 15.7 %
2.7 %
(1.4 )%
2.3 % — %
2.1 %
8.7 %
49.2 % 30.2 %
8.4 % 20.9 % 23.4 % 17.2 % 11.7 %
46.1 % 43.9 %
7.1 %
1.1 %
5.9 % 21.4 % 30.7 % 12.7 %
20.9 % 31.6 % 28.6 %
(0.9 )%
4.2 % 48.7 %
n/a
2.3 % — % — % — % — %
0.9 %
5.3 %
0.3 %
n/a
n/a
1.5 %
n/a
n/a
n/a
n/a
n/a
n/a
4.3 %
23.5 %
31.2 %
4.6 %
3.4 %
2.6 %
— % — % — % — % — %
n/a
— % — % — % — %
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
— % — %
n/a
n/a
n/a
n/a
— %
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
The Company was incorporated on October 6, 2011, commenced underwriting operations in January 2012 and
predominantly writes a mix of personal and commercial lines. As a result, the Company has limited historical data and is
unable to present a full cycle of claim payments.
10. Reinsurance premiums ceded
From time to time, the Company purchases retrocessional coverage for one or more of the following reasons: to manage
its overall exposure, to reduce its net liability on individual risks, to obtain additional underwriting capacity and to
balance its underwriting portfolio. Additionally, 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 the Company’s interests with those of its counterparties.
In the year ended December 31, 2018, the Company entered into a quota share contract that provides coverage for
recovery of a portion of its mortgage assumed reinsurance contracts. Premiums ceded for the years ended December 31,
2018, 2017 and 2016 were $19.9 million, $2.5 million and $2.3 million, respectively. Loss and loss adjustment expenses
recoverable from the retrocessionaire are recorded as assets. Retrocession contracts do not relieve the Company from its
obligations to the insureds. Failure of retrocessionaires to honor their obligations could result in losses to the Company.
As of December 31, 2018, the Company had loss and loss adjustment expenses recoverable of $2.0 million (December
31, 2017 - $1.1 million). The Company generally obtains retrocessional coverage from companies rated “A-” or better by
A.M. Best Company, Inc. unless the retrocessionaire’s obligations are collateralized.
F-47
11. Management and performance fees
Prior to the change in the Company’s investment account structure described in Note 4, Third Point Re, Third Point Re
BDA, TPRUSA and Third Point Re USA were parties to the JV Agreements with Third Point LLC and TP GP under
which Third Point LLC managed certain jointly held assets. Effective August 31, 2018, Third Point Re, Third Point Re
BDA and Third Point Re USA entered into the 2018 LPA with TP GP, pursuant to which Third Point Re BDA and Third
Point Re USA invested in the TP Fund.
Management fees
Pursuant to both the JV Agreements and the 2018 LPA, Third Point LLC is entitled to receive monthly management fees.
Prior to the change in the Company’s investment account structure, management fees were calculated based on 1.5%,
(2.0% up to December 22, 2016), of net investments managed by Third Point LLC. As a result of the 2018 LPA effective
August 31, 2018, management fees are charged at the TP Fund level and are 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.
Performance fees
Pursuant to both the JV Agreements and the 2018 LPA, TP GP receives a performance fee allocation. Prior to the change
in the Company’s investment account structure, the performance fee allocation was equal to 20% of the net investment
income of the applicable company’s share of the net investment assets managed by Third Point LLC. As a result of the
2018 LPA effective August 31, 2018, the performance fee allocation is equal to 20% of the Company’s investment
income in the related party investment fund.
Prior to the change in the investment account structure, the performance fee accrued on net investment income was
included in liabilities as a performance fee payable to related party during the period, unless funds were redeemed from
the TPRE Limited Partners’ accounts, in which case, the proportionate share of performance fee associated with the
redemption amount was earned and allocated to TP GP’s capital account and recorded as an increase in noncontrolling
interests in related party. At the end of each year, the remaining portion of the performance fee payable that had not been
included in noncontrolling interests in related party was earned and then allocated to TP GP’s capital account.
As a result of the 2018 LPA effective August 31, 2018, 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, not 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. As of December 31, 2018, the Loss Recovery Account for Third Point
Re BDA’s investment in TP Fund was $46.8 million and for Third Point Re USA’s investment in TP Fund was $3.8
million (December 31, 2017 - $nil). These amounts have not been recorded in the Company’s consolidated balance
sheets.
For the year ended December 31, 2018, management and performance fees to related parties in the consolidated
statements of income (loss) include activity in the separate accounts up to the date of change in the investment account
structure. As a result of the 2018 LPA effective August 31, 2018, management and performance fees for the remainder of
the year ended December 31, 2018 are presented within net investment income from investment in related party
investment fund in the consolidated statements of income (loss).
F-48
The total management and performance fees to related parties, including our share of fees paid in connection with our
investment in TP Fund, for the years ended December 31, 2018, 2017 and 2016 were as follows:
Management fees - Third Point LLC
Management fees - Founders (1)
Performance fees - Third Point Advisors LLC (before loss carryforward) (2)
Performance fees - loss carryforward
$
2018
25,797 $
—
4,048
—
2017
36,733 $
—
93,978
—
2016
7,110
35,321
23,475
(6,199 )
Management and performance fees to related parties as reported in the Company’s
consolidated statement of income
29,845
130,711
59,707
Management and performance fees included in net investment loss from
investment in related party investment fund (2)
Total management and performance fees to related parties
7,376
37,221 $
—
130,711 $
—
59,707
$
(1) KEP TP Bermuda Ltd., KIA TP Bermuda Ltd., Pine Brook LVR, L.P., P RE Opportunities Ltd. and Dowling Capital Partners I,
L.P., collectively the “Founders”, received a share of the management fees in proportion to their initial investments in Third Point
Re until December 22, 2016.
(2) On the date when the Company’s investments were transferred to TP Fund, $3.4 million of performance fees payable to TP GP
were also transferred to TP Fund. As a result of the investment loss in the subsequent period, a reduction of $3.4 million in
performance fee is included in management and performance fees included in net investment loss from investment in related party
investment fund.
As of December 31, 2017, $94.0 million related to performance fees earned by TP GP were included in noncontrolling
interests in related party. See Note 19 for additional information.
12. Deposit accounted contracts
The following table represents activity in the deposit contacts for the years ended December 31, 2018, 2017 and 2016:
Balance, beginning of year
Consideration received
Consideration receivable
Net investment expense (income) allocation
Payments
Foreign currency translation
Balance, end of year
13. Senior Notes payable and letter of credit facilities
Senior Notes payable
2018
2017
2016
129,133 $
17,879
7,390
(1,273 )
(8,089 )
302
145,342 $
104,905 $
22,658
2,080
2,800
(3,545 )
235
129,133 $
83,955
22,463
—
(164 )
(915 )
(434 )
104,905
$
$
As of December 31, 2018, TPRUSA had outstanding debt obligations consisting of an aggregate principal amount of
$115.0 million of senior unsecured notes (the “Notes”) due February 13, 2025. The Notes bear interest at 7.0% and
interest is payable semi-annually on February 13 and August 13 of each year. The 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 of December 31, 2018, the
Company had capitalized $1.1 million of costs associated with the Notes, which are presented as a direct deduction from
the principal amount of the Notes on the consolidated balance sheets. As of December 31, 2018, the Notes had an
estimated fair value of $114.7 million (December 31, 2017 - $116.7 million). The fair value measurements were based on
observable inputs and therefore were considered to be Level 2. The Company was in compliance with all debt covenants
as of December 31, 2018 and 2017.
F-49
Letters of credit
As of December 31, 2018, the Company had entered into the following letter of credit facilities:
Unsecured syndicated credit facility (1)
Committed - Secured letters of credit facilities
Uncommitted - Secured letters of credit facilities (2)
Letters of Credit
Committed
Capacity
Issued
Collateral
Cash and Cash
Equivalents
$
200,000 —
$
125,000
n/a
$
145,249
59,564
144,389
349,202 $
n/a
59,564
144,389
203,953
(1) On July 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA entered into an Unsecured Revolving Credit and Letter of Credit
Facility Agreement (the “Credit Agreement”) with SunTrust Bank, SunTrust Robinson Humphrey, Inc., RBC Capital Markets and ING Capital.
The Credit Agreement provides for the issuance of up to $200.0 million of letters of credit to support obligations in connection with the
reinsurance business of Third Point Re BDA and Third Point Re USA. The Credit Agreement is fully and unconditionally guaranteed by Third
Point Reinsurance Ltd.
(2) On December 28, 2018, Third Point Re BDA and Third Point Re USA amended its facilities with Citibank under which, the previous committed
letter of credit facility agreements for $300.0 million were amended to uncommitted facilities.
The Company’s secured letter of credit facilities are bilateral agreements that generally renew on an annual basis. The
letters of credit issued under the secured letter of credit facilities are fully collateralized. The syndicated unsecured letter
of credit facility expires on July 30, 2019. See Note 3 for additional information.
14. Net investment income (loss)
Net investment income (loss) for the years ended December 31, 2018, 2017 and 2016 consisted of the following:
Net investment income (loss) by type
Net realized gains on investments and investment derivatives
Net change in unrealized gains (losses) on investments and investment derivatives
Net gains (losses) on foreign currencies
Dividend and interest income
Dividends paid on securities sold, not yet purchased
Other expenses
Management and performance fees to related parties
Net investment loss from investment in related party investment fund (1)
Net investment income (loss)
2018
2017
2016
$
$
446,646 $
(412,650 )
(7,305 )
53,523
(5,259 )
(15,696 )
(29,845 )
(280,847 )
(251,433 ) $
228,628 $
251,496
6,441
65,896
(5,724 )
(24,073 )
(130,711 )
—
391,953 $
33,624
71,704
(2,557 )
77,160
(1,977 )
(19,422 )
(59,707 )
—
98,825
(1) Effective August 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the 2018 LPA to invest in TP Fund. As a
result, the management and performance fees are presented within net investment income from investment in related party investment fund from
the effective date of the transition. See Notes 4 and 11 for additional information regarding the 2018 LPA and related management and
performance fees.
F-50
The following table provides an additional breakdown of our net investment income by asset and liability type for
the years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Net investment income (loss) by asset type
Equity securities
Private common equity securities
Private preferred equity securities
$
Total equities
Asset-backed securities
Bank debt
Corporate bonds
Municipal bonds
U.S. Treasury securities
Sovereign debt
Other debt securities
Total debt securities
Options
Rights and warrants
Real estate
Trade claims
Total other investments
Net investment income (loss) in funds valued at NAV, excluding TP Fund
Total net investment income from invested assets
Net investment income (loss) by liability type
Equity securities
Sovereign debt
Corporate bonds
Options
Total net investment income (loss) from securities sold, not yet purchased
Other investment income (losses) and other expenses not presented above
Other investment expenses
Net investment income (loss) on derivative contracts
Net investment loss on cash, including foreign exchange loss
70,646 $
(401 )
(2,680 )
67,565
20,714
5,326
(2,958 )
9,990
2,787
(7,380 )
406
28,885
(15,527 )
238
(186 )
(580 )
(16,055 )
(723 )
79,672
(32,407 )
—
(2,452 )
21,697
(13,162 )
903
644
(14,885 )
467,527 $
(6 )
5,764
473,285
12,571
8,868
6,462
—
2,366
21,553
2,546
54,366
(33,510 )
169
502
(89 )
(32,928 )
10,309
505,032
(35,643 )
—
(1,725 )
(2,907 )
(40,275 )
(5,103 )
61,978
(1,454 )
Net investment losses on securities purchased under an agreement to sell and
securities sold under and agreement to repurchase
Withholding taxes reclassified to income tax expense
Total other investment income (losses) and other expenses
Management and performance fees to related parties
Net investment loss from investment in related party investment fund (1)
Net investment income (loss)
(238 )
6,325
(7,251 )
(29,845 )
(280,847 )
(251,433 ) $
(87 )
2,573
57,907
(130,711 )
—
391,953 $
$
78,955
333
4,146
83,434
1,166
6,887
115,568
—
2,605
8,267
—
134,493
(28,426 )
(370 )
—
116
(28,680 )
1,330
190,577
(11,725 )
(382 )
(4,195 )
11,272
(5,030 )
(6,068 )
(15,479 )
(10,173 )
(1,970 )
6,675
(27,015 )
(59,707 )
—
98,825
(1) Effective August 31, 2018, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the 2018 LPA to invest in TP Fund. As a
result, the management and performance fees are presented within net investment income from investment in related party investment fund from
the effective date of the transition. See Notes 4 and 11 for additional information regarding the 2018 LPA and related management and
performance fees.
