S-1/A 1 d532633ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 5, 2013

Registration No. 333-189960

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

THIRD POINT REINSURANCE LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda   6331   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

The Waterfront, Chesney House

96 Pitts Bay Road

Pembroke HM 08 Bermuda

+1 441 542-3300

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

Registered Agent Solutions, Inc.

99 Washington Avenue

Suite 1008

Albany, NY 12260

(888) 705-7274

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

Steven J. Slutzky, Esq.   John R. Berger   Michael Groll, Esq.
Debevoise & Plimpton LLP   Chief Executive Officer   Willkie Farr & Gallagher LLP
919 Third Avenue   Third Point Reinsurance Ltd.   787 Seventh Avenue
New York, New York 10022   96 Pitts Bay Road   New York, New York
(212) 909-6000   Pembroke HM 08 Bermuda   (212) 728-8000
  +1 441 542-3300  

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨     Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be

Registered(1)(2)

 

Proposed

Maximum Aggregate

Offering Price

Per Share(1)(2)

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Common Shares, $0.10 par value per share

  25,555,555   $14.50   $370,555,548   $50,544

 

 

(1) Includes shares/offering price of shares which the underwriters have the option to purchase.
(2) This amount represents the proposed maximum aggregate offering price of the securities registered hereunder. These figures are estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) The registrant previously paid $47,058 of this amount.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 5, 2013

22,222,222 Shares

 

LOGO

Common Shares

 

 

This is the initial public offering of common shares of Third Point Reinsurance Ltd. We are offering 21,524,492 common shares to be sold in the offering. The selling shareholders identified in this prospectus are offering an additional 697,730 common shares. We will not receive any proceeds from the sale of shares by the selling shareholders. No public market currently exists for our common shares. The estimated initial public offering price is between $12.50 and $14.50 per share.

We have been approved to list our common shares on the New York Stock Exchange (the “NYSE”) under the symbol “TPRE.”

 

 

We are an “emerging growth company” as defined under applicable federal securities laws and may utilize reduced public company reporting requirements. Investing in our common shares involves risks. See “Risk Factors” beginning on page 15 of this prospectus.

 

    Per Share     Total  

Initial public offering price

  $                   $                

Underwriting discounts and commissions(1)

  $                   $                

Proceeds, before expenses, to Third Point Reinsurance Ltd.(2)

  $                   $                

Proceeds, before expenses, to Selling Shareholders

  $                   $                

 

 

  (1) See Underwriting (Conflicts of Interest) for additional compensation details.
  (2) We estimate that we will incur additional expenses in connection with this offering, including fees and expenses incident to any required review by the Financial Industry Regulatory Authority, Inc. (“FINRA”) as further described under “Underwriting (Conflicts of Interest).”

The underwriters also may purchase up to 3,333,333 additional shares from us at the initial offering price less the underwriting discounts and commissions to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority (the “BMA”) for the issue and transfer of our common shares to and between residents and non-residents of Bermuda for exchange control purposes provided our common shares remain listed on an appointed stock exchange, which includes the NYSE.

The underwriters expect to deliver the shares to purchasers on or about             , 2013.

 

 

 

J.P. Morgan   Credit Suisse    Morgan Stanley
BofA Merrill Lynch   Citigroup

 

Aon Benfield Securities, Inc.

 

Dowling & Partners Securities LLC

 

Keefe, Bruyette & Woods

A Stifel Company

Macquarie Capital   Sandler O’Neill + Partners, L.P.

Prospectus dated                     , 2013.


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

SUMMARY CONSOLIDATED FINANCIAL DATA

     12   

RISK FACTORS

     15   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     51   

USE OF PROCEEDS

     53   

DIVIDEND POLICY

     54   

CAPITALIZATION

     55   

DILUTION

     56   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     58   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     61   

BUSINESS

     100   

CERTAIN REGULATORY CONSIDERATIONS

     126   

MANAGEMENT

     137   

EXECUTIVE COMPENSATION

     144   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     158   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND SELLING SHAREHOLDERS

     167   

DESCRIPTION OF SHARE CAPITAL

     171   

COMPARISON OF SHAREHOLDER RIGHTS

     176   

COMMON SHARES ELIGIBLE FOR FUTURE SALE

     183   

CERTAIN TAX CONSIDERATIONS

     185   

UNDERWRITING (CONFLICTS OF INTEREST)

     197   

LEGAL MATTERS

     204   

EXPERTS

     204   

ENFORCEMENT OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS

     204   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     205   

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

GLOSSARY OF SELECTED INSURANCE, REINSURANCE AND FINANCIAL TERMS

     G-1   

You should rely only on the information contained in this prospectus or any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. Neither this prospectus nor any free writing prospectus is an offer to sell anywhere or to anyone where or to whom we are not permitted to offer or to sell securities under applicable law. The information in this prospectus or any free writing prospectus is accurate only as of the date of this prospectus or such free writing prospectus, as applicable.

For investors outside the United States: Neither we, the selling shareholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common shares. You should read this entire prospectus, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to those statements, before making an investment decision. Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” and the “Company,” as used in this prospectus, refer to Third Point Reinsurance Ltd. and its directly and indirectly owned subsidiaries, including Third Point Reinsurance Company Ltd. (“Third Point Re”), as a combined entity, except where otherwise stated or where it is clear that the terms mean only Third Point Reinsurance Ltd. exclusive of its subsidiaries. We refer to Third Point Reinsurance Investment Management Ltd. as the “Catastrophe Fund Manager,” Third Point Reinsurance Opportunities Fund Ltd. as the “Catastrophe Fund” and Third Point Re Cat Ltd. as the “Catastrophe Reinsurer.” For your convenience, we have included a glossary beginning on page G-1 of selected insurance, reinsurance and financial terms. All dollar amounts referred to in this prospectus are in U.S. dollars unless otherwise indicated.

Overview

We are a Bermuda-based property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us from our competitors. Our goal is to deliver attractive equity returns to shareholders by combining profitable reinsurance underwriting with superior investment management provided by Third Point LLC, our investment manager.

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 perspective.

Substantially all of our investable assets are managed by our investment manager, 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 $13.2 billion in assets as of June 30, 2013. We directly own our investments, which are held in a separate account and managed by Third Point LLC on substantially the same basis as its main hedge funds, including Third Point Partners L.P., the original Third Point LLC hedge fund.

We were incorporated on October 6, 2011 and completed our initial capitalization transaction on December 22, 2011 with $784.3 million of equity capital, and commenced underwriting business on January 1, 2012. In January 2012, we received an A- (Excellent) financial strength rating from A.M. Best Company, Inc., or A.M. Best.

Our management team is led by John R. Berger, a highly-respected reinsurance industry veteran with over 30 years of experience, the majority of which was spent as the principal executive officer of three successful reinsurance companies. In addition, we have recruited a management team around Mr. Berger that also has significant senior leadership and underwriting experience in the reinsurance industry. We believe that our experience and longstanding relationships with our insurance company clients, senior reinsurance brokers, insurance regulators and credit rating agencies are an important competitive advantage.

For the year ended December 31, 2012, we generated net income of $99.4 million, which represented a return on beginning shareholders’ equity attributable to shareholders as of December 31, 2011 of 13.0%. For 2012 and for the six months ended June 30, 2013, our gross premiums written totaled $190.4 million and $194.2 million, respectively, and earned premiums totaled $96.5 million and $95.8 million, respectively. For

 

 

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the same periods our net investment income totaled $136.4 million and $112.8 million, respectively, which represent net returns of 17.7% and 12.2%, respectively, on our investments managed by Third Point LLC. In 2012, our combined ratio for our property and casualty reinsurance segment was 129.7%, reflecting the impact of high general and administrative expenses relative to earned premiums due to the start-up nature of our business in 2012; a $10.0 million underwriting loss in our crop line of business attributable to the severe drought that impacted most of the U.S. farm belt in 2012; and the fact that crop was our largest line of business by earned premium, representing almost half of earned premium for the year. Our combined ratio for our property and casualty reinsurance segment for the six months ended June 30, 2013 was 107.7% due to a significant decrease in general and administrative expenses as a percentage of earned premium. As of June 30, 2013, we had shareholders’ equity attributable to shareholders of $972.7 million.

Reinsurance Strategy

Our reinsurance strategy is to build a reinsurance portfolio that generates stable underwriting profits, with margins commensurate with the amount of risk assumed, by opportunistically targeting sub-sectors of the market and specific situations where reinsurance capacity and alternatives may be constrained. Our management team has differentiated expertise that allows us to identify profitable reinsurance opportunities. 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. We manage reinsurance volatility by focusing on lines of business that have historically demonstrated more stable return characteristics, such as limited catastrophe exposed property, which we refer to as “property quota share”, auto, workers compensation and certain segments of crop. These lines of business are often characterized as having exposure to higher frequency and lower severity claims activity. We seek to further manage the volatility of our reinsurance results by writing reinsurance contracts on a quota share basis, where we assume an agreed percentage of premiums and losses for a portfolio of insurance policies. We also make use of contractual terms and conditions within our reinsurance contracts that include individual or aggregate loss occurrence limits, which limit the dollar amount of loss that we can incur from a particular occurrence or series of occurrences within the term of a reinsurance contract; loss ratio caps, which limit the maximum loss we can incur pursuant to a contract to a defined loss ratio; sliding scale commissions that vary with accordance to the client’s performance; and sub-limits and exclusions for particular risks not covered by a particular reinsurance contract.

We wrote 11 quota share contracts during 2012 in our property and casualty reinsurance segment, and a further thirteen quota share contracts in our property and casualty reinsurance segment during the six months ended June 30, 2013, of which 23 covered risks for U.S. based exposures and one included non-U.S. risks. For the year ended December 31, 2012, three contracts each contributed more than 10% of our gross premiums written. These three contracts contributed 22%, 20% and 12%, respectively, of total gross premiums written for the year ended December 31, 2012. For the six months ended June 30, 2013, three contracts each contributed more than 10% of total gross premiums written. These three contracts contributed 18.0%, 18.0% and 11.5%, respectively, of total gross premiums written for the six months ended June 30, 2013. As we expand our business over time, we expect that the proportion of total gross premiums written represented by individual contracts will decline. Under current market conditions, we focus primarily on writing quota share agreements pursuant to which we assume an agreed percentage of premiums and losses for a portfolio of insurance policies and share that percentage of premiums and losses with the reinsured.

We underwrite a mix of short to medium tail personal lines and commercial lines. We intend to increase our geographic spread over time by adding reinsurance programs from European, Asian and South American clients; however, we expect that a majority of our reinsurance business will continue to be composed of U.S. exposure.

Most of our clients buy reinsurance from us for capital management purposes, primarily to increase their capacity to write insurance premium. The most common form of reinsurance used for this purpose is quota share

 

 

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reinsurance. Many of the clients that buy these contracts are growing as a result of securing primary rate increases and growth in the number of policies they write. Because quota share reinsurance typically includes structural and contractual features that limit the amount of risk assumed by the reinsurer, it therefore carries relatively lower expected margins than excess of loss reinsurance and other more volatile forms of reinsurance. During periods of less favorable market conditions, margins on quota share reinsurance written for the capital management purposes of our clients typically remain stable and are sufficient to support our business plan. As market conditions improve, we may expand the lines of business and forms of reinsurance on which we focus to increase our risk-adjusted returns.

We typically write larger customized reinsurance contracts that require significant interaction during the course of negotiations between the client, intermediaries and our management. Our management team lead underwrites most of our reinsurance contracts, meaning that we establish the pricing and terms and conditions of the reinsurance contract, except in certain instances where we will follow terms and conditions established by our competitors if we believe the opportunity meets our return hurdles and helps us balance our reinsurance portfolio.

Our property and casualty reinsurance operations also generate excess cash flows, or float, which we track in managing our business. We believe that continuing to seek net investment income from float is a key part of our reinsurance strategy and an important consideration in evaluating the overall contribution of our property and casualty reinsurance operations to our consolidated results.

In contrast to many reinsurers with whom we compete, we have elected to limit our underwriting of property catastrophe exposures and write excess of loss catastrophe reinsurance exclusively through the Catastrophe Fund, which is a separately capitalized reinsurance fund vehicle. We established the Catastrophe Fund, the Catastrophe Fund Manager and the Catastrophe Reinsurer on June 15, 2012, in partnership with Hiscox Insurance Company (Bermuda) Limited, or Hiscox. Our investment in and management of the Catastrophe Fund allow us to provide a product that is critical to most of our reinsurance clients and to earn fee income over time. Because the Catastrophe Fund is capitalized in part by investments from unrelated parties, our financial exposure to the higher volatility and liquidity risks associated with property catastrophe losses is limited to our investment commitment to the Catastrophe Fund, which as of the date hereof was $50 million, out of total commitments of $94.7 million. Until our investment in the Catastrophe Fund drops below 50% of total investment in the Catastrophe Fund, we will consolidate the financial results of the Catastrophe Fund. As there are no additional guarantees or recourse to us beyond this investment, we anticipate that our property catastrophe exposures will consistently remain relatively low when compared to many other reinsurers with whom we compete.

The following table provides a breakdown by line of business of gross premiums written for the year ended December 31, 2012 and for the three and six months ended June 30, 2013:

 

    Three Months Ended
June 30, 2013
    Six Months Ended
June 30, 2013
    Year Ended
December 31, 2012
 

Gross Premiums Written

  Amount     Percentage
of Total
    Amount     Percentage
of Total
    Amount     Percentage of
Total
 
   

($ in thousands)

 

Property and Casualty Reinsurance Segment

           

Property

  $ 27,888        28.4   $ 28,238        14.5   $ 103,174        54.2

Casualty

    49,388        50.3     101,595        52.3     44,700        23.5

Specialty

    17,368        17.7     57,682        29.7     42,500        22.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    94,644        96.4     187,515        96.5     190,374        100.0

Catastrophe Risk Management Segment

    3,571        3.6     6,720        3.5     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 98,214        100.0   $ 194,235        100.0   $ 190,374        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Investment Strategy

Our investment strategy 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 our investment manager, Third Point LLC, our 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 account 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, we may have investment gains in our investment portfolio as a result of the shift in market sentiment. Through our investment manager, Third Point LLC, we make 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 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. For additional detail regarding Third Point LLC’s investment strategy and event-driven framework utilized in managing our investment portfolio, please refer to the expanded description under “Investments—Investment Strategies.”

As our investment manager, Third Point LLC has the contractual right to manage substantially all of our investable assets pursuant to an investment management agreement that has an initial term expiring on December 22, 2016, subject to automatic renewal for additional successive three-year terms unless a party notifies the other parties of its intention to terminate at least six months prior to the end of a term. Third Point LLC is required to follow our investment guidelines 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 account. Our investment guidelines require Third Point LLC to manage our investment portfolio on a substantially equivalent basis to its main funds; but in any event to keep at least 60% of the investment portfolio in debt and equity securities, cash, cash equivalents or precious metals; limit single position concentration to no more than 15% of the portfolio assets managed; and limit net exposure to no greater than 1.5 times portfolio assets managed for more than 10 trading days in any 30-day period. Net exposure represents the short exposure subtracted from the long exposure in a given category. We have the contractual right to withdraw funds from our managed account to pay claims and expenses as needed. The net increase in the value of our investment portfolio for the year ended December 31, 2012 was 17.7%. For the six months ended June 30, 2013, the net increase in the value of our investment portfolio was 12.2% compared to 2.1% for the six months ended June 30, 2012.

 

 

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Third Point Partners L.P., which is Third Point LLC’s oldest fund, has reported a compounded annualized return of approximately 21.0% from its formation in June 1995 through December 31, 2012, and a compounded annual return of 9.7% and 17.7% for the five- and ten-year periods ended December 31, 2012. The following chart sets forth Third Point Partners L.P.’s total return after fees and incentive allocation for each year in the period since inception as measured against various equity and alternative management indices. The linear graph below illustrates the compounded growth of a hypothetical $1,000 investment in Third Point Partners L.P. at inception in June 1995, assuming no redemptions and net of fees and expenses as described below:

 

Historical

Performance of

  Third Point
Partners L.P.(1)(2)(3)

   

Illustrative Return After Fees, Expenses and Incentive Allocation Since Inception—

Third Point Partners L.P.(2)(3)(4)

2013

     13.10 %(5)   

LOGO

2012

     20.96  

2011

     -0.35  

2010

     41.81  

2009

     38.44  

2008

     -32.75  

2007

     17.31  

2006

     15.03  

2005

     19.51  

2004

     30.36  

2003

     52.02  

2002

     -6.65  

2001

     15.05  

2000

     17.07  

1999

     42.16  

1998

     6.61  

1997

     52.07  

1996

     44.29  

1995

     37.00  
    

 

(1) For 2012, results of Third Point Partners L.P. as reported are higher than results for our investment portfolio due primarily to timing of the initial investment of our portfolio and differences in management and performance fees.
(2) Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal.
(3) The historical performance of Third Point Partners L.P. (i) for the years 2001 through June 2013 reflects the total return after incentive allocation for each such year as included in the audited statement of financial condition of Third Point Partners L.P. for those years and (ii) for the years 1995 through 2000 reflects the total return after incentive allocation for each such year as reported by Third Point Partners L.P. Total return after incentive allocation for the years 2001 through June 30, 2013 is based on the net asset value for all limited partners of Third Point Partners L.P. taken as a whole, some of whom pay no incentive allocation or management fees, whereas total return after incentive allocation for the years 1995 through 2000 is based on the net asset value for only those limited partners of Third Point Partners L.P. that paid incentive allocation and management fees. In each case, results are presented net of management fees, brokerage commissions, administrative expenses, and accrued performance allocation, if any, and include the reinvestment of all dividends, interest, and capital gains.
(4) The illustrative return is calculated as a theoretical investment of $1,000 in Third Point Partners, L.P. at inception relative to the same theoretical investment in two hedge fund indices designed to track performance of certain “event-driven” hedge funds over the same period of time. All references to the Dow Jones Credit Suisse HFI Event Driven Index (“DJ-CS HFI”) and HFRI Event-Driven Total Index (“HFRI”) reflect performance calculated through December 31, 2012. The DJ-CS HFI is an asset-weighted index and includes only funds, as opposed to separate accounts. The DJ-CS HFI uses the Dow Jones Credit Suisse database and consists only of event driven funds deemed to be “event-driven” by the index and that have a minimum of $50 million in assets under management, a minimum of a 12-month track record, and audited financial statements. The HFRI consists only of event driven funds with a minimum of $50 million in assets under management or a minimum of a 12-month track record. Both indices state that returns are reported net of all fees and expenses. Please see the glossary included in this prospectus beginning on page G-1 for a description of how these indices are calculated. While Third Point Partners L.P. has been compared here with the performance of well-known and widely recognized indices, the indices have not been selected to represent an appropriate benchmark for Third Point Partners L.P., whose holdings, performance and volatility may differ significantly from the securities that comprise the indices.
(5) Through June 30, 2013.

 

 

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Competitive Strengths

Our operations are designed to achieve superior results through a combination of our reinsurance underwriting and our investment management strategies. We believe that our flexible business model has the potential to outperform through both reinsurance and capital markets cycles, which differentiates us from many of the reinsurers with whom we compete:

 

   

Balanced Business Model: Our reinsurance underwriting strategy and portfolio construction and our investment strategy are designed to be complementary and to maximize the risk-taking opportunity set available to us.

 

   

Disciplined and Opportunistic Underwriting Approach: We will focus on reinsurance transactions where we can compete most efficiently through cultivating our relationships with intermediaries and insurance and reinsurance company clients, contributing to our ability to structure the coverage and lead underwrite the terms and conditions of the transactions on which we focus. We intend to manage reinsurance pricing cycles by reducing our risk-taking during periods of less favorable market conditions and potentially increasing our risk-taking when conditions improve.

 

   

Differentiated Investment Strategy: Our investment portfolio is managed by our investment manager, Third Point LLC, according to its event-driven opportunistic strategy, which we believe will lead to higher risk-adjusted returns than can be achieved by the portfolios of many of the reinsurers with whom we compete, which are typically concentrated in long-only, investment grade, shorter-term, fixed income securities.

 

   

Experienced Management Team: We have assembled an experienced management team led by industry veteran John Berger. Our management team’s breadth of underwriting experience and strong relationships with key intermediaries and insurance company clients provide access to a significant flow of reinsurance opportunities.

 

   

Strong Balance Sheet: We have a strong balance sheet with no debt, low operating leverage, no legacy liabilities, limited catastrophe exposure and minimal liquidity risk.

Market Trends and Opportunities

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, investment results (including interest rate levels) and the credit ratings and financial strength of competitors.

While our management believes that pricing trends for the type of quota share business on which we focus have been relatively stable, there is significant underwriting capacity currently available, and we therefore believe market conditions will remain competitive in the near term. We believe there are several market developments, however, that indicate the potential for improving conditions in the medium term. These include improving pricing in several primary insurance lines of business which historically have flowed through to the reinsurance market, decelerating reserve releases from prior underwriting years, and the rapid decrease in recent periods in yields from the investment portfolios consisting mostly of long-only, investment grade, shorter-term, fixed income securities. These companies are now focused on the need for pricing increases to offset the drop in investment income or on increasing the risk profile of their investment portfolios, which consumes more of their risk capital.

 

 

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We anticipate that we will continue to see attractive opportunities for the following reasons: intermediaries and reinsurance buyers are increasingly familiar with Third Point Re, leading to increased submission volume in the lines and types of reinsurance we target; our primary insurance company clients are growing gross premium primarily through realizing rate increases and, to a lesser extent, adding to the number of policies they write and consequently increasing their need for quota share reinsurance; and the number of distressed situations for which our customized solutions may be helpful appears to be increasing.

We intend to continue to monitor market conditions to participate in future underserved or capacity constrained lines of business as they arise and offer products that we believe will generate favorable returns on equity over the long term. For instance, we recently reinsured certain obligations of a U.S. mortgage insurance company with respect to newly originated residential mortgages. The U.S. mortgage market suffered severe dislocation during the financial crisis of 2008 and as a result, mortgage insurers suffered severe losses and several needed to increase their capital both by means of new equity issuances and buying increased amounts of reinsurance. At the same time, we believe that the quality of the mortgages that mortgage insurers now insure has generally improved due to more rigorous lending standards imposed by banks and other industry participants. We believe this recent transaction presented an attractive opportunity because of the improved quality of newly originated mortgages, the underlying risk of the reinsurance contract, and the recapitalization of the mortgage insurer, which eliminated most of the residual servicer performance risk.

We also believe that increasingly competitive market conditions in the property catastrophe reinsurance market, due to an influx of capacity from collateralized reinsurance funds and separately capitalized reinsurance vehicles managed by traditional reinsurance companies, which are often termed “sidecars,” has affected business opportunities available to us in two ways: First, approximately 35% of our property and casualty gross premiums written since inception represented property quota share business, where the clients purchase separate catastrophe coverage from another reinsurer. To the extent these clients are able to access more attractively priced catastrophe reinsurance from another reinsurer, the profitability of their underlying business is increased, thereby improving their financial condition and reducing our residual counterparty credit risk. Second, while the expected margins generated by our Catastrophe Fund are expected to be negatively impacted by decreasing reinsurance pricing, the expected overall impact on our results is tempered by our Catastrophe Fund’s portfolio construction and focus on smaller, regional companies. These companies may have more limited access to collateralized reinsurance funds because of the size of their reinsurance programs and tend to favor reinsurance providers with whom they have had a long term relationship.

