SiriusPoint Ltd

Good morning, ladies and gentlemen, and welcome to the Serious Point Limited third quarter 2021 earnings conference 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 Ms. Claire Kerrigan, Head of Investor Relations for Serious Point. Please go ahead.

Thank you, operator. Welcome to the Sirius Point Limited earnings call for the third quarter of 2021. Last night, we issued our third quarter Form 10Q, an 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 10Q and the Form 10Q for the period ended March 31, 2021 and June 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 believes 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.

Thank you, Claire, and good morning, everyone. It's been an eventful third quarter for the industry and for Serious Point. I'm going to share my perspective on the market, our results this quarter, and the work we've undertaken to position Serious Point for sustainable and profitable growth. This includes working to shift the mix between the insurance and reinsurance portions of our portfolio, applying changes to our legacy books by addressing lines of business that no longer fit our risk appetite, our continued and growing investment in our insurance and services platform, and our planned rebalancing of our investment portfolio. We believe all of this will shape our future growth and create value for our stakeholders. To begin, the third quarter exacerbated what has been another significant catastrophe year, highlighting the frequency and severity of secondary perils impacts on market losses. Serious points losses for Hurricane Ida and the European floods are based on estimated insured market losses of $40 billion and $14 billion, respectively. Damon will address our lost position, our robust approach to reserving, and the significant strength of our balance sheet in his remarks. The losses the industry has reported, not just this quarter, but in the past few years, serve to validate our focus on managing the volatility of our property business as we continue to implement the changes identified by our line-by-line business review. While we have a strong balance sheet to absorb these losses, we're making strong progress managing our books to de-risk by exiting risks that no longer fit our risk profile or where we do not see attractive risk-adjusted returns. With the close of the merger in February, we made strides reducing our catastrophe exposure through modest additional reinsurance purchases and rebalancing the overall portfolio to non-cap lines, including accident and health, credit, aviation, and niche U.S. casualty lines. A reduction of met PMLs over the last year reflects execution of the purchase of additional retrocessional reinsurance protection, a reduction of the legacy third-point reproperty catastrophe book, and exiting risks that failed to meet stringent risk hurdles. However, these actions were insufficient in our minds to manage exposures down to acceptable levels on the enforced book acquired in the merger. We remain committed to property reinsurance, although we've been clear in our intention to reduce our exposure, and we and the industry need to reprice large parts of the business to generate acceptable net returns. We'll reduce our exposure to property in general, and property cat in particular, through three key actions. First, by repricing businesses or risks where we do not believe the historically priced margin is adequate, such as cat-exposed property pro rata business. Second, by applying a broad reduction in gross and net limits, and in particular, outsized individual lines, particularly in geographies where low pricing for broad coverage presents potential over-reliance on imprecise risk assessment. And finally, by structuring our reinsurance protections to manage our net limits within the company's risk appetite. As we've said on prior calls, we anticipate that reshaping our portfolio would take a full year to accomplish, even though the majority of our coverages renew at 1.1. Importantly, market conditions are improving due to the heavy industry losses from catastrophes this quarter. As a result, we expect to see better terms and conditions and pricing in the property market, although our focus remains on balancing our portfolio to reduce risk and the associated volatility. We've also seen hardening broadly in other lines, including cyber and large portions of the casualty and specialty markets in both primary insurance and reinsurance across most geographies. We believe the market is maintaining underwriting discipline, and we don't expect a deterioration in terms. Through our remediation efforts, we expect to see an improvement in underwriting profitability with the lower volatility going forward. While we experienced underwriting losses this quarter, our relationship with Third Point LLP and the impact of their expertise on our investment portfolio helped to mitigate those losses and continues to be a differentiator for Serious Point. We saw very strong returns this quarter, which were predominantly from our investment in the TP Enhanced Fund and was primarily attributable to long-event fundamental and activist equities. In particular, strong performance from the fund's largest positions. Equity markets continue to rebound with technology-oriented stocks leading out performance globally. As we execute our strategy to reduce overall volatility, we also anticipate remixing the asset portfolio over time. This will focus on the reallocation of investments from the TP Enhanced Fund into lower volatility asset classes, which we expect will be material in reducing risk and capital consumption going forward. Moving on to