F-51
15. Other expenses
Other expenses for the years ended December 31, 2018, 2017 and 2016 consisted of the following:
Investment expense (income) on deposit liabilities
Investment expense and change in fair value of embedded derivatives in
reinsurance contracts
2018
2017
2016
$
(1,273 ) $
2,800 $
(164 )
10,883
9,610 $
9,874
12,674 $
$
8,551
8,387
16. Income taxes
The Company provides for income tax expense or benefit based upon pre-tax income or loss reported in the consolidated
statements of income (loss) and the provisions of currently enacted tax laws. The Company and its Bermuda subsidiaries
are incorporated under the laws of Bermuda and are subject to Bermuda law with respect to taxation. Under current
Bermuda law, the Company and its Bermuda subsidiaries are not subject to any income or capital gains taxes in
Bermuda. In the event that such taxes are imposed, the Company and its Bermuda subsidiaries would be exempted from
any such taxes until March 2035 under the Tax Assurance Certificates issued to such entities pursuant to the Bermuda
Exempted Undertakings Tax Protection Act of 1966, as amended.
The Company has an operating subsidiary incorporated in Bermuda, Third Point Re USA, which made an election to pay
tax in the United States of America under Section 953(d) of the U.S. Internal Revenue Code of 1986, as amended. Our
non-U.S. subsidiaries would become subject to U.S. federal income tax only to the extent that they derive income from
activity that is deemed to be the conduct of a trade or business within the United States. On December 22, 2017, the U.S.
government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S.
federal corporate tax rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax (AMT) and changing
how existing AMT credits can be realized; (3) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; and
(4) creating a new limitation on deductible interest expense.
As a result of the change in the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018, the Company
had recorded a decrease related to deferred tax assets and deferred tax liabilities of $6.0 million and $6.8 million,
respectively, with a corresponding net adjustment decreasing deferred income tax expense by $0.8 million for the year
ended December 31, 2017. Although the Company believes that it has accounted for the most significant tax effects of
the Tax Act, there may be further changes that could impact the Company’s calculations of certain deferred tax amounts.
For example, the Company has not fully incorporated the revisions to the discounting rules for loss reserves into its
calculation of this deferred tax asset. The Company does not anticipate material changes to its effective tax rate as a
result of the other changes included in the Tax Act.
The Company also has subsidiaries in the United Kingdom, TPRUK and Third Point Re UK, which are subject to
applicable taxes in that jurisdiction.
Prior to the change in the Company’s investment account structure described in Note 4, the Company was subject to
withholding taxes on income sourced in the United States and in other countries, subject to each countries’ specific tax
regulations. Income subject to withholding taxes includes, but is not limited to, dividends, capital gains and interest on
certain investments. In addition, the Company had recorded uncertain tax positions related to certain investment
transactions in certain foreign jurisdictions. As of December 31, 2018, the Company has accrued $1.5 million
(December 31, 2017 - $1.9 million).
F-52
For the years ended December 31, 2018, 2017 and 2016, the Company recorded income tax expense (benefit), as
follows:
Income tax expense (benefit) related to U.S. and U.K. subsidiaries
Change in uncertain tax positions
Withholding taxes on certain investment transactions
2018
2017
2016
$
$
(10,035 ) $
(300 )
6,325
(4,010 ) $
9,248 $
155
2,573
11,976 $
(1,232 )
147
6,678
5,593
The following is a summary of the Company’s income (loss) before income tax expense (benefit) by jurisdiction for the
years ended December 31, 2018, 2017 and 2016:
Bermuda
United States
United Kingdom
2018
(273,697 ) $
$
(47,771 )
(11 )
$
(321,479 ) $
2017
266,497 $
27,172
78
293,747 $
2016
38,243
(3,687 )
(87 )
34,469
The Company’s expected income tax provision computed on pre-tax income at the weighted average tax rate has been
calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax
rate. Statutory tax rates of 0.0%, 21.0% and 19.0% have been used for Bermuda, the United States and the United
Kingdom, respectively. As of December 31, 2018, the Company has income tax returns open for examination in the
United States for the tax years 2015, 2016 and 2017.
The following table presents a reconciliation of expected income taxes to income tax expense (benefit) for the years
ended December 31, 2018, 2017 and 2016:
Bermuda (expected tax expense at 0%)
Foreign taxes at local expected rates:
United States
United Kingdom
Withholding taxes related to dividend and interest income
Uncertain tax positions
Non-deductible expenses and other
2018
2017
2016
$
— $
— $
—
(10,032 )
(2 )
6,325
(300 )
(1 )
$
(4,010 ) $
9,510
15
2,573
155
(277 )
11,976 $
(1,290 )
(17 )
6,678
147
75
5,593
The following table presents the Company’s current and deferred incomes taxes for the years ended December 31, 2018,
2017 and 2016:
Current tax expense
Deferred tax expense (benefit)
2018
2017
2016
$
$
6,025 $
(10,035 )
(4,010 ) $
2,824 $
9,152
11,976 $
6,825
(1,232 )
5,593
F-53
The following table presents the tax effects of temporary differences that give rise to the deferred tax assets and deferred
tax liabilities as of December 31, 2018, 2017 and 2016:
Deferred tax assets:
Discounting of loss and loss adjustment expense reserves
$
Unearned premiums
Temporary differences in recognition of expenses
Net operating loss carryforward
Total deferred tax assets
Deferred tax liabilities:
Deferred acquisition costs
Unrealized losses (gains) on investments
Total deferred tax liabilities
Net deferred tax asset (liability)
$
2018
2017
2016
534 $
1,567
1,247
6,798
10,146
1,490
(405 )
1,085
9,061 $
330 $
1,634
138
7,048
9,150
7,798
2,435
10,233
(1,083 ) $
451
2,486
1,134
13,326
17,397
4,079
5,438
9,517
7,880
The deferred tax assets and liabilities as of December 31, 2018 were primarily related to U.S. income tax. To evaluate the
recoverability of the deferred tax assets, the Company considers the timing of the reversal of deferred income and
expense items as well as the likelihood that the Company will generate sufficient taxable income to realize future tax
benefits. The Company believes that it is more likely than not that it will generate sufficient taxable income and realize
the future tax benefits in order to recover the deferred assets and, accordingly, no valuation allowance was recorded as of
December 31, 2018 and 2017. As of December 31, 2018, deferred tax assets include $32.3 million of net operating losses
generated prior to January 1, 2018 that can be carried forward for twenty years and part of which will begin to expire in
2035.
17. Share capital
The following tables present a summary of the common shares issued and outstanding and shares repurchased held as
treasury shares as of and for the years ended December 31, 2018, 2017 and 2016:
Common shares
Common shares issued, beginning of period
Options exercised
Restricted shares granted, net of forfeitures
Performance restricted shares granted, net of forfeitures and shares withheld
Retirement of treasury shares and shares repurchased (1)
Warrants exercised, net (2)
Common shares issued, end of period
Treasury shares, end of year
Common shares outstanding, end of year
2018
2017
107,227,347
—
50,644
106,501,299
150,802
(35,011 )
2016
105,479,341
514,059
47,712
256,106
(14,256,043 )
361,556
93,639,610
—
93,639,610
610,257
—
—
107,227,347
(3,944,920 )
103,282,427
460,187
—
—
106,501,299
(644,768 )
105,856,531
(1) Prior to December 31, 2017, common shares repurchased by the Company were not canceled and were classified as treasury shares. Effective
January 1, 2018, all treasury shares were retired and future shares repurchased will be retired.
(2) During the year ended December 31, 2018, 1,156,184 warrants were exercised. As a result of the warrant holder electing net settlement, 794,628
of those common shares were withheld by the Company and were subsequently retired, resulting in a net issuance of 361,556 common shares.
F-54
Authorized and issued
The Company’s authorized share capital of $33.0 million is comprised of 300,000,000 common shares with a par value
of $0.10 each and 30,000,000 preference shares with a par value of $0.10 each. No preference shares have been issued to
date.
Share repurchases
On May 4, 2016, the Company’s Board of Directors authorized a common share repurchase program for up to an
aggregate of $100.0 million of the Company’s outstanding common shares.
On February 28, 2018, the Company’s Board of Directors authorized the repurchase of an additional $148.3 million of
common shares, which together with the shares remaining under the previously announced share repurchase program,
would allow the Company to repurchase up to $200.0 million more of the Company’s outstanding common shares in the
aggregate. Under the common share repurchase program, the Company may repurchase shares from time to time in
privately negotiated transactions or in open-market purchases in accordance with all applicable securities laws and
regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.
During the year ended December 31, 2018, the Company repurchased 10,311,123 (December 31, 2017 - 3,300,152) of its
common shares in the open market for an aggregate cost of $138.7 million (December 31, 2017 - $40.9 million) at a
weighted average cost, including commissions, of $13.45 (December 31, 2017 - $12.38) per share. Common shares
repurchased by the Company during the year were retired. In addition, the Company also retired all shares previously
held in treasury.
As of December 31, 2018, the Company is authorized to repurchase up to an aggregate of $61.3 million of additional
common shares under its share repurchase program.
Warrants
The Company’s Founders and an advisor provided insurance industry expertise, resources and relationships to ensure
that the Company would be fully operational with key management in place in time for the January 2012 underwriting
season. In consideration of these commitments, the Company reserved for issuance to the Founders and an advisor
warrants to purchase, in the aggregate, up to 4.0% (Founders 3.5% and an advisor 0.5%) of the diluted shares (up to a
maximum of $1 billion of subscribed shares) provided that the Founders and the advisor will not be issued any warrants
for common shares issued in consideration for any capital raised by the Company in excess of $1 billion. The following
is a summary of warrants as of December 31, 2018:
Founders
Advisor
Exercise price
Authorized and
issued
Aggregated fair
value of
warrants
$
$
10.00
10.00
2,913,684 $
581,295
3,494,979 $
10,884
2,171
13,055
The warrants expire 10 years from the date of issuance, December 22, 2011, and will be exercisable at a price per share
of $10.00, which is equal to the price per share paid by investors in the initial private offering.
18. Share-based compensation
On July 15, 2013, the Third Point Re 2013 Omnibus Incentive Plan (“Omnibus Plan”) was approved by the Board of
Directors and subsequently on August 2, 2013 by the Shareholders of the Company. An aggregate of 21,627,906
common shares were made available under the Omnibus Plan. This number of shares includes the shares available under
the Third Point Re Share Incentive Plan (“Share Incentive Plan”). Awards under the Omnibus Plan may be made in the
form of performance awards, restricted shares, restricted share units, share options, share appreciation rights and other
share-based awards.
F-55
As of December 31, 2018, 9,017,930 (December 31, 2017 - 9,330,000) of the Company’s common shares were available
for future issuance under the equity incentive compensation plans.
The following table provides the total share-based compensation expense included in general and administrative
expenses during the years ended December 31, 2018, 2017 and 2016:
Management and director options
Restricted shares with service condition(1)
Restricted shares with service and performance condition
2018
2017
2016
275 $
611
4,070
4,956 $
648 $
(331 )
3,282
3,599 $
6,054
1,365
1,519
8,938
$
$
(1) Net of forfeitures of $nil in the year ended December 31, 2018 (December 31, 2017 - $0.9 million and December 31, 2016 - $nil)
As of December 31, 2018, the Company had $7.4 million (December 31, 2017 - $5.8 million) of unamortized share
compensation expense, which is expected to be amortized over a weighted average period of 1.4 years (December 31,
2017 - 1.5 years).
