Siriuspoint Ltd (SPNT) CEO Sid Sankaran on Q1 2022 Results – Earnings Call Transcript

Siriuspoint Ltd (NYSE:SPNT) Q1 2022 Earnings Conference Call May 5, 2022 8:30 AM ET

Company Participants

Clare Kerrigan – Head, Investor Relations

Sid Sankaran – Chairman & Chief Executive Officer

David Junius – Chief Financial Officer

Conference Call Participants

Operator

Good morning, ladies and gentlemen, and welcome to the SiriusPoint Limited First Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. As a reminder this conference is being recorded.

I would now like to turn the call over to Ms. Clare Kerrigan, Head of Investor Relations for SiriusPoint. Please go ahead.

Clare Kerrigan

Thank you, Operator. Welcome to the SiriusPoint Limited Earnings Call for the first quarter of 2022. Last night, we issued our earnings press release and financial supplement, which are available on our website, www.siriuspt.com.

With me here today are Sid Sankaran, our Chairman and Chief Executive Officer; and David Junius, our Chief Financial Officer.

Before we begin, I would like to remind you that many of the remarks today will contain forward-looking statements based on current expectations. Actual results may differ materially from those projected as a result of certain risks and uncertainties. Please refer to the earnings press release and the company’s other public filings, including the recent Form 10-K for the period ended December 31, 2021, where you will find risk factors that could cause actual results to differ materially from these forward-looking statements.

In addition, management will refer to certain non-GAAP financial measures, which management believe allow for a more complete understanding of the company’s financial results. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is presented in the company’s earnings press release that is available on our website.

At this time, I will turn the call over to Sid.

Sid Sankaran

Thank you, Clare, and good morning everyone. I’m extremely pleased that the first quarter of 2022 showed positive underwriting progress as we continue to execute on the strategic priorities we laid out one year ago to transform our business.

SiriusPoint launched in 2021 with the capital, platform and expertise to address our legacy challenges and unlock the potential that exists in our company. When we launched, we outlined our plans to achieve profitability through a shift in business mix towards insurance products. A significant reduction in exposure to catastrophe risk and a complete re-underwriting of other reinsurance business. Finally on the asset side, we intended a derisking of our investment portfolio. This is the first quarter that meaningfully reflects the hard work that has been undertaken since then.

We achieved a consolidated underwriting profit of $34 million for the quarter with a combined ratio of 93.7% and gross premiums written of just over $1 billion. Our results this quarter showed progress with the deliberate shift towards our promising insurance and services segment as our strategic partnerships approach gains traction evidenced by growth and momentum in premium and profitability. We also improved on last quarter’s reinsurance segment results as our steps to reduce the risk in our portfolio and ruthlessly execute on our re-underwriting continued. I’m extremely pleased in our progress on both of these fronts.

That said, our investment results were disappointing this quarter, driven primarily by losses in the Third Point Enhanced Fund. We continue to execute our investment derisking program in the coming quarter.

I’d like to dive a little deeper on our progress. We have remediated, reduced and refined SiriusPoint’s underwriting portfolio risk appetite. We executed a loss portfolio transfer to exit legacy runoff business and freed up capital. We announced an agreement for an industry first in the creation of a solution for the investment needed in our Lloyd’s platform, which I’ll return to shortly and pivoted our focus from property cat reinsurance to harness opportunities across the insurance market, particularly through our unique strategic partnership approach.

We’ve also restructured our legal entities to streamline operations and reduce costs. We’ve attracted industry leading talent to our open senior leadership roles and the integration of our legacy companies has progressed well. This has been a dramatic capital reallocation and that includes shifting our investment portfolio from equity to fixed income, in line with our risk appetite and the strategic direction of SiriusPoint. This approach also frees up capital, which we intend to redeploy both the growth and expected value creation of our insurance and services business.