Recent Developments

Expected Investment Results of our Investment Account Managed by Third Point LLC for the Period from July 1, 2013 to July 31, 2013

The following summarizes the returns on our investment account managed by Third Point LLC for the period from July 1, 2013 through July 31, 2013, and our estimate of net investment income for the same period. Corresponding results of our reinsurance operations are not available. Results of our investment account managed by Third Point LLC for the period from July 1, 2013 through July 31, 2013 are based on information provided by our investment manager. The estimate of net investment income for the period from July 1, 2013 to July 31, 2013 primarily reflects preliminary estimates of investment returns on our investment account managed by Third Point LLC and is subject to finalization. Our actual results may vary from the expectations set forth below. This information has not been audited.

For the period from July 1, 2013 through July 31, 2013, the return on our investments managed by Third Point LLC was 2.6%. Estimated net investment income, net of non-controlling interest, for the same period was $28.3 million. The net asset value of our investment portfolio, net of non-controlling interest, as of July 31, 2013 was $1,130.0 million.

 

 

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Summary Risk Factors

Our business is subject to numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:

 

   

limited history of operations;

 

   

reinsurance underwriting and/or investment losses;

 

   

fluctuation in results of operations;

 

   

losses exceeding reserves;

 

   

dependence on Third Point LLC to implement our investment strategy;

 

   

risks associated with our investment strategy being greater than those faced by our competitors;

 

   

increased regulation or scrutiny of alternative investment advisers affecting our reputation;

 

   

potentially being deemed an investment company under U.S. federal securities law;

 

   

potential characterization of Third Point Reinsurance Ltd. and/or Third Point Re as a passive foreign investment company for U.S. federal income tax purposes; and

 

   

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

Ownership and Certain Corporate Information

Founders Overview

Third Point Reinsurance Ltd. 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 our chief executive officer John R. Berger (collectively, the “Founders”), together with certain members of management, committed $533.0 million to capitalize Third Point Reinsurance Ltd.

Daniel S. Loeb

Mr. Loeb is a successful and experienced figure in the investment management industry. Mr. Loeb is the Chief Executive Officer of Third Point LLC, which he founded in 1995. Mr. Loeb leads portfolio management, risk management and research activities at Third Point LLC.

Before founding Third Point LLC, Mr. Loeb worked as a capital markets professional on both the buy and the sell sides for over a decade, gaining dedicated experience in distressed debt, high-yield bond sales, risk arbitrage, and private investments. He built a network of resources and gained an understanding of the investment spectrum that provides significant yields for his investors today.

Immediately before starting Third Point LLC, Mr. Loeb was Vice-President of high-yield bond sales at Citigroup. Previously, he was a Senior Vice-President in the distressed debt department at Jefferies & Co., where he worked as a bankruptcy analyst, bank loan trader, and as a distressed securities salesman. Before Jefferies, he was a risk arbitrage Analyst at Lafer Equity Investors. He began his finance career as an Associate in private equity at Warburg Pincus. Mr. Loeb graduated from Columbia University with an A.B. in economics.

Mr. Loeb has a majority of his investable net worth in Third Point LLC’s funds.

 

 

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Kelso & Company

Kelso is one of the oldest and most established firms specializing in private equity. Since 1980, Kelso has invested in over 120 companies in a broad range of industry sectors, with aggregate initial capitalization at closing of over $45.0 billion. Kelso is currently investing its eighth investment partnership, Kelso Investment Associates VIII, L.P., with $5.1 billion of committed capital.

Pine Brook

Pine Brook is a New York-based investment firm that provides “business building” and other equity to new and growing businesses, primarily in the energy and financial services sectors. Over the course of their careers, Pine Brook’s financial services investment professionals have invested over $3.0 billion in more than 30 financial services companies, 17 of which were (re)insurance companies. Pine Brook’s experience in (re)insurance includes investments in companies such as Arch Capital Group Ltd., Catlin Group Limited, Lancashire Holdings Limited, Montpelier Re Holdings Ltd. and Renaissance Re Holdings Ltd.

Dowling Capital Partners

Dowling Capital Partners is a private equity firm focused on investing in insurance and related services and distribution companies. Collectively, the management of Dowling Capital Partners has over 80 years of senior level industry experience, including insurance-related private equity investment management, investment banking, industry research and operational and board-level roles within major insurance, reinsurance and brokerage companies. V.J. Dowling, on behalf of his business partners and his family, has invested in 28 individual insurance-related private equity investments since 1998. Thirteen of these transactions involved the funding of start-up entities, including prominent (re)insurers Axis Capital Holdings Limited, Montpelier Re Holdings Ltd., Validus Group, Ariel Holdings Ltd. and Ironshore Insurance Ltd.

P RE Opportunities Ltd. and the Permal Group

PROL serves as an investment vehicle for certain of Permal Asset Management LLC’s discretionary advisory clients. Permal Asset Management LLC is a member of the Permal Group, a global alternative asset manager offering investment solutions through established funds and customized portfolios. Today, the Permal Group manages approximately $24 billion with a global investment team based in New York and London, and additional investment resources in Singapore and Paris. Established in 1973, the Permal Group is today part of the Legg Mason Group of Companies. Legg Mason is one of the world’s largest asset management firms with a diverse family of independent investment managers.

As of June 30, 2013, Kelso owned approximately 33.6% of our issued and outstanding common shares, on an as converted basis, Pine Brook owned approximately 16.9% of our issued and outstanding common shares, on an as converted basis, the Loeb Entities owned approximately 10.8% of our issued and outstanding common shares, on an as converted basis, PROL owned approximately 6.8% of our issued and outstanding common shares, on an as converted basis, Dowling owned approximately 2.1% of our issued and outstanding common shares, on an as converted basis and Mr. Berger owned approximately 1.4% of our issued and outstanding common shares, on an as converted basis, in each case after giving effect to the exercise of applicable options and warrants as described under “Security Ownership of Certain Beneficial Ownership of Certain Beneficial Owners, Management and Selling Shareholders”. Following the completion of this offering and assuming that the underwriters do not exercise their option to purchase additional shares, Kelso, Pine Brook, the Loeb Entities, Dowling, PROL and Mr. Berger will own approximately 26.5%, 13.4%, 8.5%, 1.6%, 5.4%, and 1.2%, of our issued and outstanding common shares, respectively on an as converted basis.

Our Corporate Information

We are incorporated in Bermuda and our corporate offices are located at The Waterfront, Chesney House, 96 Pitts Bay Road, Pembroke HM 08, Bermuda. Our telephone number is +1 (441) 542-3300. Our website address is http://www.thirdpointre.bm. None of the information contained on, or that may be accessed through, our website or any other website identified herein is part of, or incorporated into, this prospectus. All website addresses in this prospectus are intended to be inactive textual references only.

 

 

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The Offering

 

Common shares offered by us

21,524,492 shares

 

Common shares offered by selling shareholders

697,730 shares

 

Total common shares offered

22,222,222 shares

 

Option to purchase additional common shares

The underwriters have a 30-day option to purchase an additional 3,333,333 common shares from us to cover over-allotments, if any.

 

Common shares to be issued and outstanding after this offering

100,580,924 shares (or 103,914,257 shares if the over-allotment option is exercised in full), including restricted shares.

 

Use of proceeds

We intend to use the net proceeds from this offering for general corporate purposes, including the costs associated with being a public company. We will not receive any proceeds from the sale of shares by the selling shareholders. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” for a discussion of factors you should carefully consider before deciding whether to invest in our common shares.

 

Conflicts of Interest

One of the underwriters in the offering, Sandler O’Neill & Partners, L.P. is considered to be an affiliate of Kelso for purposes of Rule 5121 of the Conduct Rules of FINRA. Since Kelso owns more than 10% of our issued and outstanding common shares, a “conflict of interest” would be deemed to exist under Rule 5121(f) (5)(B). Accordingly, we intend that this offering will be made in compliance with the applicable provisions of Rule 5121. Since Sandler O’Neill & Partners, L.P. is not primarily responsible for managing this offering, pursuant to FINRA Rule 5121, the appointment of a qualified independent underwriter is not necessary. As such, Sandler O’Neill & Partners, L.P. will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer.

 

Dividend policy

We do not currently expect to pay dividends on our common shares for the foreseeable future.

 

Proposed NYSE trading symbol

TPRE

As of the date of this prospectus, 79,056,432 of our common shares were issued and outstanding, including 624,300 restricted shares. See “Description of Share Capital.”

 

 

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Unless we indicate otherwise, the information in this prospectus:

 

   

gives effect to the issuance of 21,524,492 common shares in this offering;

 

   

assumes no exercise by the underwriters of their option to purchase additional shares;

 

   

assumes that the initial public offering price of our common shares will be $13.50 per share (which is the midpoint of the price range set forth on the cover page of this prospectus);

 

   

does not give effect to shares issuable pursuant to warrants to purchase common shares held by certain of the Founders and certain entities that acted as advisors in connection with our initial capitalization, which following the completion of this offering will represent the right to receive an aggregate of 4,651,163 common shares, with a weighted average exercise price of $10.00 per share, assuming that this offering yields proceeds to us of not less than $215.7 million;

 

   

does not give effect to shares issuable pursuant to common share purchase options held by our directors and officers, with a weighted average exercise price of $13.23 per share, which following the completion of this offering will be exercisable (subject to vesting) for 11,014,975 common shares, assuming that this offering yields proceeds to us of not less than $215.7 million;

 

   

does not give effect to any future issuances of up to 10,621,931 common shares available for grant under our current equity incentive compensation plans; and

 

   

gives effect to amendments to our bye-laws to be adopted prior to the completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth our summary financial data for the fiscal year ended December 31, 2012, the period from October 6, 2011 (which is our incorporation date) to December 31, 2011 and for the three and six months ended June 30, 2013 and June 30, 2012. We were capitalized in December 2011 and commenced underwriting operations in January 2012. Because we have a limited operating history, period-to-period comparisons of our results of operations for full fiscal years are not yet possible and may not be meaningful in the near future. We derived the financial data for the year ended December 31, 2012 and the period from October 6, 2011 (which is our incorporation date) to December 31, 2011 from our audited financial statements included elsewhere in this prospectus, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The financial data for the three and six months ended June 30, 2013 and June 30, 2012 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. These historical results are not necessarily indicative of future results, and the unaudited interim results for the three and six months ended June 30, 2013 are not necessarily indicative of results that may be expected for the full year ended December 31, 2013. You should read the following summary financial data together with our audited financial statements and related notes included elsewhere in this prospectus and the information under “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
    Year  Ended
December 31,
2012
    Period from
October 6,
2011 to
December 31,
2011
 
    2013     2012     2013     2012      
   

(In thousands, except share and per share data and ratios)

 

Selected Statement of Income Data:

           

Gross premiums written

  $ 98,215      $ 28,178      $ 194,235      $ 120,828      $ 190,374      $ —     

Net premiums earned

    62,287        14,841        95,828        28,678        96,481     

Net investment income

    32,067        (17,623     112,758        16,225        136,422        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

 

 

 

 

 

 

 

 

94,354

 

 

 

  

 

 

 

 

 

 

 

 

(2,782

 

 

 

 

 

 

 

 

 

 

 

208,586

 

 

 

  

 

 

 

 

 

 

 

 

44,903

 

 

 

  

    232,903        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expenses incurred, net

    45,692        16,686        64,330        28,971        80,306        —     

Acquisition costs, net

 

 

 

 

 

 

 

 

14,921

 

 

 

  

 

 

 

 

 

 

 

 

2,138

 

 

 

  

 

 

 

 

 

 

 

 

27,994

 

 

 

  

 

 

 

 

 

 

 

 

2,850

 

 

 

  

    24,604        —     

General and administrative expenses

    7,217        9,621        14,225        13,782        27,376        1,130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

 

 

 

 

 

 

 

 

67,830

 

 

 

  

 

 

 

 

 

 

 

 

28,445

 

 

 

  

 

 

 

 

 

 

 

 

106,549

 

 

 

  

 

 

 

 

 

 

 

 

45,603

 

 

 

  

    132,286        1,130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) including non-controlling interests

    26,524        (31,227     102,037        (700     100,617        (1,130

Income attributable to non-controlling interests

 

 

 

 

 

 

 

 

(301)

 

 

 

  

 

 

 

 

 

 

 

 

120

 

 

 

  

 

 

 

 

 

 

 

 

(1,384

 

 

 

 

 

 

 

 

 

 

 

(185

 

 

 

    (1,216     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 26,223      $ (31,107   $ 100,653      $ (885   $ 99,401      $ (1,130
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share(1):

           

Basic

  $ 0.33      $ (0.40   $ 1.27      $ (0.01   $ 1.26      $ (0.01

Diluted

 

 

 

 

$

 

 

 

0.30

 

 

 

  

 

 

 

 

$

 

 

 

(0.40

 

 

 

 

 

 

 

$

 

 

 

1.15

 

 

 

  

 

 

 

 

$

 

 

 

(0.01

 

 

 

  $ 1.14      $ (0.01

Weighted average number of ordinary shares:

           

Basic

    79,053,543        78,432,132        79,052,488        78,432,132        79,015,510        78,432,132   

Diluted

 

 

 

 

 

 

 

 

87,895,953

 

 

 

  

 

 

 

 

 

 

 

 

78,432,132

 

 

 

  

 

 

 

 

 

 

 

 

87,836,378

 

 

 

  

 

 

 

 

 

 

 

 

78,432,132

 

 

 

  

    87,253,760        78,432,132   

Selected ratios:

           

Property and casualty reinsurance – underwriting ratios(2):

           

Loss ratio(3)

    73.7%        112.4     68.0     101.0     83.2     n/a   

Acquisition cost ratio(4)

    24.1%        14.4     29.6     9.9     25.5     n/a   

General and administrative expense ratio(5)

    7.7%        49.9     10.1     37.4     21.0     n/a   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio(6)

 

 

 

 

105.5%

 

  

 

 

 

 

176.7

 

 

 

 

 

107.7

 

 

 

 

 

148.3

 

    129.7     n/a   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment return(7)

    3.2%        -2.2     12.2     2.1     17.7     n/a   

 

(1)

Basic earnings (loss) per share are based on the weighted average number of common shares and participating securities outstanding during the period. The weighted average number of common shares excludes the dilutive effect of warrants currently held by the Founders and Aon Corporation, or Aon, which acted as an advisor in connection with our initial capitalization, which following the completion of this offering will represent the right to receive an aggregate of 4,651,163 common shares, assuming that this offering yields proceeds to us of not less than $215.7 million, options held by our directors and officers, which, following the completion of this

 

 

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  offering will be exercisable (subject to vesting) for 11,014,975 common shares, assuming that this offering yields net proceeds to us of not less than $215.7 million, and 624,300 unvested restricted shares.
(2) Underwriting ratios are for the property and casualty reinsurance segment only. See additional information in Note 23 of the Notes to Consolidated Financial Statements.
(3) Loss ratio is calculated by dividing loss and loss adjustment expenses incurred, net, by net premiums earned.
(4) Acquisition cost ratio is calculated by dividing acquisition costs, net by net premiums earned.
(5) General and administrative expense ratio is calculated by dividing general and administrative expenses related to underwriting activities by net premiums earned.
(6) 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.
(7) Net investment return represents the return on our investments managed by Third Point LLC, net of fees.

 

    As of
June 30,
2013
    As of December, 31  
              2012                     2011          
    (In thousands, except share
and per share data)
 

Selected Balance Sheet Data:

     

Total investments in securities and commodities

  $ 937,868      $ 937,690      $ —     

Cash and cash equivalents(1)

    32,602        34,005        603,841   

Restricted cash and cash equivalents

    130,569        77,627        —     

Securities purchased under an agreement to sell

    40,355        60,408        —     

Reinsurance balances receivable, net

    208,253        84,280        —     

Deferred acquisition costs, net

    70,262        45,383        —     

Total assets

    1,606,495        1,402,017        605,263   

Deposit liabilities(2)

    103,609        50,446        —     

Unearned premium reserves

    187,313        93,893        —     

Loss and loss adjustment expense reserves

    113,100        67,271        —     

Securities sold, not yet purchased, at fair value

    77,528        176,454        —     

Total liabilities

    581,634        473,696        19,838   

Shareholders’ equity attributable to shareholders(3)

    972,665        868,544        585,425   

Non-controlling interests

    52,196        59,777        —     

Total shareholders’ equity

  $ 1,024,861      $ 928,321      $ 585,425   

Book value per share data:

     

Book value per share(4)

  $ 12.40      $ 11.07      $ 9.73   

Diluted book value per share(5)

  $ 12.07      $ 10.89      $ 9.73   

Selected ratios:

     

Growth in diluted book value per share(6)

    10.9     11.9     n/a   

Return on beginning shareholders’ equity(7)

    11.6     13.0     n/a   

 

(1) Cash and cash equivalents consists of cash, cash held with investment managers and other short-term, highly liquid investments with original maturity dates of ninety days or less.
(2) Management exercises significant judgment in determining whether contracts should be accounted for as reinsurance contracts or deposit 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.
(3) Shareholders’ equity attributable to shareholders and total shareholders’ equity as of December 31, 2011 is reflected net of subscriptions receivable of $177.5 million in accordance with SEC Regulation S-X.
(4) Book value per share is a non-GAAP financial measure. Book value per share is calculated by dividing shareholders’ equity attributable to shareholders, adjusted for subscriptions receivable, by the number of issued and outstanding shares at period end. See the reconciliation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Book Value Per Share and Fully Diluted Book Value Per Share.”
(5)

Diluted book value per share is a non-GAAP financial measure. Diluted book value per share is calculated by dividing shareholders’ equity attributable to shareholders, adjusted for subscriptions receivable, and adjusted to include unvested restricted shares and the exercise of all in-the-money options and warrants. For purposes of this calculation, the market share price is assumed to be equal to the

 

 

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  fully diluted book value per share. See the reconciliation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Book Value Per Share and Fully Diluted Book Value Per Share.”
(6) Growth 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.
(7) Return on beginning shareholders’ equity as presented is a non-GAAP financial measure. Return on beginning shareholders’ equity is calculated by dividing net income by the beginning of year shareholders’ equity attributable to shareholders. For purposes of determining December 31, 2011 shareholders’ equity attributable to shareholders, we add back the impact of subscriptions receivable to shareholders’ equity attributable to shareholders. Management believes this adjustment more fairly presents the return on shareholders’ equity over the period.

 

 

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RISK FACTORS

Investing in our common shares involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision. 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. In that case, the trading price of our common shares could decline, and you may lose all or part of your original investment. This prospectus 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 Relating to Our Business

We are a start-up operation with limited historical information available for investors to evaluate our performance or a potential investment in our shares.

We have a limited history of operations. We were incorporated on October 6, 2011 and began underwriting reinsurance transactions on January 1, 2012. As a result, there is limited historical information available to help prospective investors evaluate our performance or an investment in our shares.

In general, reinsurance and insurance companies in their initial stages of development present substantial business and financial risks and may suffer significant losses. They must develop business relationships, establish operating procedures, hire staff, install information technology systems, implement management processes and complete other tasks appropriate for the conduct of their intended business activities. In particular, our ability to implement our reinsurance underwriting strategy will depend on, among other things:

 

   

our ability to attract clients;

 

   

our ability to attract and retain personnel with sufficient underwriting, actuarial and accounting and finance expertise;

 

   

our ability to maintain at least an A- (Excellent) rating from A.M. Best or a similar financial strength rating from one or more other ratings agencies;

 

   

our ability to evaluate the risks we assume under reinsurance contracts that we write;

 

   

our reliance on third parties to provide certain services; and

 

   

the risk of being deemed a passive foreign investment company or an investment company if we are deemed to not be in the active conduct of an insurance business or to not be predominantly engaged in an insurance business. See “Risks Relating to Insurance and Other Regulations—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.”

We cannot assure you that there will be sufficient demand for the reinsurance products we plan to write to support our planned level of operations, or that we will accomplish the tasks necessary to implement our business strategy.

 

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Our operational structure is currently being developed.

We are in the process of developing and implementing our operational structure and enterprise risk management framework, including exposure management, financial reporting, information technology and internal controls, with which we will conduct our business activities. Our operations are currently supplemented by manual processes, and we expect to migrate over time to a fully-automated control system. While we utilize manual processes, our controls may not be adequate to identify or eliminate risks. There can be no assurance that the development of our operational structure or the implementation of our enterprise risk management framework will proceed smoothly or on our projected timetable or achieve the aforementioned goals.

The preparation of our financial statements requires us to make many estimates and judgments, which are even more difficult than those made in a mature company, and which, if inaccurate, could cause volatility in our results.

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Management believes the item that requires the most subjective and complex estimates is the reserve for losses and loss expenses. Due to our relatively short operating history, loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim may take years to develop. In addition, the possibility of future litigation or legislative change that may affect interpretation of policy terms further increases the degree of uncertainty in the reserving process. The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss expenses materially different from the reserves initially established. Changes to prior year reserves will affect current underwriting results by increasing net income if the prior year reserves prove to be redundant or by decreasing net income if the prior year reserves prove to be insufficient. We expect volatility in results in periods in which significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have occurred and are expected to give rise to a claim. As a result, we are not allowed to record contingency reserves to account for expected future losses. We anticipate that claims arising from future events may require the establishment of substantial reserves from time to time.

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 portfolio fluctuate from period to period. Fluctuations result from a variety of factors, including:

 

   

reinsurance contract pricing;

 

   

our assessment of the quality of available reinsurance opportunities;

 

   

the volume and mix of reinsurance products we underwrite;

 

   

loss experience on our reinsurance liabilities;

 

   

our ability to assess and integrate our risk management strategy properly; and

 

   

the performance of our investment portfolio.

In particular, we seek to underwrite products and make investments to achieve favorable return on equity over the long term. In addition, our opportunistic nature and focus on long-term growth in book value 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:

 

   

price of reinsurance coverage;

 

   

the general reputation and perceived financial strength of the reinsurer;

 

   

relationships with reinsurance brokers;

 

   

terms and conditions of products offered;

 

   

ratings assigned by independent rating agencies;

 

   

speed of claims payment and reputation; and

 

   

the experience and reputation of the members of our underwriting team in the particular lines of reinsurance we seek to underwrite.

Our competitors include, among others, Tokio Millennium Re Ltd., Endurance Specialty Reinsurance Ltd., AXIS Specialty Limited, Arch Reinsurance Ltd., ACE Tempest Reinsurance Ltd., Transatlantic Reinsurance Company and S.A.C. Re, Ltd. In addition, Greenlight Reinsurance, Ltd. has a business model similar to ours, and we expect to compete with them in many lines of business and geographies. In addition, in the future, we may have to compete for the type of reinsurance we intend to underwrite with new start-up companies that have a business model similar to ours.

