SiriusPoint Ltd Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to the SiriusPoint Ltd First Quarter 2023 Earnings Conference Call. On today’s presentation, all parties will be in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Dhruv Gahlaut, Head of Investor Relations and Chief Strategy Officer of SiriusPoint. Please go ahead now, sir.

Welcome to the SiriusPoint Earnings Call for the 2023 first quarter results. Last night, we issued our earnings press release and financial supplement, which are both available on our website. Additionally, a webcast presentation will coincide with today’s discussion and is available on our website. With me here today are Scott Egan, our Chief Executive Officer; and Steve Yendall, our Chief Financial Officer. Before we start, I would like to remind you that today’s remarks contain forward-looking statements based on management’s current expectations. Actual results may differ. Please refer to Page 2 of our investor presentation for additional information and the company’s latest public filings. At this point, I will turn the call over to Scott.

Thank you, Dhruv, and good morning, good afternoon, everyone. Thank you for joining our first quarter results call. We have been busy executing against our strategic priorities, which I outlined as part of our full-year 2022 results. I intend to provide you with a fuller update on our progress against these at our half-year results update. But today, I will highlight the significant progress we have made during this quarter. Before we get into the results, I would like to update you on two areas: Firstly, we are extremely pleased to announce today the appointment of Bronec Masojada as an independent director to our Board. Bronec is a proven industry leader with over 30 years of insurance experience, which will further strengthen our board. We look forward to welcoming him to the company. Secondly, turning to the 13D filing by Dan Loeb. As an update, the City’s Point Board of Directors has established a special committee of independent directors to review any acquisition proposal made by Mr. Loeb if and when a proposal is received. In connection with forming the special committee, the Board agreed that it would not move forward with any transaction unless it is first approved by the committee. I’d like to remind everyone that there is no assurance that any definitive agreement will be executed with Mr. Loeb or any other party or that any other proposals or transactions will be approved or consummated. Now I will turn to our results, and I will share some of the key messages from the last quarter. I will outline them as shown on Slide 5 and provide an update on our strong progress across our strategic initiatives. Overall, we are pleased to report continuing performance improvement in Q1 as we build on the progress made in Q3 and Q4 of last year. To put this in perspective, this is the first time we have delivered a quarterly profit since Q2 of 2021. Importantly, we have seen positive capital generation across all parts of our business: underwriting, net tangible assets, and investment returns. Culture is an important part of the improvement journey. At SiriusPoint, we are focused on creating a performance culture that rewards underwriting performance and aligns closely with shareholder value creation. To that end, in our recent proxy statement released in April, we have made changes to the annual incentive plan for 2023. This clearly states that the target bonus will only be paid if the combined ratio for continued operations is 95.7%. Therefore, you should take from that that this is the combined ratio management is targeting in 2023 outside our logs portfolio transfer benefits. As of Q1, we are on track, but we also recognize there are three more quarters to go. This level of combined ratio would signify a substantial improvement compared to 2022. It also includes a shift of significant expenses from net corporate and other expenses to be included within the combined ratio. We believe this significant change to structure and target levels closely aligns with shareholder value creation and indicates a step change in overall performance levels. Turning more specifically to our underwriting result for quarter 1, we delivered a combined ratio of 80.5%. This was supported by significant reserve releases. However, importantly, our combined ratio will be 2.5 points better year-on-year, excluding these releases and expense reallocations to the combined ratio from outside of the underwriting result. We have also seen improvements in the attritional loss ratio. In addition, despite the high level of reserve releases in the quarter, our balance sheet is strong as we continue to maintain our prudent and conservative approach to reserving. Investment results have also been strong this quarter and are on a run rate basis, in line to meet our full-year guidance previously communicated. Our capital-light fee income from our five consolidated managing general agents is growing strongly year-on-year and is an important and efficient contributor to our profits. So in summary, we have seen strong performance from all key areas of our business, but of course, there is room to improve further. Our diluted book value per share grew very strongly by 9% to $12.31 during the quarter. This, as a reminder, doesn’t fully reflect the value of our five consolidated MGAs, which are held at only $91 million as of March 31, 2023, despite having a net service fee