Management and director options
The management options issued under the Share Incentive Plan were subject to a service and performance condition.
The service condition will be met with respect to 20% of the management options on each of the first five anniversary
dates following the grant date of the management options. The performance condition with respect to the management
options was met as a result of the Company’s IPO.
The management and director options activity for the years ended December 31, 2018, 2017 and 2016 were as follows:
Balance as of January 1, 2016
Forfeited
Exercised
Balance as of January 1, 2017
Forfeited
Exercised
Balance as of January 1, 2018
Forfeited
Exercised
Balance as of December 31, 2018
Number of
options
10,250,586 $
(139,534 )
(514,059 )
9,596,993
(558,138 )
(150,802 )
8,888,053
—
—
8,888,053 $
Weighted
average exercise
price
13.52
18.00
10.00
13.64
18.00
10.00
13.43
—
—
13.43
The fair value of share options issued were estimated on the grant date using the Black-Scholes option-pricing model.
There were no share options granted in the years ended December 31, 2018 and 2017. As of December 31, 2018, the
weighted average remaining contractual term for options outstanding and exercisable was 3.2 years and 3.2 years,
respectively (2017 - 4.2 years and 4.1 years, respectively).
F-56
The following table summarizes information about the Company’s management and director share options outstanding as
of December 31, 2018:
Range of exercise prices
$10.00 - $10.89
$15.05 - $16.89
$20.00 - $25.05
Options outstanding
Options exercisable
Number of
options
5,123,531 $
1,917,145 $
1,847,377 $
8,888,053 $
Weighted
average
exercise price
10.04
15.93
20.26
13.43
Remaining
contractual
life
3.1 years
3.3 years
3.2 years
3.2 years
Number of
options
5,123,531 $
1,917,145 $
1,847,377 $
8,888,053 $
Weighted
average
exercise price
10.04
15.93
20.26
13.43
As the Company’s closing share price on December 31, 2018 was below $10.00, there was no aggregate intrinsic value
of options outstanding and options exercisable. As of December 31, 2017, the aggregate intrinsic value of options
outstanding and options exercisable was $23.6 million and $23.4 million, respectively. For the year ended December 31,
2018, the Company received proceeds of $nil (2017 - $1.5 million) from the exercise of options.
Restricted shares with service condition
Restricted shares vest either ratably or at the end of the required service period and contain certain restrictions during the
vesting period, relating to, among other things, forfeiture in the event of termination of employment or service and
transferability.
Restricted share award activity for the restricted shares with only a service condition for the years ended December 31,
2018, 2017 and 2016 was as follows:
Balance as of January 1, 2016
Granted
Vested
Balance as of January 1, 2017
Granted
Forfeited
Vested
Balance as of January 1, 2018
Granted
Vested
Balance as of December 31, 2018
Number of non-
vested restricted
shares
301,043 $
47,712
(47,712 )
301,043
36,418
(71,429 )
(247,823 )
18,209
50,644
(44,788 )
24,065 $
Weighted
average grant
date fair value
11.12
11.37
11.37
11.12
12.15
14.00
10.36
12.15
13.45
12.97
13.35
For the year ended December 31, 2018, the Company issued 50,644 (2017 - 36,418 and 2016 - 47,712) to directors and
nil (2017 - nil and 2016 - nil) restricted shares to employees. The restricted shares issued to employees in 2015 had an
original vesting period of three years from the date of issuance, however, as a result of the grantee’s departure from the
Company, these shares were forfeited in the year ended December 31, 2017. The restricted shares issued in 2016 to
directors vested on December 31, 2016. The restricted shares issued to directors in 2017 and 2018 vest quarterly on July
31, October 31, January 31 and April 30, of each year.
Restricted shares with service and performance condition
Beginning in December 2014, the Company granted on an annual basis performance-based restricted shares to certain
employees pursuant to the Omnibus Plan. Performance-based restricted shares vest based on continued service and the
achievement of certain financial performance measures over a three-year measurement period. The number of
F-57
performance-based restricted shares that will be retained upon vesting will vary based on the level of achievement of the
performance goals. The formula for determining the amount of shares that will vest is based on underwriting
performance of the property and casualty reinsurance segment including underwriting income and the amount of float
generated, as defined in the relevant award agreements.
Restricted share award activity for the restricted shares with a service and performance condition for the years ended
December 31, 2018, 2017 and 2016 was as follows:
Balance as of January 1, 2016
Granted
Forfeited
Change in estimated restricted shares considered probable of vesting
Balance as of January 1, 2017
Granted
Forfeited
Vested
Change in estimated restricted shares considered probable of vesting
Balance as of January 1, 2018
Granted
Forfeited
Vested
Change in estimated restricted shares considered probable of vesting
Balance as of December 31, 2018
Defined contribution retirement plans
Number of non-
vested restricted
shares
Number of non-
vested restricted
shares probable
of vesting
921,553
653,958
(193,771 )
n/a
1,381,740
935,825
(325,568 )
(136,618 )
n/a
1,855,379
556,403
(294,977 )
(115,757 )
n/a
2,001,048
536,234 $
435,974
(119,009 )
(275,713 )
577,486
623,882
(45,617 )
(136,618 )
(131,930 )
887,203
370,931
(4,102 )
(115,757 )
46,945
1,185,220 $
Weighted
average grant
date fair value
14.24
11.40
13.16
13.06
12.91
12.66
12.57
14.60
12.17
12.60
14.01
13.98
14.00
13.35
12.80
The Company's employees are eligible for retirement benefits through defined contribution retirement plans. The
Company and employees contribute an amount equal to a specified percentage of each employee's salary. Expenses
related to the defined contribution plans were $0.9 million for the year ended December 31, 2018 (2017 - $0.8 million
and 2016 - $0.8 million)
19. Noncontrolling interests in related party
Noncontrolling interests in related party represents the portion of equity in consolidated subsidiaries not attributable,
directly or indirectly, to the Company. Prior to the change in the Company’s investment account structure described in
Note 4, the joint ventures created through the JV Agreements (Note 4) had been considered variable interest entities and
had been consolidated in accordance with ASC 810, Consolidation (ASC 810). Since the Company was deemed to be the
primary beneficiary, the Company had consolidated the joint ventures and recorded TP GP’s minority interests as
redeemable noncontrolling interests in related party and noncontrolling interests in related party in the consolidated
balance sheets.
A portion of the noncontrolling interest in investment affiliates was subject to contractual withdrawal rights of TP GP,
whereas TP GP, at its sole discretion, could withdraw the capital over the minimum capital required to be maintained in
its capital accounts. This excess capital was therefore recorded on the Company’s consolidated balance sheets as
redeemable noncontrolling interest in related party whereas the required minimum capital was recorded as
noncontrolling interests in related party within shareholders’ equity on the Company’s consolidated balance sheets since
it does not have withdrawal rights.
F-58
The following table is a reconciliation of the beginning and ending carrying amounts of redeemable noncontrolling
interests in related party, noncontrolling interests in related party and total noncontrolling interests in related party for the
years ended December 31, 2018 and 2017:
Balance, beginning of period $
Changes in capital account
allocation (1)
Balance, end of period
$
Redeemable noncontrolling
interests in related party
Noncontrolling interests in
related party
Total noncontrolling interests
in related party
2018
108,219 $
2017
2018
2017
— $
5,407 $
35,674 $
2018
113,626 $
2017
35,674
(108,219 )
— $
108,219
108,219 $
(5,407 )
— $
(30,267 )
5,407 $
(113,626 )
— $
77,952
113,626
(1) Changes in capital account allocation include TP GP's redemption in conjunction with the change in the investment account structure. See Note 4
for additional information.
In addition, the following table is a reconciliation of beginning and ending carrying amount of total noncontrolling
interests in related party resulting from the consolidation of the Company’s joint venture in Third Point Re BDA and
Third Point Re USA:
Balance, beginning of period $
97,619 $
30,358 $
16,007 $
5,316 $
2018
2017
2018
2017
2018
113,626 $
2017
35,674
Third Point Re BDA
Third Point Re USA
Total
Net income attributable to total
noncontrolling interests in
related party
Contributions (1)
Redemptions (2)
Balance, end of period
$
141
564
(98,324 )
— $
3,167
82,093
(17,999 )
97,619 $
82
80
(16,169 )
— $
806
11,885
(2,000 )
16,007 $
223
644
(114,493 )
— $
3,973
93,978
(19,999 )
113,626
(1) Contributions include performance fees earned during the period. See Note 11 for additional information.
(2) Redemptions include TP GP's redemption in conjunction with the change in the investment account structure. See Note 4 for additional
information.
Non-consolidated variable interest entities
Third Point Enhanced LP
TP Fund meets the definition of a variable interest entity principally because of the existence of disproportionate rights in
the partnership compared to the obligations to absorb the expected losses and right to receive the expected residual
returns of TP Fund’s results. As of December 31, 2018, the Company and TP GP hold interests of approximately 87.3%
and 12.5%, respectively, of the net asset value of TP Fund. As a result, both entities hold significant financial interests in
TP Fund. However, TP GP controls all of the investment decision making authority and the Company does not have the
power to direct the activities which most significantly impact the economic performance of TP Fund. As a result, the
Company is not considered the primary beneficiary and does not consolidate TP Fund.
Realized gains or losses upon any redemptions of investments are calculated using the weighted average method and the
Company records contributions and withdrawals related to its investment in the TP Fund on the transaction date. As of
December 31, 2018, the Company had no unfunded commitments related to TP Fund and the Company’s maximum
exposure to loss corresponds to the value of its investments in TP Fund.
Under the 2018 LPA, the TPRE Limited Partners have the right to withdraw funds weekly from TP Fund to pay claims
and expenses as needed, to meet capital adequacy requirements and to satisfy financing obligations. The TPRE Limited
Partners may also withdraw their investment upon the occurrence of certain events specified in the 2018 LPA and may
withdraw their investment in full on December 31, 2021 and each successive three-year anniversary of such date.
F-59
Non-consolidated variable interest entities under previous investment account structure
Prior to the change in the Company’s investment account structure, the Company invested directly in several limited
partnerships and other investment vehicles. Some of these entities were affiliated with TP Fund’s investment manager,
Third Point LLC. The activities of these variable interest entities were generally limited to holding investments and the
Company’s involvement in these entities was passive in nature. The Company did not have the power to direct the
activities which most significantly impacted the variable interest entities economic performance and therefore, the
Company was not the primary beneficiary of these variable interest entities. The Company elected the practical expedient
for estimating fair value for these investments and reported the investments based on the reported NAV with changes in
fair value recognized within the consolidated statements of income (loss). The following summarizes all of the
Company’s investment in variable interest entities that were not consolidated prior to the change in the investment
account structure:
TP Lux Holdco LP
Prior to the change in the Company’s investment account structure, the Company was a limited partner in TP Lux Holdco
LP (the “Cayman HoldCo”), which was an affiliate of the Investment Manager. The Cayman HoldCo was formed as a
limited partnership under the laws of the Cayman Islands and invests and held debt and equity interests in TP Lux
HoldCo S.a.r.l, a Luxembourg private limited liability company (the “LuxCo”) established under the laws of the Grand-
Duchy of Luxembourg, which was also an affiliate of the Investment Manager. LuxCo’s principal objective was to act as
a collective investment vehicle to purchase certain European debt and equity investments. The Company invested in the
Cayman HoldCo alongside other investment funds managed by the Investment Manager.
During the period from January 1, 2018 to September 4, 2018, the date when the Company’s investment in TP Lux
Holdco was transferred to TP Fund, the Company received net distributions of $0.6 million (2017 - $39.6 million) from
the Cayman HoldCo.
As a result of the change in the investment account structure, the Company’s investment of $0.3 million in the limited
partnership was transferred to the TP Fund. The estimated fair value of the investment in the limited partnership as of
December 31, 2017 was $0.6 million, representing a 15.6% interest.
Third Point Hellenic Recovery US Feeder Fund, L.P.
