SiriusPoint Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 4 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the SiriusPoint Limited Second Quarter 2023 Earnings Call. During 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 Dhruv Gallo, Head of Investor Relations and Chief Strategy Officer for SiriusPoint. Please go ahead.

Speaker 1

Thank you, operator, and good morning, good afternoon to everyone listening. I welcome you to the SiriusPoint earnings call for the 2023 half year and Q2 results. Last night, we issued our earnings press release and financial supplement, which are available on our website, www.siriuspt.com. 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 Yandell, our Chief Financial Officer.

Speaker 1

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 time, I will turn the call over to Scott.

Speaker 2

Thank you, Dhruv, and welcome everyone and thank you for joining our half year results call. Our second quarter has been another strong quarter for SiriusPoint. We continue to make good progress against our strategic priorities, building on the progress made during the last three quarters. Before we get into the results, I would like to provide some comments on 3 other areas. Firstly, Bronick is now serving as Chair of the company's Board of Directors effective June 2 after joining our Board as an independent director on May 2.

Speaker 2

Braunik is a proven industry leader with over 30 years of insurance experience, which will further strengthen our Board. I'd like to take this opportunity to thank Sharon Ludlow, who joined the Board in February 2021 and has been Interim Chair since May 2022 for her service over the past year. Sharon will continue to serve as a Non Executive Director and as Chair of SiriusPoint's Audit Committee. Secondly, and as widely reported at the beginning of Q2, The SiriusPoint Board of Directors established a special committee of independent directors to review the proposal made by Mr. Daniel Loeb in conjunction with his 13D filing regarding a potential transaction to acquire the company.

Speaker 2

On May 12, Mr. Loeb and certain affiliates filed a subsequent 13D with their decision to conclude the exploratory discussions. Ultimately, the committee was unanimous in its belief that its current strategy is the best path to deliver enhanced long term value for shareholders. Finally, culture is an important element of the SiriusPoint transformation. I firmly believe our people and how we operate are a key differentiator.

Speaker 2

As part of making SiriusPoint an underwriting first company, we've implemented a new underwriting model with the intention to achieve better results and drive higher performance and growth in each of our focus areas. We've also enhanced our vision, purpose and values as we look to improve employee engagement and behaviors. This is part of creating a high performing organization. Our people are our most important asset. As we've communicated, management is focused on improving performance and is aligned rewards with shareholder value creation.

Speaker 2

As I said last quarter, the target bonus will only be paid if the combined ratio for the continuing operations is 95.7%, which is the combined ratio management is targeting in 2023 and is around 10 points better than last year on a like for like basis. As of quarter 2, we're on track, but recognize there are 2 more quarters to go. There is no complacency. Moving now to results, I will share some of the key messages from the first half of twenty twenty three before passing across to Steve, who will take you through the details. The key messages are outlined on Slide 5 of our presentation and provide an update on our strong progress across our strategic initiatives.

Speaker 2

Overall, we are very pleased to report continuing performance improvement in the 2nd quarter and another period of positive capital generation across all parts of our business, underwriting, MGAs and Investments. Underwriting income for the first half of the year was strong as we delivered the combined ratio of 84.4 percent for our core business. This is inclusive of 1 off reserve releases linked to our loss portfolio transaction offset in part by the reallocation of $90,000,000 of expenses to the combined ratio from outside of the underwriting result. Portfolio actions are coming through and we have aggressively cut our PMLs, which are reducing potential volatility in our underwriting results. We did not have any cat losses during the quarter despite this being an above Average cat quarter for the industry.

Speaker 2

And we expect a reduction in PMLs to help us navigate the hurricane season better than in previous years. PMLs for 1 in-one hundred year events are now down around 58% since Q2 2021 and around 10% since the start of 2023 and are supported by both exposure reduction and retro purchase at oneone renewals. Our full year 2022, I said to expect greater than $50,000,000 reduction in our cost base by 2024. We are pleased with our progress and are on track to deliver to our stated goal. Today, we have reduced our total cost base by more than 15% year over year as we create globally integrated functions and our total expense ratio including acquisition costs is now around 30%, almost 6 points improvement on a like for like basis versus last year.

Speaker 2

Our headline cost savings are around $25,000,000 The underlying run rate improvement is higher in the range $35,000,000 to $40,000,000 when we adjust for 1 off items. 1 off items for 2023 include restructuring and transaction related costs of $27,000,000 We have provided additional details on costs on Page 8 of our presentation and will review the 2024 guidance later in the year depending on the progress we make in the second half of this year. Our capital light fee income from our 5 consolidated MGAs gives us diversification and is growing strongly year on year. MGA revenues are up 9% versus last year, whilst the service margin is stable around 22%. Investment results have been strong this quarter and on a run rate basis in line to meet the top end of our previously communicated full year guidance.