income of $36 million in 2022 and a plan to grow in 2023 as demonstrated by our Q1 numbers. As I said before, these are undervalued in our current book value. In summary, our focus on execution is high; it has to be. This set of results begins to show the evidence of this work. Our ambition is to keep the execution momentum and focus high as we see significant room for performance improvement over the next two to three years, and we expect it to close at the end of Q2, subject to regulatory approval. This remains on track. Today, we are also sharing new details on the split of reserves and the substantial capital release we expect as a result of this deal. The loss portfolio transfer covers approximately $1.3 billion of reserves, 76% and 24%, respectively, and includes lines of business that we have already invested in. It is also financially attractive. We expect to release more than $150 million of capital, which will give us future capital flexibility, further strengthening an already strong balance sheet. We will outline our thinking on this during the second half of this year. Additionally, the financial benefits of this deal provide finality to the portfolio we exited in 2022 and align our balance sheet to the going-forward strategy. Regarding our MGA portfolio, we continue to maintain fewer and deeper investments, which align strongly with being more focused. During the quarter, we sold our equity stake in distinguished programs for $7.5 million and released around $4 million of capital whilst also agreeing on a multi-year program to provide capacity. We are also committed to growing and strengthening specific MGA relationships, as demonstrated by our recently announced renewal of our partnership with Arcadian, one of our five consolidated MGAs, through to 2026. We grew around $290 million in gross written premiums with Acadian last year, a 35% growth compared to the prior year. On to our balance sheet, which we further strengthened during the quarter. We continue to operate the company against the AA rating requirement under the S&P model. Our efforts to improve performance are getting noticed, and we have recently received an upgrade on our ratings to stable from negative by Fitch. Our union capital ratio is strong and has also improved to 217% at Q4 2022 versus 194% at Q3 2022, and we expect it to further improve by more than 15 points at the time of closing the loss portfolio transfer. Our debt-to-capital ratio fell by 1.5 percentage points during Q1 to around 26% and has been benefiting from the growth in book value. Our balance sheet is strong, and we will explore more ways to optimize our capital structure. I would like to conclude by saying that it has been a busy quarter, but we are proud of the results we have posted. With each quarter, we aim to build confidence as we deliver on our plans. We are on track with the guidance we have provided, with the aim to do better if we can. Quarter 1 is a good start, but there is no room for complacency. We have a lot more to do, but I am confident that we are on our way to becoming a less volatile, high-performing specialist insurer. I look forward to continuing to share our progress against our plans and targets during the year. With these remarks, I will pass it over to Steve, who will take you through the first quarter financials.

Thank you, Scott, and good morning, good afternoon, everyone. I will now take you through the financial section of the presentation, and we’ll start with Slide 7, looking at our first quarter financials for 2023. Overall, it was a positive quarter as we delivered profits and generated capital across all three sources of earnings: underwriting, MGA fee income, and investments. Net income for the quarter was up $356 million compared to Q1 of last year. Our results were mainly impacted by losses in the investment portfolio in 2022. During Q1 2023, core underwriting results improved materially as we delivered underwriting profits of $107 million, which benefited from $90 million of reserve redundancy linked to the loss portfolio transfer transaction. Excluding that $90 million release, underwriting profits were $17 million, resulting in a core ex-loss portfolio transfer ratio of 96.8%. Our actions are having an impact as attritional loss ratios and expenses were down, while our catastrophe losses were stable compared to the prior year. We experienced $7 million of catastrophe losses in the quarter, which are primarily related to the Turkey earthquake events and are stable year-on-year. Gross premium written for the core business increased 5%, driven by insurance and services, which were up $181 million, partially offset by reinsurance, down $128 million, while capital light net services fee income saw a steady increase to $18 million compared to $14 million last year. Service revenues were up 12%, while margins improved to around 29%. The total investment result was $74 million, driven by $62 million of net investment income, while unrealized and realized gains, including from related parties, were $12 million and significantly higher than the $213 million loss from last year. These results illustrate the progress we’ve made in rebalancing the investment portfolio towards high-quality fixed-income assets to reduce P&L volatility and capitalize on the current high-interest rate environment. Net corporate and other expenses were down $16 million and mainly driven as we moved $10 million of expenses above the line within our core