Prior to the change in the Company’s investment account structure, the Company was a limited partner in Third Point
Hellenic Recovery US Feeder Fund, L.P. (the “Hellenic Fund”), which was an affiliate of the Investment Manager. The
Hellenic Fund was formed as a limited partnership under the laws of the Cayman Islands on April 12, 2013 and invests
and holds debt and equity interests in Greek Cypriot companies.
No capital distributions or calls were made during the period from January 1, 2018 to September 4, 2018, the date when
the Company’s investment in the Hellenic Fund was transferred to TP Fund (2017 - $1.5 million net distributions).
As a result of the change in the investment account structure, the Company’s investment of $4.9 million in the limited
partnership was transferred to the TP Fund. The estimated fair value of the investment in the limited partnership as of
December 31, 2017 was $4.9 million, representing a 2.9% interest.
TP DR Holdings LLC
Prior to the change in the Company’s investment account structure, the Company held an equity and debt investment in
TP DR Holdings LLC (“TP DR”), which was an affiliate of the Investment Manager. In December 2016, TP DR was
formed as a limited liability company under the laws of the Cayman Islands to invest and own 100% equity interest in
DCA Holdings Six Ltd. and its wholly owned subsidiary group. TP DR’s principal objective was to own, develop and
manage properties in the Dominican Republic. The Company invested in TP DR alongside other investment funds
managed by the Investment Manager and third-party investors.
During the period from January 1, 2018 to September 4, 2018, the date when the Company’s investment in TP DR was
transferred to TP Fund, the Company contributed cash of $3.0 million (2017 - $2.4 million) to TP DR.
F-60
As a result of the change in the investment account structure, the Company’s investment of $16.8 million in TP DR was
transferred to the TP Fund. As of December 31, 2017, the estimated fair value of the investment was $12.7 million,
corresponding to $3.7 million of equity, representing a 7.0% interest, and $9.0 million of debt, representing a 13.1%
interest.
Cloudbreak II Cayman Ltd and TP Trading II LLC
Prior to the change in the Company’s investment account structure, the Company directly held an equity interest in
Cloudbreak II Cayman Ltd, Cloudbreak II US LLC (collectively, the “Cloudbreak entities”) and TP Trading II LLC
which are affiliates of the Investment Manager. The Company invested in the Cloudbreak entities and TP Trading II
LLC alongside other investment funds managed by the Investment Manager. These entities’ were invested in a structure
whose primary purpose was to purchase consumer loans and warrants from a marketplace lending platform.
As a result of the change in the investment account structure, $3.4 million of the Company’s asset-backed security
investments were transferred to the TP Fund. As of December 31, 2017, the Cloudbreak entities held $4.6 million of the
Company’s asset-backed security investments, which were included in investments in securities in the consolidated
balance sheet. The Company’s pro rata interest in the underlying investments was registered in the name of Cloudbreak
II US LLC and the related income and expense were reflected in the consolidated balance sheets and the consolidated
statements of income (loss).
As a result of the change in the investment account structure, the Company’s equity investment of $4.4 million in TP
Trading II LLC was transferred to the TP Fund. As of December 31, 2017, the estimated fair value of the investment was
$6.0 million, representing a 9.3% interest.
Ventures Entities
Prior to the change in the Company’s investment account structure, the Company held equity interests in Venture Three
Holdings LLC, Venture Four Holdings LLC, Venture Five Holdings LLC and Venture Six Holdings LLC (collectively,
the “Ventures entities”), which were affiliates of the Investment Manager. The Company invested in the Ventures entities
alongside other investment funds managed by the Investment Manager. The primary purpose of these entities was to
make investments in direct commercial real estate, real estate debt and a publicly traded telecommunications company.
As a result of the change in the investment account structure, $20.8 million of the Company’s real estate and other debt
investments were transferred to the TP Fund. As of December 31, 2017, the Ventures entities held $7.5 million of the
Company’s investments, which were included in investments in securities in the consolidated balance sheets. The
Company recorded changes in the fair value of this investment in the consolidated statements of income (loss).
Cloudbreak Aggregator LP
Prior to the change in the Company’s investment account structure, the Company held equity interests in Cloudbreak
Aggregator LP, which was an affiliate of the Investment Manager. The Company invested in the Cloudbreak Aggregator
LP alongside other investment funds managed by the Investment Manager. The primary purpose of this entity was to
invest in Far Point LLC, the sponsor of Far Point Acquisition Corporation “FPAC”. FPAC is a NYSE listed special
acquisition corporation.
As a result of the change in the investment account structure, the Company’s equity investment of $4.5 million in the
Cloudbreak Aggregator LP was transferred to the TP Fund. As of December 31, 2017 the Company did not hold an
equity interest in the Cloudbreak Aggregator LP.
F-61
20. Earnings (loss) per share available to Third Point Re common shareholders
The following sets forth the computation of basic and diluted earnings (loss) per share available to Third Point Re
common shareholders for the years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Weighted-average number of common shares outstanding:
Basic number of common shares outstanding
Dilutive effect of options
Dilutive effect of warrants
($ in thousands, except share and per share amounts)
102,264,094 104,060,052
633,955
709,499
97,054,315
—
—
1,392,384
1,270,957
Dilutive effect of restricted shares with service and performance
condition
Diluted number of common shares outstanding
Basic earnings (loss) per common share:
Net income (loss) available to Third Point Re common shareholders
Net income allocated to Third Point Re participating common
shareholders
Net income (loss) allocated to Third Point Re common shareholders
Basic earnings (loss) per share available to Third Point Re common
shareholders
Diluted earnings (loss) per common share:
Net income (loss) available to Third Point Re common shareholders
Net income allocated to Third Point Re participating common
shareholders
Net income (loss) allocated to Third Point Re common shareholders
Diluted earnings (loss) per share available to Third Point Re common
shareholders
$
$
$
$
$
$
—
97,054,315
299,603
160,278
105,227,038 105,563,784
(317,692 ) $
277,798 $
27,635
—
(317,692 ) $
(263 )
277,535 $
(88 )
27,547
(3.27 ) $
2.71
$
0.26
(317,692 ) $
277,798 $
27,635
—
(317,692 ) $
(256 )
277,542 $
(87 )
27,548
(3.27 ) $
2.64
$
0.26
As a result of the net loss for the year ended December 31, 2018, dilutive options, warrants and restricted shares with
service and performance conditions totaling 9,820,795 were considered anti-dilutive and were excluded from the
computation of diluted loss per common share. No allocation of the net loss has been made to participating shares in the
calculation of diluted net loss per common share.
For the years ended December 31, 2017 and 2016, anti-dilutive options of 4,056,588 and 4,369,171, respectively, were
excluded from the computation of diluted earnings per share.
21. Related party transactions
In addition to the transactions disclosed in Notes 4, 11 and 19 to these consolidated financial statements, the following
transactions are classified as related party transactions, as the counterparties have either a direct or indirect shareholding
in the Company or the Company has an investment in such counterparty.
Prior to the change in the Company’s investment account structure described in Note 4, Third Point Loan L.L.C. (“Loan
LLC”) and Third Point Ventures LLC (“Ventures LLC” and, together with Loan LLC, “Nominees”) served as nominees
of the Company and other affiliated investment management clients of the Investment Manager for certain investments.
The Nominees appointed the Investment Manager as its true and lawful agent and attorney. As of December 31, 2017,
Loan LLC held $99.6 million and Ventures LLC held $6.3 million of the Company’s investments, which were included
in investments in securities and derivative contracts in the consolidated balance sheets. The Company’s pro rata interest
in the underlying investments registered in the name of the Nominees and the related income and expense were reflected
in the consolidated balance sheets and the consolidated statements of income (loss). The valuation policy, with respect to
investments held by the nominees, is further discussed in Note 4.
BlackRock, Inc. (“BlackRock”) reported a beneficial ownership interest of more than 10% of the Company’s common
shares as of December 31, 2017. As a result, BlackRock is considered a related party as defined by U.S. GAAP. Prior to
F-62
the change in the Company’s investment account structure, the Company sold its equity securities in BlackRock. As of
December 31, 2017, $106.5 million of equity securities in BlackRock were included in the Company’s consolidated
balance sheets. Included in the Company’s net investment income (loss) in its consolidated statements of income (loss)
for the year ended December 31, 2018 was $(0.2) million (2017 - $23.3 million) of investment income (loss) associated
with the Company’s investment in BlackRock.
22. Financial instruments with off-balance sheet risk or concentrations of credit risk
Off-balance sheet risk
Subsequent to the change in the Company’s investment account structure described in Note 4, the Company does not
own directly the net investment assets and related liabilities but instead, owns limited partnership interests in TP Fund.
There are no off-balance sheet risks associated with the Company’s investment in TP Fund. The Company’s maximum
exposure to loss associated with its investment in the TP Fund corresponds to the carrying value of its investments in TP
Fund.
Prior to the change in the Company’s investment account structure described in Note 4, the Company traded various
financial instruments and engaged in various investment activities with off-balance sheet risk. These financial
instruments included securities sold, not yet purchased, forwards, futures, options, swaptions, swaps and contracts for
differences. These financial instruments are now part of the underlying investment activities of TP Fund. Generally, these
financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at
specified future dates. Each of these financial instruments contain varying degrees of off-balance sheet risk whereby
changes in the fair values of the securities underlying the financial instruments or fluctuations in interest rates and index
values could have exceeded the amounts recognized in the consolidated balance sheets.
Prior to the change in the Company’s investment account structure, the Company traded and held certain derivative
contracts, such as written options, which constitute guarantees. These type of investments are now part of the underlying
investment securities held by TP Fund.
Swaption contracts gave the Company the right, but not the obligation, to enter into a specified interest-rate swap within
a specified period of time. The Company’s market and counterparty credit risk was limited to the premium paid to enter
into the swaption contract and net unrealized gains.
Total return swaps, contracts for differences, index swaps, and interest rate swaps that involve the exchange of cash
flows between the Company and counterparties were based on the change in the fair value of a particular equity, index,
or interest rate on a specified notional holding. The use of these contracts exposed the Company to market risks
equivalent to actually holding securities of the notional value but typically involved little capital commitment relative to
the exposure achieved. The gains or losses of the Company may therefore have been magnified on the capital
commitment. These type of investments are now part of the investment strategies of the TP Fund.
Credit derivatives
Credit default swaps protect the buyer against the loss of principal on one or more underlying bonds, loans, or mortgages
in the event the issuer suffers a credit event. Prior to the change in the investment account structure described in Note 4,
the Company directly held these type of securities. Those securities are no longer held by the Company but instead, are
included in the TP Fund’s investment strategies.
Prior to the change in the Company’s investment account structure, the Company entered into index and/or basket credit
default swaps where the credit derivative may reference a basket of single-name credit default swaps or a broad-based
index. Generally, in the event of a default on one of the underlying names, the buyer would receive a pro-rata portion of
the total notional amount of the credit default index or basket contract from the seller. When the Company purchased
single-name, index and basket credit default swaps, the Company was exposed to counterparty nonperformance.
F-63
The following table sets forth certain information related to the Company’s written credit derivatives as of December 31,
2017:
Maximum Payout/ Notional Amount
(by period of expiration)
Fair Value of Written Credit Derivatives (2)
Credit Spreads on
underlying (basis points)
0-5 years
5 years or
Greater Expiring
Through 2047
Total Written
Credit Default
Swaps (1)
Asset
Liability
Net
Asset/(Liabilit
y)
Single name (0 - 250)
$
— $
2,351 $
2,351 $
— $
2,085 $
(2,085 )
(1) As of December 31, 2017, the Company did not hold any offsetting buy protection credit derivatives with the same underlying
reference obligation.
(2) Fair value amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting.
Concentrations of credit risk
Investments
Subsequent to the change in the Company’s investment account structure described in Note 4, the Company does not
own directly the net investment assets but instead, owns limited partnership interests in TP Fund. As a result, the
Company is no longer exposed directly to credit risk associated with its net investment assets it used to hold. The
Company’s maximum exposure to loss associated its investment in the TP Fund corresponds to the carrying value of its
investments in TP Fund. The Company does not have any unfunded capital commitments associated with its investment
in TP Fund.