As I’ll discuss shortly, we’re seeing growth in our more established partnerships and green shoots of progress in many of our newer investments. We believe that we are positioning SiriusPoint for long-term profitable growth through the meaningful restructuring work that we have undertaken. And as a result, we see significant intrinsic value in our current share price. Given the material discount to book value, we repurchased $5 million of common stock in March with $57 million remaining in our share repurchase authorization. We will continue to review our share repurchase program quarter-to-quarter.

Much of the value, we are creating is within our insurance and services segment. We are shifting our identity from a traditional reinsurer, rebalancing our business to create value for our shareholders and positioning SiriusPoint for the future. This transformation is largely driven by our strategic partnership model within our insurance and services segment.

We believe our MGA first model allows for sustainable value creation. The differentiating technology is more likely to be developed in small innovative organizations and that the best underwriting talent is increasingly gravitating towards entrepreneurial managing general agents.

SiriusPoint’s competitive advantage is as a partner to these MGAs, supporting those with the differentiating and value-add offering in a variety of ways. We believe that strong strategic and incentive alignment is key for mutual success. We often establish multiyear partnerships to create value for both businesses. We can provide growth capital, distribution, access to our global platform, fronting, our extensive expertise, including underwriting actuarial and product development and finally management of regulated insurance company paper and balance sheets.

We provide much more in typical fronting or reinsurance relationship working towards the success of both of our businesses, while driving disruptive change in entrepreneurialism in the insurance industry. We are very selective, partnering with MGAs and insurance service providers that are building a strong competitive mode across a variety of segments by addressing customer needs. We’ve announced over 20 strategic partnerships with MGAs and insurance service providers in the last year, bringing our total partnerships to more than 30. We believe these partnerships will accelerate growth and improve profitability, as we support our investments to mature over time to deliver long-term sustainable value.

In the fourth quarter of 2021, we resegmented our results into insurance and services and reinsurance, in line with our strategy to provide more transparency into the value creation from insurance and services. This segment had a strong start to the year generating income of $24 million including underwriting income of $10 million with a 95.5% combined ratio and $14 million of service income on $57 million of service revenues.

I want to highlight three types of MGA partnerships. The first is incubations or start-ups, where we can provide start-up capital, operational support, licenses and expertise to allow entrepreneurs to launch new businesses at record time. These include Arcadian Risk Capital which offers general and professional liability and property; Banyan risk which underwrites D&O; Joyn insurance covering small and mid-market commercial insurance; LimitFi which offers credit insurance; Parameter Climate which provides climate underwriting and distribution; and VYRD, a Florida homeowner insurance carrier.

Secondly, we partner with technology-enabled MGAs where we make an investment, generally at a relatively early point in their maturity offering capital, paper, and/or function arrangements. These include Corvus, a cyber insurer; Honeycomb, which provides commercial real estate insurance; Players Health, offering amateur and youth sports insurance and risk management; and start-up insurer Vouch.

Finally, we have our wholly owned subsidiaries our Modicare which provides supplemental Health and Employee Benefit Solutions and International Medical Group or IMG, which provides travel medical and assistance insurance. These are our most established and developed MGAs with increased contributions to income and growth this quarter.

Following a return to normalcy post-COVID restrictions, we’ve seen an increase in employees using our modest supplemental health products. Perhaps going back to the doctor, we’re scheduling elective surgeries leading to a very good renewal season and continued profitability following the trend set in 2021. With an increased use of benefits, our modest customers have seen continued value in their employee benefit offering and during the renewals many opted to add either employees or benefits their programs, positively impacting our modest quarterly results.

We are also seeing a strong recovery in travel after challenging 2020 and 2021 due to COVID-related travel reductions. Driven by leisure travel returned to pre-pandemic levels, we’re seeing strong momentum in IMG’s results with $1.7 million of income in the first quarter versus breaking even in the same quarter last year. With the insurance generated by IMG for SiriusPoint’s balance sheet generating a combined ratio for the quarter of 90.8%.

