Sirius International Insurance Group, Ltd. (SG) Q2 2019 Earnings Call Transcript

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Sirius International Insurance Group, Ltd. (SG)
Q2 2019 Earnings Call
Aug 08, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the 2019 second-quarter earnings conference call of Sirius International Insurance Group, Ltd. You may access this teleconference as a participant by dialing (844) 746-0740 for U.S. callers and (412) 317-5272 for international callers. [Operator instructions] Please note, this event is being recorded, and playback will be available on the company's website shortly after the call.

On the call today are Kip Oberting, president and chief executive officer; Monica Cramer Manhem, chief operating officer; Ralph Salamone, chief financial officer; and Matthew Kirk, head of investor relations. Also available for questions after the presentation are Gene Boxer, general counsel and chief strategy officer; and Jeffrey Davis, chief risk officer and chief actuary. I would now like to turn the conference over to Matthew Kirk. Please go ahead.

Matthew Kirk -- Head of Investor Relations

Thank you, and good morning. Before we get started, I wanted to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These forward-looking statements include references to potential pricing renewals, growth in certain segments and potential M&A or other strategic transactions or initiatives. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future results, investors should review the earnings press release, the company's 2018 annual report and other periodic reports that are filed by the company with the SEC from time to time, including our second quarter 10-Q, which we expect to file on Friday. Management will make reference to some non-GAAP financial measures, including the definitions of operating-income loss attributable to common shareholders and adjusted book-value-per-share. The reconciliation of these measures to GAAP measures can be found in our earnings press release and is available on our website.

Today's call, as well as our investor presentation and Investor financial supplement are available through our investor relations section on our website, ir.siriusgroup.com. I would now like to turn the call over to our president and CEO, Kip Oberting.

Kip Oberting -- President and Chief Executive Officer

Thank you, Matt. Good morning, everyone, and thank you for joining our earnings call. Our bottom line results were marginally positive, driven by strong investment results, but were negatively impacted by adverse development on prior year catastrophes. Book-value-per-common-share increased to $15.47 at the end of the quarter, representing a 0.6% return for the quarter and 4.5% year-to-date.

Adjusted book-value-per-share increased by 4.1% during the first six months to $15.87. Before turning it over to Ralph for the update on quarterly financials, I'd like to make a few observations on our strategic positioning, including a bit of a recap but also a look ahead. First, the past. I won't go all the way back, but in 2004, a New York-based broker-market reinsurer, Folksamerica, and an international property reinsurer based in Stockholm, Sirius International, were combined under common ownership.

The Folksamerica team sourced the acquisition of Sirius International from a distressed European conglomerate. As evidenced by that acquisition, among others, Folksamerica's key differentiating capability was its capacity to execute accretive M&A. This allowed it to increase scale and deliver growth in book value in a very competitive pricing environment in the late 1990s. At the same time, Sirius International's distinguishing feature was its extensive global-branch network, allowing it to foster local relationships across the globe.

Sirius leveraged these long-term partnerships into strong client relationships, which allowed it to deliver industry-beating margins over decades. In fact, many of our clients also participate as retrocessionaires to Sirius, allowing our clients to access a diversified income stream from Sirius and allowing Sirius to earn fees and leverage a large global off-balance sheet capital base. Over the years, we've built or acquired additional components. After years of organic growth in Global A&H, in 2017, we made a further commitment to this segment with the acquisition of two MGUs: International Medical Group, which provides insurance solutions for travelers and expatriates; and secondly, ArmadaGlobal, which provides specialty health and benefit products.

We also launched a Lloyd's integrated vehicle and a U.S. specialty insurance business, which is growing at a high rate from a small base in three attractive business lines. Our Runoff Solutions business has remained a steady contributor over this whole period. We are more short-tail oriented than most of our peers.

Our property and accident and health businesses, which comprised 80% of our book, pay out losses in a relatively short period of time, and this results in lower-than-average investment leverage. We also have generally positioned our investment portfolios with a shorter duration and less credit risk than peer companies. This is partly a result of preserving capital for M&A, as well as recognizing our tolerance for volatility. Although our net-underwriting margins were persistently strong for decades, our different operating platforms have resulted in disparate processes that are complex, expensive and result in suboptimal solutions.

Here, we are making a big push. There are a number of benefits the organization will achieve from a stronger group-centric orientation. We want to make improvements to our organization that will benefit and strengthen our relationship with our clients and our franchise. Finally, our ownership base is concentrated and presents us with challenges.

We are a public company with an independent Board of Directors and key governance protection, which insulates Sirius from our largest shareholder. However, the lack of sufficient public float, along with financial challenges at the China Minsheng Investment Group, limit our financial flexibility and lead us to evaluate a range of incremental to bold opportunities. Solving this issue is the top of my list every day. I will now turn the call over to Ralph Salamone to take you through our second-quarter results, who will then pass the ball to Monica to address our businesses in more detail.

Ralph Salamone -- Chief Financial Officer

Thank you, Kip, and good morning, everyone. As Kip noted in his opening remarks, our operating results, particularly in our global property segment, were impacted by additions to prior-year-catastrophe losses. In the quarter, we recorded $64 million of net-prior-year-loss development, primarily related to additions to Typhoon Jebi. Our total estimated losses for Jebi are now approximately $136 million and reflect an industry loss estimate of nearly $16 billion.

