SiriusPoint Ltd.
Q4 2021 Earnings Call Transcript

Published: 25 Feb 2022

[Operator:]

Good morning, ladies and gentlemen, and welcome to SiriusPoint Fourth Quarter and Full Year 2021 Earnings Conference Call. . As a reminder, this call 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 fourth quarter of 2021. 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-Q for the period ended September 30, 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.

[Siddhartha Sankaran:]

Thank you, Clare, and good morning, everyone. It's terrific to be speaking with you on the first anniversary of SiriusPoint's formation. At the end of February last year, we created a company that has enormous potential with a global platform, strong long-term relationships and outstanding talent. Our strategy is focused on a comprehensive reunderwriting of our property, casualty and specialty reinsurance portfolios. Building value in our Insurance and Services segment, including our robust and growing MGA platform and repositioning our capital allocation within our investment portfolio. The team has been relentless this year in their dedication to positive change and profitable growth, and I couldn't be more proud of the talented people who make up SiriusPoint. Some of our milestones this year include launching on the New York Stock Exchange on February 26, 2021, under the ticker symbol SPNT with a new management team who bring a wealth of diverse experience and expertise. Creating our Insurance and Services division and developing our brand as the go-to partner for entrepreneurs in the insurance industry. We've evaluated over 200 partnership opportunities and have launched strategic partnerships with over 20 companies, bringing our total portfolio to over 30 relationships. We've recruited significant new hires in key growth areas and functional support with unique skills and expertise to build on our outstanding talent and drive our business forward. We've made significant progress over the last year, dramatically reshaping our company with a single-minded focus on our goals of optimizing our capital allocation, reducing our volatility profile and leveraging our global platform to build long-term differentiated value for our shareholders, partners and clients. Our focus remains on continuing to shift to a more balanced business mix between insurance and reinsurance. In particular, away from property cat and on reducing equity exposure in our investment portfolio. As part of our underwriting review, we've materially reduced our property exposure, eliminated float-driven transactions and re-underwritten our global reinsurance book. Recent property reinsurance market conditions have reinforced our decision to shift to a more diversified portfolio across reinsurance and insurance. Our investment portfolio had superior returns in the first 3 quarters of the year. The fourth quarter results reflect poor performance in the broader equity markets. During the quarter, we completed a redemption of $450 million from the Third Point Enhanced Fund to be deployed in cash and fixed income, with an additional $100 million redemption at the end of January 2022. We've amended the investment management agreement with Third Point LLC to facilitate the transformation of our investment portfolio from equity to fixed income. That's in line with our risk appetite and the strategic direction of the company. Our plan is to reduce capital intensity and volatility on the asset side. This frees up capital to support the growth of our insurance and services business. More disclosure on our revised investment management agreement will be included as part of our 10-K. As part of our overall transformation, we've resegmented our business into 2 reporting lines effective in the fourth quarter, which are

[David Junius:]