Leisure travelers are taking longer and more expensive trips and choosing to buy insurance at a higher rate than pre-pandemic norms, resulting in continued strong performance within the travel medical market segment. SiriusPoint is accessing this opportunity via IMG’s approach to merchandising on key aggregators and the business’ effective direct digital marketing program, while we continue to invest in our IMG’s platform to grow product and distribution.

Our partnership with Mosaic Insurance is designed to reinvigorate SiriusPoint’s Lloyd’s syndicate in 1945. As part of the partnership and the subject to Lloyd’s regulatory approval, which we anticipate in the second half of 2022, Mosaic will acquire a managing agency, while SiriusPoint retains syndicated 1945. This creates a unique arrangement that offers a path to growth and development also providing serious point access to Mosaic’s growing product classes and geographic reach with best-in-class underwriters. Our alignment with Mosaic includes taking a stake in the business and a seat on their board.

Separately, Syndicate 1945 improved in Lloyd’s rankings from the fourth to the second quartile in the last year due to focused work to improve the underwriting which is reflective of the revaluation, remediation and innovation being applied to our entire business while making tough choices on the business we continue to write.

In addition to the MGA partnerships, we invest in high-value insurance service providers that support the MGA ecosystem. These include LuckyTruck, a digital broker and aggregator specializing in commercial trucking insurance and Broker Buddha, a commercial insurance platform that simplifies the missions for brokers, MGAs and carriers. As we reposition ourselves as an insurer and partner of choice for entrepreneurial nimble MGAs and tech-enabled insurance service providers, remediating the reinsurance segment of our business remains an important part of our strategy and has a key part to play in the SiriusPoint offering. We have outstanding reinsurance talent within our business, which drives our reinsurance client and broker relationships and provides a deep bench of expertise for both our reinsurance book and the MGA and InsurTech partnerships. We have an established global platform which provides access to global and local opportunities and we have a nimble approach to market opportunity and great adequacy, all of which we intend to leverage to position us for long-term disciplined growth within our risk appetite.

Following the substantial and ongoing re-underwriting and reallocation in our reinsurance segment, premiums written for the quarter was $524 million with a segment income of $3 million and a 99% combined ratio. David will address our specific Ukraine-Russian catastrophe losses but this includes our current modest underwriting loss estimate for Russia and Ukraine of $13 million and combined with catastrophe losses net of reinsurance and restatement premiums of $7 million, which falls within our budgeted cat loads for the quarter.

As is the case for businesses across the insurance and economic markets, we’re closely monitoring the potential impact of the Ukraine-Russia conflict. The full consequences in this war is still to unfold in terms of economic and tragically human cost. The ultimate impact on our business of this conflict still remains uncertain. We’ll continue to monitor the unfolding situation closely and ensure full compliance with applicable sanctions.

More generally, we’ve made major changes in our reinsurance segment in the last 15 months, having exited or non-renewed approximately $700 million of business reflecting major re-underwriting across our portfolio. We continue our re-underwriting as transactions renew and anticipate additional portfolio actions throughout 2022. We’ve reduced our global property aggregates by more than 30%, a more prudent risk thresholds overall as well as the pullback from select regions and payrolls where we view there is heightened risk or an adequate rate.

We exited London direct and facultative property as well as most cat-exposed property risk and US property pro rata, where we had concerns about inherent catastrophe pricing and the risks presented by secondary perils. We exited the legacy Third Point refloat transactions and a book of political violence, Workers’ Comp cap, Cyber and War, previously written out of our Bermuda office. We also exited a significant volume of accounts in our US casualty pro rata portfolio replaced by structured and niche business, which we expect to outperform higher acquisition cost commodity accounts.