Despite this charge, we produced $8 million of comprehensive income in the second quarter of 2019 and $84 million year to date. We reported $8 million of net income in the second quarter of 2019 and $112 million year-to-date, which compares to $142 million in the first half of 2018. Return on equity, calculated as net income attributable to common shareholders on beginning common shareholders' equity, was 0.4% in the quarter and 6% year-to-date compared to 7.2% a year ago. Our 6-month results incorporate the drag of $8 million from the amortization of intangibles related to prior acquisitions.

The GAAP-combined ratio in the second quarter of 2019 was 105%. The accident-year combined ratio, which excludes prior-year development, was 88%. We operate in four business segments. Our global accident & health segment, which includes our MGU businesses, contributed $8 million of underwriting income, including net service fee income in the quarter.

Our global property segment, specialty & casualty segment and runoff and other segment posted losses of $14 million, $8 million and $6 million, respectively. Property results were impacted by adverse development, where specialty & casualty reflects losses in aviation and start-up costs associated with the launch of new lines of business. On a year-to-date basis, the GAAP-combined ratio was 99% compared to 85% a year ago. Net underwriting income, including net-service-fee income, was approximately $19 million for the six months.

Our global property segment has produced $19 million in underwriting income, and global A&H has contributed $20 million. Our specialty & casualty and runoff & other segments have posted losses of $10 million and $11 million, respectively, due primarily to unfavorable prior year-loss movements. We wrote $487 million of gross premiums in the quarter and $1.1 billion for the six months ended June 30, 2019. Our six-month volume is consistent with prior year, although absent the effect of a single arrangement within the global property segment, gross premiums were up 7% compared to the same period last year.

We continue to diversify our premium mix, with global property making up 51%; global A&H, 29%; and specialty & casualty, 20% of the combined portfolio. We are pleased with the growth in our A&H and specialty & casualty segments as we continue our long-term efforts to build out our primary-specialty platform in the U.S. and more broadly diversify our revenue and underwriting profits. Our investment portfolio generated a total return of 1.5% in original currencies and 1.7% in U.S.

dollars for the quarter. Year-to-date returns are 3.6% in both original currencies and in U.S. dollars. The average-credit quality of our fixed-income portfolio remains at AA, with an average duration of 1.5 years.

I would like to turn it over to Monica to provide an update on our underwriting.

Monica Manhem -- Chief Operating Officer

Thank you, Ralph. Before going public in the fourth quarter 2018, our business was organized into the four segments that I will touch upon here. For our global property segment, overall net premiums were up slightly for the six months when compared to prior year. We continue to shed unperforming accounts and treaties where terms and conditions have not been in line with our expectations.

We have also reduced our participation in some contracts to better balance the overall portfolio.The pricing of U.S. renewals during the quarter was positive as reinsurers were determined to move terms and conditions. Loss-affected accounts saw increases between 10% and 30%, while loss-free accounts were renewed up to 10%. While we cannot say that this is a hard market, the rate improvements are signs that there is some momentum toward desired risk-adjusted pricing.

Overall, we remain prepared to take advantage of opportunities we see in markets and regions where terms and conditions meet our expectations. Turning to our global accident & health segment, where we provide a broad selection of specialty products across the globe on both the direct and reinsurance basis. A&H gross written premiums increased nicely from the second quarter of 2018 due in part to higher insurance writings, primarily for risks originated from the U.S. We also continued to see reinsurance opportunities globally and particularly in Asia.

Gross-written premiums in the specialty & casualty segment increased 59% from the second quarter of 2018. This is mostly due to increases in casualty, as well as the continued development of our direct environmental and surety line. Our rollout of primary environmental and surety business is developing nicely, and we believe this will contribute to profitability as we gain scale. In addition, our reentry into the casualty market remains on track, with $118 million of written premium in the first six months of the year.

The majority of this relates to casualty reinsurance. The $22 million approximately relates to U.S. primary workers' compensation, where we have an investment in Pie Insurance. Launched in 2018, Pie provides workers' compensation insurance directly to small businesses.

It leverages a data-intensive underwriting approach, which, coupled with a streamlined workflow, provides transparency for customers. This allows it to efficiently access ins; and; price risks and provide superior customer service. The final segment is runoff & other, which includes Sirius global solutions and legacy reserves in Runoff. The solutions team provides runoff solutions to sellers looking for an exit and has had an excellent track record.

The team continues to evaluate new business opportunities with a disciplined underwriting approach. I will now turn it back to the operator to open up for questions.

Questions & Answers:

Operator

[Operator instructions] This then concludes our question-and-answer session. I will turn the conference back over to Kip Oberting for any closing remarks.

Kip Oberting -- President and Chief Executive Officer

Thank you, operator. Just to close out, we did have a bit of a bumpy quarter here, prior-year reserve development. But we've been through this before. We've been in business for 75 years.

We've got a global franchise and a track record of providing solutions and service for our clients. And many of these clients have been with us for decades. We're continuing with that blocking and tackling. We're working on some internal efficiencies, which will bear fruit over time.

And then with our other hand, we are focused on a variety of strategic initiatives, including M&A, along with solving our shareholder concentration issue. We have all the tools and people to execute on these strategies, and it's actually going to be a great 2019 and 2020, and we look forward to interacting with our shareholders in the future. Thank you for your participation and interest in Sirius. Goodbye.

Operator

[Operator signoff]

Duration: 18 minutes

Call participants:

Matthew Kirk -- Head of Investor Relations

Kip Oberting -- President and Chief Executive Officer

Ralph Salamone -- Chief Financial Officer

Monica Manhem -- Chief Operating Officer

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