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 Regulations—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 generally written for a one-year term. In our financial forecasting process, we make assumptions about the renewal of our prior year’s contracts. The insurance and reinsurance industries have historically been cyclical businesses with 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. This risk is especially prevalent in the first quarter of each year when a larger number of reinsurance contracts are subject to renewal.

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 license analytic and modeling capabilities software from third parties to facilitate our pricing, capital modeling software and objective risk assessment relating to risks in our reinsurance portfolio. These models help us to control risk accumulation, inform management and other stakeholders of capital requirements and to improve the risk/return profile or minimize the amount of capital required to cover the risks in each reinsurance contract in our overall portfolio of reinsurance contracts. However, given the inherent uncertainty of modeling techniques and the application of such techniques, these models and databases may not accurately address the emergence of a variety of matters which might be deemed to impact certain of our coverages. Accordingly, these models may understate the exposures we are assuming and our financial results may be adversely impacted, perhaps significantly.

 

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Operational risks, including human or systems failures, are inherent in our business.

Operational risks and losses can result from many sources including fraud, errors by employees, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements or information technology failures.

We believe our modeling, underwriting and information technology and application systems are critical to our business and reputation. Moreover, our technology and applications are an important part of our underwriting process and our ability to compete successfully. 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. A major defect or failure in our internal controls or information technology and application systems could result in management distraction, harm to our reputation, a loss or delay of revenues or increased expense.

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. Like all companies, our information technology systems are vulnerable to data breaches, interruptions or failures due to events that may be beyond our control, including, but not limited to, natural disasters, theft, terrorist attacks, computer viruses, hackers and general technology failures.

We believe that we have established and implemented appropriate security measures, controls and procedures to safeguard our information technology systems and to prevent unauthorized access to such systems and any data processed or stored in such systems, and we periodically evaluate and test the adequacy of such systems, controls and procedures. In addition, we have established a business continuity plan which is designed to ensure that we are able to maintain all aspects of our key business processes functioning in the midst of certain disruptive events, including any disruptions to or breaches of our information technology systems. Our business continuity plan is routinely tested and evaluated for adequacy. Despite these safeguards, disruptions to and breaches of our information technology systems are possible and may negatively impact our business.

It is possible that insurance policies we have in place with third parties would not entirely protect us in the event that we experienced a breach, interruption or widespread failure of our information technology systems. Furthermore, we have not secured insurance coverage designed to specifically protect us from an economic loss resulting from such events.

Although we have never experienced any known or threatened cases involving unauthorized access to our information technology systems or unauthorized appropriation of the data contained within such systems, we have no assurance that such technology breaches will not occur in the future.

We may not be able to manage our growth effectively.

We intend to grow our business in the future, which could require additional capital, systems development and skilled personnel. We cannot assure you that we will be able to meet our capital needs, expand our systems effectively, allocate our human resources optimally, identify and hire qualified employees or incorporate effectively the components of any businesses we may acquire in our effort to achieve growth. Additionally, as we grow, the ability of our management to source sufficient reasonably priced reinsurance business in the segments we target may be limited. The failure to manage our growth effectively could have a material adverse effect on our business, financial condition, and results of operations.

 

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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

 

   

the necessary 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 newly 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.

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, workers’ compensation and certain segments of crop. 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. For example, during 2012, we incurred a $10.0 million underwriting loss in our crop line of business. We seek to further manage the volatility of our reinsurance results by writing policies on a quota share basis and through the use of contractual terms and conditions, such as loss ratio caps, within our reinsurance contracts. In addition, in contrast to many reinsurers with whom we compete, we write property catastrophe reinsurance on an excess of loss basis exclusively through the Catastrophe Reinsurer, which is a separately capitalized reinsurance vehicle. However, there can be no assurance that these loss limitation methods will be effective in mitigating our exposure, or that market or other conditions would necessitate a different loss mitigation strategy. The failure or ineffectiveness of any of our loss limitation methods could have a material adverse effect on our financial condition and results of operations.

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, changes in equity, debt and other investment markets, changes in legislation, case law and prevailing concepts of

 

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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 insurance 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.

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 us 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 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 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:

 

   

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 our losses exceed our loss reserves;

 

   

if we are unable to retain our senior management and other key personnel;

 

   

if our investment portfolio incurs significant losses; or

 

   

if A.M. Best alters its capital adequacy assessment methodology in a manner that would adversely affect Third Point Re’s rating.

 

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If A.M. Best downgrades our rating below A- (Excellent), places us on credit watch or withdraws our rating, we could be severely limited or prevented from writing any new reinsurance contracts 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. The contracts containing such a termination right represented approximately 95.8% of gross premiums written during 2012 and 85.9% of gross premiums written during the six months ended June 30, 2013.

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.

If any such provisions were to become exercisable, we cannot predict whether or how many of our clients would actually exercise such rights or the extent to which they 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.

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, in particular Mr. Berger, and other key personnel, such as our chief financial officer and chief operating officer, our chief actuary and chief risk officer 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, in particular Mr. Berger, or other key personnel could delay or prevent us from fully implementing our business strategy and, consequently, significantly and negatively affect our business.

We do not currently maintain key man life insurance with respect to any of our senior management. If any member of senior management dies or becomes incapacitated, or leaves the company 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 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.

We are not 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.

 

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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 investment portfolio.

Typically, letters of credit are collateralized with fixed-income securities. Banks may be willing to accept our investment portfolio 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 collateralized by our investment portfolio may significantly limit the amount of reinsurance we can write or require us to modify our investment strategy.

We may need additional letter of credit capacity as we grow, and if we are unable to renew, maintain or increase our letter of credit facilities 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 Reinsurance Ltd. 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 subsidiary, Third Point Re, and Third Point Re may also receive income relating to its shareholdings in the Catastrophe Fund. Our cash flows consist primarily of dividends and other permissible payments from Third Point Re and income generated from management fees payable to the Catastrophe Fund Manager, our majority owned subsidiary that provides management services to the Catastrophe Fund. Third Point Reinsurance Ltd. depends on such payments to receive funds to meet its obligations, including the payment of any dividends and other distributions to our shareholders.

Third Point Reinsurance Ltd. is indirectly subject to Bermuda regulatory constraints placed on Third Point Re and the Catastrophe Reinsurer, which is the licensed special purpose insurer that writes policies for the Catastrophe Fund. This affects our ability to pay dividends on the shares and make other payments. Under the Insurance Act, Third Point Re, as a Class 4 insurer, is prohibited from declaring or paying a dividend if it 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 Third Point Re, as a Class 4 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, Third Point Re, as 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.

The Catastrophe Reinsurer, as a special purpose insurer, is prohibited from declaring or paying any dividends during any financial year if it is in breach of its minimum solvency margin or if the declaration or payment of such dividends would cause it to fail to meet such minimum margin. If the Catastrophe Reinsurer, as a special purpose insurer, were to fail to meet its minimum solvency margin on the last day of any financial year, it would be prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.

 

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In addition, under the Bermuda Companies Act 1981, as amended (the “Companies Act”), Bermuda companies such as Third Point Reinsurance Ltd., Third Point Re and the Catastrophe Reinsurer 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 the realizable value of its assets would thereby be less than its liabilities.

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;

 

   

satisfy letters of credit or guarantee bond requirements that may be imposed by our clients or by regulators;

 

   

meet rating agency or regulatory capital requirements; or

 

   

respond to competitive pressures.

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.

Changing climate conditions may adversely affect our financial condition, profitability or cash flows.

Climate change, to the extent it produces extreme changes in temperatures and changes in weather patterns, could affect the frequency or severity of weather events and wildfires. Further, it could reduce the affordability and availability of homeowners insurance, which could have an effect on pricing. Changes in weather patterns could also affect the frequency and severity of other natural catastrophe events to which we may be exposed. For example, due to the severe drought that impacted most of the U.S. farm belt in 2012, we suffered a $10.0 million underwriting loss on $42.5 million of earned crop premium.

Our reinsurance operations may make us vulnerable to losses from catastrophes and may cause our results of operations to vary significantly from period to period.

While Third Point Re, our Class 4 reinsurer, currently does not directly underwrite catastrophe exposed reinsurance business on an excess of loss basis, we recently launched an open-ended catastrophe reinsurance fund with an exposure to a diversified portfolio of peak zone natural catastrophe risk. Involvement in catastrophe exposed excess of loss reinsurance through our investment in the Catastrophe Fund exposes us to claims arising out of unpredictable catastrophic events, such as hurricanes, hailstorms, tornados, windstorms, severe winter weather, earthquakes, floods, droughts, fires, explosions, volcanic eruptions, acts of war or terrorism or political unrest 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 volatility in our results of operations for any fiscal quarter or year.

In addition, we are exposed to the impact of catastrophic events in some cases through the property and casualty quota share reinsurance business of Third Point Re, as significant disasters or weather events can result

 

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in increased claims under such lines of business as auto or crop. If a natural or man-made disaster significantly increased the amount of claims payable under the types of property and casualty reinsurance written by Third Point Re, our reinsurance results of operation could be materially and adversely affected.

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. 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 top three reinsurance brokers, Guy Carpenter & Company, LLC, Advocate Reinsurance Partners, LLC, and Aon Benfield, accounted for approximately 54% of our gross premiums written since inception. Affiliates of these 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.

While we did not purchase retrocessional coverage in 2012, we have begun to do so in the first half of 2013 and may continue to do so in the future, in order to mitigate the effect of a potential concentration of losses upon our financial condition. The insolvency or inability or refusal of a reinsurer to make payments under the terms of its agreement with us could have an adverse effect on us because we remain liable to our client. From time to time, market conditions have limited, and in some cases have prevented, reinsurers from obtaining the types and amounts of retrocession that they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amounts of retrocessional coverage or negotiate terms that we deem appropriate or acceptable or obtain retrocession from entities with satisfactory creditworthiness. Our failure to establish adequate retrocessional arrangements or the failure of our retrocessional arrangements to protect us from overly concentrated risk exposure could significantly and negatively affect our business, financial condition and results of operations.

 

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Currency fluctuations could result in exchange rate losses and negatively impact our business.

Our functional currency is the U.S. dollar. However, we may in the future write a portion of our business and receive premiums in currencies other than the U.S. dollar. In addition, our investment manager, Third Point LLC, invests a portion of our portfolio in assets denominated in currencies other than the U.S. dollar. Consequently, we may experience exchange rate losses to the extent our foreign currency exposure is not hedged or is not sufficiently hedged, which could significantly and negatively affect our business. If we do seek to hedge our foreign currency exposure through the use of forward foreign currency exchange contracts or currency swaps, we may be subject to the risk that our counterparties to the arrangements fail to perform.

Our ability to implement our business strategy could be delayed or adversely affected by Bermuda employment restrictions relating to the ability to obtain and retain work permits for key employees in Bermuda.

Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Our success may depend in part on the continued services of key employees in Bermuda, and none of our chief executive officer, our chief financial officer and chief operating officer, our chief actuary and chief risk officer or our senior underwriting executives are Bermudians or spouses of Bermudians. A work permit may be granted or renewed upon showing that, after proper public advertisement, no Bermudian (or spouse of a Bermudian or a holder of a permanent resident’s certificate or holder of a working resident’s certificate) is available who meets the minimum standards reasonably required by the employer. A work permit is issued with an expiry date (up to ten years) and no assurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of the relevant term. If work permits are not obtained, or are not renewed, for our principal employees, we would lose their services, which could materially affect our businesses.

Risks Relating to Our Investment Strategy and Investment Manager

We have limited control over how our investment portfolio is allocated, and its performance depends on the ability of our investment manager, Third Point LLC, to select and manage appropriate investments.

We have engaged Third Point LLC to act as our exclusive investment manager for substantially all of our investment portfolio and to recommend appropriate investment opportunities. Although Third Point LLC is contractually obligated to follow our investment guidelines, 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.

The performance of our investment portfolio depends to a great extent on the ability of Third Point LLC, as our investment manager to select and manage appropriate investments. We have entered into an investment management agreement with Third Point LLC which terminates on December 22, 2016 and is subject to automatic renewal for additional successive three-year terms unless a party notifies the other parties at least six months prior to the end of a term that it wishes to terminate the investment management agreement at the end of such term. We have limited ability to terminate the investment management agreement earlier. We cannot assure you that Third Point LLC will be successful in meeting our investment objectives. The failure of Third Point LLC to perform adequately could significantly and negatively affect our business, results of operations and financial condition.

The historical performance of Third Point LLC should not be considered as indicative of the future results of our investment portfolio or of our future results or of 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. Although as our investment manager, Third Point LLC has agreed to invest our portfolio on substantially the same basis as Third Point LLC’s hedge funds, results for our investment portfolio could differ

 

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from results of the funds managed by Third Point LLC as a result of restrictions imposed by our investment guidelines. In addition, even if our investment portfolio generates investment income in a given period, our overall performance could be adversely affected by losses generated by our reinsurance operations. Poor performance of our investment portfolio will cause a decline in our revenue from that portfolio and will 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:

 

   

the historical performance of funds managed by Third Point LLC should not be considered indicative of the future results that should be expected from our investment portfolio; and

 

   

the returns of funds managed by Third Point LLC have benefited historically from investment opportunities and general market conditions that currently may not exist and may not repeat themselves, and there can be no assurance that Third Point LLC will be able to avail itself of profitable investment opportunities in the future.

The risks associated with Third Point LLC’s strategy in managing our investment portfolio may be substantially greater than the investment risks faced by other reinsurers with whom we compete.

We may derive a significant portion of our income from our investment portfolio. As a result, our operating results depend in part on the performance of our investment portfolio. We cannot assure you that Third Point LLC, as our investment manager, will successfully structure our investments in relation to our anticipated liabilities. Failure to do so 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 with a focus on event-driven situations, in which Third Point LLC believes that a catalyst, either intrinsic or extrinsic, 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. The market price of our common shares may be volatile and the risk of loss may be greater when compared with other reinsurance companies.

In addition to risks associated with volatility in our portfolio, although we conduct our business through our Class 4 Bermuda licensed insurance company as an operating reinsurance business actively engaged in writing property and casualty coverage, because our investment portfolio as managed by Third Point LLC may include a very small number of futures, options on futures, swaps and other commodity interests from time to time, we are exposed to the risk that the U.S. Commodity Futures Trading Commission (the “CFTC”) could assert that our business has been operated for the purpose of trading commodity interests and we are, therefore, a commodity pool. If this were to occur, our investment strategy and our business could be disrupted as we would be required to have a registered commodity pool operator in order to continue to include investments in commodity interests in our investment portfolio. Registered commodity pool operators are subject to disclosure, reporting and recordkeeping requirements with respect to the pools they operate. In addition, if it were established that we were a commodity pool, the CFTC could pursue remedies against the party or parties it deems to be the commodity pool operator, and we could under certain circumstances be required to indemnify those individuals or entities.

 

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The termination by Third Point LLC of our investment management agreement at the end of its term or any successive term could materially adversely affect our investment results.

We depend upon Third Point LLC, our investment manager, to implement our investment strategy. The investment management agreement, which terminates on December 22, 2016, is subject to automatic renewal for additional successive three-year terms unless a party notifies the other parties at least six months prior to the end of a term that it wishes to terminate the investment management agreement at the end of such term. If Third Point LLC chooses to terminate the investment management agreement at the end of such term, there is no assurance that we could find a suitable replacement.

Potential conflicts of interest with Third Point LLC may exist 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 to our affairs. Affiliates of Third Point LLC manage, and expect to continue to manage, other client accounts, some of which have objectives similar to ours, 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. Pursuant to our investment management agreement with Third Point LLC, Third Point LLC has the exclusive right to manage our investment portfolio and is required to follow our investment guidelines and act in a manner that is fair and equitable in allocating investment opportunities to us, but the agreement does not otherwise impose any specific obligations or requirements concerning allocation of time, effort or investment opportunities to us or any restriction on the nature or timing of investments for our account and for Third Point LLC’s own account or other accounts that Third Point LLC or its affiliates may manage. 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 investment opportunities and returns.

Our investment portfolio may contain large positions which could result in large losses.

Our investment guidelines provide that as our investment manager, Third Point LLC may commit up to 15% of our assets under management to any one investment. Our 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, 2012 and June 30, 2013, the net exposure of our portfolio was 62.8% and 81.5%, respectively, and the largest ten long and short positions comprised an aggregate of 41% and 24% and 40% and 13%, respectively, of our 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 the investment portfolio were required to maintain a wide diversification among companies, securities and types of securities.

We are exposed to credit risk from the possibility that counterparties may default on their obligations.

To the extent that transactions in our investment portfolio are entered into directly and not through a broker or clearinghouse, including, but not limited to, forward foreign currency transactions, swap transactions, and the purchase and sale of bonds and other fixed income securities directly from the current holder thereof, we must rely on the creditworthiness of the counterparty to the extent it is unable to deliver the promised asset or cash flows in the case of cash settled transactions, net of any collateral that has been posted by or to the counterparty. The bankruptcy or insolvency of these counterparties could also result in a loss of any collateral posted against these transactions.

In addition, any prime broker or custodian through whom transactions are effected in our investment portfolio will each have a lien over assets held in a margin account with such counterparty. Further, should a prime broker or custodian become insolvent, those assets may become unavailable for redemption and potentially classified as belonging to the defaulting party. The insolvency of any such prime broker or custodian could result in the loss of a substantial portion or all of the assets held with such counterparty. Assets which are deposited with brokers as collateral against margin loss may become available to the creditors of the brokers in the event of

 

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the bankruptcy or insolvency of the broker to the extent that it is needed to satisfy obligations to the insolvent party. Any reduction in our assets as a result of a default by a prime broker could negatively affect the net asset value of our investment portfolio.

If Third Point LLC’s risk management systems are ineffective, we may be exposed to material unanticipated losses.

Third Point LLC continually refines its risk management techniques, strategies and assessment methods. However, its risk management techniques and strategies do not fully mitigate the risk exposure of its funds and managed accounts, including our 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 our investment portfolio. In addition, any risk management failures could cause losses in the portfolios managed by Third Point LLC, including our managed account, to be significantly greater than the historical measures predict. Third Point LLC’s approach to managing those risks could prove insufficient, exposing us to material unanticipated losses in our investment portfolio.

In managing our investment portfolio, Third Point LLC may trade on margin and use other forms of financial leverage, which could potentially adversely affect our revenues.

Our 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 our investment portfolio could have a disproportionately large effect in relation to our capital. As of June 30, 2013, our investment account had no margin debt at its brokers. A common metric used to determine financial leverage for accounts such as our investment portfolio is the “gross exposure” of our managed account. 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 June 30, 2013, the gross exposure of our investment portfolio was 155.5%. Any event which may adversely affect the value of positions we hold could significantly and negatively affect the net asset value of our investment portfolio and thus our results of operations.

In managing our investment portfolio, Third Point LLC engages in short sales that may subject us to unlimited loss potential.

As our investment manager, Third Point LLC routinely enters into transactions for our account in which it sells a security that we do not own, which we refer to as a short sale, in anticipation of a decline in the market value of the security. Short sales for our account theoretically will 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 June 30, 2013, short exposure in our investment portfolio was $394 million over 140 debt, equity and index positions, including $28 million over 14 positions in the equity portfolio.

Third Point LLC’s representatives’ service on boards and committees may place trading restrictions on our 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 our portfolio is invested. While such representation may enable Third Point LLC to enhance the sale value of our investments, it may also place trading restrictions on our investments.

As of the date hereof, representatives of Third Point LLC sat on the board of directors of Enphase Energy, Inc., whose securities are publicly traded and included in our investment portfolio.

 

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The ability to use ‘‘soft dollars’’ may provide Third Point LLC with an incentive to select certain brokers that may take into account benefits to be received by Third Point LLC.

Under certain circumstances and subject to compliance with the safe harbor provided by section 28(e) of the Exchange Act, Third Point LLC is entitled to use so-called “soft dollars” generated by commissions paid in connection with transactions for our investment portfolio to pay for certain categories of expenses relating to research and related services provide by brokers. Soft dollars are a means of paying brokerage firms for their services through commission revenue, rather than through direct payments. Third Point LLC’s right to use soft dollars may give Third Point LLC an incentive to select brokers or dealers for our transactions, or to negotiate commission rates or other execution terms, in a manner that takes into account the soft dollar benefits received by Third Point LLC rather than giving exclusive consideration to the interests of our investment portfolio and, accordingly, may create a conflict.

Our investment management agreement has limited termination provisions.

Our investment management agreement with Third Point LLC has limited termination provisions which restrict our ability to manage our investment portfolio outside of Third Point LLC. Because the investment management agreement contains exclusivity and limited termination provisions, we are unable to use investment managers other than Third Point LLC for so long as the agreement is in effect. The investment management agreement was entered into on December 22, 2011 and has an initial term of five years, subject to automatic renewal for additional successive three-year terms unless a party notifies the other parties at least six months prior to the end of a term that it wishes to terminate the investment management agreement at the end of such term. We may also terminate the investment management agreement 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.

We may also withdraw as participants under the investment management agreement prior to the expiration of the investment management agreement’s term at any time only “for cause”, which is defined as:

 

   

a material violation of applicable law relating to Third Point LLC’s advisory business;

 

   

Third Point LLC’s fraud, gross negligence, willful misconduct or reckless disregard of its obligations under the investment management agreement;

 

   

a material breach by Third Point LLC of our investment guidelines that is not cured within a 15-day period;

 

   

a conviction or, a plea of guilty or nolo contendere to a felony or a crime affecting the asset management business of Third Point LLC by certain senior officers of Third Point LLC;

 

   

any act of fraud, material misappropriation, material dishonesty, embezzlement, or similar conduct against or involving us by senior officers of Third Point LLC; or

 

   

a formal administrative or other legal proceeding before the SEC, the CFTC, 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.

In addition, we may withdraw as a participant under the investment management agreement prior to the expiration of its term if our portfolio underperforms as measured against specified benchmarks.

We may not withdraw or terminate the investment management agreement on the basis of performance other than as provided above. If we become dissatisfied with the results of the investment performance of Third Point LLC as our investment manager but the contractually specified termination threshold has not been met, we will be unable to hire new investment managers until the investment management agreement expires by its terms or is terminated for cause.

 

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Certain of our investments may have limited liquidity and lack valuation data, which could create a conflict of interest.

Our investment guidelines provide Third Point LLC, as our 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 our 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 agreement 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 management agreement gives 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 may exist or arise.

The U.S. and global economic downturns could harm the performance of our investment portfolio, our liquidity and financial condition and our share price.

