Siriuspoint Ltd. (NYSE: SPNT)
Q1 2021 Earnings Call
May 11, 2021, 8:30 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good morning, ladies and gentlemen, and welcome to the SiriusPoint Limited First Quarter 2021 Earnings Conference Call. [Operator Instructions]
I would now like to turn the call over to Ms. Clare Kerrigan, Head of Investor Relations for SiriusPoint. Please go ahead.
Clare Kerrigan -- Corporate Communications and Investor Relations
Thank you, operator. Welcome to the SiriusPoint Limited earnings call for the first quarter of 2021, last night we issued our first quarter Form 10-Q and earnings press release and financial supplement, which are available on our website www.siriuspt.com.
With me here today, a 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 most recent Form 10-Q, 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 believe, allow for a more complete understanding of the company's financial results. The 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.
Sid Sankaran -- Chief Executive Officer and Chairman
Thank you, Clare, and good morning everyone. I'm very pleased to be here today to officially introduce SiriusPoint. Following the completion of Third Point Re's merger with Sirius Group in February. Our combined company has the capital, platform, capabilities, culture, and expertise to take advantage of changing market conditions and compete in a differentiated and effective fashion in the global insurance and reinsurance marketplaces.
I'm extremely pleased that by the closing of our transaction, we had added world-class talent to our team, strengthened the quality of our balance sheet, and refocused our underwriting strategy, allowing us to benefit from strong market conditions. We are creating an entrepreneurial and innovative company that is just at the beginning of its transformation.
Today, SiriusPoint is a meaningful player in the insurance and reinsurance markets comprising a global platform that serves clients and brokers in almost 150 countries. And it has an outstanding team of experienced leaders and underwriters, many of them long-tenured with us and a robust balance sheet comprising more than $3 billion of capital. We still view ourselves as a start-up company where we see the insurance industry is ripe for change. SiriusPoint is going to be at the forefront of that change.
COVID-19 has dramatically changed the world's perception of risk. Over the past few years, the spectrum of realistic disaster scenarios has become more apparent and the insurance industry response to that requires product innovation, better risk management, and capital. With the start-ups mentality and responsive team of experienced underwriters, we can quickly develop solutions to help our clients manage this new risk environment.
Our vision is to grow our business, create value, and positively impact a changing world by being the most adaptive and responsive reinsurer in the market. We are aiming to enhance our existing relationships and improve the economics of our key lines of business. While looking at ways that we can grow intelligently and leverage technology to improve how we underwrite, manage risk, use data, and develop new strategic opportunities.
As a new company with an entrepreneurial approach and abundant energy to embrace and drive industry disruption and positive change, we are very much a start-up insurer, but a company with the 75-year history and relationships that we view and that we are part of the class of 2020. We feel we have a head start over the other new entrants in the market as we have existing sticky relationships and business, a broad product offering, existing infrastructure, and global reach.
We also have a solid foundation with a strong balance sheet as can be seen in our A- ratings, which were confirmed by AM Best, S&P, and Fitch during the first quarter 2021. As a result we are big enough to matter while having the ability to remain nimble, responsive, and collaborative. This approach is at the heart of our entrepreneurial culture and it's what drives our team.
As this is our first earnings call for the combined company, I want to take some time to introduce our four segments: Accident and Health or A&H, Specialty, Property, and Runoff. Our Accident and Health segment is a global lead offering a broad range of products, including disability, stop-loss accident, travel medical, and expat health plans written on a global basis. It is recognized for its market-leading performance having been consistently profitable over the last two decades. And we're still profitable in 2020 despite the pandemic.
Our underwriting teams based in the U.S., London, and Zurich write A&H insurance and reinsurance globally through our admitted and surplus lines entities in the U.S., our Lloyd's Syndicate 1945, and our international legal entities. Our A&H team employs an effective and integrated Managing General Underwriter strategy or MGU to deliver operational outperformance whle maximizing growth. To accomplish this, we partner with market-leading MGUs and create a relationship that is properly incentivized. Today, we have high-retention and long-standing relationships with over 15 leading profit-oriented North American MGUs that generates significant premiums for us. These MGUs retain a share of the underwriting results, creating the right alignment with SiriusPoint.