Speaker 2

The investment portfolio remains focused on high quality fixed income instruments with an average credit rating at AA and we remain well placed to manage market volatility. Our portfolio is performing well and we saw no defaults across the portfolio during the first half of twenty twenty three and we have no exposure to commercial real estate. In summary, all three areas of our business are delivering strong results compared to prior years and our balance sheet remains strong. We continue to maintain our prudent and conservative approach to reserving and our book value was flat this quarter, but ex AOCI, it grew by around 3%. Regarding the simplification of our MGA portfolio, We continue to believe that MGA distribution is core to our strategy.

Speaker 2

We have many strong MGA relationships across the market where we are important capacity providers to them. We have taken steps to reduce our minority equity stakes in many MGAs in line with our focused philosophy for fewer and deeper investments, which we believe will drive better performance. Since quarter 1, we've sold another 2 equity stakes, bringing us down to holding 28 non consolidated stakes from 31 at year end. As a reminder, we consolidate the results of 5 MGAs into our results. The book value of our 5 consolidated MGAs is held in our accounts at $91,000,000 as of June 30, despite having a net service fee income of $28,000,000 at the half year 2023, which is up 9% from last year.

Speaker 2

We believe the full value of these MGAs are not reflected in our book value given their growth profile, earnings generation capability and attractive margins. Onto our balance sheet, which remains strong. Diluted book value per share was broadly unchanged during the quarter at $12.29 and impacted by mark to market on fixed income instruments, some of which has already reversed since the end of the quarter. The loss portfolio transfer closed in June 30, which released more than $150,000,000 of capital under the S and P Capital Model. We also expect the loss portfolio transfer to add over 15 points to the BSCR, which was 2 19 percent at Q1 2023.

Speaker 2

Our asset and debt leverage have remained stable and we are exploring ways to optimize our capital structure. This was an important quarter for us and I'm very proud I'm also grateful to my colleagues for the hard work that they continue to put in. These sort of results do not happen by accident. We have achieved a great deal in the past 9 months and more importantly, we think we can still do a lot more. We are on track to deliver against the 2023 2024 objectives set at the start of the year and I look forward to sharing further updates and progress next quarter.

Speaker 2

With these remarks, I will pass it over across to Steve, who will take you through the financials. Steve?

Speaker 3

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 10, looking at our half year financials for 2023. We delivered positive profits Generated capital across all the three sources of earnings, underwriting, MGA fee income and investments for the first half of the year. Net income was up $483,000,000 versus half year twenty twenty two as our results last year were mainly impacted by negative investment returns. During the first half of twenty twenty three, core underwriting results improved materially as we delivered underwriting profits of $189,000,000 which benefited from $100,000,000 of reserve redundancy linked to the loss portfolio transaction.

Speaker 3

Excluding the releases linked to the LPT, Underwriting profits were $89,000,000 with a combined ratio of 92.7%. Our portfolio actions are having an impact given cat losses were down versus prior year and we had no cat losses during Q2 despite a high cat quarter for the market. During the first half period, we only experienced $7,000,000 of cat losses, all during Q1 and primarily related to earthquake claims from Turkey. Gross premiums written for the core business increased 5%, driven by insurance and services, up $209,000,000 partially offset by reinsurance, down $119,000,000 while Capital Light net service fee income saw a steady increase at $28,000,000 versus $25,000,000 last year. Services revenues are up 9% compared to the first half of last year, while margins are stable at around 22%.

Speaker 3

Total investment result was strong at 140,000,000 and driven by $130,000,000 of net investment income, while unrealized and realized gains, including related party, were $9,000,000 and significantly higher than the $372,000,000 loss for this period last year. These results demonstrate the progress we've made in rebalancing the investment portfolio towards high quality fixed income assets in order to produce P and L volatility and capitalize on the current high interest rate environment. Net corporate and other expenses were down to $35,000,000 a $26,000,000 improvement versus the prior year. We had 2 moving parts here. 1, we moved $19,000,000 of expenses above the line within our core underwriting result, which supported an improvement, but on the other hand, we had $27,000,000 of one off expenses in relation to restructuring costs and transaction costs.

Speaker 3

Transaction costs of $8,000,000 were in relation to the 13b process and the loss portfolio transfer. Other notable item was the $44,000,000 negative impact from mark to market on liability classified capital instruments. As a reminder, we expect an additional $6,000,000 of restructuring costs to come during the second half of twenty twenty three. Moving to Slide 11, I'll talk briefly about Q2 financials. Overall, it was a positive quarter with regards to the underwriting result as we delivered underwriting profits of $82,000,000 The core combined ratio was lower at 87.7 percent and the accident year combined ratio was 91.4%, down 7 basis points year over year.