insurance and services, our current business portfolio consists of the established A&H business and our primary P&C platforms. We seek to shift our business mix and drive future growth in insurance and services through incubation of and partnership with MGA and tech companies that provide access to unique specialty primary insurance business. This will allow us to grow premiums in the primary space with the flexibility to adjust the volume of business based on market cycles. Across ANH and PNC, we have more than 30 MGAs and partnerships on our platform today. Being nimble means we can allocate capital to areas where we see market dislocations and demand supply gaps, such as DNO and cyber. Travel and the digital economy present other opportunities. Strategic partnerships allow us to access business with attractive risk-adjusted returns in return for equity participation, our paper, and industry expertise. There's early days on the majority of these investments, but we do see signs of success and promise. Some examples of these investments are Cormis, which provides cyber insurance for small and mid-sized companies. Rhino, which offers security deposit insurance for renters sold through landlords. Vouch, providing SME insurance for startups via partnerships with entrepreneurial investing and funding platforms. And Outdoorsy, offering auto, travel, and other insurance products for RV renters. We're seeing strong contributions from our MGAs, which we're incubating on our platform, such as Arcadian and Pi. Let me touch upon Arcadian in particular. We co-founded this MGA, which writes E&O and D&O business in September 2020. Market dislocation D&O provides an attractive opportunity, and the business is led and underwritten by strong entrepreneurial talent, John Boylan and the team he's built. The business is performing very well with great market reception. As of the end of the third quarter, Arcadian has written approximately $150 million in premium and is on track to add about $200 million in premium by the end of 2021. We're excited about the market interest in Arcadian and our strategic partnerships in general, and anticipate that they will increasingly contribute to our bottom line in the future. In our runoff segment, our transaction with the Comp 3 Group closed at the end of October and underscores our focus on optimizing capital allocation and rebalancing towards insurance at higher margin and growth lines. It also provides further certainty on Series Point's reserve position. Following the completion of the transaction, runoff will not be actively acquiring new runoff lots, and the LPT reduces our net reserve position in this segment by approximately half. We've made great additions in underwriting talent and leadership this quarter. We've added to our international leadership team, hiring Bobby Hearsing as head of international strategic business development. This is a new role created to help us identify new organic and inorganic growth opportunities internationally and shift our business mix from reinsurance to insurance and services, particularly non-CAT-exposed business. Patrick Charles joined our North American business this quarter as head of America's property and casualty insurance. Patrick leads PNC insurance business in the Americas, driving relationships with PNC managing general underwriters and supporting the build and launch of new products. We're delighted with our ability to attract outstanding industry talent. To conclude, we're undertaking a transformational business plan to focus on growth and improving company profitability. This will result in reallocating capital away from property cap and investment risk and into our insurance and services platform. We aim to better manage our risk, grow higher margin differentiating businesses, and invest in technology. We expect our actions and improvements each quarter to deliver progress towards value creation. I will now hand the call over to David to take us through the financials.

Thanks, Sid. For the third quarter, we generated a net loss of $48 million, or 34 cents per diluted share, versus net income of $69 million or 73 cents per diluted share in the quarter a year ago. Our annualized return on average common equity was negative 7.8% for the quarter. We had a net underwriting loss of $266 million for the third quarter and a combined ratio of 151.9%, which compares to a net underwriting loss of $30 million and a combined ratio of 121% in the third quarter of 2020. The increase in net underwriting loss was primarily driven by third quarter catastrophe losses in Europe and North America. Our current quarter combined ratio included $287 million of CAT losses or 55.9 percentage points compared to 20.9 percentage points in the quarter a year ago. In addition, the runoff and other segments recorded $7 million of accelerated expenses as we took decisive action on legacy float driven contracts that do not meet our cost of capital. Looking at underwriting in more detail, Total cat losses came primarily from European floods and Hurricane Ida. During the middle of July, heavy rainfall associated with the low-pressure system burned led to severe flooding in Western Europe, particularly in several German states, as well as Luxembourg, parts of Belgium, France, and the Netherlands. We provided an estimated loss range of $70 to $100 million based on an estimated industry loss of $1. 