Volatility in the United States and other securities markets may adversely affect our investment portfolio. The ability of Third Point LLC to manage our investment portfolio profitably is dependent upon conditions in the global financial markets and economic and geopolitical conditions throughout the world that are outside of our control and difficult to predict. Factors such as equity prices, equity market volatility, asset or market correlations, interest rates, counterparty risks, availability of credit, inflation rates, economic uncertainty, changes in laws or regulation (including laws relating to the financial markets generally or the taxation or regulation of the hedge fund industry), trade barriers, commodity prices, interest rates, currency exchange rates and controls, and national and international political circumstances (including governmental instability, wars, terrorist acts or security operations) can have a material impact on the value of our investment portfolio.

If Third Point LLC, as our investment manager, fails to react appropriately to difficult market, economic and geopolitical conditions, our investment portfolio could incur material losses.

Third Point LLC’s use of hedging and derivative transactions in executing trades for our account may not be successful, which could materially adversely affect our investment results

In managing our investment portfolio, Third Point LLC may utilize various financial instruments both for investment purposes and for risk management purposes in order to protect against possible changes in the market value of our investment portfolio resulting from fluctuations in the securities markets and changes in interest rates, protect unrealized gains in the value of our investment portfolio, facilitate the sale of any such investments, enhance or preserve returns, spreads or gains on any investment in our 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 our account at a later date or for any other reason that Third Point LLC, as our 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 our account to seek to reduce risk, such transactions may result in a poorer overall performance for our investment portfolio than if it had not engaged in any such hedging transactions. For a variety of reasons, in managing our investment portfolio 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 our investment portfolio to risk of loss.

 

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Our investment portfolio includes investments in mortgage-backed securities and other asset-backed securities, whose investment characteristics differ from corporate debt securities.

Our investment portfolio may from time to time be invested in mortgage-backed securities and other asset-backed securities, whose investment characteristics differ from corporate debt securities. As of June 30, 2013, the fair value of asset-backed securities in our investment portfolio was $257.2 million. For a discussion of the performance of such instruments included in our investment portfolio as of December 31, 2012 and June 30, 2013 see “Investments—Investment Strategy—Asset-Backed Securities Strategy.” 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 our 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, our 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 holders of such securities, reducing the value of those securities or rendering them worthless. The risk of such defaults is generally higher in the case of mortgage pools that include “sub-prime” mortgages. Changes in laws and other regulatory developments relating to mortgage loans may impact the investments of our portfolio in mortgage-backed securities in the future.

Our 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 our 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 our investment portfolio has counterparty credit risk with respect to such counterparty.

 

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In addition, within the Euro-zone, there remains significant market concern as to the potential default of government issuers. In addition to European sovereign debt, we have other assets in our investment portfolio that are Euro-denominated. As of June 30, 2013, approximately $76 million by market exposure of our invested assets were denominated in Euros. A devaluation of the Euro could lead to a significant decline in the value of these assets. Should governments default on their obligations, there could be a negative impact on both our direct holdings within our investment portfolio as well as non-government issues held within the country of default.

Third Point LLC’s role as an engaged investor in special situation and distressed investments may subject us or Third Point Re to increased risks including the incurrence of additional legal or other expenses.

As our investment manager, Third Point LLC may invest a portion of our 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 our 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 that 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, our investment portfolio may be subject to increased risk of incurring additional legal, indemnification or other expenses, even if we are 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 investors’ claims; recharacterization of the investor’s claims; and preference or fraudulent transfer claims. Third Point LLC’s use of short-selling for its funds and the accounts it manages has subjected, and may continue to subject Third Point LLC and the short sellers to increased risk of litigation. Lawsuits can be brought against short sellers of a company’s stock to discourage short selling. Among other claims, these suits may allege libel, conspiracy, and market manipulation.

Third Point LLC’s diminution or loss of service or loss of key employees could materially adversely affect our investment results.

We depend upon Third Point LLC, as our investment manager, to implement our investment strategy. All investment decisions with respect to our investment portfolio are made by Third Point LLC, subject to our investment guidelines, under the general supervision of Daniel S. Loeb. As a result, the success of our investment strategy depends largely upon the abilities of Mr. Loeb. While we may terminate the investment management agreement with Third Point LLC upon the death, long-term disability or retirement of Mr. Loeb, or the occurrence of other circumstances in which Mr. Loeb is no longer directing the investment program of Third Point LLC, no assurance can be given that a suitable replacement could be found.

 

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The compensation arrangements of Third Point LLC, as our investment manager, may create an incentive to effect transactions that are risky or speculative.

Third Point LLC is entitled to two forms of compensation under our investment management agreement:

 

   

a management fee of 2% annually (less the founders payment paid to the Lead Investors and Dowling, as described in our investment management agreement), charged monthly, based on net assets under management; and

 

   

performance compensation based on the appreciation, including unrealized appreciation, in the value of our investment portfolio equal to 20% of net profits, subject to 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 our portfolio. These performance compensation arrangements may create an incentive for Third Point LLC as our 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 our 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 our investment portfolio that utilize leverage or to pursue its trading strategies in managing our investment portfolio. 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 which 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 our investment portfolio.

As our investment manager, Third Point LLC routinely engages in short selling for our account in managing our 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 our investment portfolio may be materially and adversely impacted by temporary or new permanent rules, interpretations, prohibitions, and restrictions adopted in response to these adverse market events. Temporary restrictions or prohibitions on short selling activity may be imposed by regulatory authorities with little or no advance notice and may impact prior and future trading activities of our 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.

 

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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 our investment portfolio, including in the event that Third Point LLC is required to enter into a borrowing arrangement for our 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 our investment portfolio.

An increase in Third Point LLC’s assets under management may adversely affect the returns of our investment portfolio.

It is possible that if the amount of assets Third Point LLC manages for us, in its funds 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. While the hedge funds managed by Third Point LLC are currently closed for new investment subject to limited exceptions, Third Point LLC may revisit this decision based on market conditions and any increase in assets under management could adversely affect the returns of our investment portfolio.

Risks Relating to Insurance and Other Regulations

Any suspension or revocation of Third Point Re’s reinsurance license would materially impact our ability to do business and implement our business strategy.

Our subsidiary Third Point Re is licensed as a reinsurer only in Bermuda and we do not plan to seek licenses in any other jurisdiction. The suspension or revocation of Third Point Re’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 became licensed in another jurisdiction. Any such suspension or revocation of our license would negatively impact our reputation in the reinsurance marketplace and could have a material adverse effect on our results of operations.

If we become subject to insurance statutes and regulations in jurisdictions other than Bermuda or there is a change to Bermuda law or regulations or application of Bermuda law or regulations, there could be a significant and negative impact on our business.

Third Point Re, our wholly owned operating subsidiary, is a registered Bermuda Class 4 insurer. As such, it is subject to regulation and supervision in Bermuda. Bermuda insurance statutes, regulations and policies of the BMA require Third Point Re, among other things:

 

   

maintain a minimum level of capital, surplus and liquidity;

 

   

satisfy solvency standards;

 

   

restrict dividends and distributions;

 

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obtain prior approval of ownership and transfer of shares;

 

   

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 and its 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 should 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 could significantly and adversely affect our business by limiting our ability to conduct business as well as subjecting us to penalties and fines.

In addition, the BMA could revoke or suspend Third Point Re’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 or on its behalf for the purposes of any provision of the Insurance Act; (ii) we have ceased to carry on business; (iii) Third Point Re has persistently failed to pay fees due under the Insurance Act; (iv) Third Point Re has been shown to have not complied with a condition attached to its registration or with a requirement made of us under the Insurance Act; (v) we are convicted of an offense against a provision of the Insurance Act; (vi) Third Point Re 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 suspended or revoked Third Point Re’s license we could lose our exception under 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 U.S. Investment Company Act of 1940, as amended, or 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, we would have to seek to register under the Investment Company Act as an investment company, which, under the Investment Company Act, would require an order from the SEC. Our inability to obtain such an order could have a significant adverse impact on our business.

Assuming that we were permitted to register as an investment company, registered investment companies are subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, our ability to raise additional debt and equity securities or issue stock options or warrants (which could impact our ability to compensate key employees), financial leverage, dividends, board of director composition and transactions with affiliates. Accordingly, if we were required to register as an investment company we would not be able to operate our business as it is currently conducted, nor would we be permitted to have many of the relationships that we have with our affiliated companies. Accordingly, we likely would not be permitted to engage Third Point LLC as our investment manager, unless we obtained board and shareholder approvals under the Investment Company Act. If Third Point LLC were not our investment manager, we may be required to liquidate our investment portfolio and we would seek to identify and retain another investment manager with a similar investment philosophy. If we could not identify or retain such an advisor, we

 

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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 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 new 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 new 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 subsidiary increased under the Bermuda Solvency Capital Requirement model. While Third Point Re, as operating, currently has excess capital and surplus under these new requirements, there can be no assurance that such requirement or similar regulations, in their current form or as may be amended in the future, will not have a material adverse effect on our business, financial condition or results of operations. Any failure to meet applicable requirements or minimum statutory capital requirements could subject us to further examination or corrective action by regulators, including restrictions on dividend payments, limitations on our writing of additional business or engaging in finance activities, supervision or liquidation. Further, any changes in existing risk based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels, which we might be unable to do.

 

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Changes in law or regulations could cause a significant and negative impact on our reinsurance business.

From time to time, various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. The extreme turmoil in the financial markets has increased the likelihood of changes in the way the financial services industry is regulated. Governmental authorities worldwide have become increasingly interested in potential risks posed by the insurance industry as a whole, and to commercial and financial systems in general. While we cannot predict the exact nature, timing or scope of possible governmental initiatives, there may be increased regulatory intervention in our industry in the future.

Our exposure to potential regulatory initiatives could be heightened by the fact that we are domiciled in, and operate exclusively from, Bermuda. Bermuda is a small jurisdiction and may be disadvantaged when participating in global or cross-border regulatory matters as compared with larger jurisdictions such as the United States or the leading European Union countries.

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 tax liability or increased regulatory supervision. In addition, we will be exposed to any changes in the political environment in Bermuda.

The Bermuda insurance and reinsurance regulatory framework recently has become subject to increased scrutiny in many jurisdictions. As a result, the BMA has recently implemented and imposed additional requirements on the companies it regulates, such as Third Point Re, as part of its efforts to achieve equivalence under Solvency II, the EU regulatory regime which was enacted in November 2009 and which imposes new solvency and governance requirements across all EU Member States. Although Solvency II was originally supposed to have become effective by November 1, 2012, a proposed Omnibus II directive was to set revised dates for transposition and implementation of Solvency II by the EU Member States. However, there have been a series of delays in the European Parliament vote to approve the Omnibus II directive. Further delay in the implementation of Solvency II is likely, but the extent and nature of the delay is uncertain. The detail of the Solvency II project will be set out in “delegated acts” and binding technical standards which will be issued by the European Commission and will be legally binding. No official drafts for any of these measures have been released. As a result of the delay in implementation of Solvency II, it is unclear when the European Commission will take a final decision on whether or not it will recognize the solvency regime in Bermuda to be equivalent to that laid down in Solvency II.

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 its 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.

 

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Changes in accounting principles and financial reporting requirements could result in material changes to our reported results and financial condition.

U.S. GAAP and related financial reporting requirements are complex, continually evolving and may be subject to varied interpretation by the relevant authoritative bodies. Such varied interpretations could result from differing views related to specific facts and circumstances. Changes in U.S. GAAP and financial reporting requirements, or in the interpretation of U.S. GAAP or those requirements, could result in material changes to our reported results and financial condition. Moreover, the SEC is currently evaluating IFRS to determine whether IFRS should be incorporated into the financial reporting system for U.S. issuers. Certain of these standards could result in material changes to our reported results of operation. See Note 2 of the Notes to our audited consolidated financial statements included elsewhere in this prospectus for a summary of pending changes in accounting principles or financial reporting requirements that could affect our results and disclosures.

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 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. However, because there are no definitive standards provided by the Internal Revenue Code, regulations or court decisions as to the specific activities that constitute being engaged in the conduct of a trade or business within the United States, and as any such determination is essentially factual in nature and must be made annually, we cannot assure you that the United States Internal Revenue Service, or the IRS, will not successfully assert that we are engaged in a trade or business in the United States or, if applicable under the income tax treaty between the U.S. and Bermuda (the “Bermuda Treaty”), engaged in a trade or business in the United States through a permanent establishment, and thus are subject to current United States federal income taxation. If we were deemed to be engaged in a trade or business in the United States (and, if applicable under the Bermuda Treaty, were deemed to be so engaged through a permanent establishment), Third Point Re 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 adversely affect our results of operations.

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.

PFIC. Significant potential adverse United States federal income tax consequences generally apply to any United States person who owns shares in a PFIC. In general, either we or Third Point Re 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 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.

 

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We believe that our financial reserves are consistent with industry standards and are not in excess of the reasonable needs of our insurance business, and that we are actively engaged in insurance activities that involve sufficient transfer of risk. 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. Moreover, our expectation with respect to any taxable year is based on the amount of risk that we expect to underwrite during that year. If we are unable to underwrite sufficient amount of risk for any taxable year, the Company and/or Third Point Re 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 the Company and/or Third Point Re may be treated as a PFIC. Counsel to the Company and its subsidiaries (the “Group”) is not providing 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. Prospective investors are urged to consult their own tax advisors to assess their tolerance of this risk.

If a U.S. Holder (as defined below) holds our shares during any taxable year in which the Company and Third Point Re are treated as PFICs, such shares will generally be treated as stock in a PFIC for all subsequent years. The consequences of the Company and/or Third Point Re being treated as a PFIC and certain elections designed to mitigate such consequences, including a “Protective QEF Election,” are discussed in more detail under the heading “Certain United States Federal Income Tax Considerations”. 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 and to assess your tolerance of this risk.

CFC. United States persons who, directly or indirectly or through attribution rules, own 10% or more of the voting power 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 for an uninterrupted period of 30 days or more during any year. We believe that the restrictions placed on the voting power of our shares should generally prevent shareholders who acquire shares from being treated as United States 10% shareholders of a CFC. We cannot assure you, however, that these rules will not apply to you. 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 are 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

 

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the case may be, that were accumulated during the period that the United States 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 U.S. 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.

We may become subject to U.S. withholding and information reporting requirements under the Foreign Account Tax Compliance Act (“FATCA”) provisions.

The Foreign Account Tax Compliance provisions of the Code (“FATCA”) generally impose a 30% withholding tax regime with respect to (i) certain U.S. source income (including interest and dividends) and gross proceeds from any sale or other disposition after December 31, 2016, of property that can produce U.S. source interest or dividends (“withholdable payments”) and (ii) “passthru payments” (generally, withholdable payments and payments that are attributable to withholdable payments) made by foreign financial institutions (“FFIs”). As a general matter, FATCA was designed to require U.S. persons’ direct and indirect ownership of certain non-U.S. accounts and non-U.S. entities to be reported to the IRS. The application of the FATCA withholding rules will be phased in beginning July 1, 2014, with withholding on foreign passthru payments made by FFIs taking effect no earlier than 2017.

The Bermuda government recently announced that it will negotiate and sign a “Model 2” intergovernmental agreement (“IGA”) with the United States to implement FATCA. If we and/or Third Point Re are treated as FFIs for the purposes of FATCA, under the Model 2 IGA, we and/or Third Point Re will be directed to ‘register’ with the IRS and enabled to comply with the requirements of FATCA, including due diligence, reporting and withholding. Assuming registration and compliance pursuant to a Model 2 IGA, an FFI would be treated as FATCA compliant and not subject to withholding. However, at this early stage, there can be no certainty how such Model 2 IGA would modify the application of FATCA to us and/or Third Point Re. An FFI that satisfies the eligibility, information reporting and other requirements of an IGA generally is not subject to the regular FATCA reporting and withholding obligations discussed below. However, there can be no assurance that the government of Bermuda and the United States will enter into an IGA and it is not clear whether and how such IGA would modify the application of FATCA to the Company and/or Third Point Re. As a result, the following discussion assumes that the Company and/or Third Point Re will not be subject to an IGA. Moreover, there can be no assurance that the government of Bermuda and the United States will ultimately sign a Model 2 IGA. As a result, the following discussion assumes that the Company and/or Third Point Re will not be subject to an IGA.

If the Company and/or Third Point Re are treated as FFIs for purposes of FATCA, withholdable payments and passthru payments made to the Company and/or Third Point Re will be subject to a 30% withholding tax

 

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unless an agreement with the IRS (an “FFI Agreement”) is in effect, pursuant to which the Company and/or Third Point Re 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 that it is out of compliance with the FFI Agreement and the Company and/or Third Point Re does not remediate the compliance failure. Even if the Company and Third Point Re are subject to an FFI Agreement, distributions to an investor that are treated as 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 to comply with the FFI Agreement including, in the case of a non-U.S. investor, providing information regarding certain U.S. direct and indirect owners of the investor (and, in certain circumstances, obtaining waivers of non-U.S. law to permit such reporting), or (b) if the investor is an FFI, unless the investor (i) is subject to an FFI Agreement, (ii) establishes that an exemption applies or (iii) is required to comply with FATCA under an applicable IGA.

Under the regulations implementing FATCA, a foreign insurance company (or foreign holding company of an insurance company) that issues or is obligated to make payments with respect to an account is a foreign financial institution. For this purpose, insurance contracts treated as having “cash value” and annuity contracts issued or maintained by a financial institution are considered accounts, and certain term life insurance contracts are not considered accounts. Insurance companies that issue only property and casualty insurance contracts, or that only issue life insurance contracts lacking cash value (or that provide for limited cash value) generally would not be considered FFIs under the final regulations. However, a holding company may be treated as an FFI if it is formed in connection with or availed of by a collective investment vehicle, mutual fund, exchange traded fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. Moreover, a company may be treated as an FFI if its gross income is primarily attributable to investing, reinvesting, or trading in financial assets and the entity is managed by an FFI, or the entity functions or holds itself out as an investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. There can be no certainty as to whether Company and/or Third Point Re will be treated as a “foreign financial institution” under FATCA. Even if the Company and Third Point Re are not treated as FFIs, then depending on whether the shares of the Company is 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 meet the requirements for the treatment of Third Point Re as an “active NFFE,” withholdable payments to the Company and/or Third Point Re may be subject to a 30% withholding tax unless the Company and/or Third Point Re provide information regarding its U.S. direct or indirect owners.

Potential additional application of the Federal Insurance Excise Tax.

The IRS, in Revenue Ruling 2008-15, has formally announced its position that the U.S. federal insurance excise tax (the “FET”) is applicable (at a 1% rate on premiums) to all reinsurance cessions or retrocessions of risks by non-U.S. insurers or reinsurers to non-U.S. reinsurers where the underlying risks are either (i) risks of a U.S. entity or individual located wholly or partly within the U.S. or (ii) risks of a non-U.S. entity or individual engaged in a trade or business in the U.S. which are located within the U.S. (“U.S. Situs Risks”), even if the FET has been paid on prior cessions of the same risks. The legal and jurisdictional basis for, and the method of enforcement of, the IRS’s position is unclear. We have not determined if the FET should be applicable with respect to risks ceded to us by, or by us to, a non-U.S. insurance company. If the FET is applicable, it should apply at a 1% rate on premium for all U.S. Situs Risks ceded to us by a non-U.S. insurance company, or by us to a non-U.S. insurance company, even though the FET also applies at a 1% rate on premium ceded to us with respect to such risks.

 

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Change in United States tax laws may be retroactive and could subject us and/or United States persons who own our shares to United States income taxation on our undistributed earnings.

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. There are currently no regulations regarding the application of the passive foreign investment company rules to an insurance company and the regulations 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.

We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on our results of operations and your investment.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given us an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of our operations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. See “Certain Tax Considerations—Bermuda Tax Considerations.” Given the limited duration of the Bermuda Minister of Finance’s assurance, we cannot assure you that we will not be subject to any Bermuda tax after March 31, 2035.

Risks Relating to This Offering and Our Common Shares

Our common shares have no prior public market and the market price of our common shares may be volatile and could decline after this offering.

Prior to this offering, there has not been a public market for our common shares, and an active market for our common shares may not develop or be sustained after this offering. We will negotiate the initial public offering price per share with the representatives of the underwriters and therefore, that price may not be indicative of the market price of our common shares after this offering. We cannot assure you that an active public market for our common shares will develop after this offering or, if it does develop, it may not be sustained. In the absence of a public trading market, you may not be able to liquidate your investment in our common shares. In addition, the market price of our common shares may fluctuate significantly. Among the factors that could affect our share price are:

 

   

general market conditions;

 

   

domestic and international economic factors unrelated to our performance;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in or failure to meet publicly disclosed expectations as to our future financial performance;

 

   

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 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;

 

   

announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;

 

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any future sales of our common shares or other securities;

 

   

potential characterization of the Company or Third Point Re as a PFIC;

 

   

regulatory developments; and

 

   

additions or departures of key personnel.

In particular, we cannot assure you that you will be able to resell your shares at or above the initial public offering price. The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading 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 our management’s attention and resources, which would harm our business, operating results and financial condition.

Future sales of shares by existing shareholders could cause our share price to decline.

Sales of substantial amounts of our common shares in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common shares to decline. Based on shares (including restricted shares) issued and outstanding as of the date of this prospectus, upon completion of this offering, we will have 100,580,924 issued and outstanding common shares (or 103,914,257 issued and outstanding common shares, assuming exercise of the underwriters’ overallotment option in full). All of the shares sold pursuant to this offering will be immediately tradeable without restriction under the Securities Act unless held by “affiliates”, as that term is defined in Rule 144 under the Securities Act. The remaining 79,056,432 common shares issued and outstanding as of the date of this prospectus will be restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject to applicable volume, means of sale, holding period and other limitations of Rule 144 or pursuant to an exception from registration under Rule 701 under the Securities Act, subject to the terms of the lock-up agreements entered into among us, the underwriters and shareholders holding approximately 90% of our common shares. J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC, may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements entered into in connection with this offering. See “Underwriting (Conflicts of Interest).” Upon completion of this offering, we intend to file one or more registration statements under the Securities Act to register the common shares to be issued under our equity compensation plans and, as a result, all common shares acquired upon exercise of share options granted under our plans would also be freely tradable under the Securities Act, subject to the terms of the lock-up agreements, unless purchased by our affiliates. A total of 21,627,906 common shares are reserved for issuance under our current share incentive plans. As of June 30, 2013, there were share options outstanding which following the completion of this offering will be exercisable (subject to vesting) for 11,014,975 common shares, assuming that this offering yields proceeds to us of not less than $215.7 million. In addition, as of June 30, 2013, we have reserved for issuance common shares underlying certain warrants to purchase, in the aggregate, up to 4,651,163 common shares.

We, our executive officers and shareholders holding approximately 90% of our common shares, including shares held by the selling shareholders, have agreed to a “lock-up,” meaning that, subject to certain exceptions, neither we nor they will sell any shares without the prior consent of J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC, for 180 days after the date of this prospectus. Following the expiration of this 180-day lock-up period, approximately 79.1 million of our common shares will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144. See “Common Shares Eligible for Future Sale” for a discussion of the common shares that may be sold into the public market in the future. 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 following the expiration of the lock-up period. Such sales may not be subject to the volume, manner of sale, holding period and other limitations of

 

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Rule 144A. 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. None of the Founders or our management will participate as selling shareholders in this offering. However, existing holders of our common shares 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 the restrictions contained in the lock-up agreements.