results. Other notable items impacting income include $7 million of restructuring costs and $25 million of negative mark-to-market from liability classified instruments. Moving on to Slide 8. We focus on the premium trends, and I’ll also provide an update on the April 1 renewals. Gross premiums for the core segment were up 5% quarter-over-quarter, mainly driven by the 37% growth in insurance and services. The growth in premiums is driven by organic growth in both strategic partnerships and across our accident and health lines. This growth was partially offset by a 24% reduction in reinsurance, mainly driven by the already announced portfolio restructuring actions we have taken in the International Property segment. On the topic of renewals, only 7% of our business was subject to reduction in April, and we experienced similar trends as the January 1 renewals. We experienced positive rate increases with an average rate change of around 6% across our portfolio, mainly driven by around 15% rate increases in the International Property segment. As part of the remediation of the international property catastrophe book, we continued exiting businesses that did not meet our price requirements. In addition to rate strengthening, we continue to see the same improvements in contractual terms and conditions across most classes, including restatement provisions and tightening of exclusions and coverage. Slide 9 shows the change in combined ratio versus Q1 2022 for our core business and breaks the movements into individual subcomponents. Our portfolio actions are yielding positive results as the combined ratio for our core business on a like-for-like basis has improved by 2.5 percentage points. Our headline core combined ratio of 8.5% has benefited from 16 points of reserve releases linked to the loss portfolio transfer transaction. However, the expense reallocation of $10 million has been a 2-point drag, adjusting for these results gives us a like-for-like core of 95% versus 97.5% last year. Looking at the combined ratio for the segments and excluding the loss portfolio transfer, the reinsurance combined ratio remained stable compared to the prior period, while the insurance and services combined ratio decreased by 0.5 points to 95%. The attritional loss ratio improved for both reinsurance and insurance and services. Moving on to the investment portfolio and investment results as shown on Slides 10 and 11, respectively. We have made progress as we delivered a strong investment result, increased our overall asset duration to 2.1 years from 1.8 years, and locked in attractive reinvestment yields in excess of 4% on our investments. We have invested over $500 million this quarter and around $1 billion year-to-date, increasing our exposure to corporates and asset-backed securities. Overall, our investment strategy remains unchanged and focused on maintaining a high-quality fixed-income portfolio. Seventy percent of our portfolio is now fixed income, of which 93% is investment grade. The average rating of our fixed-income book is AA, with 9% of the securities being rated BBB and 70% being below investment grade non-rated fixed-income instruments. Given the quality of our portfolio, we believe we are well positioned heading into the market. We are monitoring our exposures and proactively making adjustments to our investment portfolio. We have no direct exposures to Silicon Valley Bank, Signature Bank, First Republic Bank, and other small regional banks or any alternative tier one (AT1) instrument exposure to Credit Suisse in our investment portfolio. Even from the underwriting side, our exposure to Silicon Valley Bank, Signature Bank, and First Republic, including the Directors and Officers liability book, is less than $5 million. As I’ve already highlighted, net investment income for the quarter was $62 million compared to $8 million last year, while the overall investment result was $74 million versus a loss of $205 million in the first quarter of 2022. P&L volatility was lower in Q1, and we expect our actions to designate new fixed-income investments as available for sale will help us going forward. At quarter end, more than 70% of the fixed-income portfolio was designated as available for sale, and that will continue to grow in 2023 as we rebalance the fixed-income portfolio and reduce volatility. Slide 12 looks at our balance sheet. Our balance sheet is strong, ending the quarter with $2.2 billion of shareholders’ equity, up from $2.1 billion since year-end 2022. Total capital, including debt, was $3 billion, while tangible book value per diluted share was $11.41. Our Bermuda solvency capital ratio was strong and improved to 270% at year-end 2022. We expect it to further improve by more than 15 points post the completion of the loss portfolio transfer. Our issued debt is unchanged, while our debt-to-capital ratio reduced to 25.8% from 27.3% at year-end 2022 and is within our target range. With this, we conclude the financial section of our presentation. I would like to remind you again that we had a good start to 2023 and are in a strong position to deal with market volatility, while 2024 should be the year in which we realize the full run-rate benefits of all of our strategic actions, and we expect to deliver a double-digit return on average common equity. I would like to thank you again for your time this morning. For any questions, please contact our Investor Relations team.

With this, I’ll turn the call back over to the operator.