Our two in-house MGUs, IMG and ArmadaCare design, distribute, and administer global health and travel benefits. IMG offers travel medical insurance, international health insurance for expats, and travel insurance. All of which are poised for a strong rebound as the pandemic was brought under control and international travel pursuits. ArmadaCare is a market-leading provider of supplemental healthcare insurance products and administration services in the U.S. It offers employers and various industries a suite of solutions that keep top performers healthy, productive, and focused on their work. IMG and ArmadaCare are best-in-class MGUs on their own, but I see an opportunity to apply the latest technology to take their business to a new level.
In our Specialty segment, we write specialized short-tail lines such as aviation and space, marine and energy, credit, mortgage, contingency event cancellation and long-tail lines such as general liability, professional liability, auto liability, workers compensation, umbrella, and environmental. Our specialty reinsurance business is written by our strong network of European branches, our Lloyd's Syndicate, and our offices in the U.S. and Bermuda. We access profitable business by leveraging our relationships with local and global insurers and brokers.
In addition to our core reinsurance business, we also work with high-quality MGUs and MGAs globally to acquire specialty insurance business. Let me offer a few examples. In Europe, we work with Elsaco, a tech-enabled MGA for aviation and space risk. In Bermuda, we helped to establish Arcadian Risk Capital to write general liability and professional liability lines. We are also founding investor in Pie, which produces workers compensation business on our paper.
In the Property segment, we participate in the broader market for property reinsurance treaties written on a proportional and excess of loss basis. Our international business consists of proportional an XOL treaties, both treaty and facultative, primarily in Europe, Asia, and Latin America. The international book is diversified across many countries, regions, payrolls and layers. In the U.S, we have significant participations on proportional and excess of loss treaties across a variety of clients ranging from smaller regional companies to large national accounts.
Runoff & Other consists of asbestos risks, environmental risks, and other long-tail liability exposures and includes the acquisition and management of runoff liabilities for insurance and reinsurance companies, both in the U.S. and internationally.
Finally, we have a unique ceded reinsurance program that allows us to carefully manage our gross to net positions across all of our lines of business and is a key part of our risk management strategy.
Moving to investments, our investment portfolio is heavily weighted toward traditional fixed income, cash, and restricted cash with the latter used to support regulatory collateral requirements for our reinsurance book. We have a strong partnership with Third Point LLC and positions in their long-short equity, credit opportunities, and venture funds. We also hold certain legacy Sirius positions in various alternative asset classes, of which a portion we have already given fund managers redemption notices.
We aim to maximize long-term after-tax total return while carefully managing risk and volatility. We also have a portfolio of strategic investments in insurtech companies. At SiriusPoint, we view investments as an integral part of our strategy to revitalize and grow and modernize and breakout on the business as we leverage both sides of the balance sheet to support our strategic investments, through which we expect to realize appropriate risk-adjusted equity returns in addition to appropriate premium and business growth.
We've continued to execute on our strategy and we de-risked a portion of the investment portfolio in order to reduce volatility and release capital for redeployment. Third Point LLC has also reduced leverage in the TP Enhanced Fund and continues to be a great partner for SiriusPoint, allowing us to punch above our weight relative to our peers through access to their differentiated and diverse investment expertise and products.
We've identified three strategic pillars to drive success, which I'd like to talk about today. To unlock the potential that exists within SiriusPoint, we need to continue to improve our profitability by being best-in-class capital allocators, better manage our risk, grow higher margin differentiated businesses, and invest in technology. To achieve these goals, we have three pillars, which we'll review.
The first pillar is focusing on stabilizing the company's core insurance and reinsurance business through profitable underwriting. And we'll be disciplined in managing our balance sheet and optimizing our capital allocation. The portfolios of Third Point Re and Sirius Group experienced challenges in recent years. A number of which were addressed by our strategic combination. Now, our goal is to reassess these portfolios and boost profitability while lowering the volatility of the book. To this end, I'm very pleased to report that we made great strides in refining our portfolio in the first quarter, reducing catastrophe exposure through modest additional retro reinsurance purchases and rebalancing the overall portfolio to non-cat lines including A&H, credit, aviation, and niche U.S. casualty ones.
We'll continue to reshape the portfolio through 2021 to execute on our underwriting strategy and be disciplined in our approach to managing risk. We have identified certain pockets of the property portfolio that do not optimize our returns, which we'll restructure, non-renew, or redeploy to optimize portfolio returns. We're also considering our strategic options with respect to the ongoing Runoff business.