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.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our share price and trading volume could decline.

The trading market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If there is no coverage of our company by securities or industry analysts, the trading price for our shares would be negatively impacted. In the event we obtain securities or industry analyst coverage or if one or more of these analysts downgrades our shares or publishes misleading or unfavorable research about our business, our share price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our shares could decrease, which could cause our share price or trading volume to decline.

If the ownership of our common shares continues to be highly concentrated, it could prevent you and other shareholders from influencing significant corporate decisions.

Following the completion of this offering, our Founders will beneficially own approximately 56.6% in the aggregate of our issued and outstanding common shares, on an as converted basis after giving effect to the issuance of warrants representing the right to receive 4,069,868 common shares and assuming that the underwriters do not exercise their option to purchase additional shares. As a result, the Founders could exercise significant influence over all matters requiring shareholder approval for the foreseeable future, including approval of significant corporate transactions, which may reduce the market price of our common shares.

The interests of our existing shareholders may conflict with the interests of our other shareholders. Our board of directors intends to adopt corporate governance guidelines that will, among other things, address potential conflicts between a director’s interests and our interests. In addition, we intend to adopt a Code of Business Conduct and Ethics that, among other things, requires 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 will not, by themselves, prohibit transactions with our Founders.

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure and other requirements applicable to emerging growth companies could make our common shares less attractive to investors.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting and other requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive

 

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compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We expect to qualify as an emerging growth company upon completion of this offering and will remain an emerging growth company until the earliest of (a) the last day of our fiscal year following the fifth anniversary of this offering; (b) the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (d) the date on which we are deemed to be a “large accelerated filer,” which will occur at such time as we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (2) have been required to file annual, quarterly and current reports under the Securities Exchange Act of 1934 for a period of at least 12 calendar months, and (3) have filed at least one annual report pursuant to the Securities Act of 1934. As a result, we may qualify as an emerging growth company until as late as December 31, 2018.

We cannot predict whether investors will find our common shares less attractive if we choose to rely on one or more of these exemptions or if our decision to avail ourselves of the reduced requirements may make it more difficult for investors and securities analysts to evaluate our company. If some investors find our common shares less attractive as a result of our decision to utilize one or more of the exemptions available to us as an emerging growth company, there may be a less active trading market for our common shares and the market price of our common shares may be adversely affected.

Under Section 102(b) of the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Pursuant to Section 107(b) of the Jumpstart Our Business Startups Act, we have irrevocably elected to “opt out” of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, will be expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on our future results of operations and our share price.

We have historically operated as a private company and have not been subject to the same financial and other reporting and corporate governance requirements as a public company. After this offering, we will be required to file annual, quarterly and other reports with the SEC. We will need to prepare and timely file financial statements that comply with SEC reporting requirements. We will also be subject to other reporting and corporate governance requirements, under the listing standards of the NYSE and the Sarbanes-Oxley Act of 2002, which will impose significant new compliance costs and obligations upon us. The changes necessitated by becoming a public company will require a significant commitment of additional resources and management oversight which will increase our operating costs, including as a result of our engagement of a third party to assist us in developing our internal audit function. These changes will also place significant additional demands on our finance and accounting staff, who may not have prior public company experience or experience working for a newly public company, and on our financial accounting and information systems. We may in the future hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we will be required, among other things, to:

 

   

prepare and file periodic reports, and distribute other shareholder communications, in compliance with the federal securities laws and NYSE rules;

 

   

define and expand the roles and the duties of our board of directors and its committees;

 

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institute more comprehensive compliance, investor relations and internal audit functions; and

 

   

evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with rules and regulations of the SEC and the Public Company Accounting Oversight Board.

In particular, upon completion of this offering, the Sarbanes-Oxley Act of 2002 will require us to document and test the effectiveness of our internal control over financial reporting in accordance with an established internal control framework, and to report on our conclusions as to the effectiveness of our internal controls. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 unless we choose to utilize the exemption from such attestation requirement available to “emerging growth companies.” As described above, we expect to qualify as an emerging growth company upon completion of this offering and could potentially qualify as an emerging growth company until December 31, 2018. In addition, upon completion of this offering, we will be required under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to maintain disclosure controls and procedures and internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common shares. Failure to comply with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC, the NYSE, or other regulatory authorities.

We estimate that the increase in out-of-pocket costs related to being a public company will be approximately $2.5 to $3.0 million per annum. We retained the services of advisors at the beginning of 2012 to assist with preparing for compliance with the Sarbanes-Oxley Act of 2002 and to help us develop an internal audit function in anticipation of effecting an initial public offering as required by contractual arrangements with our Founders. Since we have already incurred certain costs related to becoming a public company, the $2.5 to $3.0 million estimated annual additional costs does not reflect the total costs of being a public company.

Investors purchasing common shares in this offering will experience immediate and substantial dilution as a result of this offering and future equity issuances.

The initial public offering price per share will significantly exceed the net tangible book value per share of our issued and outstanding common shares. As a result, investors purchasing common shares in this offering will experience immediate substantial dilution of $1.09 a share, based on an initial public offering price of $13.50, which is the midpoint of the price range set forth on the cover page of this prospectus. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Investors purchasing common shares sold by us in this offering will contribute approximately 27% of the total amount we have raised since our inception, but will own only approximately 21.5% of our total common shares immediately following the completion of this offering. In addition, we have issued options and warrants to acquire common shares at prices significantly below the initial public offering price. These options and warrants contain contractual provisions that increase the number of our common shares issuable thereunder depending on the amount of proceeds payable to us in the offering. To the extent outstanding options and warrants are ultimately exercised, there will be further dilution to investors in this offering. In addition, if the underwriters exercise their over-allotment option, or if we issue additional equity securities, investors purchasing common shares in this offering will experience additional dilution.

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

 

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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 your common shares without your 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 which is necessary to avoid or cure any adverse tax consequences or materially adverse legal or regulatory treatment to us, our subsidiaries or our shareholders if our board of directors reasonably determines, in good faith, that failure to exercise our option would result in such adverse consequences or treatment.

Holders of our shares may have difficulty effecting service of process on us or enforcing judgments against us in the United States.

We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of our assets are located in jurisdictions outside the United States. As such, we have been advised that there is doubt as to whether:

 

   

a holder of our shares would be able to enforce, in the courts of Bermuda, judgments of United States courts against persons who reside in Bermuda based upon the civil liability provisions of the United States federal securities laws;

 

   

a holder of our shares would be able to enforce, in the courts of Bermuda, judgments of United States courts based upon the civil liability provisions of the United States federal securities laws;

 

   

a holder of our shares would be able to bring an original action in the Bermuda courts to enforce liabilities against us or our directors and officers who reside outside the United States based solely upon United States federal securities laws.

Further, we have been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of United States courts, and there are grounds upon which Bermuda courts may not enforce judgments of United States courts. Because judgments of United States courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments.

U.S. persons who own our shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.

The Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Companies Act and our bye-laws which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us and our shareholders.

Interested Directors: Bermuda law provides that we cannot void any transaction we enter into in which a director has an interest, nor can such director be liable to us for any profit realized pursuant to such transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of directors, or in writing, to the directors. Under Delaware law such transaction would not be voidable if:

 

   

the material facts as to such interested director’s relationship or interests were disclosed or were known to the board of directors and the board of directors had in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors;

 

   

such material facts were disclosed or were known to the shareholders entitled to vote on such transaction and the transaction were specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or

 

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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 supermajority 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. Following this offering, however, we expect that our bye-laws will include a provision restricting business combinations with interested shareholders consistent with the corresponding Delaware statute. See “Description of Share Capital—Certain Bye-laws Provisions—Business Combinations.”

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 stockholders 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: Prior to the completion of this offering, we will enter into indemnification agreements with our directors. The indemnification agreements will 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. See “Certain Relationships and Related Party Transactions—Related Person Transactions—Indemnification.” Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if such director or officer acted in good faith and in a manner he or she reasonably believed to be in or not be opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his or her conduct was unlawful.

Provisions in our bye-laws may reduce or increase the voting rights of our shares.

In general, and except as provided under our bye-laws and as described below, the common shareholders have one vote for each common share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, if, and so long as, the shares of a shareholder are treated as “controlled shares” (as determined pursuant to sections 957 and 958 of the Internal Revenue Code of 1986, as amended (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

 

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respect to the controlled shares owned by such U.S. 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 U.S. 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 the Company within ten days following the date it owns 9.5% of our common shares.

Following the offering, our bye-laws may contain provisions that could discourage takeovers and business combinations that our shareholders might consider in their best interests.

In connection with this offering, we intend to seek the consent of our shareholders to amend our bye-laws to 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, we anticipate that, prior to the completion of this offering, our bye-laws will be amended to:

 

   

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;

 

   

establish a classified board of directors;

 

   

require advance notice of shareholders’ proposals in connection with annual general meetings;

 

   

authorize our board to issue “blank cheque” preferred shares;

 

   

prohibit us from engaging in a business combination with a person who acquires at least 15% of our common shares for a period of three years from the date such person acquired such common shares unless board and shareholder approval is obtained prior to the acquisition;

 

   

require that directors only be removed from office for cause by majority shareholder vote once the Lead Investors and the Loeb Entities cease to collectively hold at least 35% of our issued and outstanding shares;

 

   

provide that vacancies on the board, including newly-created directorships, may be filled only by a majority vote of directors then in office;

 

   

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

 

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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.

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.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes market and industry data and forecasts that we have developed from independent research firms, publicly available information, various industry publications, other published industry sources or our internal data and estimates. Independent research reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, none of the issuer of the securities offered hereby, the selling shareholders or the underwriters have independently verified the data. Our internal data, estimates and forecasts are based on information obtained from our investors, trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had such information verified by any independent sources.

This prospectus includes forward-looking statements, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” 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 prospectus.

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:

 

   

limited historical information about us;

 

   

operational structure currently is being developed;

 

   

fluctuation in results of operations;

 

   

more established competitors;

 

   

losses exceeding reserves;

 

   

downgrades or withdrawal of ratings by rating agencies;

 

   

dependence on key executives;

 

   

dependence on letter of credit facilities that may not be available on commercially acceptable terms;

 

   

potential inability to pay dividends;

 

   

unavailability of capital in the future;

 

   

dependence on clients’ evaluations of risks associated with such clients’ insurance underwriting;

 

   

suspension or revocation of our reinsurance license;

 

   

potentially being deemed an investment company under U.S. federal securities law;

 

   

potential characterization of Third Point Reinsurance Ltd. and/or Third Point Re as a PFIC;

 

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dependence on Third Point LLC to implement our investment strategy;

 

   

termination by Third Point LLC of our investment management agreement;

 

   

risks associated with our investment strategy being greater than those faced by competitors;

 

   

increased regulation or scrutiny of alternative investment advisers affecting our reputation;

 

   

potentially becoming subject to United States federal income taxation;

 

   

potentially becoming subject to U.S. withholding and information reporting requirements under the FATCA provisions; and

 

   

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

In light of these risks, uncertainties and other factors, the forward-looking statements contained in this prospectus might not prove to be accurate and you should not place undue reliance upon 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.

 

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USE OF PROCEEDS

Based upon an assumed initial public offering price of $13.50 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering of approximately $267.4 million, after deducting estimated underwriting discounts and commissions in connection with this offering and estimated offering expenses payable by us of approximately $23.2 million. See “Underwriting (Conflicts of Interest).”

We will not receive any of the proceeds from the common shares to be sold by the selling shareholders in this offering.

We intend to use the net proceeds we receive from this offering for general corporate purposes, including the costs associated with being a public company, which we estimate will result in additional costs of approximately $2.5 to $3.0 million per annum. We presently intend to contribute substantially all the remaining net proceeds of this offering to our subsidiary Third Point Re’s surplus to increase its underwriting capacity in order to support the growth of our reinsurance premium writings. To the extent that this additional surplus is not immediately needed to pay claims or expenses, it will be invested consistent with past practice pursuant to the terms of our investment management agreement with Third Point LLC. The terms of the agreement among members entered into with our existing shareholders requires that we effect an initial public offering within a contractually specified time period. We are conducting this offering both to raise capital to support the growth of our reinsurance business and to provide a liquidity realization event to our existing shareholders who elect to participate as selling shareholders in this offering. All of our existing shareholders have the contractual right to request the inclusion of shares to be sold on their behalf in this offering pursuant to a registration rights agreement.

A $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share (the mid-point of the price range set forth on the front cover of this prospectus) would increase or decrease the net proceeds to us from this offering by $20.2 million, assuming that the number of shares offered by us set forth on the front cover of this prospectus remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease the total consideration paid to us by new investors and the total consideration paid to us by all shareholders by $12.7 million, assuming the initial public offering price of $13.50 per share (the mid-point of the price range set forth on the front cover of this prospectus) remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will vary based on the actual public offering price and other terms of this offering determined at pricing.

 

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DIVIDEND POLICY

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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” 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.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of June 30, 2013:

 

   

on an actual basis; and

 

   

on an adjusted basis to reflect the sale by us of 21,524,492 common shares in this offering, at an assumed public offering price of $13.50 per share, the midpoint of the range set forth on the cover page of this prospectus. Each $1.00 increase (decrease) in the public offering price per share would increase (decrease) our total shareholders’ equity and total capitalization by $20.2 million (assuming no exercise of the underwriters’ over-allotment option and after deducting estimated underwriting discounts and estimated offering expenses).

 

     As of June 30, 2013  
     Actual     As Adjusted  
           (unaudited)  
     (in thousands, except share
and per share data)
 

Cash and cash equivalents

   $ 32,602      $ 300,021   
  

 

 

   

 

 

 

Long-term debt

   $ —   (1)    $ —     

Shareholders’ equity

    

Common shares, $0.10 par value per share, 150,000,000 shares authorized, 79,056,432 shares issued and outstanding actual and                  shares issued and outstanding as adjusted(2)

   $ 7,843      $ 9,995   

Additional paid-in capital

     765,898        1,031,165   

Retained earnings

     198,924        198,924   
  

 

 

   

 

 

 

Shareholders’ equity attributable to shareholders

     972,665        1,240,084   

Non-controlling interests

     52,196        52,196   
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 1,024,861      $ 1,292,280   

Total capitalization

   $ 1,024,861      $ 1,292,280   

You should read this table in conjunction with the sections of this prospectus entitled “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

(1) We do not currently have any long-term debt. We utilize letters of credit facilities to secure certain reinsurance contract obligations.
(2) Does not include restricted shares, options and warrants held by management, directors, our Founders and Aon.

 

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DILUTION

If you invest in our common shares, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per common share and the net tangible book value per common share immediately after this offering.

Our shareholders’ equity attributable to shareholders as of June 30, 2013 was $972.7 million, or $12.40 per common share, and our pro forma book value per share was $12.40. Pro forma book value per share before the offering has been determined by dividing shareholders’ equity attributable to shareholders by the number of common shares issued and outstanding at December 31, 2012.

After giving effect to the sale of common shares sold by us in this offering at an assumed initial public offering price of $13.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma shareholders’ equity attributable to shareholders at June 30, 2013 would have been $1,240.1 million, or $12.41 per share. This represents an immediate increase in book value per share of $.01 to the existing shareholders and dilution in book value per share of $1.09 to new investors who purchase shares in this offering. The following table illustrates this per share dilution to new investors:

 

Assumed initial public offering price per share

      $ 13.50   

Pro forma book value per share as of June 30, 2013

   $ 12.40      

Increase in book value per share attributable to new investors in this offering

   $ .01      

Pro forma book value per share after this offering

      $ 12.41   
     

 

 

 

Dilution of book value per share to new investors

      $ 1.09   
     

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase or decrease total consideration paid by new investors and total consideration paid by all shareholders by $20.2 million, assuming that the number of shares offered by us set forth on the front cover of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease the total consideration paid to us by new investors and total consideration paid to us by all shareholders by $12.7 million, assuming the assumed initial public offering price of $13.50 per share (the mid-point of the price range set forth on the cover page of this prospectus) remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, as of June 30, 2013 the total number of common shares purchased from us, the total consideration paid to us and the average price per share paid by the existing shareholders and by new investors purchasing shares from us in this offering (amounts in thousands, except percentages and per share data):

 

    

 

Shares Purchased

   

 

Total Consideration

   

 

Average
Price
Per Share

 
      Number      Percent     Amount      Percent    

Existing shareholders

     78,432         78.5   $ 784,321         73.0   $ 10.00   

New investors

     21,524         21.5        290,581         27.0        13.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     99,956         100   $ 1,074,902         100   $ 10.75   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The foregoing table does not reflect proceeds to be realized by the selling shareholders in connection with the sales by them in this offering, options outstanding under our share option plans or share options to be granted at or after this offering. As of June 30, 2013 we had outstanding options with a weighted average exercise price of $13.23 per share, which following the completion of this offering will be exercisable (subject to vesting) for 11,014,975 common shares; warrants which following the completion of this offering will represent the right to

 

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purchase 4,651,163 common shares with an average exercise price of $10.00 per share, assuming that this offering yields proceeds to us of not less than $215.7 million; and 624,300 outstanding (subject to vesting) restricted shares, which are not included in shares issued and outstanding as of June 30, 2013. As of June 30, 2013, 612,931 shares remained available for grant, assuming that this offering yields proceeds to us of not less than $215.7 million. Subject to adjustment, a total of 21,627,906 common shares will be available for issuance under the Omnibus Equity Incentive Plan. The number of shares available includes the 10,621,931 shares available for issuance under our Share Incentive Plan. See “Executive Compensation—Additional Incentive Plans—Omnibus Equity Incentive Plan.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth our summary financial data for the fiscal year ended December 31, 2012, the period from October 6, 2011 (which is our incorporation date) to December 31, 2011 and for the three and six months ended June 30, 2013 and June 30, 2012. We were capitalized in December 2011 and commenced underwriting operations in January 2012. Because we have a limited operating history, period-to-period comparisons of our results of operations for full fiscal years are not yet possible and may not be meaningful in the near future. We derived the financial data for the year ended December 31, 2012 and the period from October 6, 2011 (which is our incorporation date) to December 31, 2011 from our audited financial statements included elsewhere in this prospectus, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The financial data for the three and six months ended June 30, 2013 and June 30, 2012 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. These historical results are not necessarily indicative of future results, and the unaudited interim results for the three and six months ended June 30, 2013 are not necessarily indicative of results that may be expected for the full year ended December 31, 2013. You should read the following summary financial data together with our audited financial statements and related notes included elsewhere in this prospectus and the information under “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
    Year Ended
December 31,
2012
    Period from
October 6,
2011 to
December 31,
2011
 
    2013     2012     2013     2012      
   

(In thousands, except share and per share data and ratios)

 
                                     

Selected Statement of Income Data:

           

Gross premiums written

  $ 98,215      $ 28,178      $ 194,235      $ 120,828      $ 190,374      $ —     

Net premiums earned

    62,287        14,841        95,828        28,678        96,481     

Net investment income

    32,067        (17,623     112,758        16,225        136,422        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    94,354        (2,782     208,586        44,903        232,903        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expenses incurred, net

    45,692        16,686        64,330        28,971        80,306        —     

Acquisition costs, net

    14,921        2,138        27,994        2,850        24,604        —     

General and administrative expenses

    7,217        9,621        14,225        13,782        27,376        1,130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    67,830        28,445        106,549        45,603        132,286        1,130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) including non-controlling interests

    26,524        (31,227     102,037        (700     100,617        (1,130

Income attributable to non-controlling interests

    (301     120        (1,384     (185     (1,216     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 26,223      $ (31,107   $ 100,653      $ (885   $ 99,401      $ (1,130
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share(1):

           

Basic

  $ 0.33      $ (0.40   $ 1.27      $ (0.01   $ 1.26      $ (0.01

Diluted

  $ 0.30      $ (0.40   $ 1.15      $ (0.01   $ 1.14      $ (0.01

Weighted average number of ordinary shares:

           

Basic

    79,053,548        78,432,132        79,052,488        78,432,132        79,015,510        78,432,132   

Diluted

    87,895,953        78,432,132        87,836,378        78,432,132        87,253,760        78,432,132   

Selected ratios:

           

Property and casualty reinsurance – underwriting ratios(2):

           

Loss ratio(3)

    73.7     112.4     68.0     101.0     83.2     n/a   

Acquisition cost ratio(4)

    24.1     14.4     29.6     9.9     25.5     n/a   

General and administrative expense ratio(5)

    7.7     49.9     10.1     37.4     21.0     n/a   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio(6)

    105.5     176.7     107.7     148.3     129.7     n/a   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment return(7)

    3.2     -2.2     12.2     2.1     17.7     n/a   

 

(1)

Basic earnings (loss) per share are based on the weighted average number of common shares and participating securities outstanding during the period. The weighted average number of common shares excludes the dilutive effect of warrants currently held by the Founders and Aon, which acted as an advisor in connection with our initial capitalization, which following the completion of this offering will represent the right to receive an aggregate of 4,651,163 common shares, assuming that this offering yields proceeds to us of not less than $215.7 million, and options held by our directors and officers which following the completion of this offering will be

 

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  exercisable (subject to vesting) for 11,014,975 common shares, assuming that this offering yields net proceeds to us of not less than $215.7 million, and 624,300 unvested restricted shares.
(2) Underwriting ratios are for the property and casualty reinsurance segment only. See additional information in Note 23 of the Notes to Consolidated Financial Statements.
(3) Loss ratio is calculated by dividing loss and loss adjustment expenses incurred, net by net premiums earned.
(4) Acquisition cost ratio is calculated by dividing acquisition costs, net by net premiums earned.
(5) General and administrative expense ratio is calculated by dividing general and administrative expenses related to underwriting activities by net premiums earned.
(6) 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.
(7) Net investment return represents the return on our investments managed by Third Point LLC, net of fees.