Our re-underwriting is a continuous process with account-by-account scrutiny across our portfolio, including the deal structure, target economics and distribution as well as other factors including the market cycle and viewed the seeding company. We have flagged approximately 20% of accounts at our current reinsurance portfolio for likely non-renewal or increased scrutiny including where the market cycle has peaked and conditions are deteriorating or generally where we prefer to improve our position with more niche and non-commoditized business.

While 4/1 rates were generally positive, we deployed approximately 30% less aggregates than planned at 4/1 renewals. This reflects our underwriting discipline and avoidance some risks which we view as underpriced or inadequately modeled. Lower aggregate deployment creates near-term impact on our financial results given the higher fixed cost of our retrocession.

However, we have retained the option to deploy more aggregates later in the year such as Atlantic wind at 6/1 should the pricing and terms be favorable. We remain committed to our strategy for global reinsurance and especially property reinsurance to maintain discipline and avoid deploying aggregates unless we have confidence in the risk-reward profile and price adequacy of the business. This strategy includes shifting to a more nimble lower-cost operating model so we have the ability to flex our top line up or down in response to market conditions and avoiding the top line pressures associated with high fixed operational retrocession expenses.

The net investment loss of $205 million is the main driver of our overall results this quarter. This is very disappointing given the progress we’ve made in our underwriting results and the steps that we are taking to address this pressing issue. The return is primarily due to negative returns for the long fundamental equities in the Third Point Enhanced fund, with the traction led by growth-oriented positions in the enterprise technology and financial sector.

Repositioning our investment portfolio for stable and sustainable returns remains an ongoing and key priority for us. As we reported last quarter, we amended our investment management agreement with Third Point LLP at the end of 2021 and are aggressively reallocating capital to eliminate the extreme levels of investment volatility that we have experienced over the last year.

Redeemed $100 million from the Third Point Enhanced fund during the quarter, following $450 million of redemptions in the fourth quarter of 2021. We intend to execute on further withdrawals from TP in the coming quarter and continue the redemption of funds. We continue however to be extremely excited about partnership opportunities with Third Point in both the managed credit and TP venture space.

I will now hand the call over to David to take us through the financials.

David Junius

Thanks, Sid. For the first quarter, we generated a net loss of $217 million or $1.36 per diluted share versus net income of $168 million or $1.35 per diluted share in the same quarter a year ago. Our annualized return on average common equity in the quarter was a negative 39.5%. We achieved an underwriting profit of $34 million, with a combined ratio of 93.7%, reflecting a $10 million or 160 basis point improvement quarter-over-quarter, marking the fourth quarter with an underwriting profit out of the five quarters, since we launched SiriusPoint.

This is our second quarter reporting under the new segment structure of reinsurance and insurance and services, the combination of which we define as core with our remaining results including the former Runoff segment reported in the corporate results.

Core underwriting income and net core services income are each presented on a gross basis, to show the contribution of underwriting, and our consolidated distribution platforms before intercompany eliminations. So as if the two parts of the company operated independently.

As a reminder, as part of this change, we have broken out service fee income and expenses, as well as gains and losses from our investments in MGAs, separately from underwriting income. This provides stakeholders with greater transparency into the profit contribution from the fee-driven parts of our business, as well as the returns on our investments in our strategic partnerships.

The combination of core underwriting and net core services income is core income. We believe this presentation better reflects our company’s strategy and management structure and provides transparency on which to evaluate the transformation of our reinsurance business and the growth in our Insurance and Services segment.

Additional detail on our segment presentation can be found in our Form 10-Q. Core segment income was $27 million for the first quarter of 2022, including underwriting income of $13 million, and a combined ratio of 97.5%, which compares to a $15 million and a combined ratio of 93.7% in the first quarter of 2021, which only included partial results from Sirius Group as the acquisition closed at the end of February last year.

Our current quarter combined ratio includes $7 million cat losses or 1.3 points excluding Russia-Ukraine losses and $20 million of cat losses or 3.9 points, including Russia and Ukraine. Core underwriting income was driven by benign net cat activity and favorable prior year loss development, partially offset by a $13 million loss provision for the events in Russia and Ukraine.