Importantly, we intend to be disciplined in reducing classes, which have been unprofitable. At the same time, our global platform and entrepreneurial culture will give us flexibility and culture to adapt to market conditions and be responsive to opportunities. While there is much work ahead, we are confident we are making progress in our execution.
The second pillar is revitalizing and growing our core insurance and reinsurance books. While the insurance market has been hardening over the last few years, the rate increases have varied from line to line. The areas that are more specialized and less commoditized have seen the strongest sustainable price gains. As a result, we'll continuously allocate our capital to the best opportunities and react quickly as market conditions change by product and region toward rate adequacy.
Our A&H and Specialty segments which respectively comprised 37% and 46% of our first quarter gross written premium, our two areas that we're focused on growing given the better return profiles as we work to drive profitable premium, which we believe will lead to improved performance and accelerate book value growth.
In both segments, our MGU, MGA platform that include wholly owned IMG and ArmadaCare, strategic partnerships such as Arcadian, and third-party MGAs are a key driver of our growth strategy. In particular, we will work to be nimble and react to market conditions to take advantages of dislocations. This approach is illustrated by the investment I mentioned in Arcadian Risk Capital. Our Bermuda incorporated MGU where we partner with an outstanding manager and entrepreneur, John Boylan, who has a 30-year track record in the global insurance market. We invested capital, provided expertise in SiriusPoint paper [Phonetic] to help John establish Arcadian.
Arcadian began writing business in October of 2020, filling the market need for capacity by well-capitalized company with no legacy business. Arcadian has swiftly ramped up and wrote $29 million of premium in the first quarter of 2021. We expect Arcadian to write more than $100 million of gross premium this year as they become a meaningful growth driver for SiriusPoint.
The third pillar of our strategy is modernize and breakout. We intend to leverage technology and build alternative business models to respond to how the world and risk are changing, optimizing our global platform by partnering with and investing in innovative businesses and teams in the insurance industry. To accomplish this, we are going to assess and rework our platforms that is more efficient and ready for higher growth. We're committed to building a strong technology foundation to ensure that SiriusPoint is an industry leader in this regard. This will make us more productive for our client partners and our investors.
We aim to provide start-up insurers with seasoned advice and equity or debt capital, so they can hire people and invest in technology themselves. We'll provide the platform, licenses, and risk capital to create a balance sheet to help them write the products. We'll also offer legal and regulatory support, provide the reinsurance expertise, support and syndication to grow and diversify the capital base for their product offerings. Through this process, we aim to play a role in accelerating their growth and create value and returns. We see this is a differentiator, which will position us as something completely new in the market. I'll share more details on our efforts and execution on all three pillars in subsequent calls.
To be successful, we need the right people to drive these initiatives forward and I'm delighted that the SiriusPoint proposition is attractive to top-quality entrepreneurial talent. Our Chief Operating Officer and President of insurance and services, Prashanth Gangu leads our growth and modernization efforts. Prashanth joined us at the launch of SiriusPoint from Oliver Wyman, a unit of Marsh & McLennan, where he was a long-standing partner and head of Americas P&C insurance. We also recently announced that Darryl Siry has joined us as Chief Technology Officer to support the technological transformation of the Company. Darryl held executive roles of ProSight, Fireman's Fund, Allianz, and Tesla.
In reinsurance, we have an outstanding team in place including Global Chief Underwriting Officer and President, America's reinsurance David Govrin, who joined the company after many years at Berkshire Hathaway; President of International Reinsurance, Monica Cramer Manhem, spent over 30 years in leadership positions at legacy Sirius Group; President, Global Head of Distribution and Runoff, Dan Malloy; and Vice Chairman, Steve Fass who brings extensive industry experience as CEO of White Mountains and previously had responsibility for legacy Sirius Group.
Key new hires on the reinsurance side include Tim Mardon, who will be joining us shortly as Global Head of property reinsurance. Tim joins us from Chubb Tempest Re Bermuda, where he was Division President responsible for all operating aspects of the company's Bermuda-based P&C reinsurance business. I'm also pleased that Larry Hallett from RFID has joined our casualty team in the U.S. Larry has a long track record in the casualty reinsurance market, including alternative risk management, captives, runoff, and fronting arrangements and has 40 years experience in the North American reinsurance market. I believe this is a terrific underwriting team to execute on our strategy and achieve our goal of delivering profitability.