 

     As of
June 30,
2013
    As of December, 31  
       2012     2011  
     (In thousands, except share
and per share data)
 

Selected Balance Sheet Data

      

Total investments in securities and commodities

   $ 937,868      $ 937,690      $ —     

Cash and cash equivalents(1)

     32,602        34,005        603,841   

Restricted cash and cash equivalents

     130,569        77,627        —     

Securities purchased under an agreement to sell

     40,355        60,408        —     

Reinsurance balances receivable, net

     208,253        84,280        —     

Deferred acquisition costs, net

     70,262        45,383        —     

Total assets

     1,606,495       
1,402,017
  
    605,263   

Deposit liabilities(2)

     103,609        50,446        —     

Unearned premium reserves

     187,313        93,893        —     

Loss and loss adjustment expense reserves

     113,100        67,271        —     

Securities sold, not yet purchased, at fair value

     77,528        176,454        —     

Total liabilities

     581,634        473,696        19,838   

Shareholders’ equity attributable to shareholders(3)

     972,665        868,544        585,425   

Non-controlling interests

     52,196        59,777        —     

Total shareholders’ equity

   $ 1,024,861      $ 928,321      $ 585,425   

Book value per share data:

      

Book value per share(4)

   $ 12.40      $ 11.07      $ 9.73   

Diluted book value per share(5)

   $ 12.07      $ 10.89      $ 9.73   

Selected ratios:

      

Growth in diluted book value per share(6)

     10.9     11.9     n/a   

Return on beginning shareholders’ equity(7)

     11.6     13.0    
n/a
  

 

(1) Cash and cash equivalents consists of cash, cash held with investment managers and other short-term, highly liquid investments with original maturity dates of ninety days or less.
(2) Management exercises significant judgment in determining whether contracts should be accounted for as reinsurance contracts or deposit 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.
(3) Shareholders’ equity attributable to shareholders and total shareholders’ equity as of December 31, 2011 is reflected net of subscriptions receivable of $177.5 million in accordance with SEC Regulation S-X.
(4) Book value per share is a non-GAAP financial measure. Book value per share is calculated by dividing shareholders’ equity attributable to shareholders, adjusted for subscriptions receivable, by the number of issued and outstanding shares at period end. See the reconciliation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Book Value Per Share and Fully Diluted Book Value Per Share.”
(5) Diluted book value per share is a non-GAAP financial measure. Diluted book value per share is calculated by dividing shareholders’ equity attributable to shareholders, adjusted for subscriptions receivable, and adjusted to include unvested restricted shares and the exercise of all in-the-money options and warrants. For purposes of this calculation, the market share price is assumed to be equal to the fully diluted book value per share. See the reconciliation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Book Value Per Share and Fully Diluted Book Value Per Share.”

 

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(6) Growth 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.
(7) Return on beginning shareholders’ equity as presented is a non-GAAP financial measure. Return on beginning shareholders’ equity is calculated by dividing net income by the beginning of year shareholders’ equity attributable to shareholders. For purposes of determining December 31, 2011 equity, we add back the impact of subscriptions receivable to shareholders’ equity attributable to shareholders. Management believes this adjustment more fairly presents the return on shareholders’ equity over the period.

 

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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 “Selected Historical Consolidated Financial and Other Data,” and our consolidated financial statements and the related notes beginning on page F-1 of this prospectus.

The statements in this discussion regarding industry 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, the risks and uncertainties described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Our fiscal year ends December 31 and, unless otherwise noted, references to year or fiscal year are for the fiscal year ended December 31, 2012.

Overview

We are a Bermuda-based specialty property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us from our competitors. Our objective is to deliver attractive equity returns to shareholders by combining profitable reinsurance underwriting with our investment manager, Third Point LLC’s superior investment management.

We manage our business on the basis of two operating segments: Property and Casualty Reinsurance and Catastrophe Risk Management. We also have a corporate function that includes our investment results and certain general and administrative expenses related to corporate activities.

Property and Casualty Reinsurance

We provide treaty reinsurance to insurance and reinsurance companies. Treaty reinsurance contracts are contractual arrangements that provide for automatic reinsurance of an agreed upon portion of business written as specified in a reinsurance contract. Contracts can be written on an excess of loss basis or quota share basis, although all contracts written to date have been on a quota share basis. The product lines that we currently underwrite for this operating segment are: property, casualty and specialty.

Insurance float is an important aspect of our property and casualty reinsurance operation. In an insurance or reinsurance operation, float arises because premiums and proceeds associated with deposit accounted reinsurance contracts are collected before losses are paid. In some instances, the interval between premium receipts and loss payments can extend over many years. During this time interval, insurance and reinsurance companies invest the premiums received and generate investment returns. Although float can be calculated using numbers determined under U.S. GAAP, float is a non-GAAP financial measure and, therefore, there is no comparable U.S. GAAP measure.

We believe that our property and casualty reinsurance segment will contribute to our results by both generating underwriting income as well as generating float. In addition, we expect that float will grow over time as our reinsurance operations expand.

Catastrophe Risk Management

In contrast to many reinsurers with whom we compete, we have elected to limit our underwriting of property catastrophe exposures and write excess of loss catastrophe reinsurance exclusively through the

 

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Catastrophe Fund, which is a separately capitalized reinsurance fund vehicle. We established on June 15, 2012, the Catastrophe Fund, the Catastrophe Fund Manager and the Catastrophe Reinsurer, in partnership with Hiscox. Our partnership with Hiscox is governed by a shareholders’ agreement that provides for certain matters relating to governance of the Catastrophe Fund Manager and restrictions on transfers of its shares. Our investment in and management of the Catastrophe Fund allows us to provide a product that is critical to most of our reinsurance clients and to earn fee income over time. Because the Catastrophe Fund is capitalized in part by investments from unrelated parties, our financial exposure to the higher volatility and liquidity risks associated with property catastrophe losses is limited to our investment commitment to the Catastrophe Fund, which as of the date hereof was $50.0 million, out of total commitments of $94.7 million. We anticipate that our property catastrophe exposures will consistently remain relatively low when compared to many other reinsurers with whom we compete and there are no additional guarantees or recourse to us beyond this investment.

The Catastrophe Fund Manager is a property catastrophe fund management company, which began writing catastrophe risk through the Catastrophe Fund and related Catastrophe Reinsurer on January 1, 2013. The Catastrophe Fund Manager receives fee income in the form of management fees and performance fees from the Catastrophe Fund. We own 85% of The Catastrophe Fund Manager and Hiscox owns the remaining 15%. We consolidate the Catastrophe Fund Manager’s results in our consolidated Third Point Reinsurance Ltd. results with a non-controlling interest recorded for the 15% Hiscox ownership. The objective of the Catastrophe Fund is to achieve positive uncorrelated investment returns by transacting, through the Catastrophe Reinsurer, in a portfolio of collateralized reinsurance treaties and other insurance-linked securities, including catastrophe bonds and industry loss warranties. The Catastrophe Reinsurer is a Bermuda based special purpose insurer authorized to write collateralized property catastrophe reinsurance business. The Catastrophe Fund Manager owns 100% of the voting, non-participating, common shares of the Catastrophe Reinsurer. The Catastrophe Fund owns 100% of the non-voting participating, preferred shares of the Catastrophe Reinsurer. The Catastrophe Fund, the Catastrophe Fund Manager and the Catastrophe Reinsurer commenced underwriting activity on January 1, 2013.

As of June 30, 2013, the Catastrophe Fund had drawn all of its $94.6 million (our share was $50.0 million) in commitments. As a result of our 53% majority interest in the Catastrophe Fund, we were required to consolidate the results of the Catastrophe Fund and the Catastrophe Reinsurer as of June 30, 2013 and December 31, 2012. The Catastrophe Reinsurer is actively seeking new third party investments and we expect our interest to drop below 50% at some point which would potentially allow us to deconsolidate the Catastrophe Fund and the Catastrophe Reinsurer. Market conditions, however, have been challenging due to the launch in the past year of several similar funds and a resulting drop in catastrophic reinsurance pricing.

Investment Management

Our investment strategy is implemented by our investment manager, Third Point LLC, under a long-term investment management contract. We directly own the investments which are held in a separate account and managed by Third Point LLC on substantially the same basis as Third Point LLC’s main hedge funds.

Limited Operating History and Comparability of Results

We were incorporated on October 6, 2011 and completed our initial capitalization on December 22, 2011. We began underwriting business on January 1, 2012. As a result, we have a limited operating history and are exposed to volatility in our results of operations. Period to period comparisons of our results of operations may not be meaningful. In addition, the amount of premiums written may vary from year to year and period to period as a result of several factors, including changes in market conditions and our view of the long-term profit potential of individual lines of business.

Key Performance Indicators

We believe that by combining a disciplined and opportunistic approach to reinsurance underwriting with investment results from the active management of our investment portfolio, we will be able to generate attractive

 

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returns to our shareholders. The key financial measures that we believe are meaningful in analyzing our performance are: net underwriting income (loss) for our property and casualty reinsurance segment, combined ratio for our property and casualty reinsurance segment, net investment income, net investment return on investments managed by Third Point LLC, change in diluted book value per share and return on beginning shareholders’ equity.

The table below shows the key performance indicators for our consolidated business for the year ended December 31, 2012, the period from October 6, 2011, which is our incorporation date, to December 31, 2012 and for the three and six months ended June 30, 2013 and June 30, 2012:

 

    
 
Three Months Ended
June 30,
  
  
   

 

Six Months Ended

June 30,

  

  

   
 
 
Year Ended
December 31,
2012
 
 
  
   
 
 
Period Ended
December 31,
2011
 
 
  
     2013        2012        2013        2012       
    

($ in thousands except percentages and per share amounts)

 

Key underwriting metrics for Property and Casualty Reinsurance segment:

            

Net underwriting loss

   $ (3,397   $ (11,393   $ (7,198   $ (13,870   $ (28,719     n/a   

Combined ratio

     105.5     176.7     107.7     148.3     129.7     n/a   

Key investment return metrics:

            

Net investment income

   $ 32,067      $ (17,623   $ 112,758      $ 16,225      $ 136,422        n/a   

Net investment return on investments managed by Third Point LLC

     3.2     -2.2     12.2     2.1     17.7     n/a   

Key shareholders’ value creation metrics:

            

Book value per share

   $ 12.40      $ 9.75      $ 12.40      $ 9.75      $ 11.07      $ 9.73   

Diluted book value per share

   $ 12.07      $ 9.68      $ 12.07      $ 9.68      $ 10.89      $ 9.73   

Growth in diluted book value per share

     2.7     -3.5     10.9     -0.4     11.9     n/a   

Return on beginning shareholders’ equity

     2.8     -3.9     11.6     -0.1     13.0     n/a   

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 or losses. We do not measure performance based on the amount of gross premiums written. Net underwriting income or loss is calculated from premiums earned, less net loss and loss expenses, acquisition costs and general and administrative expenses related to the underwriting activities.

Combined Ratio for Property and Casualty Reinsurance Segment

The combined ratio compares the amount of net premiums earned to the amount incurred in claims and underwriting related expenses. This ratio is a key indicator of a reinsurance company’s profitability. It is calculated by dividing net premiums earned by the sum of loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities. A combined ratio 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.

Net Investment Income

Net investment income is an important measure that affects overall profitability. Net investment income is affected by the performance of Third Point LLC as our exclusive investment manager and the amount of

 

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investable cash, or float, generated by our reinsurance operation. Pursuant to the investment management agreement, Third Point LLC is required to manage our investment portfolio on substantially the same basis as its main hedge funds, subject to certain conditions set forth in our 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 investment management agreement allows us to withdraw cash from our investment account with Third Point LLC at any time with three days’ notice to pay claims and with five days’ notice to pay expenses.

We track excess cash flows generated by our property and casualty reinsurance operation, or float, in a separate account which allows us to also track the net investment income generated on the float. We believe that net investment income generated on float is an important consideration in evaluating the overall contribution of our property and casualty reinsurance operation to our consolidated results. It is also explicitly considered as part of the evaluation of management’s performance for purposes of incentive compensation.

Net investment income for the three and six months ended June 30, 2013 and 2012 and year ended December 31, 2012 was comprised of the following:

 

      For the Three Months Ended      For the Six Months Ended      Year ended  
      June 30,
2013
    June 30,
2012
     June 30,
2013
    June 30,
2012
     December 31,
2012
 
    

($ in thousands)

 

Net investment income on float

   $ 2,530      $ —         $ 8,056      $ —         $ 4,901   

Net investment income on capital

     29,937        (17,623      105,009        16,225         131,521   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net investment income on investments managed by Third Point LLC

     32,467        (17,623      113,065        16,225         136,422   

Deposit liability investment allocation

     (759     —           (1,429     —           —     

Net unrealized gain on reinsurance contract derivatives

     359        —           1,122        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 32,067      $ (17,623    $ 112,758      $ 16,225       $ 136,422   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net Investment Return on investments managed by Third Point LLC

The net investment return is the percentage change in value of a dollar invested over the reporting period on our investment assets managed by Third Point LLC. Net investment return is the key indicator by which we measure the performance of Third Point LLC, our investment manager.

Return on beginning shareholders’ equity

Return on beginning shareholders’ equity as presented is a non-GAAP financial measure. Return on beginning shareholders’ equity is calculated by dividing net income by the beginning shareholders’ equity attributable to shareholders and is a commonly used calculation to measure profitability. For purposes of this calculation, we add back the impact of subscriptions receivable to shareholders’ equity attributable to shareholders as of December 31, 2011. Management believes this adjustment more fairly presents the return on equity over the period.

Book Value Per Share and Diluted Book Value Per Share

Book value per share is calculated by dividing shareholders’ equity attributable to shareholders, adjusted for subscriptions receivable, by the number of issued and outstanding shares at any period end. Diluted book value per share is calculated by dividing shareholders’ equity attributable to shareholders, adjusted for subscriptions receivable, and adjusted to include unvested restricted shares and the exercise of all in-the-money options and warrants. For purposes of this calculation, the market share price is assumed to be equal to the diluted book value per share.

 

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Revenues

We derive our revenues from two principal sources:

 

   

premiums from reinsurance on property and casualty reinsurance business assumed; and

 

   

income from investments.

Premiums from our property and casualty reinsurance business assumed are directly related to the number, type and pricing of contracts we write. Premiums are earned over the contract period in proportion to the period of risk covered which is typically 12 to 24 months.

Income from our investments is primarily comprised of interest income, dividends and gains, and net realized and unrealized gains on investment securities included in our investment portfolio.

Expenses

Our expenses consist primarily of the following:

 

   

loss and loss adjustment expenses;

 

   

acquisition costs;

 

   

investment-related expenses; and

 

   

general and administrative expenses.

Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and of the loss experience of the underlying coverage. Loss and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a period of years.

Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to our writing reinsurance contracts and are presented net of commissions ceded under reinsurance contracts. We amortize deferred acquisition costs over the related contract term in the same proportion that the premiums are earned.

Investment-related expenses primarily consist of management and performance fees we pay to our investment manager, Third Point LLC and certain of our Founders, pursuant to the investment management agreement. A 2% management fee calculated on assets under management is paid monthly to Third Point LLC and certain of our Founders, and a performance fee equal to 20% of the net investment income is paid annually to Third Point Advisors LLC (“TPGP”). We include these expenses in net investment income in our consolidated statement of income.

General and administrative expenses consist primarily of salaries and benefits and related costs, including costs associated with our incentive compensation plan, share compensation expenses, legal and accounting fees, travel and client entertainment, fees relating to our letter of credit facilities, information technology, occupancy and other general operating expenses.

For share option expenses, we calculate compensation cost using the Black-Scholes option pricing model and expense shares options over their vesting period, which is typically five years

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions. We have performed a current assessment of our critical

 

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accounting policies in connection with preparing our interim unaudited consolidated financial statements as of and for the three and six months ended June 30, 2013. We believe that the critical accounting policies set forth in our audited consolidated financial statements for the year ended December 31, 2012 continue to describe the significant judgments and estimates used in preparation of our consolidated financial statements. These accounting policies pertain to premium recognition, loss and loss adjustment expenses and fair value of financial instruments. 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

We estimate the ultimate premiums for the entire contract period and record this estimate at the inception of the contract. These estimates are based primarily on information in the underlying contracts as well as information provided by the clients or brokers. Premiums written are earned over the contract period in proportion to the period of risk covered. Unearned premiums represent the portion of premiums written that relate to the unexpired term of the contracts in force.

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 could 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 quota share contracts and all of our property and casualty reinsurance segment premiums written to date has represented quota share business. As a result, we may be subject to greater volatility relating to our premium estimates compared to other property and casualty companies. We continuously monitor our premium estimate with respect to each of our contracts considering the cash premiums received, reported premiums, and 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 do not necessarily 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 pro rata changes in acquisition costs and net loss and loss adjustment expenses.

During the three months ended June 30, 2013, we recorded $(19.1) million of changes in premium estimates on prior year’s contracts, representing (19.4)% of total gross premiums written, primarily due to return premiums on certain contracts that expired during the period that contained a contractual provision to return the unearned premiums at expiration. There was no impact on net income as a result of the changes in premium estimates for the three months ended June 30, 2013. During the six months ended June 30, 2013, we recorded $(21.2) million of changes in premium estimates on prior year’s contracts, representing (10.9)% of gross premiums written, primarily due to return premiums on certain contracts that expired during the period that contained a contractual provision to return the unearned premiums at expiration. There was no impact on net income of these changes in premium estimates for the six months ended June 30, 2013.

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. We evaluate the recoverability of deferred acquisition costs by

 

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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 June 30, 2013 and December 31, 2012, deferred acquisition costs are 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

Our reserves for losses and loss expenses include case reserves and reserves for losses incurred but not yet reported (“IBNR reserves”). Case reserves are established for losses that have been reported, but not yet paid, based on loss reports from brokers and ceding companies. IBNR reserves represent the estimated ultimate cost of events that have occurred but have not been reported to us, or specifically identified by us. IBNR reserves are established by management based on actuarially determined estimates of ultimate losses and loss adjustment expenses.

Inherent in the estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts recorded in the 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 our consolidated income in the period in which they become known.

We perform an actuarial projection of our reserves quarterly and have an independent actuarial review performed annually. All reserves are estimated on an individual contract basis; there is no aggregation of contracts for projection of ultimate loss or reserves. The company records the reserve estimates produced by our quarterly actuarial reserves as the liability for unpaid claims and claims adjustment expenses; there are no adjustments made by management on the calculated reserves.

We initially reserve every individual contract to the expected loss and loss expense ratio in the pricing analysis. As loss information is received from the cedents, we incorporate other actuarial methods in our projection of ultimate losses and, hence, reserves. In our pricing analyses, we typically utilize a significant amount of information unique to the individual client and, when necessary, supplement the analysis with industry data. Industry data primarily takes the form of paid and incurred development patterns from statutory financial statements and statistical agencies.

For our actuarial reserve projections, the relevant information we receive from our reinsurance clients include premium estimates, paid loss and loss adjustment expense and case reserves. We review the data for reasonableness and research any anomalies. On each contract, we compare the expected paid and incurred amounts at each quarter-end with actual amounts reported. We 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 actually reported to our cedents. The actuarial methods that we use to estimate losses have been designed to address this lag in loss reporting. There is also a time lag between reinsurance clients paying claims, establishing case reserves and re-estimating their reserves, and notifying us 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. We use techniques that adjust for this type of lag. While it would be unusual to have lags that extend beyond 90 days, our actuarial techniques are designed to adjust for such a circumstance.

 

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The principal actuarial methods (and associated key assumptions) we use to perform our quarterly loss reserve analysis may include one or more of the following methods:

A Priori Loss Ratio Method. To estimate ultimate losses under the a priori loss ratio method, we multiply 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 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 established.

Bornhuetter-Ferguson Paid and Incurred Loss Methods. These methods are a weighted average of the a priori loss ratio and the relevant development factor 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, while for the more mature years a greater weight is placed on the development factor 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.

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. For most actuaries, 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, we have implemented a weighting scheme that incorporates numerous “rules” for the weighting of actuarial methods. These rules attempt to effectively codify the judgmental process used for selecting weights for the various methods. There can be extenuating circumstances where the rules would be modified for a specific reinsurance contract; 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 our 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 our quarterly reserving process.

 

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Our reserving methodologies use a loss reserving model that calculates a point estimate for our ultimate losses. Although we believe that our assumptions and methodologies are reasonable, we cannot be certain that our ultimate payments will not vary, potentially materially, from the estimates we have made.

As of December 31, 2012, approximately 77.7% of our total net IBNR reserves related to our crop book of business; as of June 30, 2013, that percentage had decreased to 29.0% of the total net IBNR reserves. Crop is a relatively fast paying line of business with the majority of losses from any underwriting year paying out within nine months after the end of the calendar year. Furthermore, we reduced our exposure to crop in 2013 relative to 2012 and increased our writings in other lines of business.

We do not produce a range of IBNR reserves. However, a 10% increase in IBNR reserves would translate into a 0.7% decrease in total shareholders’ equity as of December 31, 2012 and a 0.5% decrease in total shareholders’ equity as of June 30, 2013.

Deposit assets and liabilities

Certain reinsurance contracts are deemed not to transfer sufficient insurance risk in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 944, Financial Services—Insurance and Topic 340-30 Insurance contracts that do not transfer insurance risk, and are accounted for using the deposit method of accounting. Management exercises significant judgment in determining whether contracts should be accounted for as reinsurance contracts or deposit 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.

Effective October 1, 2012, we entered into a single aggregate excess of loss contract for consideration of $50.0 million. This contract was deemed to not transfer sufficient insurance risk or timing risk, and has therefore been accounted for using the deposit method of accounting. Under the terms of the agreement, we maintain a notional experience account, the value of which is determined by adding premiums to the $50.0 million of consideration less claims paid plus a crediting rate multiplied by the annual starting balance of the notional experience account. The crediting rate varies from a minimum of 3% to a maximum of 6.1%, based on our actual investment returns.

Effective May 1, 2013, we entered into a single aggregate excess of loss contract for consideration of $25.0 million. This contract was deemed to not transfer sufficient insurance risk or timing risk, and has therefore been accounted for using the deposit method of accounting. Under the terms of the agreement, we maintain a notional experience account, the value of which is determined by adding premiums to the $25.0 million of consideration less claims paid plus a crediting rate multiplied by the annual starting balance of the notional experience account. The crediting rate varies from a minimum of 3% to a maximum of 6.5%, based on our actual investment returns.

Effective June 30, 2013, we entered into two loss portfolio contracts for consideration of $27.2 million. Under the terms of the agreement, we maintain a notional experience account, the initial value of which is based on the consideration received less a margin. The value of the experience account is reduced by loss payments as they are made and increased by a quarterly interest credit of 0.625%.

The following table details the deposit liability as of June 30, 2013 and December 31, 2012:

 

      June 30,
2013
     December 31,
2012
 
     ($ in thousands)  

Initial consideration received

   $ 101,734       $ 50,000   

Net investment income allocation accrued

     1,875         446   
  

 

 

    

 

 

 
   $ 103,609       $ 50,446   
  

 

 

    

 

 

 

 

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Fair value measurement

Our investments are managed by Third Point LLC and are carried at fair value. Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying value of our assets and liabilities, which qualify as financial instruments, approximates the fair value presented in the consolidated balance sheet.

Our investment manager Third Point LLC, has a formal valuation policy that sets forth the pricing methodology for investments to be used in determining the fair value of each security in our portfolio. The valuation policy is updated and approved at least on an annual basis by Third Point LLC’s valuation committee (the “Committee”), which is comprised of officers and employees who are senior business management personnel. The Committee meets on a monthly basis. The Committee’s role is to review and verify the propriety and consistency of the valuation methodology to determine the fair value of investments. The Committee also reviews any due diligence performed and approves any changes to current or potential external pricing vendors.