10 billion euros on September 9th. Based on additional information and an updated view of industry loss to $14 billion, we now have reported losses, net of reinsurance and reinstatement premiums of $132 million. We have taken into account the high level of uncertainty that exists for this event, in particular due to the potential impact of demand surge from a shortage of skilled contractors and adjusters. In addition, we have received a limited amount of actual student reporting to date. Due to the scale of the flooding, it will likely take several quarters for the true ultimate losses for this event to become known. Our loss reserve for Ida is $100 million and reflects a $40 billion industry loss estimate and our ground-up review of contracts. We have also taken into account COVID-related labor shortages in the U.S. and anticipated supply chain disruptions, which we believe will drive lost cost inflation. Our lower market share of IDA losses as a percentage of estimated industry losses partially reflects the action we took through 1-1 renewals and subsequent reinsurance purchases to reduce third-point breeze Atlantic wind exposure. As Sid discussed, we have more work to do to reduce the overall volatility in our reinsurance portfolio. We will be executing on these changes through the upcoming 1-1 renewals and into Q1 and early Q2 of 2022 to position our portfolio for improved results in the year ahead. Despite these losses, our shareholders' equity attributable to SharePoint common stock declined less than 2% in the quarter. Turning to COVID reserves, consistent with the prior two quarters, Our ultimate loss tick remains unchanged while we recognized 2.4 million of COVID-19 losses in the quarter as we continue to earn in our multi-year mortgage insurance book. While we continue to monitor overall developments in recent court rulings on COVID, particularly on impacted property business interruption, we did not see anything in the quarter that would change our view on reserves where more than half are IB&Rs. For non-COVID reserves, we did have $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 lost positions. Our gross premiums written for the third quarter were $654 million. We do not view prior year comparisons as relevant given the merger and the transformation of the book. We continue to see strong year-over-year contributions from our MGA relationships with Pai and Arcadian, with promising initial contributions coming from our more recently announced ventures, with the expectation that their contributions will be more material in 2022. Underwriting expenses were $89 million for the third quarter of 2021, or a 17.4 percentage point OUE ratio. Excluding $7 million from the accelerated interest crediting expense in runoff, our expense ratio was generally in line with the second quarter. Corporate expenses were $20 million in the quarter, including $3 million for severance charges, down from $26 million in the second quarter. We continue the work of rationalizing platforms between the two legacy companies. Since the merger date, our legal entity count is down more than 14% and is on track for a 25% reduction by year-end, which will simplify our operations and reduce costs. We continue to make investments in talent and technology to support the transformation of the company. In the A&H segment, personal accident rates were up about 1%, and the U.S. medical market has seen rate changes in line with inflation. Our core book of medical stop-loss remains highly competitive as utilization is only just starting to rebound from COVID-induced reductions. These reductions had a beneficial effect on the results for that class and on our book through 2020 and the first half of 2021. A&H produced an underwriting profit of $15.2 million and a combined ratio of 86.4%, which reflects good results in third-party business and our wholly-owned MGUs, ArmadaCare, and IMG. In this specialty segment, we reported a net underwriting loss of $6.4 million and combined ratio of 102.6%, which reflects prudent initial loss picks in the growing Arcadian pie and environmental books to account for the greenness of these businesses. However, we continue to have confidence in these platforms to generate underwriting income in the long term based on comparisons to industry benchmarks. Within our core reinsurance portfolio, casualty continues to be a hard market for both our Lloyds and U.S. platforms. Capacity is abundant, but disciplined, and we continue to see opportunities to write new, attractive business. For several segments of casualty, rate adequacy has shifted from 98% to 99% in 2019 to greater than 105% currently, and we expect slight hardening to continue into 2022, both with original rate and the improvements in terms which reinsurers are seeing. Continued rate increases needed in these markets to compensate for poor conditions between 2013 and 2018, as well as to account for the prospect of continued social inflation. Marine and energy have continued to see rate increases, with liability in onshore segments seeing anywhere from 2% to 5% or more rate increases. However, for offshore energy, despite the Gulf of Mexico wind season being among the more active on record, loss experience was relatively benign. So we anticipate some softening with upcoming 2022 renewals. Within aviation, we are seeing a pickup in travel due to easing COVID restrictions, with most segments of the market continuing to see a positive rate movement. For our global credit bond and Bermuda specialty portfolios, we also continue to see positive rate movement, particularly for new business within international credit. U.S. mortgage remains fast-growing, though similar to the prior quarter, there is more reinsurance capacity in the market, especially with post-COVID re-engagement. We are seeing significant price increases in our other parts of our portfolio. As Sid discussed, property has experienced another