Prior to the change in the Company’s investment account structure, the Company was subject to concentrations of credit
risk with certain counterparties. Substantially all securities transactions and individual counterparty concentrations were
with major securities firms, such as prime brokers or their affiliates. The Company reduced its credit risk with
counterparties by entering into master netting agreements. Furthermore, the Company obtained collateral from
counterparties to reduce its exposure to counterparty credit risk.
Underwriting
The Company is exposed to credit risk through reinsurance contracts with companies that write credit risk insurance. The
Company’s portfolio of risk is predominantly U.S. mortgage insurance and mortgage credit risk transfer. The Company
provides its 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. The Company proactively manages the risks associated with
these credit-sensitive lines of business by closely monitoring its risk aggregation and by diversifying the underlying risks
where possible. The Company has bought some retrocessional coverage against a subset of these risks.
The Company has exposure to credit risk as it relates to its business written through brokers, if any of the Company’s
brokers are unable to fulfill their contractual obligations with respect to payments to the Company. In addition, in some
jurisdictions, if the broker fails to make payments to the insured under the Company’s policy, the Company may remain
liable to the insured for the deficiency. The Company’s exposure to such credit risk is somewhat mitigated in certain
jurisdictions by contractual terms.
The Company has exposure to credit risk related to balances receivable under our reinsurance contracts, including funds
withheld and premiums receivable, and the possibility that counterparties may default on their obligations to the
Company. The risk of counterparty default is partially mitigated by the fact that any amount owed from a reinsurance
counterparty would be netted against any losses or acquisition costs the Company would pay in the future. The Company
monitors the collectability of these balances on a regular basis.
F-64
23. Commitments and Contingencies
Operating leases
The Company leases offices space in Bermuda and in New Jersey, U.S.A. The leases have been accounted for as
operating leases. Total rent expense for each of the years ended December 31, 2018, 2017 and 2016 were $0.8 million.
Future minimum rental commitments as of December 31, 2018 under these leases are expected to be as follows:
2019
2020
2021
2022
2023
Thereafter
Agreements
Third Point LLC
$
$
935
839
236
39
—
—
2,049
In June 2016, Third Point Re, Third Point Re BDA, TPRUSA and Third Point Re USA entered into JV Agreements with
Third Point LLC and TP GP for an additional five year term, effective on December 22, 2016. These agreements have
similar terms to the expired agreements, however, the management fee was reduced from 2% to 1.5%.
As a result of the change in investment structure described in Note 4, pursuant to the 2018 LPA effective August 31,
2018, management fees are charged at the TP Fund level and are 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 Offshore Master Fund. The JV Agreements will be
terminated on the date that all net investment assets have been transferred to TP Fund pursuant to the Subscription
Agreement.
NetJets
In September 2016, the Company traded in its existing aircraft and acquired from NetJets Sales Inc. (“NetJets”) an
undivided 31.25% interest in a new aircraft for a five year period. The agreement with NetJets provides for monthly
management fees, occupied hourly fees and other fees.
Future minimum management fee commitments as of December 31, 2018 under the existing agreement are expected to
be as follows:
2019
2020
2021
2022
2023
$
$
738
765
529
—
—
2,032
Employment agreements
As of December 31, 2018, the Company has entered into employment agreements with certain of its executive officers.
Such employment arrangements provide for compensation in the form of base salary, annual bonus, share-based awards,
participation in the Company’s employee benefit programs and the reimbursements of expenses.
F-65
Investments
Under the new investment account structure described in Note 4, the Company does not have any unfunded
commitments or obligations.
Prior to the change in the Company’s investment account structure, the Company purchased loan and other participation
interests, such as bank debt, which may have included revolving credit arrangements or other financing commitments
obligating the Company to advance additional amounts on demand.
Financing
In February 2015, TPRUSA issued $115.0 million of Notes due February 13, 2025. The Notes bear interest at 7.0% and
interest is payable semi-annually on February 13 and August 13 of each year. The 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.
Letters of Credit
See Note 13 for additional information related to the Company’s letter of credit facilities.
Litigation
From time to time in the normal course of business, the Company may be involved in formal and informal dispute
resolution procedures, which may include arbitration or litigation, the outcomes of which determine the rights and
obligations under the Company’s reinsurance contracts and other contractual agreements. In some disputes, the Company
may seek to enforce its rights under an agreement or to collect funds owed to it. In other matters, the Company may
resist attempts by others to collect funds or enforce alleged rights. The Company is not currently involved in any material
formal or informal dispute resolution procedures.
Reinsurance contracts
The Company is subject to customary termination and collateral provisions within certain of its reinsurance contracts,
based on reductions of capital and surplus. The inclusion and terms of these provisions vary by contract but are typically
set at a 20% or greater reduction of capital and surplus over any 12 month period. For the year ended December 31,
2018, the decrease in shareholders’ equity attributable to common shareholder’s of Third Point Re and Third Point Re
BDA both exceeded 20%. As a result, termination or collateral rights for some of Third Point Re BDA’s and Third Point
Re USA’s reinsurance contracts can be exercised. The Company has not been advised by any client of their intention to
exercise these rights; however, they may do so in the future. The exercising of such rights could cause Third Point Re
BDA to have to return premiums and/or post additional collateral, however the impact cannot be reasonably estimated.
In each case, this could cause Third Point Re BDA to liquidate investments in TP Fund to return to clients or to post as
additional collateral.
24. Segment reporting
The determination of the Company’s business segments is based on the manner in which management monitors the
performance of its operations. The Company reports one operating segment, Property and Casualty Reinsurance. Non-
underwriting income and expenses including: net investment income (loss), certain general and administrative expenses
related to corporate activities, interest expense, foreign exchange (gains) losses and income tax (expense) benefit are
presented as a reconciliation to the Company’s consolidated results. The Company does not manage its assets by
segment; accordingly, total assets are not allocated to the segments.
F-66
The following is a summary of the Company’s operating segment results for the years ended December 31, 2018, 2017
and 2016:
2018
2017
2016
Property
and
Casualty
Reinsurance
Total (1)
Property
and
Casualty
Reinsurance
Total (1)
Property
and
Casualty
Reinsurance
Total (1)
Revenues
Gross premiums written
Gross premiums ceded
Net premiums written
Change in net unearned premium
reserves
Net premiums earned
Expenses
Loss and loss adjustment expenses
incurred, net
Acquisition costs, net
General and administrative expenses
Total expenses
Net underwriting loss
$
Net investment income (loss)
Corporate expenses
Other expenses
Interest expense
Foreign exchange gains (losses)
Income tax (expense) benefit
Net income attributable to
noncontrolling interests in related
party
Net income (loss) available to Third
Point Re common shareholders
$
$ 578,252
(19,895 )
558,357
578,252 $ 641,620
(19,895 )
558,357
639,145
(2,475 )
$
641,620 $ 617,374
(2,475 )
639,145
615,049
(2,325 )
$ 617,374
(2,325 )
615,049
63,085
621,442
63,085
621,442
(92,087 )
547,058
(92,087 )
547,058
(24,859 )
590,190
(24,859 )
590,190
438,414
206,498
18,635
663,547
(42,105 )
370,058
188,904
30,656
589,618
(42,560 )
438,414
206,498
18,635
663,547
(42,105 ) $
(251,433 )
(17,606 )
(9,610 )
(8,228 )
7,503
4,010
395,932
222,150
22,160
640,242
(50,052 )
370,058
188,904
30,656
589,618
(42,560 ) $
391,953
(22,447 )
(12,674 )
(8,225 )
(12,300 )
(11,976 )
395,932
222,150
22,160
640,242
(50,052 )
98,825
(17,207 )
(8,387 )
(8,231 )
19,521
(5,593 )
(223 )
(3,973 )
(1,241 )
$
(317,692 )
$
277,798
$
27,635
Property and Casualty Reinsurance - Underwriting Ratios (2):
Loss ratio
Acquisition cost ratio
Composite ratio
General and administrative expense
ratio
Combined ratio
3.0 %
106.8 %
70.6 %
33.2 %
103.8 %
67.6 %
34.5 %
102.1 %
5.6 %
107.7 %
67.1 %
37.6 %
104.7 %
3.8 %
108.5 %
(1) As a result of the change in the Company’s investment account structure, the Company is no longer quantifying the net investment income on
float and all non-underwriting income and expenses are presented as a reconciliation to the Company’s consolidated results. Prior year
comparatives have been adjusted to conform with the revised presentation.
(2) Underwriting ratios are calculated by dividing the related expense by net premiums earned.
F-67
The following table lists the number of contracts that individually contributed more than 10% of total gross premiums
written for the years ended December 31, 2018, 2017 and 2016 as a percentage of total gross premiums written in the
relevant year:
Largest contract
Second largest contract
Third largest contract
Total for contracts contributing greater than 10% each
Total for contracts contributing less than 10% each
2018
2017
2016
17.5 %
12.1 %
n/a
29.6 %
70.4 %
100.0 %
16.1 %
14.1 %
13.1 %
43.3 %
56.7 %
100.0 %
16.1 %
n/a
n/a
16.1 %
83.9 %
100.0 %
The following table lists counterparties with whom the Company has reinsurance balances receivable representing more
than 10% of the Company’s total reinsurance balances receivable as of December 31, 2018 and 2017:
Counterparty 1
Counterparty 2
Counterparty 3
Counterparty 4
Other counterparties representing less than 10% each
Reinsurance balances receivable
December 31, 2018
December 31, 2017
86,155
83,079
69,641
n/a
238,875
363,573
602,448
14.3 % $
13.8 %
11.6 %
n/a
39.7 %
60.3 %
100.0 % $
80,187
58,776
51,613
47,438
238,014
237,994
476,008
16.8 %
12.4 %
10.8 %
10.0 %
50.0 %
50.0 %
100.0 %
$
$
The following table provides a breakdown of the Company’s gross premiums written by line of business for the
years ended December 31, 2018, 2017 and 2016:
Property
Casualty
Specialty
Total prospective reinsurance contracts
Retroactive reinsurance contracts
2018
9,070
235,789
259,173
504,032
74,220
578,252
1.6 % $
40.8 %
44.8 %
87.2 %
12.8 %
100.0 % $
2017
136,999
269,759
125,511
532,269
109,351
641,620
21.4 % $
42.0 %
19.6 %
83.0 %
17.0 %
100.0 % $
2016
98,334
213,050
305,990
617,374
—
617,374
15.9 %
34.5 %
49.6 %
100.0 %
— %
100.0 %
$
$
Substantially all of the Company’s business is sourced through reinsurance brokers. The following table sets forth the
Company’s premiums written by source that individually contributed more than 10% of total gross premiums written for
the years ended December 31, 2018, 2017 and 2016:
Largest broker
Second largest broker
Third largest broker
Other
2018
198,251
157,542
70,524
151,935
578,252
34.3 % $
27.2 %
12.2 %
26.3 %
100.0 % $
2017
243,581
128,648
107,612
161,779
641,620
38.0 % $
20.1 %
16.8 %
25.1 %
100.0 % $
2016
240,172
185,638
97,148
94,416
617,374
38.9 %
30.1 %
15.7 %
15.3 %
100.0 %
$
$
F-68
The following table provides a breakdown of the Company’s gross premiums written by domicile of the ceding
companies for the years ended December 31, 2018, 2017 and 2016:
United States
United Kingdom
Bermuda
Other
25. Statutory requirements
2018
326,261
63,619
93,406
94,966
578,252
56.4 % $
11.0 %
16.2 %
16.4 %
100.0 % $
2017
352,539
203,768
62,234
23,079
641,620
54.9 % $
31.8 %
9.7 %
3.6 %
100.0 % $
2016
332,849
187,625
96,900
—
617,374
53.9 %
30.4 %
15.7 %
— %
100.0 %
$
$
Under the Bermuda Insurance Act 1978, as amended, and related regulations, Third Point Re BDA and Third Point Re
USA are subject to capital requirements calculated using the Bermuda Solvency and Capital Requirement (“BSCR”)
model, which is a standardized statutory risk-based capital model used to measure the risk associated with Third Point Re
BDA’s and Third Point Re USA’s assets, liabilities and premiums. Third Point Re BDA’s and Third Point Re USA’s
required statutory capital and surplus under the BSCR model is referred to as the enhanced capital requirement (“ECR”).