Securities and commodities listed on a national securities or commodities exchange or quoted on NASDAQ are 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 are 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 June 30, 2013, securities valued at $386.4 million (December 31, 2012 – $248.4 million), representing 41.2% (December 31, 2012 – 26.5%) of investments in securities and commodities, and $44.5 million (December 31, 2012 – $68.8 million), representing 57.4% (December 31, 2012 – 39.0%) of securities sold, not yet purchased, are valued based on dealer quotes or other quoted market prices for similar securities.

Our derivatives are recorded at fair value. Third Point LLC values exchange-traded derivative contracts at their last sales price on the exchange where it is primarily traded. OTC derivatives, which include swap, option, swaption, and forward currency contracts, are valued by third party sources when available; otherwise, fair values are obtained from counterparty quotes that are based on pricing models that consider the time value of money, volatility, and the current market and contractual prices of the underlying financial instruments.

As an extension of its underwriting activities, the Catastrophe Reinsurer has sold derivative instruments that provide reinsurance-like protection to third parties for specific loss events associated with certain lines of business. These derivatives are recorded on the consolidated balance sheet at fair value, with the offset recorded in net investment income in the consolidated statement of income. These contracts are valued on the basis of models developed by us.

Our holdings in asset-backed securities (“ABS”) are substantially invested in residential mortgage-backed securities (“RMBS”). The balance of the ABS positions were held in commercial mortgage-backed securities, collateralized debt obligations and student loan asset-backed securities. All of these classes of ABS are sensitive to changes in interest rates and any resulting change in the rate at which borrowers sell their properties, refinance, or otherwise pre-pay their loans. Investors in these classes of ABS 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, investors may be exposed to significant market and liquidity risks.

We value our investments in limited partnerships at fair value, which is an amount equal to the sum of the capital account in the limited partnership generally determined from financial information provided by the investment manager of the applicable limited partnership. The resulting net gains or net losses are reflected in the consolidated statement of income.

The fair values of all investments are estimated using prices obtained from third-party pricing services, where available. For securities that we are unable to obtain fair values from a pricing service or broker, fair values were estimated using information obtained from Third Point LLC. We perform several processes to ascertain the reasonableness of the valuation of all of our investments comprising our investment portfolio, including securities

 

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that are categorized as Level 2 and Level 3 within the fair value hierarchy. 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 our third-party fund administrator which are compared to the reports noted in (i), and (iii) weekly update discussions with Third Point LLC regarding the investment portfolio, including, their process for reviewing and validating pricing obtained from outside service providers. As of June 30, 2013, the investments for which we did not receive a fair value from a pricing service or broker accounted for less than 1% of our investment portfolio. The actual value at which these securities could be sold or settled with a willing buyer or seller may differ from our 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.

During the year ended December 31, 2012 and six months ended June 30, 2013, there were no changes in the valuation techniques as it relates to the above.

Monetary assets and liabilities denominated in foreign currencies are translated at the closing rates of exchange as of June 30, 2013. Transactions during the period are translated at the rate of exchange prevailing on the date of the transaction. We do not isolate that portion of the results of operations 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. Periodic payments received or paid on swap agreements are recorded as realized gain or loss on investment transactions. Such fluctuations are included within net investment income in the consolidated statement of income.

Private securities are not registered for public sale and are 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 may include market approach, last transaction analysis, liquidation analysis and/or using discounted cash flow models where the significant inputs could include but are 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 Point LLC may employ third party valuation firms to conduct separate valuations of such private securities. The third party valuation firms provide written reports documenting their recommended valuation as of the determination date for the specified investments.

Due to the inherent uncertainty of valuation for private securities, the estimated fair value may differ materially from the values that would have been used had a ready market existed for these investments. As of June 30, 2013, we had $3.1 million (December 31, 2012 – $2.8 million) of private securities fair valued by the Third Point LLC and third-party pricing services representing less than 1% of total investments in securities and commodities.

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. The types of assets and liabilities that are classified at this level generally include equity securities, commodities, futures and option contracts listed in active markets.

 

   

Level 2 – Pricing inputs other than observable inputs including, but not limited to, prices quoted for similar assets or liabilities in active markets/exchanges or prices quoted for identical or similar assets or liabilities in markets that are not active, and fair value is determined through the use of models or other valuation methodologies. The types of assets and liabilities that are classified at this level generally include equity securities traded on non-active exchanges, corporate, sovereign, asset-backed and bank debt securities, forward contracts and certain derivatives.

 

   

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

 

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significant management judgment and estimation. The types of assets and liabilities that are classified at this level generally include certain corporate and bank debt, private investments and certain derivatives.

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.

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. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The key inputs for corporate, government and sovereign bond valuation are coupon frequency, coupon rate and underlying bond spread. The key inputs for asset-backed securities are yield, probability of default, loss severity and prepayment.

Key inputs for OTC valuations vary based on the type of underlying security on which the contract was written:

 

   

The key inputs for most OTC option contracts include notional, strike price, maturity, payout structure, current foreign exchange forward and spot rates, current market price of underlying and volatility of underlying.

 

   

The key inputs for most forward contracts include notional, maturity, forward rate, spot rate, various interest rate curves and discount factor.

 

   

The key inputs for swap valuation will vary based on the type of underlying on which the contract was written. Generally, the key inputs for most swap contracts include notional, swap period, fixed rate, credit or interest rate curves, current market or spot price of the underlying and the volatility of the underlying.

Investments

Our investments are classified as “trading securities” and are carried at fair value with changes in fair value included in earnings in our consolidated statement of income.

Fair values of our fixed maturity investments are based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications and/or internal pricing valuation techniques. Investment transactions are recorded on a trade date basis with balances pending settlement recorded separately in the consolidated balance sheet as receivable for investments sold or payable for investments purchased.

We record security and commodity transactions and related income and expense on a trade-date basis. Realized gains and losses are determined using cost calculated on a specific identification basis. Dividends are recorded on the ex-dividend date. Income and expense are recorded on the accrual basis including interest and premiums amortized and discounts accreted.

 

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Share-based compensation

We account for our share plans in accordance with ASC 718, “Compensation—Share Compensation.”

U.S. GAAP requires that share-based compensation transactions be recognized using the fair value of the award at the grant date. We measure compensation for restricted shares based on the price of our common shares at the grant date and the expense is recognized on a straight-line basis over the vesting period. Determining the fair value of share purchase options at the grant date requires significant estimation and judgment. We use an option-pricing model (Black-Scholes) to calculate the fair value for share purchase options.

For share purchase options issued under our employee share incentive plan (the “Share Incentive Plan”), compensation cost is calculated and expensed over the vesting periods on a graded vesting basis. If actual results differ significantly from these estimates and assumptions, particularly in relation to the estimation of volatility that requires the most judgment due to our limited operating history, share-based compensation expense, primarily with respect to future share-based awards, could be materially impacted.

We have established a Share Incentive Plan for directors, employees and consultants. The following is a summary as of the date of this prospectus of authorized and granted shares under the Share Incentive Plan:

 

      Exercise Price    Authorized      Granted      Aggregate fair
value of
granted options
and shares(1)
 
                        ($ in thousands)  

Management options

   $10.00-$10.89      6,976,744         6,732,558      
   $16.00-$16.89      2,325,581         2,244,184      
   $20.00-$20.89      2,325,581         2,244,184      
     

 

 

    

 

 

    
        11,627,906         11,220,926       $ 33,995   

Director options

   $10.00      50,848         50,848      
   $16.00      16,950         16,950      
   $20.00      16,950         16,950      
     

 

 

    

 

 

    
        84,748         84,748         260   

Management restricted shares

   n/a      624,300         624,300         6,243   
     

 

 

    

 

 

    

 

 

 
        12,336,954         11,929,974       $ 40,498   
     

 

 

    

 

 

    

 

 

 

 

  (1) Aggregate fair value of management options granted includes $7.1 million related to management options that have not met the performance condition described below.

In the absence of a public market for our common shares and in light of the proximity of the dates of the grants of incentive options to our initial capitalization, our board of directors, with input from management, estimated the fair value of our common shares on the date of each grant made in early 2012 as being equivalent to the original $10.00 per share price in our initial private placement capitalization. For purposes of option grants made in 2013, we estimated the fair value of our common shares as the diluted book value per share on December 31, 2012.

 

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The following table provides, by grant date, the number of stock options awarded for the period from inception to June 30, 2013 (including forfeited awards), the exercise price for each set of grants, the associated estimated fair value of our common stock and the fair value of the option:

 

Grant date

   Options
granted
     Exercise
price
     Fair
value of
common
shares
     Fair
value of
option
 

2/1/2012

     5,651,163       $ 10.00       $ 10.00       $ 3.73   
     1,883,719       $ 16.00       $ 10.00       $ 2.34   
     1,883,719       $ 20.00       $ 10.00       $ 1.78   

2/13/2012

     348,837       $ 10.00       $ 10.00       $ 3.73   
     116,279       $ 16.00       $ 10.00       $ 2.34   
     116,279       $ 20.00       $ 10.00       $ 1.78   

2/16/2012

     50,848       $ 10.00       $ 10.00       $ 3.73   
     16,950       $ 16.00       $ 10.00       $ 2.34   
     16,950       $ 20.00       $ 10.00       $ 1.78   

4/16/2012

     348,837       $ 10.00       $ 10.00       $ 3.73   
     116,279       $ 16.00       $ 10.00       $ 2.34   
     116,279       $ 20.00       $ 10.00       $ 1.78   

6/4/2012

     174,419       $ 10.00       $ 10.00       $ 3.73   
     58,140       $ 16.00       $ 10.00       $ 2.34   
     58,140       $ 20.00       $ 10.00       $ 1.78   

4/1/2013

     209,302       $ 10.89       $ 10.89       $ 2.76   
     69,767       $ 16.89       $ 10.89       $ 1.12   
     69,767       $ 20.89       $ 10.89       $ 0.63   
  

 

 

          
     11,305,674            
  

 

 

          

Our board of directors and management intended all options granted to be exercisable at a price per share not less than the estimated per share fair value of our common stock underlying those options on the date of grant.

The following table provides, by grant date, the number of restricted share awards for the period from inception to June 30, 2013, and the estimated fair value of our common stock on the grant date:

 

Grant date

   Restricted
shares
granted
     Fair value of
common
shares
 

2/1/2012

     585,300       $ 10.00   

4/16/2012

     34,000       $ 10.00   

5/22/2013

     5,000       $ 11.76   
  

 

 

    
     624,300      
  

 

 

    

Share based compensation expense of $1.7 million for the three months ended June 30, 2013 (2012—$1.8 million) and $3.5 million for the six months ended June 30, 2013 (2012—$2.9 million) was included in general and administrative expenses for the applicable period. As of June 30, 2013, the Company has $29.7 million of unamortized share compensation expense related to management and director options, including $7.1 million related to management stock options that have not met the performance condition. Of the $7.1 million related to management stock options that have not met the performance condition, $2.1 million related to the portion that has met the service condition described below as of June 30, 2013.

The vesting of the options issued pursuant to the Share Incentive Plan is subject to satisfaction of both (i) a service condition and (ii) a capital condition. The service condition will be met as to 20% of the options on each

 

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of the first five anniversaries of the employee’s first day of employment with us. As of June 30, 2013, the Company had raised $784.3 million, or 78.4% of $1 billion, of aggregate consideration from the subscription of shares. Consequently, 8,572,594 of the management options outstanding have met the performance condition as of June 30, 2013 and 2,357,633 of the management options outstanding would be considered exercisable (subject to service condition) only if the additional capital is raised. We did not consider it probable as of June 30, 2013 that this performance condition would be met; therefore, we have not recorded share compensation expense for these 2,357,633 management options as of June 30, 2013.

The director options contain only a service condition that will be met with respect to 20% of the director options on each of the five anniversary dates following the grant date of the director options.

The Share Incentive Plan’s management and director options activity for the six months ended June 30, 2013 and year ended December 31, 2012 was as follows:

 

     Number of
options
    Weighted
average exercise
price
 

Balance as of January 1, 2012

     —        $ —     

Granted—employees

     10,872,090        13.20   

Granted—directors

     84,748        13.20   

Forfeited

     —          —     

Exercised

     —       
  

 

 

   

Balance as of December 31, 2012

     10,956,838        13.20   

Granted—employees

     348,836        14.09   

Granted—directors

     —       

Forfeited

     (290,699     13.20   

Exercised

     —       
  

 

 

   

Balance as of June 30, 2013

     11,014,975      $ 13.23   
  

 

 

   

The fair value of stock options issued during the six months ended June 30, 2013 was estimated on the grant date using the Black-Scholes option-pricing model. The estimated share price used for purposes of determining the fair value of stock options was $10.89 based on the diluted book value per share as of December 31, 2012. The volatility assumption used of 21.95% was based on average estimated volatility of a reinsurance company peer group. The other assumptions used in the option-pricing model were as follows: risk free interest rate of 1.23%, expected life of 6.5 years and a 0.0% dividend yield.

The fair value of stock options issued during 2012 was estimated on the grant date using the Black-Scholes option-pricing model. The estimated share price used for purposes of determining the fair value of stock options was $10.00 based on the proximity to the $10.00 original offering price per share. The volatility assumption used of 31.25% was based on average estimated volatility of a reinsurance company peer group. The other assumptions used in the option-pricing model were as follows: risk free interest rate of 1.9%, expected life of ten years and a 0.0% dividend yield.

 

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The following table summarizes information about our management and director stock options outstanding as of June 30, 2013:

 

      Options outstanding      Options exercisable  

Range of exercise prices

   Number of
options
     Weighted
average
exercise price
     Remaining
contractual
life
     Number of
options
     Weighted
average
exercise price
 

$10.00 - $10.89

     6,608,987       $ 10.03         8.57         1,006,049       $ 10.00   

$16.00 - $16.89

     2,202,994       $ 16.03         8.57         335,350       $ 16.00   

$20.00 - $20.89

     2,202,994       $ 20.03         8.57         335,350       $ 20.00   
  

 

 

          

 

 

    
     11,014,975       $ 13.23         8.57         1,676,749       $ 13.20   
  

 

 

          

 

 

    

For the three months ended June 30, 2013, we recorded $1.5 million (2012—$1.3 million) of share compensation expense related to stock options. For the six months ended June 30, 2013, we recorded $2.8 million (2012—$2.1 million) of share compensation expense related to stock options.

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 and transferability.

Restricted share award activity for the six months ended June 30, 2013 and year ended December 31, 2012 was as follows:

 

     Number of
non-vested
restricted shares
    Weighted
average grant
date fair value
 

Balance as of January 1, 2012

     —        $ —     

Granted

     641,800        10.00   

Forfeited

     (22,500     10.00   

Vested

     —       
  

 

 

   

 

 

 

Balance as of December 31, 2012

     619,300        10.00   

Granted

     5,000        11.76   

Forfeited

     —       

Vested

     —       
  

 

 

   

 

 

 

Balance as of June 30, 2013

     624,300      $ 10.01   
  

 

 

   

 

 

 

For the three months ended June 30, 2013, the Company recorded $0.2 million (2012—$0.4 million) of share compensation expense related to restricted share awards. For the six months ended June 30, 2013, we recorded $0.7 million (2012—$0.7 million) of share compensation expense related to restricted share awards.

Warrants

We account for certain warrant contracts issued to our Founders and Aon in conjunction with our initial capitalization, and which may be settled by us using either the physical settlement or net-share settlement methods, in accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Accordingly, the fair value of these warrants has been recorded in equity as an addition to additional paid-in capital. The associated cost of these warrants has been recorded as a component of capital raise costs and is included in general and administrative expenses. We use an option-pricing model (Black-Scholes) to calculate the fair value for share purchase warrants issued.

We account for certain warrant contracts issued to an advisor in connection with our initial capitalization, where services have been received by the Company, in part, in exchange for equity instruments, based on the fair

 

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value of such services, in accordance with ASC 718, Compensation—Stock Compensation, and ASC 505-50, Equity-Based Payments to Non-Employees. The associated cost of these warrants has been recorded as capital raise costs, and are included in additional paid in capital in the consolidated statement of shareholders equity.

Capital raise costs

Capital raise costs of $20.5 million incurred in connection with our initial capitalization through private common share offerings, including placement agent and investment banking fees, legal fees and the fair value of warrants issued to our founders and advisors were deducted from the proceeds of the offering and reported net in shareholders’ equity and the statement of cashflows. Incorporation costs not related to the raising of capital are expensed as incurred and are included in general and administrative expenses.

Foreign currency transactions

Our functional currency is the U.S. dollar. Transactions in foreign currencies are recorded in U.S. dollars at the exchange rate in effect on the transaction date. Monetary assets and liabilities in foreign currencies are translated at the exchange rates in effect at the consolidated balance sheet date and foreign exchange gains and losses, if any, are included in the consolidated statement of income.

Taxes and uncertain tax positions

Under current Bermuda law, Third Point Reinsurance Ltd. and its Bermuda subsidiaries are not subject to any income or capital gains taxes. In the event that such taxes are imposed, Third Point Reinsurance Ltd. and its Bermuda incorporated subsidiaries would be exempted from any such taxes until March 2035 pursuant to the Tax Assurance Certificates issued to such entities pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966, as amended.

As of June 30, 2013 and December 31, 2012, we did not have any uncertain tax positions.

Non-controlling interests

Third Point Re consolidates the results of entities in which it has a controlling financial interest. We record the portion of shareholders’ equity attributable to non-controlling interests as a separate line item within shareholders’ equity of the consolidated balance sheet. We record the portion of net income attributable to non-controlling interests as a separate line within the consolidated statement of income.

Earnings per share

Basic earnings (loss) per share are 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 convertible securities such as non-participating unvested restricted shares. Diluted earnings (loss) per share are based on the weighted average number of common shares and share equivalents including any dilutive effects of warrants, options and other awards under stock plans. 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 included in the number of shares outstanding for both basic and diluted earnings per share calculations. We treat our unvested restricted stock as participating securities. In the event of a net loss, the participating securities are excluded from the calculation of both basic and diluted loss per share.

Subscriptions receivable

In December 2011, we entered into subscription agreements with shareholders to purchase 78,432,132 common shares for $784.3 million. All of the shares were issued and outstanding as of the date of the

 

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subscriptions. As of December 31, 2011, we had received $606.8 million resulting in a subscriptions receivable balance of $177.5 million. The remaining subscriptions receivable were received in the first quarter of 2012. In accordance with SEC Regulation S-X, this subscription receivable has been recorded as a reduction in shareholders’ equity in the consolidated balance sheet.

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 statement of income (loss) on a straight-line basis over the term of the lease.

Comprehensive income (loss)

We have no comprehensive income (loss) other than the net income (loss) disclosed in the consolidated statement 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 as the source of the our reportable segments. Third Point Re reports two operating segments—Property and Casualty Reinsurance and Catastrophe Risk Management. We have also identified a corporate function that includes our investment results and certain general and administrative expenses related to corporate activities. For more information, see Note 24 of our audited consolidated financial statements included elsewhere in the prospectus.

Business Outlook

Property and Casualty Reinsurance

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 impacted by several factors, including industry losses, including the impact of catastrophes, changes in legal and regulatory guidelines, new entrants, investment results including interest rate levels and the credit ratings and financial strength of competitors.

While our management believes that pricing trends for the type of quota share business on which we focus have been relatively stable, there is significant underwriting capacity currently available, and we therefore believe market conditions will remain competitive in the near term. We believe there are several market developments, however, that indicate the potential for improving conditions in the medium term. These include improving pricing in several primary insurance lines of business which historically have flowed through to the reinsurance market, decelerating reserve releases from prior underwriting years, and historically low yields from the investment portfolios consisting mostly of long-only, investment grade, shorter-term, fixed income securities. These companies are now focused on the need for pricing increases to offset the drop in investment income or on increasing the risk profile of their investment portfolios, which consumes more of their risk capital.

We anticipate that we will continue to see attractive opportunities for the following reasons: Intermediaries and reinsurance buyers are increasingly familiar with Third Point Re, leading to increased submission volume in the lines and types of reinsurance we target. In addition, our primary insurance company clients are growing gross premium primarily through realizing rate increases and, to a lesser extent, expansion of the number of policies they write. As a consequence their need for quota share reinsurance has increased. Finally, the number of distressed situations for which our customized solutions may be helpful appears to be increasing.

 

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Catastrophe Risk Management

We intend to continue to monitor market conditions to participate in future underserved or capacity constrained lines of business as they arise and offer products that we believe will generate favorable returns on equity over the long term. For instance, we believe that market conditions for property catastrophe reinsurance have deteriorated due to the significant influx of capacity from collateralized reinsurance funds and sidecars. The resultant drop in catastrophe pricing impacts us in two ways: First, approximately 35% of our property and casualty gross premiums written since inception represented property quota share business, where the clients purchase separate property catastrophe coverage from another reinsurer. To the extent these clients are able to access more attractively priced property catastrophe reinsurance from another reinsurer, the profitability of their underlying business is increased, thereby improving their financial condition and reducing our residual counterparty credit risk. Second, while the expected margins generated by our Catastrophe Fund will be negatively impacted by decreasing reinsurance pricing, the expected overall impact on our results is tempered by our Catastrophe Fund’s portfolio construction and focus on smaller, regional companies.

Consolidated Results of Operations—Three and six months ended June 30, 2013 and 2012

Overview

For the three months ended June 30, 2013, we reported net income of $26.2 million, compared to net loss of $31.1 million reported for the three months ended June 30, 2012. For the six months ended June 30, 2013, we reported net income of $100.7 million, compared to net loss of $0.9 million reported for the six months ended June 30, 2012.

Underwriting Results for our Property and Casualty Reinsurance Segment

The net underwriting loss from our property and casualty reinsurance segment for the three months ended June 30, 2013 was $3.4 million, compared to a net underwriting loss from our property and casualty reinsurance segment of $11.4 million for the three months ended June 30, 2012. The net underwriting loss from our property and casualty reinsurance segment for the six months ended June 30, 2013 was $7.2 million, compared to a net underwriting loss from our property and casualty reinsurance segment of $13.9 million for the six months ended June 30, 2012. The change in both the three and six month periods was due to the following:

Factor resulting in increases in net underwriting income (decrease in underwriting loss):

 

   

In 2013, net premiums earned increased compared to the three and six month periods ended June 30, 2012. Net premiums earned is a function of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, changes in net premiums earned generally lag quarterly increases and decreases in gross premiums written and reinsurance premiums ceded. The increase in net premiums earned for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012 was primarily due to the continued expansion of our underwriting activities and related increase in gross premiums written since our reinsurance operation commenced in January 2012.

Factors resulting in decreases in underwriting income (increase in underwriting loss):

 

   

In 2013, net loss and loss expenses increased compared to the three and six months ended June 30, 2012 due to the larger in-force underwriting portfolio; however, the net loss and loss expense ratio was lower due to changes in the mix of business and crop loss recognized in the 2012 periods. The reinsurance contracts that we write have a wide range of expected loss ratios. The three and six months ended June 30, 2012 included an increase of $5.1 million in our crop loss estimate.