Speaker 3

Reserve redundancy linked to the loss portfolio transfer was $17,000,000 for the quarter with $10,000,000 attributable to the core segment. Core gross premium written increased 5% from the Q2 in 2022, driven by insurance and services, up $29,000,000 and Reinsurance, up $9,000,000 Net income of $66,000,000 was an improvement versus $61,000,000 loss during the prior year quarter and was supported by positive earnings from underwriting, investments and NGA fee income. Underwriting and investment results were higher versus the quarter in the previous year, but MGA fee income was lower due to one off movements. Excluding these one offs, service margin for the 5 consolidated MGAs was stable at 20%. Diluted book value per share at $12.29 was broadly unchanged during the quarter and impacted by one offs and mark to market movements on fixed income securities.

Speaker 3

Moving to Slide 12. We focus on the premium trends, and I will also provide an update on the July renewals. Gross premiums for the core segment were up 5% half year over half year, mainly driven by the 23% 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 13% reduction in reinsurance, mainly driven by the already announced portfolio actions we have taken in the International Property segment.

Speaker 3

On the topic of renewals, around 11% of our business renews in July, and we experienced similar trends as with the January 1 April 1 renewals. We experienced positive rate increases with an average rate change around 7% across our portfolio excluding North American Program Business, mainly driven by around 30% rate increases in the U. S. Property Portfolio. In addition to rate strengthening, we continue to see the same improvement we experienced for the January 1 April 1 renewals in contractual terms and conditions across most classes, including reinstatement provisions and tightening of exclusions and coverage.

Speaker 3

Slide 13 shows the change in combined ratio versus half year 2022 for our core business and breaks the movement 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 6.9 percentage points year over year. Our headline core of 84.4 percent has benefited from 8 points of reserve releases linked to the loss portfolio transaction. However, the expense reallocation of $19,000,000 results in around a 2 point drag. Adjusting for these two Results like for like combined ratio of 91.1 percent compares to a 98.0% for the first half of twenty twenty two.

Speaker 3

Attritional loss ratio is higher at 63% or 1.1 points up on the previous year and is partly impacted from mix changes between Insurance and Services and the Reinsurance segment. The mix changes have also resulted in better profit commissions. We're captured in the acquisition cost ratio, which has resulted in a 2.7 points improvement. Looking at both of the moving parts together results in a net improvement of 1.6 points year on year. Moving on to the investment portfolio investment results on Slide 14 and 15.

Speaker 3

We have made progress as we delivered a strong net investment income figure, increased our overall asset duration to 2.5 years from 2.1 years at Q1 2023 and locked in attractive reinvestment yields in excess of 4% on our investments. Total investment result is higher at $140,000,000 versus a loss of $347,000,000 at half year 2022 due to mark to market movements in the portfolio. We have invested over $1,000,000,000 year to date and increased our exposure to corporates and asset backed securities. Our investment strategy remains unchanged and focused on maintaining a high quality fixed income portfolio. 73% of our portfolio is now fixed income, of which 92% is investment grade and with an average credit rating unchanged at AA.

Speaker 3

P and L volatility is lower and we Ham was helped given 85% of the fixed income portfolio was designated as available for sale, up from 76% at Q1 2023 and none at year end 2021. That percentage will continue to grow in the latter half of twenty twenty three as we continue to rebalance the fixed income portfolio and reduce volatility. Slide 16 looks at our balance sheet. Our balance sheet is strong, ending the quarter with $2,300,000,000 of shareholders' equity, Stable since the prior quarter. Total capital, including debt, was $3,000,000,000 Our Bermuda solvency capital ratio is strong and improved to 2 19 percent at the end of Q1 2023.

Speaker 3

We expect it to further improve by more than 15 points once adjusted for the completion of the LPT at Q2. Our issued debt is unchanged, while our debt to capital ratio reduced to 25 point With this, we conclude the financial section of our presentation. Overall, we had a positive first half of twenty twenty three and are in a good position to handle market volatility. We are on track to see significant improvement in profitability in 2023 as demonstrated by our happier results. We are focused on achieving double digit return on average common equity for the full year, including the benefit from the loss portfolio transfer.

Speaker 3

Looking to next year, we expect to realize full run rate benefits of all our strategic actions in 2024 as well as 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 at investor. RelationsSiriuspt.com. I now turn the call back over to the operator.

Operator

This concludes today's conference call. You may disconnect your lines at this time. We thank you for participating in the SiriusPoint Limited Second Quarter 2023 Earnings Call. Have a great

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