Thanks, Sid. For the fourth quarter, we generated a net loss of $140 million or $0.88 per diluted share versus net income of $134 million or $1.43 per diluted share in the same quarter a year ago. Our annualized return on average common equity in the quarter was negative 23.7%. As Sid mentioned, we returned to underwriting profitability following Q3, but this was offset by investment losses driven by a broad equity market decline. For the full year, we generated net income of $45 million or $0.27 per diluted share versus net income of $144 million or $1.53 per diluted share in the prior year. Our return on average common equity was 2.3% for the year. As Sid mentioned, this quarter, we changed our reporting segments to 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 key parts of the company operated independently. 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 in which to evaluate the transformation of our reinsurance business and the growth in our Insurance and Services segment. Additional detail in our segment presentation can be found in our press release and financial supplement on our website and Form 10-K when it is filed early next week. We had core underwriting income of $35 million for the fourth quarter and a combined ratio of 93.6%, which compares to an underwriting loss of $45 million and a combined ratio of 128% in the fourth quarter of 2020. Prior period results were negatively impacted by reserve strengthening in Q4 2020. Our current quarter combined ratio included $24 million of catastrophe losses or 4.5 points. Our core segment loss for the quarter was $7 million, reflecting the write-down on our carrying value in parts of our strategic investment portfolio. For the full year, we had a core underwriting loss of $174 million and a combined ratio of 110%, which compares to an underwriting loss of $68 million and a combined ratio of 112% in 2020. Our full year combined ratio included $326 million in catastrophe losses or 19 points. Our core loss for the year was $163 million. Our gross premiums written for the fourth quarter were $691 million, and $2.2 billion for the year. We do not view prior year comparisons as relevant given the merger and the transformation of the book. However, our gross premiums written and net premiums written grew 20% and 4%, respectively, on an estimated pro forma basis year-over-year. We continue to see strong year-over-year contributions from our established MGA relationships with promising initial contributions coming from our more recently announced ventures with the expectation that their contributions will be material in 2020. Looking at segment results in more detail. Reinsurance and insurance and services produced underwriting income in the quarter of $31 million and $4 million, respectively, and combined ratios of 91.2% and 98%. Reinsurance improved sequentially on lower caps. Insurance and Services had a segment loss of $38 million, driven by a $47 million decrease in the estimated fair value of one of our strategic investments, reversing gains from earlier in 2021. The quarter included $44 million of services revenue versus a minimal amount in the prior year. Net service fee income was lower than our long-term expectations in 2021, because our IMG service platform was impacted by reduced travel revenue due to COVID as well as the startup nature of our consolidated MGAs of Arcadian, Banyan and Joyn. On a full year basis, the Reinsurance segment had an underwriting loss of $197 million and a combined ratio of 116% on heavy cat losses. The full year results for reinsurance included $326 million of catastrophe losses, primarily due to the European floods and Hurricane Ida. Our ultimate loss estimates of $133 million from the European floods and $100 million of Hurricane Ida remained unchanged from last quarter. As Sid stated, we are continuing the process of lowering our cat risk through a reduction of gross and net limits and reunderwriting individual risks within the portfolio. This is apparent in the reduction in our risk limits at 1 January 2022, where PMLs, gross limits, gross net limits, which are limits after the impact of our regional property quota shares and net limits which include the benefit of UNL retro programs are down 30% to 35% year-on-year. At January 1, we placed a first layer of $50 million excess $50 million program for global property cat risks, excluding the U.S. and a second layer of $100 million excess $100 million for global property risks, including the U.S. and creating a protection layer between $50 million and $200 million. For 2022, our UNL retro program leaves us holding residual net risk exposure to frequency of severity and events under $50 million as well as risk above $200 million. We continue to hold risk at higher than target level particularly in the first half of the year as we reduce our exposures on business whose annual expiry dates are April 1 and June 1, 2022, and remain committed to working this risk down further over time. On a full year basis, insurance and services produced segment income of $34 million with $11 million of net service income and underwriting profit of $23 million and a combined ratio of 95.5%. The net service income included $134 million of services revenue predominantly from our A&H MGAs, IMG and Armada, combined with Arcadian, Banyan and Joyn. Insurance and Services underwriting profit benefited from strong growth in our P&C MGAs as well as $14 million of favorable prior year development from A&H. The A&H line continues to benefit from favorable loss ratio trends in its health care products due to lower health care utilization rates that we attribute to the COVID-19 pandemic. Turning to total COVID losses and reserves. Consistent with the prior 3 quarters, our ultimate loss pick remains effectively unchanged, while we recognized less than $1 million of COVID-19 losses in the quarter as we earned in our multiyear mortgage insurance book. We are