well-above-average cap season in largely driven by the European floods and Hurricane Ida in the U.S. Globally, we believe there likely will be increased price momentum as reinsurers assess global property exposures. Our property segment accounted for 28% of gross premium written in the quarter, producing an underwriting loss of $264.7 million and a combined ratio of 276%. In the third quarter, there is minimal new or renewed property reinsurance business, so we have limited rate change to report. Looking forward, we are anticipating upwards pressure globally on property tax-free reinsurance, around 5% to 8%, especially on significantly loss-impacted accounts and regions. We expect bifurcation in price change between the bottom and tops of programs as reinsurers seek to move up in excess of loss structures. CatExpo's property pro rata reinsurance globally, and in particular in the U.S., will likely experience significant changes in prices and terms and conditions given poor experience over the last few years, and there is a general sense that secondary apparels are not well-priced. Along with other markets, we will maintain a high level of pricing discipline to ensure attritional catastrophe is appropriately priced. Overall, we have completed a PML optimization exercise across our global property portfolio, in some cases targeting reductions to our net position and shifting capacity of products, layers, and regions, which we believe will provide an improved risk-reward profile going into January 1st. The runoff segment generated an underwriting loss of $9.9 million for the three months ended September 30, 2021. This loss was driven by other underwriting expenses, $11.4 million, including a $7.1 million charge related to the acceleration of interest crediting features for certain legacy TP refloat reinsurance and deposit contracts that do not meet our cost of capital and will not be renewed. As Sid mentioned, we completed the sale of our runoff business to Compre last week. that materially reduces our runoff segment. As part of the transaction, the subject premiums and loss amounts were updated to September 30. As a result of these and other adjustments, the premium paid to Compre was $388 million to cover subject loss reserves of $369 million. Including $4 million of federal excise tax we have incurred, we expect to recognize an estimated net charge of $23 million for the LPT in the fourth quarter financials subject to post-closing adjustments. This transaction reduces our lost reserves in the runoff segment by approximately half, including some of the longest tail and most challenging reserving classes, including A&E. Net investment income for the third quarter was $199.8 million. which compares the net investment income of $122 million for the third quarter of 2020, as gains from our investment in the Third Point Enhanced Fund were $201 million. This is a 16.3% return in the quarter and a 38.3% return for nine months, primarily driven by gains in loan equity, particularly in the fund's largest positions. Fund performance continues to be well above our annual expected return assumption. We continue to be very pleased with our results and our partnership with Third Point LLC. Performance in fixed income and collateral in original currency continues to be in line with expectations, where rising rates were offset by quality yield income and spread tightening. Performance on a U.S. dollar basis was negatively impacted by the weakening of the U.S. dollar against foreign exchange denominated assets that back non-U.S. dollar liabilities. Overall risk assets grew to $1.9 billion, consisting primarily of the $1.4 billion in the third point enhanced fund and $427 million in legacy serious group alternative assets and were 26% of the total investment portfolio, up from 25% at June 30 due to strong alternative fund performance. The change in value of liability classified capital instruments in the quarter was a gain of $18.8 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 series point stock price on the option-like elements of these instruments, among other factors. The balance sheet remains strong, ending the quarter with $2.6 billion of shareholders' equity as good investment results largely offset the underwriting losses. Total capital, including debt, was $3.5 billion. Issued debt was unchanged in the quarter, and our debt-to-total capital ratio remained at 24%. Tangible book value per diluted share fell 1.6% in the quarter and is up just under 1% since March 31st, the first financial reporting date following the merger. Now, let me turn the call back to Sid for concluding remarks.

Thanks, David. Serious Point launched into one of the best markets reinsurers have experienced in a long time. We've been working from day one to address our balance of business while leveraging our global platform and relationships to benefit from the opportunities that market conditions have created. Our focus remains on reducing volatility and delivering sustainable underwriting profitability and superior return for our shareholders. This will be achieved by the rebalancing of our portfolio, combined with rigorous risk management and disciplined underwriting. As I look forward to 2022, I'm very excited about our prospects. We expect the results of our portfolio review, our actions to address our mix of business, and the green shoots of returns from our partnership and investment strategy to be evident. Our team and global platform will be established, our balance sheet strong, and our prospects bright. Thank you for your time. I'll turn the call back over to the operator.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.