 

   

In 2013, acquisition costs increased due to the larger in-force underwriting portfolio. The acquisition cost ratio increased primarily due to changes in the mix of business. The reinsurance contracts that we write have a wide range of acquisition cost ratios. The three and six months ended June 30, 2013

 

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included a higher proportion of property quota share contracts that have a higher expense component due to the inuring catastrophe reinsurance, which increases the acquisition cost ratio on those contracts. Our property quota share contracts are structured to limit the amount of property catastrophe exposure we assume. As a result, the inuring catastrophe reinsurance for the property catastrophe exposure reduces the amount of premium we assume relative to the acquisition costs or is an additional component of the acquisition costs. In addition, the three and six months ended June 30, 2012 included a higher proportion of net premiums earned related to one crop contract, which had a very low acquisition cost ratio.

 

   

In 2013, general and administrative expenses relating to underwriting activities decreased from $7.4 million for the three months ended June 30, 2012 to $4.7 million for the three months ended June 30, 2013. In 2013, general and administrative expenses related to underwriting activities decreased from $10.7 million for the six months ended June 30, 2012 to $9.5 million for the six months ended June 30, 2013. The decrease in both periods was primarily due to employee signing bonuses included in the 2012 periods partially offset by increased headcount and related staff costs as we continued to build out our management team and infrastructure throughout 2012.

Investment Results

For the three months ended June 30, 2013, we recorded net investment income of $32.1 million, compared to $(17.6) million for the three months ended June 30, 2012. The return on investments managed by Third Point LLC was 3.2% for the three months ended June 30, 2013 compared to (2.2)% for the three months ended June 30, 2012. The increase in net investment income was primarily due to the higher investment return generated by Third Point LLC during the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The equity strategy was the largest contributor to overall investment returns for the three months ended June 30, 2013 representing approximately 81% of the total return driven primarily from the technology and financial sectors.

For the six months ended June 30, 2013, we recorded net investment income of $112.8 million, compared to $16.2 million for the six months ended June 30, 2012. The return on investments managed by Third Point LLC was 12.2% for the six months ended June 30, 2013 compared to 2.1% for the six months ended June 30, 2012. The increase in net investment income was primarily due to the higher investment return generated by Third Point LLC during the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The equity strategy was the largest contributor to overall investment returns for the six months ending June 30, 2013 representing approximately 65% of the total return driven primarily from the technology and financial sectors.

In addition, net investment income benefitted from higher average investable assets for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012 due to float generated by our reinsurance operations.

All of our assets managed by Third Point LLC are held in a separate account and managed under an investment management agreement whereby TP GP, an affiliate of Third Point LLC, has a non-controlling interest in the assets held in the separate account. The value of the non-controlling interest is equal to the amounts invested by TP GP, plus performance fees paid by us to Third Point LLC and TP GP and investment gains and losses thereon.

Also impacting net investment income for the three months ended June 30, 2013, was a $0.4 million unrealized gain on derivative reinsurance contracts written by the Catastrophe Reinsurer offset by the allocation of $0.8 million of investment income related to a deposit accounted reinsurance contract. Net investment income for the six months ended June 30, 2013 was offset by a $1.1 million unrealized gain on derivative reinsurance contracts written by the Catastrophe Reinsurer offset by the allocation of $1.4 million of investment income related to deposit accounted reinsurance contracts.

 

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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.

Book value per share as used by our management is a non-GAAP measure, as it is calculated after deducting the impact of non-controlling interests. Diluted book value per share is also a non-GAAP measure and represents 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 the three months ended June 30, 2013, the book value per share increased by $0.35 per share, or 2.9%, to $12.40 per share from $12.05 per share as of March 31, 2013. For the three months ended March 31, 2013, diluted book value per share increased by $0.31 per share, or 2.7%, to $12.07 per share from $11.76 per share as of March 31, 2013.

For the six months ended June 30, 2013, the book value per share increased by $1.33 per share, or 12.0%, to $12.40 per share from $11.07 per share as of December 31, 2012. For the six months ended June 30, 2013, diluted book value per share increased by $1.18 per share, or 10.9%, to $12.07 per share from $10.89 per share as of December 31, 2012.

The 2013 increase in basic and diluted book value per share for both the three and six month periods was driven primarily from net income generated in the respective periods. The growth in 2013 diluted book value per share was also impacted by warrants and share compensation issued to our Founders, employees and an advisor in conjunction with our initial formation and build-out of the management team.

The following table sets forth the computation of basic and diluted book value per share as of June 30, 2013 and December 31, 2012:

 

     June 30,
2013
     December 31,
2012
 
     (In thousands, except share and
per share amounts)
 

Basic and diluted book value per share numerator:

  

Total shareholders’ equity

   $ 1,024,861       $ 928,321   

Less: Non-controlling interests

     52,196         59,777   
  

 

 

    

 

 

 

Shareholders’ equity attributable to shareholders

     972,665         868,544   

Effect of dilutive warrants issued to founders and an advisor

     36,480         36,480   

Effect of dilutive stock options issued to directors and employees

     52,090         51,670   
  

 

 

    

 

 

 

Diluted book value per share numerator:

   $ 1,061,235       $ 956,694   
  

 

 

    

 

 

 

Basic and diluted book value per share denominator:

     

Issued and outstanding shares

     78,432,132         78,432,132   

Effect of dilutive warrants issued to founders and an advisor

     3,648,006         3,648,006   

Effect of dilutive stock options issued to directors and employees

     5,194,404         5,167,045   

Effect of dilutive restricted shares issued to employees

     624,300         619,300   
  

 

 

    

 

 

 

Diluted book value per share denominator:

     87,898,842         87,866,483   
  

 

 

    

 

 

 

Basic book value per share

   $ 12.40       $ 11.07   

Diluted book value per share

   $ 12.07       $ 10.89   

Segment Results—Three and Six months ended June 30, 2013 and 2012

The determination of our business segments is based on the manner in which management monitors the performance of our operations. Our business currently comprises two operating segments—Property and Casualty Reinsurance and Catastrophe Risk Management. We have also identified a corporate function that includes our investment results and general and administrative expenses related to our corporate activities.

 

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Property and Casualty Reinsurance

The Property and Casualty Reinsurance segment provides property, casualty and specialty treaty reinsurance to insurance and reinsurance companies on a worldwide basis. Treaty reinsurance contracts are contractual arrangements that provide for automatic reinsurance of an agreed upon portion of business written as specified in a reinsurance contract. Contracts can be written on an excess of loss basis or quota share basis although all contracts written to date have been on a quota share basis. The product lines that we currently underwrite are property, casualty and specialty.

Gross premiums written. Gross premiums written increased by $66.5 million, or 235.9%, to $94.6 million for the three months ended June 30, 2013 from $28.2 million for the three months ended June 30, 2012. Gross premiums written increased by $66.7 million, or 55.2%, to $187.5 million for the six months ended June 30, 2013 from $120.8 million for the six months ended June 30, 2012. The following table provides a breakdown of our property and casualty reinsurance segment’s gross premiums written by line of business for the three and six months ended June 30, 2013 and 2012:

 

     For the three months ended  
     June 30, 2013     June 30, 2012  
     ($ in thousands)  

Property

   $ 27,888         29.5   $ 35,628        126.4

Casualty

     49,388         52.2     —          0.0

Specialty

     17,368         18.3     (7,450     -26.4
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 94,644         100.0   $ 28,178        100.0
  

 

 

    

 

 

   

 

 

   

 

 

 

 

     For the six months ended  
     June 30, 2013     June 30, 2012  
     ($ in thousands)  

Property

   $ 28,238         15.1   $ 35,628         29.5

Casualty

     101,595         54.2     42,700         35.3

Specialty

     57,682         30.7     42,500         35.2
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 187,515         100.0   $ 120,828         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The change in gross premiums written for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was driven by:

Factors resulting in increases:

 

   

We wrote $83.1 million of new business in the three months ended June 30, 2013.

 

   

Contracts that renewed during the three months ended June 30, 2013 resulted in increased premiums of $23.7 million due primarily to one contract.

Factors resulting in decreases:

 

   

Changes in premium estimates relating to the prior year’s contracts were $(19.1) million for the three months ended June 30, 2013 primarily due to return premiums on expired contracts during the period that included a contractual provision to return the unearned premiums at expiration.

 

   

We did not renew two reinsurance contracts accounting for approximately $21.2 million of premiums for the three months ended June 30, 2012, primarily as a result of pricing and other changes in reinsurance contract structure, terms and conditions.

 

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The change in gross premiums written for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was driven by:

Factors resulting in increases:

 

   

We wrote $126.3 million of new business in the six months ended June 30, 2013.

 

   

Contracts that renewed during the six months ended June 30, 2013 resulted in increased premiums of $39.4 million primarily due to an increased line size on one contract.

 

   

We amended an existing contract resulting in $8.0 million of premium.

Factors resulting in decreases:

 

   

Changes in premium estimates relating to the prior year’s contracts were $(21.2) million for the six months ended June 30, 2013 primarily due to return premiums on expired contracts during the period that included a contractual provision to return the unearned premiums at expiration.

 

   

We did not renew four reinsurance contracts accounting for approximately $85.8 million of premiums for the six months ended June 30, 2012, with three of these contracts not renewing as a result of pricing and other changes in reinsurance contract structure, terms and conditions. In addition, our crop contract which accounted for $42.5 million of premium for the six months ended June 30, 2012 was written in 2013 with a new counterparty and is included as $35.0 million of new business above.

Premiums ceded. The $10.0 million of premiums ceded for the three and six months ended June 30, 2013 related to the purchase of a retrocessional contract on our crop contract.

Net premiums earned. Net premiums earned for the three months ended June 30, 2013 increased $46.6 million, or 314.9%, to $61.4 million. Net premiums earned for the six months ended June 30, 2013 increased $65.4 million, or 227.9%, to $94.1 million. Third Point Re began underwriting on January 1, 2012. The three and six months ended June 30, 2013 reflect net premiums earned on a larger in-force underwriting portfolio compared to the three and six months ended June 30, 2012. In addition, the three and six months ended June 30, 2013, include net premiums earned of $22.3 million related to one retroactive reinsurance contract pursuant to which we record the gross premiums written and earned at the inception of the contract.

Net loss and loss adjustment expenses. Net loss and loss adjustment expenses for the three months ended June 30, 2013 was $45.3 million, or 73.7% of net premiums earned, compared to $16.7 million, or 112.4% of net premiums earned, for the three months ended June 30, 2012. Net loss and loss adjustment expenses for the six months ended June 30, 2013 was $63.9 million, or 68.0% of net premiums earned, compared to $29.0 million, or 101.0% of net premiums earned, for the six months ended June 30, 2012. The decrease in the loss ratio was primarily due to the crop losses that were recorded in the three and six months ended June 30, 2012. For the three months ended June 30, 2012, we increased our crop loss estimate by $5.1 million, which equated to a 34.5 percentage point impact on the loss ratio for the three months ended June 30, 2012 and a 17.8 percentage point impact on the loss ratio for the six months ended June 30, 2012.

There was insignificant net reserve development for the three and six months ended June 30, 2013. We commenced underwriting in 2012 and therefore did not have any reserve development for the 2012 periods.

For the six months ended June 30, 2013, we also recorded a $2.9 million decrease in loss and loss adjustment expense reserves primarily due to a decrease in a premium estimate on our crop contract which is currently recorded at a greater than a 100% loss ratio. These adjustments offset resulting in no net underwriting income or net loss ratio impact in the six months ended June 30, 2013.

Acquisition costs. Acquisition costs include commissions, brokerage and excise taxes. Acquisition costs are presented net of commissions ceded under reinsurance contracts. The reinsurance contracts that we write have a

 

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wide range of acquisition costs. As a result, our acquisition cost ratio can vary significantly from period to period. Acquisition costs for the three months ended June 30, 2013 were $14.8 million, or 24.1% of net premiums earned, compared to $2.1 million, or 14.4% of net premiums earned, for the three months ended June 30, 2012. Acquisition costs for the six months ended June 30, 2013 were $27.8 million, or 29.6% of net premiums earned, compared to $2.9 million, or 9.9% of net premiums earned, for the six months ended June 30, 2012. The three and six months ended June 30, 2013 included a higher proportion of property quota share contracts that have a higher expense component due to inuring catastrophe reinsurance which increases the acquisition cost ratio on those contracts. Our property quota share contracts are structured to limit the amount of property catastrophe exposure we assume. As a result, inuring catastrophe reinsurance for the property catastrophe exposure reduces the amount of premium we assume relative to the acquisition costs or is an additional component of the acquisition costs. In addition, the three and six months ended June 30, 2012, included a higher proportion of net premiums earned related to one crop contract which had a very low acquisition cost ratio.

General and administrative expenses. General and administrative expenses for the three months ended June 30, 2013 were $4.7 million, or 7.7% of net premiums earned, compared to $7.4 million, or 49.9% of net premiums earned, for the three months ended June 30, 2012. General and administrative expenses for the six months ended June 30, 2013 were $9.5 million, or 10.1% of net premiums earned, compared to $10.7 million, or 37.4% of net premiums earned, for the six months ended June 30, 2012. The decrease in both periods was primarily due to employee signing bonuses included in the three and six months ended June 30, 2012 partially offset by an increase in headcount and related staff costs as we continued to build out our management team and infrastructure throughout 2012. The lower general and administrative ratio is also improved due to higher net premiums earned as a result of having a larger in-force underwriting portfolio compared to the three and six months ended June 30, 2012.

Catastrophe Risk Management

The Catastrophe Reinsurer wrote no business before January 1, 2013. From January 1, 2013, the underwriting results of the Catastrophe Reinsurer as well as results of the Catastrophe Fund, the entities for which the Catastrophe Fund Manager underwrites and manages catastrophe risk, are captured with the Catastrophe Fund Manager in this segment. We are currently required to consolidate the results of the Catastrophe Fund and the Catastrophe Reinsurer with our other operations because we control a majority of the outstanding interests in these entities. However, as an open-ended investment fund, the Catastrophe Fund is continuing to market its interests to third-party investors. We expect that the Catastrophe Fund may achieve levels of third-party investment to potentially allow us to deconsolidate its results during 2013.

Gross premiums written. Gross premiums written were $3.6 million for the three months ended June 30, 2013 and $6.7 million for the six months ended June 30, 2013, consisting of property catastrophe business written.

Net premiums earned. Net premiums earned were $0.9 million for the three months ended June 30, 2013 and $1.7 million for the six months ended June 30, 2013.

Net investment income. Net investment income of $0.4 million for the three months ended June 30, 2013 and $1.1 million for the six months ended June 30, 2013 consists primarily of net unrealized gain on derivatives on derivative reinsurance contracts written by the Catastrophe Reinsurer.

Net loss and loss expenses. Net loss and loss adjustment expenses were $0.4 for the three and six months ended June 30, 2013 related to tornadoes, hail and severe thunderstorms that occurred in the United States in 2013.

Acquisition costs. Acquisition costs include commissions, brokerage and excise taxes. Acquisition costs for the three months ended June 30, 2013 were $0.1 million, or 9.1% of net permiums earned. Acquisition costs for the six months ended June 30, 2013 were $0.2 million, or 10.5% of net premiums earned.

 

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General and administrative expenses. General and administrative expenses for the three months and six months ended June 30, 2013 were $1.0 million and $1.8 million, respectively. General and administrative expenses consist of costs associated with the employee leasing agreement, cat modeling and legal and accounting expenses.

Corporate function

General and administrative expenses. General and administrative expenses allocated to our corporate function include allocations of payroll and related costs for certain executives and non-underwriting staff that spend a portion of their time on corporate activities. We also allocate a portion of overhead and other related costs based on a related headcount analysis. For the three months ended June 30, 2013, general and administrative expenses allocated to the corporate function were $1.5 million compared to $2.2 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, general and administrative expenses allocated to the corporate function were $2.9 million compared to $3.1 million for the six months ended June 30, 2012. The decrease in both periods was primarily due to employee signing bonuses included in the three and six months ended June 30, 2012 partially offset by increased headcount and related staff costs as we continued to build out our management team and infrastructure throughout 2012.

Consolidated Results of Operations—Year ended December 31, 2012 and Period from October 6, 2011 to December 31, 2011

Overview

For the year ended December 31, 2012, we reported net income of $99.4 million, compared to net loss of $1.1 million reported for the period from October 6, 2011, our date of incorporation, to December 31, 2011.

Underwriting Results

The net underwriting loss for the year ended December 31, 2012 was $28.7 million. We commenced underwriting activity on January 1, 2012. The key drivers of the underwriting loss recorded in the year ended December 31, 2012 were as follows:

 

   

We incurred a full year of general and administrative expenses, including certain start-up related costs, compared to only a partial year of net premiums earned as our underwriting portfolio continues to increase. Although we would expect modest increases in our general and administrative expenses due to additional staff and professional services, including services required once we become subject to reporting requirements applicable to public companies, we also expect our general and administrative expense ratio to decrease as the net premiums earned on our underwriting portfolio increase.

 

   

We recognized a net underwriting loss of $10.0 million on the sole crop reinsurance contract written, largely due to severe drought conditions impacting most of the United States farm belt. The National Oceanic and Atmospheric Administration reported that 55% of the contiguous United States was under moderate to extreme drought conditions, which was the largest land area in the United States to be affected by a drought since December 1956. The net underwriting loss on our crop contract was partially offset by net underwriting income of $1.6 million on the remaining reinsurance business written.

Investment Results

For the year ended December 31, 2012, we recorded net investment income of $136.4 million, representing a return of 17.7% on our investments managed by Third Point LLC. The performance of our investment portfolio, as managed by Third Point LLC, was driven by positive results across all investment strategies coupled with strong gains in several core holdings, particularly large positions in Greek government bonds and Yahoo! Inc. In August and September of 2012, Third Point LLC purchased the restructured strip of Greek government

 

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debt at a significant discount to face value and sold a large portion of the position back to the Greek government in late December 2012, realizing significant returns. The investment in Yahoo! Inc. was prompted by an identification of several key positive catalysts with the potential to unlock substantial shareholder value coupled with a perceived undervaluation of Yahoo! by the market. Both investments appreciated in value considerably by year end and continue to be core positions in our portfolio. Positive performance throughout the first half of 2012 was led by investments in corporate and structured credit instruments. Our equity portfolio boosted gains in the second half of the year as our investment manager increased both gross (or long plus short positions) and net (or long minus short positions) exposure as market conditions improved in the third quarter. Equities accounted for approximately 50% of 2012 overall investment returns driven primarily by the energy, industrials and technology sectors. In addition to positive investments, Third Point LLC successfully employed several process-focused initiatives including increasing concentration in selected positions and lowering the overall number of positions.

For the year ended December 31, 2012, our net investment income reflected contributions for all of the investment strategies employed by Third Point LLC. Primary contributions included long and short equity, corporate credit, asset-backed securities, and macroeconomic and other positions which contributed $61.5 million, $28.2 million, $18.9 million and $27.8 million, respectively.

We were formed on October 6, 2011 and received initial proceeds from our capitalization transactions in December 2011. These proceeds were invested in January 2012. As of December 31, 2011, we held only cash and cash equivalents which did not generate any net investment income for that period.

All of our investable assets are held in a separate account and managed under the Investment Management Agreement whereby TP GP, an affiliate of Third Point LLC, has a minority interest in the assets held in the separate account. The value of the minority interest is equal to the amounts invested by TP GP, plus performance fees paid by us to Third Point LLC and TP GP and investment gains and losses thereon.

Book Value Per Share

For the year ended December 31, 2012, our book value per share increased by $1.35 per share, or 13.8%, to $11.07 per share from $9.73 per share as of December 31, 2011. For the year ended December 31, 2012, our diluted book value per share increased by $1.16 per share, or 11.9%, to $10.89 per share from $9.73 per share as of December 31, 2011. The growth in diluted book value per share was impacted by warrants and share compensation issued to our Founders, employees and an advisor in conjunction with our initial formation and build-out of the management team.

Book value per share as used by our management is a non-GAAP measure, as it is calculated after deducting the impact of non-controlling minority interests, and adding back subscriptions receivable. In addition, diluted book value per share is also a non-GAAP measure and represents 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. We believe that long-term growth in diluted book value per share is the most important measure of our financial performance because it allows our management and investors to track over time the value created by the retention of earnings. In addition, we believe this metric is used by investors because it provides a basis for comparison with other companies in our industry that also report a similar measure.

 

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The following table sets forth the computation of basic and fully diluted book value per share as of December 31, 2012 and 2011:

 

        December 31,
     2012
        December 31,
     2011
 
    (In thousands, except share and
per share amounts)
 

Basic and fully diluted book value per share numerator:

   

Total shareholders’ equity

  $ 928,321      $ 585,425   

Less: Non-controlling interests

    59,777        —     
 

 

 

   

 

 

 

Shareholders’ equity attributable to shareholders

    868,544        585,425   

Add: Subscriptions receivable:

    —          177,507   
 

 

 

   

 

 

 

Book value per share numerator

    868,544        762,932   

Effect of dilutive warrants issued to founders and an advisor

    36,480        —     

Effect of dilutive share options issued to directors and employees

    51,670        —     
 

 

 

   

 

 

 

Fully diluted book value per share numerator:

  $ 956,694      $ 762,932   
 

 

 

   

 

 

 

Basic and fully diluted book value per share denominator:

   

Issued and outstanding shares

    78,432,132        78,432,132   

Effect of dilutive warrants issued to founders and an advisor

    3,648,006        —     

Effect of dilutive restricted shares issued to employees

    619,300        —     

Effect of dilutive share options issued to directors and employees

    5,167,045        —     
 

 

 

   

 

 

 

Fully diluted book value per share denominator:

    87,866,483        78,432,132   
 

 

 

   

 

 

 

Basic book value per share

  $ 11.07      $ 9.73   

Fully diluted book value per share

  $ 10.89      $ 9.73   

Segment Results—Year ended December 31, 2012 and Period from October 6, 2011 to December 31, 2011.

The determination of our business segments is based on the manner in which our management monitors the performance of our operations. Our business currently comprises two operating segments—Property and Casualty Reinsurance and Property Catastrophe Risk Management. We have also identified a corporate function that includes our investment results and certain general and administrative expenses related to corporate activities.

Property and Casualty Reinsurance

The Property and Casualty Reinsurance segment provides treaty reinsurance to insurance and reinsurance companies on a worldwide basis. Treaty reinsurance contracts are contractual arrangements that provide for automatic reinsurance of an agreed upon portion of business written as specified in a reinsurance contract. Contracts can be written on an excess of loss basis or quota share basis although all contracts written to date have been on a quota share basis. The product lines that we currently underwrite are property, casualty and specialty.

Gross premiums written. Gross premiums written consisted of $190.4 million for the year ended December 31, 2012. We commenced underwriting activities on January 1, 2012. The following table provides a breakdown of our property and casualty reinsurance segment’s gross premiums written by line of business for the year ended December 31, 2012:

 

     ($ in thousands)