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spk01: Good morning, ladies and gentlemen, and welcome to the Serious Point 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. Claire Kerrigan, Head of Investor Relations for Serious Point. Please go ahead.
spk00: Thank you, Operator. Welcome to the Serious Point 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 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.
spk02: Thank you, Claire, 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 made out one year ago to transform our business. Curious Point 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 our reinsurance business. Finally, on the asset side, we intended a de-risking 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 show progress in 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 Enhance Fund. We continue to execute our investment de-risking program in the coming quarter. I'd like to dive a little deeper on our progress. We've remediated, reduced, and refined Serious Point'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 Lloyds platform, which I'll return to shortly, and pivoted our focus from property cap 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 cost. 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 Serious Point. This approach also frees up capital, which we intend to redeploy to support 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 Serious Point 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 authorizations. 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 a serious point 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, that 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. Serious Point'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 multi-year 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 than a typical fronting or reinsurance relationship. working towards the success of both of our businesses while driving disruptive change and 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 to 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 startups, where we can provide startup 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, Joint Insurance, covering small and mid-market commercial insurance, LimitFi, which offers credit insurance, Parameter Climate, which provides climate underwriting and distribution, and VERD, 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 front-end 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 Startup Insurer Voucher. Finally, we have our wholly-owned subsidiaries, ArmadaCare, 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 Armada's supplemental health products. perhaps going back to the doctor or 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, Armada's customers have seen continued value in their employee benefit offering, and during the renewals, many opted to add either employees or benefits to their programs, positively impacting Armada's 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 returning 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 Syriza Point'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. Serious Point is accessing this opportunity via IMG's approach to merchandising on key aggregators and the business's effective direct digital marketing program, while we continue to invest in IMG's platform to grow product and distribution. Our partnership with Mosaic Insurance is designed to reinvigorate Serious Point's Lloyd Syndicate 1945. As part of the partnership and subject to Lloyd's regulatory approval, which we anticipate the second half of 2022, Mosaic will acquire a managing agency while Serious Point retains Syndicate 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 reevaluation, 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 Lucky Truck, a digital broker and aggregator specializing in commercial trucking insurance, and BrokerVuta, a commercial insurance platform that simplifies submissions 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 Serious Point 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 rate 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 were $524 million, with a segment income of $3 million and a 99% combined ratio. David will address our specific Ukraine-Russia and 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 cap loan 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 of this war are 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% on more prudent risk thresholds overall, as well as the pullback from select regions and perils where we view there as heightened risk or inadequate 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 risk 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. My 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 view of the seeding company. We have flagged approximately 20% of accounts in 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'd prefer to improve our position with more niche and non-commoditized business. While 401 rates were generally positive, we deployed approximately 30% less aggregates than planned at the 401 renewals. This reflects our underwriting discipline and avoidance of risks, which we view as underpriced or inadequately modeled. Lower aggregate deployment creates near-term impact on our financial results, given the higher fixed costs of our retrocessions. However, we have retained the option to deploy more aggregates later in the year, such as Atlantic Winged 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 and 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 step that we are taking to address this pressing issue. The return was primarily due to negative returns for the long-event fundamental equities in the Third Point Enhanced Fund, with detraction 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've experienced over the last year. We 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 TPE 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 TPE venture space. I will now hand the call over to David to take us through the financials.
spk03: 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 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 Serious Point. 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 segments, 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 Serious Group as the acquisition closed at the end of February last year. Our current quarter combined ratio includes $7 million of CAT losses, or 1.3 points, excluding Russia and Ukraine losses, and $20 million of CAT losses, or 3.9 points, including Russia and Ukraine. Poor underwriting income was driven by benign NAT 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 reserving action on known exposures, including our exposure to a limited number of aviation reinsurance contracts with war hull coverage on planes leased to Russian airlines, as well as political violence treaties 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 limit reserve on our single contract that has a closure 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 non-airing profits 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 and health book with favorable prior year development across a number of prior year accident years in both our US and international A&H books. Our action was taken to close out reserves on individual contracts. Second, we took action to release a portion of our COVID reserves an area where we continue to see actuals come in below reserving positions on 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 sedent-reported losses coming in above expectations due to higher building material and skilled labor costs. On long-tail lines, 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 our 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 serious 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, weighting from reinsurance to insurance, to reduce earnings volatility and 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 segments 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 accounts, 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, reduced segment income of $24 million, consisting of $14 million net services income and underwriting profit of $10 million in a combined ratio of 95.5%. Net services income primarily benefited from Armada's continued strong 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 ANH MGAs, IMG, and Armada, together with Arcadian and Banyan. Insurance and services underwriting profit benefited from favorable prior year development across our accident and health portfolio, where we continue to reserve prudently. Insurance and services gross premiums written in the segments. 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. MGA's 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 and balances 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 in our growing MGA portfolio, which is offset by efficiency gains in our reinsurance book. Corporate expenses, excluding service expenses, were $34 million in 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 per 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 violence 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 loss 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. We reiterate our commitment to shifting our investment mix from hedge funds to fixed incomes. Our quarter and 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 series 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 restrictions. 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. Our duration positioning, as well as an allocation to cash and short-term investments, will enable the company to benefit from a rising rate environment of employee 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 to 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 SDK sub-debt, and our debt-to-total capital ratio was up 1.26% on the change in equity. Tangible book value per diluted share fell 10% in the quarter. Since the start of the year, S&P, A&B, and Fitch have all reaffirmed our A-insurer financial strength ratings. Now let me turn the call back to Sid for concluding remarks.
spk02: Thanks, David. We have positive momentum as we head towards mid-year 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's no doubt that we have considerable work to do, but we're 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.
spk01: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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