Third Point Re BDA and Third Point Re USA are required to calculate and submit the ECR to the Bermuda Monetary
Authority (“BMA”), annually. Following receipt of the submission of Third Point Re BDA’s and Third Point Re USA’s
ECR, the BMA has the authority to impose additional capital requirements (capital add-ons) if it deems necessary. If a
company fails to maintain or meet its ECR, the BMA may take various degrees of regulatory action. In 2016, the BMA
implemented the economic balance sheet (“EBS”) framework, which is now used as the basis to determine the
Company’s ECR. Under the new 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. As of December 31, 2018 and 2017, Third Point Re BDA
and Third Point Re USA met their ECR.
As of December 31, 2018 and 2017, the principal difference between statutory capital and surplus and shareholders’
equity presented in accordance with GAAP is that prepaid expenses is a non-admitted asset for statutory purposes.
Third Point Re BDA and Third Point Re USA are also required under their Class 4 licenses to maintain minimum
liquidity ratios whereby the value of their relevant assets are not less than 75% of the amount of their relevant liabilities
for general business. As of December 31, 2018 and 2017, Third Point Re BDA and Third Point Re USA met their
minimum liquidity ratio requirements.
The following is a summary of actual and required statutory capital and surplus, based on the EBS framework, of Third
Point Re BDA and Third Point Re USA as of December 31, 2018 and 2017:
Actual statutory capital and surplus
Third Point Re BDA
Third Point Re USA
Required statutory capital and surplus
Third Point Re BDA
Third Point Re USA
December 31,
2018
December 31,
2017
$
$
1,043,357 $
255,872
1,430,174
265,206
574,405
100,000 $
759,518
93,261
The following is a summary of the statutory net income (loss) for Third Point Re and Third Point Re USA for the years
ended December 31, 2018, 2017 and 2016:
Third Point Re BDA
Third Point Re USA
2018
(272,339 ) $
(29,491 ) $
2017
265,903 $
22,310 $
2016
35,096
2,701
$
$
F-69
Dividend restrictions
Third Point Re BDA
Third Point Re BDA may declare dividends subject to it continuing to meet its solvency and capital requirements, which
includes continuing to hold statutory capital and surplus equal to or exceeding its ECR. In addition, Third Point Re BDA
is prohibited from declaring or paying in any fiscal year dividends of more than 25% of its prior year’s statutory capital
and surplus unless Third Point Re BDA files with the BMA a signed affidavit by at least two members of the Board of
Directors attesting that a dividend would not cause Third Point Re BDA to fail to meet its capital requirements. As of
December 31, 2018, Third Point Re BDA could pay dividends in 2019 of approximately $260.8 million (December 31,
2017 - $357.5 million) without providing an affidavit to the BMA.
Third Point Re USA
Third Point Re USA may declare dividends subject to it continuing to meet its solvency and capital requirements, which
includes continuing to hold statutory capital and surplus equal to or exceeding its ECR. Third Point Re USA is prohibited
from declaring or paying in any fiscal year dividends of more than 25% of its prior year’s statutory capital and surplus,
unless Third Point Re USA files with the BMA a signed affidavit by at least two members of the Board of Directors
attesting that a dividend would not cause Third Point Re USA to fail to meet its capital requirements. Third Point Re
USA is also restricted by the amount of shareholder’s equity that is available for the payment of dividends and must
maintain a minimum shareholder’s equity of $250.0 million as per the Net Worth Maintenance Agreement. As of
December 31, 2018, Third Point Re USA could pay dividends of approximately $1.4 million (December 31, 2017 - $24.3
million).
26. Subsequent event
Second Amended and Restated Limited Partnership Agreement
On February 28, 2019, Third Point Re, Third Point Re BDA and Third Point Re USA entered into the Amended LPA
with TP GP, which amended and restated the 2018 LPA. The Amended LPA revised the management fee from 1.5% per
annum to 1.25% per annum with effect from January 1, 2019. In addition, pursuant to the Amended LPA, TP GP shall
notify the Company if Third Point LLC or its affiliates (either alone or together with a third party) form certain
investment vehicles that pursue an investment strategy primarily comprised of debt or other credit-related investments
(the “Permitted Funds”). The Amended LPA provides the Company with the right to withdraw up to $250.0 million in
2019 and a separate $250.0 million during the period from January 1, 2020 through December 31, 2021 for the purpose
of immediately investing such amounts in Permitted Funds. Furthermore, the Amended LPA adjusted the loss
carryforward terms of the LPA, which relate to the calculation of TP GP’s performance compensation under the LPA, to
preserve the loss carryforward attributable to the Company’s investment in TP Fund when contributions to TP Fund are
made within nine months of certain types of withdrawals from TP Fund. The term of the Amended LPA ends December
31, 2021, which is consistent with the term under the 2018 LPA. All other material terms of the Amended LPA remain
consistent with the LPA.
27. Supplemental guarantor information
Third Point Re fully and unconditionally guarantees the $115.0 million of Notes issued by TPRUSA, a wholly owned
subsidiary.
The following information sets forth the consolidating balance sheets as of December 31, 2018 and 2017 and the
consolidating statements of income (loss) and cash flows for the years ended December 31, 2018, 2017 and 2016 for
Third Point Re, TPRUSA and the non-guarantor subsidiaries of Third Point Re. Investments in subsidiaries are
accounted for on the equity method; accordingly, entries necessary to consolidate the parent guarantor, TPRUSA and all
other subsidiaries are reflected in the eliminations column.
F-70
CONSOLIDATING BALANCE SHEET
As of December 31, 2018
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
Assets
Total investments in securities
Cash and cash equivalents
Restricted cash and cash equivalents
Investment in subsidiaries
Due from brokers
Interest and dividends receivable
Reinsurance balances receivable
Deferred acquisition costs, net
Unearned premiums ceded
Loss and loss adjustment expenses recoverable
Amounts due from (to) affiliates
Other assets
Total assets
Liabilities
Accounts payable and accrued expenses
Reinsurance balances payable
Deposit liabilities
Unearned premium reserves
Loss and loss adjustment expense reserves
Participation agreement with related party investment
fund
Interest and dividends payable
Senior notes payable, net of deferred costs
Total liabilities
Redeemable noncontrolling interests in related party
Shareholders' equity
Common shares
Additional paid-in capital
Retained earnings (deficit)
Shareholders’ equity attributable to Third Point Re
common shareholders
Total shareholders’ equity
Total liabilities, noncontrolling interests and
shareholders’ equity
$
$
$
— $
—
—
1,207,161
—
—
—
—
—
—
(3,522 )
1,673
1,205,312 $
738 $
—
—
—
—
—
—
—
738
—
9,364
918,882
276,328
— $
187
—
251,350
—
—
—
—
—
—
52
5,069
256,658 $
70 $
—
—
—
—
—
3,055
113,911
117,036
—
—
176,005
(36,383 )
1,523,728 $
103,996
609,154
175,758
1,411
1,316
602,448
203,842
17,552
2,031
3,470
13,827
3,258,533 $
6,453 $
69,701
145,342
602,936
937,157
2,297
—
—
1,763,886
—
1,239
1,557,016
(63,608 )
1,204,574
1,204,574
139,622
139,622
1,494,647
1,494,647
— $
—
—
(1,634,269 )
—
—
—
—
—
—
—
—
(1,634,269 ) $
— $
—
—
—
—
—
—
—
—
—
(1,239 )
(1,733,021 )
99,991
(1,634,269 )
(1,634,269 )
1,523,728
104,183
609,154
—
1,411
1,316
602,448
203,842
17,552
2,031
—
20,569
3,086,234
7,261
69,701
145,342
602,936
937,157
2,297
3,055
113,911
1,881,660
—
9,364
918,882
276,328
1,204,574
1,204,574
$
1,205,312
$
256,658
$
3,258,533
$
(1,634,269 ) $
3,086,234
F-71
CONSOLIDATING BALANCE SHEET
As of December 31, 2017
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
$
$
Assets
Total investments in securities
Cash and cash equivalents
Restricted cash and cash equivalents
Investment in subsidiaries
Due from brokers
Derivative assets, at fair value
Interest and dividends receivable
Reinsurance balances receivable
Deferred acquisition costs, net
Unearned premiums ceded
Loss and loss adjustment expenses recoverable
Amounts due from (to) affiliates
Other assets
Total assets
Liabilities
Accounts payable and accrued expenses (1)
Reinsurance balances payable
Deposit liabilities
Unearned premium reserves
Loss and loss adjustment expense reserves
Securities sold, not yet purchased, at fair value
Securities sold under an agreement to repurchase
Due to brokers
Derivative liabilities, at fair value
Interest and dividends payable
Senior notes payable, net of deferred costs
Total liabilities
Redeemable noncontrolling interests in related party
Shareholders’ equity
Common shares
Treasury shares
Additional paid-in capital
Retained earnings (deficit)
Shareholders’ equity attributable to Third Point Re
common shareholders
Noncontrolling interests in related party
Total shareholders’ equity
Total liabilities, noncontrolling interests and
shareholders’ equity
$
— $
9
—
1,657,467
—
—
—
—
—
—
—
(1,288 )
664
1,656,852 $
763 $
—
—
—
—
—
—
—
—
—
—
763
—
10,723
(48,253 )
1,099,599
594,020
1,656,089
—
1,656,089
$
1,656,852
— $
199
—
274,272
—
—
—
—
—
—
—
412
—
274,883 $
(8,805 ) $
—
—
—
—
—
—
—
—
3,055
113,733
107,983
—
—
—
165,097
1,803
166,900
—
166,900
$
274,883
2,995,939 $
7,989
541,136
164,909
305,093
73,372
3,774
476,008
258,793
1,049
1,113
876
6,656
4,836,707 $
42,674 $
41,614
129,133
649,518
720,570
394,278
29,618
770,205
14,503
1,220
—
2,793,333
108,219
1,250
—
1,531,770
396,728
1,929,748
5,407
1,935,155
$
4,836,707
— $
—
—
(2,096,648 )
—
—
—
—
—
—
—
—
—
(2,096,648 ) $
— $
—
—
—
—
—
—
—
—
—
—
—
—
(1,250 )
—
(1,696,867 )
(398,531 )
(2,096,648 )
—
(2,096,648 )
2,995,939
8,197
541,136
—
305,093
73,372
3,774
476,008
258,793
1,049
1,113
—
7,320
4,671,794
34,632
41,614
129,133
649,518
720,570
394,278
29,618
770,205
14,503
4,275
113,733
2,902,079
108,219
10,723
(48,253 )
1,099,599
594,020
1,656,089
5,407
1,661,496
(2,096,648 ) $
4,671,794
(1) Negative balance of $8.8 million represents net deferred tax assets that are offset by net deferred tax liabilities in Third Point Re USA of $9.9
million, resulting in a net liability position as of December 31, 2017.