In investments, we brought on Ming Zhang who joined Third Point Re shortly before the completion of the acquisition to be the first Chief Investment Officer of the Company. Prior to joining us, Ming was with MetLife where he had responsibility for their global insurance risk management, product risk, and pricing oversight. Looking forward, Ming has been tasked with managing our investment portfolio as we strive to deliver less volatile and more consistent returns, which is critical to improving our valuation. We've also brought on Vievette Henry as the company's first Chief People Officer.
I'm proud of the outstanding quality of our leadership team who bring diversity of experience, perspective, and background to SiriusPoint. Having a diverse and inclusive company is not just a high-minded principle, it also makes good business sense in attracting the best people. More diversed organizations drop on a range of different backgrounds, life experience, and expertise to help them make better decisions. We aim to ensure diversity at every level of our company, attracting highly talented people who bring a variety of experience and perspectives and can contribute to the ongoing growth, development, and success of SiriusPoint.
Moving to KPIs, our first quarter's financial results reflect the hard work put in by both companies in the run-up to the merger as well as the first green shoots of our SiriusPoint strategy. The team and I are committed to delivering results. I'd like to talk a little about how we'll measure success. First, producing an underwriting profit and a combined ratio under 100. With the first quarter, SiriusPoint produced an underwriting profit of $9 million and a combined ratio of 96.6%, reflecting our focus on writing a profitable and more balanced book of business [Phonetic].
Second, growing tangible book value per share. We're baseline tangible book value per share in the quarter at $13.97. At a closing price on Friday of $10.67 per share, SiriusPoint is trading at a meaningful discount to book value, which we expect will close over time as we produce consistent underwriting profits and less volatile overall returns.
Third, generating returns on equity in excess of our cost to capital. As underwriting results improve, sustainable higher ROEs will follow. In the first quarter, our annualized return on average common equity was 26.4% driven by net investment income of $186.5 million. Investment results in the quarter were very strong and above trend. We aspire to generating double-digit return on equity even as investment results revert back to normal trends.
To conclude, we have a strong foundation consisting of a great team, strong insurance franchises, and a global footprint, which positions us for the future. As we execute on our three-pillared strategy, I expect our combined ratio to gradually improve as we profitably grow our higher-margin businesses, while also reducing the risk and volatility of our portfolio.
Our team does have much to accomplish as we improve our operations and the efficiency of our organization, which will take time. Our improvement will not be linear quarter-to-quarter given the fundamental nature of the work we need to accomplish, combined with some investments that we need to make our operations improved, especially technology.
The steps we've taken this quarter toward refining our business to achieve underwriting excellence and establishing a high-quality balance sheet will result in less volatility going forward. We are confident the path of sustained higher underwriting returns, less volatile investment results, and growth in book value will translate into long-term value creation for our shareholders.
Let me now turn the call over to David. David's background makes him the ideal person to be CFO of SiriusPoint. He joined us as COO of Third Point Re in preparation for the merger and most recently had been the CFO of AIG's General Insurance international business, where he oversaw the transformation in the financial performance of that business with the focus on many of these same lines and classes of business which we have at SiriusPoint.
Over to you, David.
David W. Junius -- Chief Financial Officer
Thanks, Sid. Since the formal merger on February 26, SiriusPoint has had a strong start to 2021. Importantly, we have had good feedback from rating agencies, investors, employees, clients, and prospective partners. While much was accomplished in these initial weeks, much work remains to be done to reunderwrite our portfolio, establish a good operating rhythm for the combined company, assess and address talent gaps and, overall, our IT infrastructure. We are excited with our plan and the opportunity that we see ahead.
Turning to our first quarter results, we reported net income of $131 million, which includes $9 million of bargain purchase gain or $1.05 per diluted share. Our annualized return on average equity was 26.4% and ending shareholders equity was $2.6 billion. We ended the first quarter of 2021 with tangible diluted book value per share of $13.97, a decrease of 16% from year-end due to share issuances related to our acquisition of Sirius Group.
Our results were driven by our strong investment returns, highlighted by the TP Enhanced funds return of 14.6% in the first quarter and a $35 million increase in the valuation of our investment in Pie. These results were above our investment return expectations and we do not expect them to be recurring. To Sid's Point on investment de-risking, TP Enhanced funds plus other invested assets were a quarter of total invested assets at March 31, down from more than a third at year-end for TP Re stand-alone.
