Third Point Reinsurance Ltd. (NYSE: TPRE) is seeing some success in moving past a three-year slump. The company, with investments managed by billionaire investor Dan Loeb, has seen several consecutive quarters of low positive or negative net income, and profits in the second quarter of 2016 were the highest since the last quarter of 2014. Q2 of 2016 brought net income of USD$53.4 million, up more than three times the Q2 2015 net income of USD$15.7 million. All told, the reinsurance company, which receives backing from Loeb's hedge fund, Third Point LLC, gained just over 2% over the first half of the year.
Income Gains, Underwriting Losses
Third Point succeeded with several investments made on energy company debt in early 2016, as well as from a bullish strategy in the wake of the U.K's Brexit referendum on June 23, 2016. John Berger, CEO of Third Point Reinsurance, noted that company leadership was pleased with the performance of investments overall in the second quarter of 2016. Investment income for that period was USD$86.3 million, more than double what it was in the analogous period one year prior. However, the same cannot be said for the loss associated with insurance underwriting. In that area, the Bermuda-based company saw underwriting losses amplified by workers' compensation policies and additional costs for drivers and property owners in Florida. While the insurance underwriting loss from the second quarter of 2015 was USD$9.4 million, the same period in 2016 saw an increase to losses of USD$25.6 million, a jump of almost three times.
Third Point's combined ratio for the most recent quarter was 119.2, or nearly 20% more spent by the reinsurer on claims and other costs than received in premiums. One year prior, the combined ratio was 107.8. Although the company has seen its stock price fall somewhat so far in 2016 (by about 6% year-to-date as of August 5, 2016), it is trading at comparable levels to its initial public offering, which took place in 2013 at $12.50 per share.
Difficulties in an Overcrowded Market
In July of 2016, S&P Global Ratings issued a report speculating that the number of hedge funds with affiliated new reinsurance interests was too high, and the investment returns too low, for the strategy to be a sustainable one. Although involvement in reinsurance allows hedge fund managers a supply of permanent capital, the difficulties in achieving a profit on underwriting and the crowded field of competitors has made matters difficult for prominent investors like Loeb and David Einhorn. Einhorn's Greenlight Capital Re Ltd. (NASDAQ: GLRE) marked Q2 of 2016 as another in a string of losing quarters over the past year and a half.
Perhaps the lowered fees that Third Point Reinsurance will owe to the affiliated hedge fund will help to increase profitability. The rates were lowered from 2% to 1.5% in June of 2016.