F-72
CONSOLIDATING STATEMENT OF LOSS
Year Ended December 31, 2018
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
Revenues
Gross premiums written
Gross premiums ceded
Net premiums written
Change in net unearned premium reserves
Net premiums earned
Net investment loss
Equity in losses of subsidiaries
Total revenues
Expenses
Loss and loss adjustment expenses incurred, net
Acquisition costs, net
General and administrative expenses
Other expenses
Interest expense
Foreign exchange gains
Total expenses
Loss before income tax benefit
Income tax (expense) benefit
Net loss
Net income attributable to noncontrolling interests in
related party
Net loss attributable to Third Point Re common
shareholders
$
— $
—
—
—
—
—
(310,552 )
(310,552 )
—
—
7,140
—
—
—
7,140
(317,692 )
—
(317,692 )
— $
—
—
—
—
—
(29,492 )
(29,492 )
—
—
47
—
8,228
—
8,275
(37,767 )
(419 )
(38,186 )
—
—
578,252 $
(19,895 )
558,357
63,085
621,442
(251,433 )
(57 )
369,952
438,414
206,498
29,054
9,610
—
(7,503 )
676,073
(306,121 )
4,429
(301,692 )
(223 )
— $
—
—
—
—
—
340,101
340,101
—
—
—
—
—
—
—
340,101
—
340,101
578,252
(19,895 )
558,357
63,085
621,442
(251,433 )
—
370,009
438,414
206,498
36,241
9,610
8,228
(7,503 )
691,488
(321,479 )
4,010
(317,469 )
—
(223 )
$
(317,692 ) $
(38,186 ) $
(301,915 ) $
340,101
$
(317,692 )
F-73
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2017
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
Revenues
Gross premiums written
Gross premiums ceded
Net premiums written
Change in net unearned premium reserves
Net premiums earned
Net investment income
Equity in earnings (losses) of subsidiaries
Total revenues
Expenses
Loss and loss adjustment expenses incurred, net
Acquisition costs, net
General and administrative expenses
Other expenses
Interest expense
Foreign exchange losses
Total expenses
Income before income tax (expense) benefit
Income tax (expense) benefit
Net income
Net income attributable to noncontrolling interests in
related party
Net income available to Third Point Re common
shareholders
$
— $
—
—
—
—
—
283,088
283,088
—
—
5,290
—
—
—
5,290
277,798
—
277,798
— $
—
—
—
—
—
22,309
22,309
—
—
49
—
8,225
—
8,274
14,035
3,062
17,097
641,620 $
(2,475 )
639,145
(92,087 )
547,058
391,953
(57 )
938,954
370,058
188,904
47,764
12,674
—
12,300
631,700
307,254
(15,038 )
292,216
— $
—
—
—
—
—
(305,340 )
(305,340 )
—
—
—
—
—
—
—
(305,340 )
—
(305,340 )
641,620
(2,475 )
639,145
(92,087 )
547,058
391,953
—
939,011
370,058
188,904
53,103
12,674
8,225
12,300
645,264
293,747
(11,976 )
281,771
—
—
(3,973 )
—
(3,973 )
$
277,798
$
17,097
$
288,243
$
(305,340 ) $
277,798
F-74
CONSOLIDATING STATEMENT OF INCOME (LOSS)
Year Ended December 31, 2016
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
Revenues
Gross premiums written
Gross premiums ceded
Net premiums written
Change in net unearned premium reserves
Net premiums earned
Net investment income
Equity in earnings (losses) of subsidiaries
Total revenues
Expenses
Loss and loss adjustment expenses incurred, net
Acquisition costs, net
General and administrative expenses
Other expenses
Interest expense
Foreign exchange gains
Total expenses
Income (loss) before income tax (expense) benefit
Income tax (expense) benefit
Net income (loss)
Net income attributable to noncontrolling interests in
related party
Net income (loss) available to Third Point Re common
shareholders
$
— $
—
—
—
—
—
32,347
32,347
—
—
4,712
—
—
—
4,712
27,635
—
27,635
— $
—
—
—
—
—
2,701
2,701
—
—
40
—
8,231
—
8,271
(5,570 )
2,895
(2,675 )
617,374 $
(2,325 )
615,049
(24,859 )
590,190
98,825
(107 )
688,908
395,932
222,150
34,615
8,387
—
(19,521 )
641,563
47,345
(8,488 )
38,857
— $
—
—
—
—
—
(34,941 )
(34,941 )
—
—
—
—
—
—
—
(34,941 )
—
(34,941 )
617,374
(2,325 )
615,049
(24,859 )
590,190
98,825
—
689,015
395,932
222,150
39,367
8,387
8,231
(19,521 )
654,546
34,469
(5,593 )
28,876
—
—
(1,241 )
—
(1,241 )
27,635
$
(2,675 ) $
37,616
$
(34,941 ) $
27,635
F-75
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2018
Operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Equity in losses of subsidiaries
Share compensation expense
Net interest income on deposit liabilities
Net realized and unrealized gain on investments and
derivatives
Net unrealized loss on investment in related party
investment fund
Net foreign exchange gains
Amortization of premium and accretion of discount, net
Changes in assets and liabilities:
Reinsurance balances receivable
Deferred acquisition costs, net
Unearned premiums ceded
Loss and loss adjustment expenses recoverable
Other assets
Interest and dividends receivable, net
Unearned premium reserves
Loss and loss adjustment expense reserves
Accounts payable and accrued expenses
Reinsurance balances payable
Amounts due from (to) affiliates
Net cash provided by (used in) operating activities
Investing activities
Net redemptions from related party investment fund
Change in participation agreement with related party
investment fund
Purchases of investments
Proceeds from sales and maturities of investments
Purchases of investments to cover short sales
Proceeds from short sales of investments
Change in due to/from brokers, net
Decrease in securities sold under an agreement to
repurchase
Contributed capital to subsidiaries
Contributed capital from parent and/or subsidiaries
Net cash provided by (used in) investing activities
Financing activities
Taxes paid on withholding shares
Purchases of Third Point Re common shares under share
repurchase program
Increase in deposit liabilities, net
Change in total noncontrolling interests in related party, net
Dividend received by (paid to) parent
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash at beginning of
period
Cash, cash equivalents and restricted cash at end of
period
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
(317,692 ) $
(38,186 ) $
(301,692 ) $
340,101 $
(317,469 )
310,552
610
—
—
—
—
—
—
—
—
—
(1,009 )
—
—
—
(25 )
—
2,234
(5,330 )
—
—
—
—
—
—
—
—
(10,000 )
—
(10,000 )
(74 )
(138,705 )
—
—
154,100
15,321
(9 )
29,492
—
—
—
—
—
178
—
—
—
—
(5,069 )
—
—
—
5,513
—
360
(7,712 )
—
—
—
—
—
—
—
—
10,000
(10,000 )
—
—
—
—
—
7,700
7,700
(12 )
57
4,346
(1,273 )
(34,145 )
280,847
(7,503 )
3,956
(120,620 )
54,951
(16,503 )
(918 )
(7,408 )
(2,716 )
(46,582 )
225,670
(30,172 )
28,728
(2,594 )
26,429
6,342
(20,852 )
(3,483,319 )
3,475,515
(853,798 )
800,508
482,778
(29,618 )
—
10,000
387,556
—
—
9,790
(97,950 )
(161,800 )
(249,960 )
164,025
9
$
—
199
$
187
549,125
713,150
$
$
F-76
(340,101 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
4,956
(1,273 )
(34,145 )
280,847
(7,503 )
4,134
(120,620 )
54,951
(16,503 )
(918 )
(13,486 )
(2,716 )
(46,582 )
225,670
(24,684 )
28,728
—
13,387
6,342
(20,852 )
(3,483,319 )
3,475,515
(853,798 )
800,508
482,778
(29,618 )
—
—
377,556
(74 )
(138,705 )
9,790
(97,950 )
—
(226,939 )
164,004
549,333
713,337
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2017
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
277,798 $
17,097 $
292,216 $
(305,340 ) $
281,771
Operating activities
Net income
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in (earnings) losses of subsidiaries
Share compensation expense
Net interest expense on deposit liabilities
Net realized and unrealized gain on investments and
derivatives
Net foreign exchange losses
Amortization of premium and accretion of discount, net
Changes in assets and liabilities:
Reinsurance balances receivable
Deferred acquisition costs, net
Unearned premiums ceded
Loss and loss adjustment expenses recoverable
Other assets
Interest and dividends receivable, net
Unearned premium reserves
Loss and loss adjustment expense reserves
Accounts payable and accrued expenses
Reinsurance balances payable
Amounts due from (to) affiliates
Net cash used in operating activities
Investing activities
Purchases of investments
Proceeds from sales and maturities of investments
Purchases of investments to cover short sales
Proceeds from short sales of investments
Change in due to/from brokers, net
Increase in securities sold under an agreement to
repurchase
Net cash provided by investing activities
Financing activities
Proceeds from issuance of common shares, net of costs
Purchases of Third Point Re common shares under share
repurchase program
Increase in deposit liabilities
Change in total noncontrolling interests in related party,
net
Dividend received by (paid to) parent
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash at beginning of
period
Cash, cash equivalents and restricted cash at end of
period
$
(22,309 )
—
—
—
—
178
—
—
—
—
5,507
(2 )
—
—
(8,845 )
—
(8,806 )
(17,180 )
—
—
—
—
—
—
—
—
—
—
—
17,300
17,300
120
79
$
199
57
3,301
2,800
(480,045 )
12,300
295
(86,606 )
(37,175 )
(354 )
(1,112 )
3,657
3,565
92,442
97,922
33,445
(1,463 )
7,660
(57,095 )
(3,099,525 )
3,228,251
(791,753 )
1,048,552
(149,898 )
29,618
265,245
—
—
19,113
73,979
(59,300 )
33,792
241,942
307,183
549,125
$
305,340
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
3,599
2,800
(480,045 )
12,300
473
(86,606 )
(37,175 )
(354 )
(1,112 )
9,137
3,563
92,442
97,922
24,212
(1,463 )
—
(78,536 )
(3,099,525 )
3,228,251
(791,753 )
1,048,552
(149,898 )
29,618
265,245
1,505
(40,864 )
19,113
73,979
—
53,733
240,442
308,891
549,333
(283,088 )
298
—
—
—
—
—
—
—
—
(27 )
—
—
—
(388 )
—
1,146
(4,261 )
—
—
—
—
—
—
—
1,505
(40,864 )
—
—
42,000
2,641
(1,620 )
1,629
$
9
F-77
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2016
Third Point
Re
TPRUSA
Non-
Guarantor
Subsidiaries Eliminations Consolidated
$
27,635 $
(2,675 ) $
38,857 $
(34,941 ) $
28,876
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in (earnings) losses of subsidiaries
Share compensation expense
Net interest income on deposit liabilities
Net realized and unrealized gain on investments and
derivatives
Net foreign exchange gains
Amortization of premium and accretion of discount, net
Changes in assets and liabilities:
Reinsurance balances receivable
Deferred acquisition costs, net
Unearned premiums ceded
Loss and loss adjustment expenses recoverable
Other assets
Interest and dividends receivable, net
Unearned premium reserves
Loss and loss adjustment expense reserves
Accounts payable and accrued expenses
Reinsurance balances payable
Amounts due from (to) affiliates
Net cash provided by (used in) operating activities
Investing activities
Purchases of investments
Proceeds from sales of investments
Purchases of investments to cover short sales
Proceeds from short sales of investments
Change in due to/from brokers, net
Increase in securities sold under an agreement to
repurchase
Contributed capital to subsidiaries
Contributed capital from parent and/or subsidiaries
Net cash used in investing activities
Financing activities
Proceeds from issuance of common shares, net of costs
Purchases of Third Point Re common shares under share
repurchase program
Increase in deposit liabilities
Change in total noncontrolling interests in related party,
net
Dividend received by (paid to) parent
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash at beginning of
period
Cash, cash equivalents and restricted cash at end of