On Russia and Ukraine, despite not having any reported losses in line with our reserving philosophy, of recognizing bad news quickly, we have taken and reserving action unknown exposures including our exposure to a limited number of aviation reinsurance contracts with work whole coverage on planes leased to Russian elements as well as political violence streets with exposure in Ukraine.

In many cases, we’ve reserved at or near what we believe to be our ultimate exposure, despite this being an evolving situation with outcomes still highly uncertain. Outside Russia and Ukraine, net cat losses were $7 million driven by February European windstorm and Australian floods.

For Australia, we have established a full net reserve on our single contract that has a core to this historic Australian flooding. As Sid mentioned, cat losses, including Russia and Ukraine are slightly below budgeted cat loads keeping us on track to deliver profit for the full year.

The quarterly results include net favorable prior year development of $5 million across three areas. First, we continue to benefit from prudent reserving in our Accident & Health book, with favorable prior year development across a number of prior year accident years in both our US and international A&H books, where action was taken to close out reserves and individual contracts.

Second, we took action to release a portion of our COVID reserves an area where we continue to see actuals coming below reserving positions on the individual contracts, which allowed us to release specific contract level reserves as well as a portion of our management margin on our overall COVID ultimate loss picks.

Third, partially offsetting this favorable development, we had adverse development related to property exposures due to cedent reported losses coming in above expectations due to higher building material and skilled labor costs.

On long-tail volumes we continue to see favorable actual versus expected trends in all classes except workers’ comp, which despite pressure on rates and loss reserves are developing within our reserving margins. Despite this overall positive trend, we did not take action on these lines in the quarter, as we wait for book to season. We continue to book reserves at levels higher than pricing across our entire book, with particular attention given to our growing casualty business written by partner MGAs.

Core gross premiums written for the first quarter were $1 billion. We do not view prior year comparisons as particularly relevant as the first quarter of 2021 included only one month of Sirius Group results. However, our gross premiums written and net premiums written grew 10% and 3% respectively on an estimated pro forma basis year-over-year. This growth reflects our business strategy of shifting our business mix waiting from reinsurance to insurance to reduce earnings volatility improve underwriting profitability. Our gross premiums written and net premiums written business mix shift is emerging quickly with a 10-point shift from 2021.

Turning to the individual segment results in more detail. The Reinsurance and Insurance and Services segment produced underwriting income in the quarter of $3 million and $10 million with combined ratios of 99.0% and 95.5% respectively. Reinsurance results were impacted by the aforementioned $13.3 million of losses from Russia-Ukraine or more than four points of losses to the segment.

Beyond property, our casualty reinsurance focus remains on niche specialty lines versus larger commodity counts, where we are seeing a good flow of new business with a positive primary commercial lines rating environment across most lines partially offset by rising seeding commissions.

Insurance and services produced segment income of $24 million, consisting of $14 million net services income and underwriting profit of $10 million and a combined ratio of 95.5%. Net services income primarily benefited from Armada’s continued stronger margins and outperformance by IMG, a stronger revenue and lower-than-planned expenses contributed to margin expansion.

Net services income included $57 million of services revenue versus $18 million in the prior year, predominantly from our A&H MGAs, IMG and Armada together with Arcadian and Banyan. Insurance and services underwriting profit benefited from favorable prior year development across our Accident & Health portfolio, where we continue to reserve prudently.

Insurance and Services gross premiums written in the segment were $484 million, compared to $191 million in the prior year, reflecting a portfolio mix of approximately two-thirds accident health and one-third P&C. In A&H, IMG saw a strong travel premium recovery and our North American portfolio has been boosted by organic increases in our portfolio and steady growth.

New business written by the North American portfolio is running well, as was expected. Our international portfolio has performed in line with our historically top-tier level. Overall for A&H, we are very pleased with the quarter.