beginning to see favorable trends in the settlement of individual policy claims versus held reserves, but we believe responding to these trends is premature. We continue to monitor overall developments in recent court rulings and COVID, particularly on impact in the property business interruption. For non-COVID reserves, we had $16 million of favorable prior year development across multiple segments due to positive trends in discrete short tail lines and contracts that settled favorably versus our held loss positions. We continue to cautiously approach our growing casualty book, setting reserve techs above pricing and waiting for these green books to season while observing early positive trends in actuals versus expected. Core underwriting expenses were $33 million for the fourth quarter of 2021 or a 6.2% OUE ratio, the respective full year figures are $135 million of underwriting expenses or 7.8% OUE ratio. Corporate expenses, excluding service expenses were $33 million in the quarter. Excluding onetime items, corporate expenses are $19 million for the quarter, in line with prior quarters. We have largely completed our work on rationalizing our legal entities and reducing our real estate footprint and expect savings from these efforts to begin to flow through the financials in 2022, pretty largely offset by ongoing investments to upgrade our IT platforms. Corporate generated an underwriting loss of $37 million for the 3 months ended December 31, 2021. As discussed in the third quarter, this loss was driven by exit of our Runoff business through a loss portfolio transfer to Compre which includes premiums paid of $381 million to cover subject loss reserves of $362 million, including $4 million of federal excise tax we have incurred on the transfer, we recognized a net charge of $23 million in the quarter. This transaction reduces our loss reserves in corporate by approximately half, including some of the longest sale and most challenging resort classes, including A&E. The net investment loss for the fourth quarter was $151 million, driven by losses from our related party investments of $97 million. Our return in 4Q '21 was negative 7.5%, while the full year return was plus 27.9%. We remain committed to reducing our ongoing exposure to equity in our investment portfolio and withdrew $450 million from Third Point Enhanced Fund at November end and December end 2021. And another $100 million at the end of January. However, this remains above our long-term target for Hedge Fund Equity risk exposure and we will continue to reduce our exposure to equity in our legacy Sirius Group alternatives portfolio. In addition to the losses from in the quarter, we had $46 million of investment losses from our strategic investment portfolio, which is largely accounted for on a fair value basis. The gains we had in 1Q 2021 largely reversed in the fourth quarter due to the large decline on the market multiples for MGA platforms and insurtechs, leaving us with a loss of $5 million for the year. The underlying business performance of the MGAs in which we have investments for the large part, continue to perform to our expectations. The market fair value is not necessarily indicative of underlying operating performance. Performance in fixed income in collateral and original currency continues to be in line with expectations, where rising rates were offset by yield income and spread tightening. Performance on a U.S. dollar basis was negatively impacted by the strengthening of the U.S. dollar against foreign exchange denominated assets that backed non-U.S. dollar liabilities. While as Sid said, we have derisked the investment portfolio, we expect Q1 returns to be depressed based on market returns through today. The change in value of liability classified capital instruments in the quarter was a gain of $16 million. As stated on last quarter's call, the value of these instruments will change from quarter-to-quarter based on the passage of time and fluctuations in SiriusPoint stock price on the option like elements of these instruments, among other factors. The balance sheet remains strong, ending the quarter with $2.5 billion of shareholders' equity, total capital including debt was $3.3 billion. Issued debt was unchanged in the quarter, and our debt to total capital ratio was largely flat at 25% on the change in equity. Tangible book value per diluted share fell 6% in the quarter. In the first 2 months of 2020, both S&P and Fitch have reaffirmed our A- insurer financial strength ratings. Now let me turn back the call to Sid for concluding remarks.

[Siddhartha Sankaran:]

Thanks, David. Going into 2022, our focus remains on profitable and sustainable growth, shifting our business mix and continuing to execute on our insurance and services strategy. When we closed the merger last February, we knew it would take a year and 1/1 renewals to derisk our reinsurance book. While our results are not yet reflective of the work we have undertaken, I'm confident that we have positioned our reinsurance portfolio for lower volatility and improved profitability going forward. While we have been successful in repositioning our portfolio, we have also made meaningful investments in over 20 MGAs and insurance services company, bringing our portfolio of partnerships to over 30. We believe these partnerships will accelerate our growth and improve our profitability as these investments mature over time. Lastly, we've derisked our investment portfolio, which will result in lower returns but also lower risk volatility in the year ahead. We have financial strength, a flexible underwriting and operating platform, a great team with a strong entrepreneurial culture and a disciplined growth mindset. I'm full of enthusiasm for the year ahead. Thank you for your time, and I'll turn the call back over to the operator.

[Operator:]

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

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