period
$
(32,347 )
543
—
—
—
—
—
—
—
—
(73 )
—
—
—
(1,985 )
—
(204 )
(6,431 )
—
—
—
—
—
—
(5,000 )
—
(5,000 )
5,141
(7,389 )
—
—
15,000
12,752
1,321
308
(2,701 )
—
—
—
—
178
—
—
—
—
(2,894 )
2
—
—
—
—
8,164
74
107
8,395
(164 )
(105,262 )
(19,521 )
4,940
(86,612 )
(24,525 )
(508 )
124
(1,652 )
3,223
25,366
156,644
(110 )
19,786
(7,960 )
11,128
—
—
—
—
—
(3,729,944 )
3,504,598
(1,264,404 )
1,046,422
367,019
—
5,000
(5,000 )
—
—
—
—
—
—
—
74
5
(8,944 )
—
5,000
(80,253 )
—
—
22,023
18,276
(15,000 )
25,299
(43,826 )
351,009
34,941
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,938
(164 )
(105,262 )
(19,521 )
5,118
(86,612 )
(24,525 )
(508 )
124
(4,619 )
3,225
25,366
156,644
(2,095 )
19,786
—
4,771
(3,729,944 )
3,504,598
(1,264,404 )
1,046,422
367,019
(8,944 )
—
—
(85,253 )
5,141
(7,389 )
22,023
18,276
—
38,051
(42,431 )
351,322
1,629
$
79
$
307,183
$
—
$
308,891
F-78
28. Quarterly financial results (UNAUDITED)
Revenues
Gross premiums written
Gross premiums ceded
Net premiums written
$
Change in net unearned premium reserves
Net premiums earned
Net investment income (loss)
Total revenues
Expenses
Loss and loss adjustment expenses incurred, net
Acquisition costs, net
General and administrative expenses
Other (income) expenses
Interest expense
Foreign exchange (gains) losses
Total expenses
Income (loss) before income tax (expense) benefit
Income tax (expense) benefit
Net income (loss)
Net income attributable to noncontrolling interests in
related party
Net income (loss) available to Third Point Re
common shareholders
Earnings (loss) per share available to Third Point
Re common shareholders
Basic earnings (loss) per share available to Third Point
Re common shareholders
Diluted earnings (loss) per share available to Third
Point Re common shareholders
Weighted average number of common shares used
in the determination of earnings (loss) per share
Basic
Diluted
Three months ended
December 31,
2018
September 30,
2018
June 30,
2018
March 31,
2018
120,063 $
(1,770 )
118,293
91,177
209,470
(276,810 )
(67,340 )
173,088
56,668
7,553
2,994
2,074
(3,288 )
239,089
(306,429 )
8,417
(298,012 )
30,064 $
—
30,064
97,929
127,993
(3,590 )
124,403
88,706
40,841
9,511
(1,362 )
2,074
(1,979 )
137,791
(13,388 )
111
(13,277 )
49,765 $
(3,479 )
46,286
95,207
141,493
31,175
172,668
84,000
57,584
9,696
3,983
2,051
(8,847 )
148,467
24,201
(4,390 )
19,811
378,360
(14,646 )
363,714
(221,228 )
142,486
(2,208 )
140,278
92,620
51,405
9,481
3,995
2,029
6,611
166,141
(25,863 )
(128 )
(25,991 )
—
(4 )
(209 )
(10 )
$
(298,012 ) $
(13,281 ) $
19,602
$
(26,001 )
$
$
(3.24 ) $
(0.14 ) $
0.20
$
(3.24 ) $
(0.14 ) $
0.19
$
(0.26 )
(0.26 )
91,967,831
91,967,831
95,671,385
95,671,385
99,498,901
102,032,485
101,195,747
101,195,747
F-79
Three months ended
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
Revenues
Gross premiums written
Gross premiums ceded
Net premiums written
Change in net unearned premium reserves
Net premiums earned
Net investment income
Total revenues
Expenses
Loss and loss adjustment expenses incurred, net
Acquisition costs, net
General and administrative expenses
Other expenses
Interest expense
Foreign exchange losses
Total expenses
Income before income tax (expense) benefit
Income tax (expense) benefit
Net income
Net income attributable to noncontrolling interests in
related party
Net income available to Third Point Re common
shareholders
Earnings per share available to Third Point Re
common shareholders
Basic earnings per share available to Third Point Re
common shareholders
Diluted earnings per share available to Third Point Re
common shareholders
Weighted average number of common shares used in
the determination of earnings per share
Basic
Diluted
$
$
$
$
164,163 $
75
164,238
(34,722 )
129,516
67,150
196,666
99,509
31,837
14,299
3,822
2,074
2,067
153,608
43,058
2,104
45,162
174,539 $
—
174,539
(68,564 )
105,975
88,968
194,943
77,275
33,974
13,218
3,846
2,074
5,437
135,824
59,119
(3,475 )
55,644
156,564 $
(1,425 )
155,139
18,419
173,558
107,325
280,883
107,379
68,641
15,014
2,105
2,051
4,781
199,971
80,912
(5,307 )
75,605
146,354
(1,125 )
145,229
(7,220 )
138,009
128,510
266,519
85,895
54,452
10,572
2,901
2,026
15
155,861
110,658
(5,298 )
105,360
(813 )
(959 )
(1,027 )
(1,174 )
44,349
$
54,685
$
74,578
$
104,186
0.44
$
0.54
$
0.73
$
0.42
$
0.52
$
0.71
$
1.00
0.98
101,405,772
105,524,115
101,391,145 102,283,844
104,679,574 104,569,226
104,013,871
105,701,599
F-80
THIRD POINT REINSURANCE LTD.
Schedule I - Summary of Investments - Other than Investments in Related Parties
Assets
U.S. Treasury securities
Sovereign debt
Total debt securities
Investment in Kiskadee Fund
Total investments in securities
Cost
Fair value
Balance sheet value
$
$
201,212 $
51,150
252,362
301
252,663 $
197,312 $
42,328
239,640
84
239,724 $
197,312
42,328
239,640
84
239,724
F-81
THIRD POINT REINSURANCE LTD.
Schedule III - Supplementary Insurance Information
For the years ended December 31, 2018, 2017 and 2016
As of and for the year ended December 31, 2018
Loss and
loss
adjustment
expense
reserves
Deferred
acquisition
costs, net
Unearned
premium
Net
premiums
earned
Net
investment
loss (1)
Other
expenses
Loss and
loss
adjustment
expenses
incurred,
net
Amortization
of deferred
acquisition
costs, net
Other
operating
expenses
Net
premiums
written
$ 203,842
—
$ 937,157
—
$ 602,936
—
$ 621,442
—
(251,433 )
$ 203,842 $ 937,157 $ 602,936 $ 621,442 $ (251,433 ) $
$
—
$
$
$ 438,414
—
—
9,610
9,610 $ 438,414 $
$
206,498
—
206,498 $
$ 558,357
18,635
17,606
—
36,241 $ 558,357
As of and for the year ended December 31, 2017
Loss and
loss
adjustment
expense
reserves
Deferred
acquisition
costs, net
Unearned
premium
Net
premiums
earned
Net
investment
income (1)
Other
expenses
Loss and
loss
adjustment
expenses
incurred,
net
Amortization
of deferred
acquisition
costs, net
Other
operating
expenses
Net
premiums
written
$ 258,793
—
$ 720,570
—
$ 649,518
—
$ 547,058
—
$
$
—
391,953
—
12,674
$ 370,058
—
$
$ 258,793 $ 720,570 $ 649,518 $ 547,058 $ 391,953 $ 12,674 $ 370,058 $
$
188,904
—
188,904 $
$ 639,145
30,656
22,447
—
53,103 $ 639,145
As of and for the year ended December 31, 2016
Loss and
loss
adjustment
expense
reserves
Deferred
acquisition
costs, net
Unearned
premium
Net
premiums
earned
Net
investment
income (1)
Other
expenses
Loss and
loss
adjustment
expenses
incurred,
net
Amortization
of deferred
acquisition
costs, net
Other
operating
expenses
Net
premiums
written
$ 221,618
—
$ 605,129
—
$ 557,076
—
$ 590,190
—
$
$ 221,618 $ 605,129 $ 557,076 $ 590,190 $
$
—
98,825
98,825 $
$
$ 395,932
—
—
8,387
8,387 $ 395,932 $
$
222,150
—
222,150 $
22,160
$ 615,049
—
17,207
39,367 $ 615,049
Property and
Casualty
Reinsurance
Corporate (2)
Property and
Casualty
Reinsurance
Corporate (2)
Property and
Casualty
Reinsurance
Corporate (2)
(1) As a result of the change in the Company’s investment account structure, the Company is no longer quantifying the net investment income on
float. These amounts had previously been presented as part of the Company’s Property and Casualty Reinsurance segment. Prior year
comparatives have been adjusted to conform with the revised presentation. See Note 24 for additional information.
(2) Corporate is comprised of non-underwriting income and expenses.
F-82
THIRD POINT REINSURANCE LTD.
Schedule IV - Reinsurance
For the years ended December 31, 2018, 2017 and 2016
Direct gross
premiums
written
Ceded to other
companies
Assumed from
other companies
Net amount
Percentage of
amount assumed
to net
Year ended December 31, 2018 $
Year ended December 31, 2017 $
Year ended December 31, 2016 $
— $
— $
— $
19,895 $
2,475 $
2,325 $
578,252 $
641,620 $
617,374 $
558,357
639,145
615,049
97 %
100 %
100 %
F-83
Third Point Re is a specialty property and casualty
reinsurer headquartered in Bermuda. The Company’s
total return business model combines exceptional
underwriting talent with market-leading investment
management, provided by Third Point LLC.
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CORPORATE
INFORMATION
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
J. Robert Bredahl
President and Chief Executive Officer
J. Robert Bredahl
President and Chief Executive Officer
Joshua L. Targoff (Chairman)
Partner, COO and General Counsel,
Third Point LLC
Rafe de la Gueronniere
Co-Chairman, Continuity Logic
Steven E. Fass
Retired 2008, White Mountains
Insurance Group Ltd.
Gretchen A. Hayes
Venture Partner - Sandbox Insurtech
Venture Fund
Mary R. Hennessy
Independent Consultant to P&C industry
Neil McConachie
Co-Founder and former CFO of Fidelis Insurance
Holdings Limited
Mark Parkin
Retired 2013, Deloitte & Touche LLP
AUDIT COMMITTEE
Mark Parkin (Chairman)
Steven E. Fass
Mary R. Hennessy
Neil McConachie
COMPENSATION COMMITTEE
Gretchen A. Hayes (Chairman)
Steven E. Fass
Mary R. Hennessy
Mark Parkin
GOVERNANCE AND
NOMINATING COMMITTEE
Mary R. Hennessy (Chairman)
Steven E. Fass
Mark Parkin
Justin J. Brenden
Chief Reserving Actuary
Nicholas J. D. Campbell
Chief Risk Officer
Christopher S. Coleman
Chief Financial Officer
Manoj K. Gupta
President, Third Point Reinsurance (USA) Ltd.;
Head of Investor Relations
Yan Leclerc
Chief Accounting Officer
Daniel V. Malloy
Chief Executive Officer,
Third Point Reinsurance Company Ltd.
Janice R. Weidenborner
Executive Vice President, Group General
Counsel and Secretary
TRANSFER AGENT
Computershare Investor Services
462 South 4th St, Suite 1600
Louisville, KY 40202
+1 (877) 373-6374 (U.S., Canada)
+1 (781) 575-2879 (non-U.S.)
THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING
FIRM APPOINTED AS OUR
INDEPENDENT AUDITOR
Ernst & Young Ltd.
3 Bermudiana Road
Hamilton HM 08
Bermuda
TO REQUEST AN ANNUAL
REPORT OR FORM 10-K
Additional copies of this Annual Report or
the Company’s Form 10-K filed with the
Securities and Exchange Commission are
available, without charge, upon request
by contacting Investor Relations at the
address or phone number listed below.
COMMON SHARE INFORMATION
The Company’s common shares are listed
on the New York Stock Exchange (NYSE).
Trading of the Company’s common shares
began on August 15, 2013, under the
symbol TPRE.
DIVIDENDS
The Company has never declared or paid
cash dividends on its common shares.
The Company intends to retain future
earnings to finance the growth and
development of its business, and does not
anticipate declaring or paying any cash
dividends in the foreseeable future.
EXECUTIVE OFFICES
Point House
3 Waterloo Lane
Pembroke HM 08
Bermuda
2019 ANNUAL GENERAL MEETING
May 8, 2019
10:00 a.m. Atlantic Daylight Time
Executive Boardroom
The WaterFront Residence
11 Waterloo Lane
Pembroke HM 08
Bermuda
INVESTOR RELATIONS
Requests for information
should be directed to:
Email: investor.relations@thirdpointre.bm
Phone: (441) 542-3333
Web: www.thirdpointre.bm
FOR MORE INFORMATION
For additional information, please visit
our website at www.thirdpointre.bm.
Information as of March 1, 2019
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Point House
3 Waterloo Lane
Pembroke HM 08
Bermuda
www.thirdpointre.bm
2018 ANNUAL REPORT