MGAs Arcadian and Banyan were strong contributors to growth year-on-year, as well as Corvus, which had strong production following our partnership launch in the fourth quarter of 2021 and where we continue to see demand supply imbalances in the market for cyber insurance.

Core underwriting expenses were $46 million for the first quarter of 2022, or an 8.8% OUE ratio. We are investing in A&H and our growing MGA portfolio, which is offset by efficiency gains in our reinsurance book.

Corporate expenses, excluding service expenses, were $34 million in the quarter, driven by elevated provisions for expected credit losses of $13 million, largely due to reinsurance exposures to Russia and Florida. Excluding this one-time item corporate expenses were $21 million for the quarter in line with prior quarters.

Corporate generated an underwriting loss of $6 million for the three months ended March 31, 2022, due to a risk-attaching political islands contract with exposure to Ukraine, which was non-renewed last year as part of our portfolio re-underwriting, and where we have a booked loss, even though we have not yet received a formal last notification.

The net investment loss for the first quarter was $205 million, driven by losses from our related party investments of $131 million, our return in 1Q 2022 from the Third Point Enhanced fund, the bulk of our related party investments was negative 15.3%.

The above target gains in TPE we had in the first nine months of 2021, largely reversed in the fourth quarter of 2021 and the first quarter of 2022. And we reiterate our commitment to shifting our investment mix from hedge funds to fixed income.

Our quarter end Third Point Enhanced balance was $650 million, incorporating the previously reported $100 million redemption at the end of January and the $450 million redemption in the fourth quarter of 2021. In addition, we continue to exit our legacy Sirius Group alternatives portfolio, down 22% since year-end to $153 million on redemptions and sales, although this portfolio continues to be subject to gating and other directions.

We have taken further action to move away from fair market value accounting for new positions in our strategic investments portfolio, where we believe changes in fair market value, driven by publicly traded peer groups, are not necessarily indicative of the underlying operating performance of our privately held portfolio. The underlying business performance of the MGAs in which we have investments for the large part continue to perform to our expectations.

Our $3.6 billion fixed income portfolio, inclusive of short-term investments, had a loss of $61 million in the quarter or a return of just under 2%. This was despite the interest rate increase in the first quarter, as we have positioned our fixed income portfolio at 1.8 years, excluding cash and cash equivalents, relative to our liability duration at approximately three years.

A duration positioning, as well as an allocation to cash and short-term investments, will enable the company to benefit from a rising rate environment, as we deploy funds away from hedge funds. Widening credit spreads also impacted returns. Although, we expect this short duration portfolio to pull the par towards maturity, residential MBS and corporate debt led the declines.

Our balance sheet remains extremely strong, ending the quarter with $2.3 billion of shareholders’ equity. Total capital including debt was $3.1 billion. Issued debt was unchanged in the quarter, except for FX changes in our SEK sub debt our debt-to-total capital ratio is up one point to 26% on the change in equity. Tangible book value per diluted share fell 10% in the quarter. Since the start of the year, S&P, AM Best and Fitch have all reaffirmed our A- insurer financial strength ratings.

Now, let me turn the call back to Sid for concluding remarks.

Sid Sankaran

Thanks David. We have positive momentum as we head towards midyear and are well positioned to take advantage of opportunities as they arise. Our progress so far is testament to the team’s tireless commitment to our transformation, development and growth. I’m immensely proud of what is being achieved across our platform and business segments to position us for long-term sustainable profitability and value creation.

Our focus remains on underwriting profitability, reducing volatility across our underwriting investment portfolios and developing our insurance and services business. There is no doubt that we have considerable work to do, but we are committed to delivering against our strategic priorities and to aiding understanding of the opportunity, our growing value proposition and market differentiation presents. Thank you for your time. And with that I’ll turn the call back over to the operator.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Question-and-Answer Session

End of Q&A

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