Turning to underwriting, our primary focus for the year is to deliver an underwriting profit and the first quarter was a good first step in fulfilling this goal. Gross premiums written as reported were $367 million, reflecting only one month of Sirius Group contribution, including a full three months of Sirius Group, GPW was $949 million in the quarter. Overall, we are seeing market conditions stabilize around the world driven by underwriting discipline and positive rate improvements.
That said, the rate story continues to differ by product with heavily impacted lines such as aviation, seeing strong rate increases, while less differentiated lines such as workers comp that have seen strong rate adequacy in the past few years, starting to soften. These rate trends continued in the first quarter and for April 1 renewals where some lines showed double-digit rate improvements. Property cat reinsurance also continues to see risk-adjusted rate increases in most global markets, but at a declining pace.
However, the market has not yet fully digested the impact of the high levels of cats in the first quarter. While property cat is a core part of the portfolio, we are focused on growth in the non-cat lines to continue to improve our balance, as well as carefully evaluating the allocation and utilization of our cat PML to improve portfolio return. Underwriting income in the first quarter was $9 million, generating a combined ratio of 96.6%. Our reported results include only one month of results for Sirius Group and Sirius Group's Texas storm Uri losses fell into the pre-merger stub period. Total catastrophe losses that include a full three months of Sirius Group were $40 million and the associated accident year combined ratio on that basis was 99.8%.
Breaking out underwriting further, I'd like to discuss our four segments, A&H, Specialty, Property, and Runoff. A&H was 37% of GPW in the quarter and almost wholly reflects the results of the legacy Sirius Group as legacy TP Re business in this segment was limited. A&H produced an underwriting profit of $5.3 million and a combined ratio of 84.9%, which reflects strong results in the primary reinsurance and ArmadaCare segments, while IMG which is travel-focused, continues to be impacted by the COVID-19 pandemic, although we are encouraged by the pace of vaccinations, particularly in the U.S., and expect to pick up in travel in the second half of 2021.
Specialty represented 46% of GPW in the quarter. Underwriting income was largely breakeven with 100.2% combined ratio and reflects prudent loss picks in the growing Arcadian, Pie, and environmental books to account for the greenness of this business, despite our overall confidence in these platforms to generate underwriting income in the long term.
Property was 17% of GPW in the quarter, producing an underwriting profit of $5.4 million and a combined ratio of 93.3%. While this quarter's reported results clearly benefited from Sirius' Uri losses falling into the pre-merger period, the pro forma accident year combined ratio for this segment was 99.4% on higher cat losses. We have an attractive globally diversified cat portfolio, where we will also take advantage of the highest risk-adjusted returns when allocating our peak zone cat PML, a process we anticipate continuing through January 1 of next year.
Runoff had minimal production in the quarter as new blocks available in the market did not meet our pricing hurdles. The underwriting loss of $1.7 million reflects Runoff of legacy portfolios in line with expectations, and segment results do not benefit from an allocation of investment income.
Turning to expenses, total corporate and other expenses were $68 million in the first quarter, largely driven by $40 million of transaction-related expenses and severance, as well as $17 million to reestablish the Sirius Group provision for expected credit losses, which was taken down in purchase accounting. Underwriting expenses were slightly lower than expectations.
On the balance sheet, in addition to the disclosures on the Impact of the acquisition in our 10-Q, I also call your attention to the December 31, 2020 pro forma balance sheet filed in our 8-K/A last Friday. The opening balance sheet is on a strong footing and I'd like to call out a few of the most significant items. First, transaction-related intangibles were established with evaluation of $174 million and largely reflects distribution and managing general underwriter relationships and the value of our insurance licenses. Second, the casualty reserves of Sirius Group were aligned on the same basis that we took when we strengthened TP Re reserves in the fourth quarter of 2020. This adjustment resulted in a $70 million increase in the opening balance sheet casualty reserves for the legacy Sirius book. This places us higher in the range of actuarial best estimates.
Third, our COVID ultimate loss picks in the quarter were unchanged to $364 million with IBNR representing approximately 60% of outstanding COVID reserves. We continue to monitor COVID developments closely, but believe we are adequately reserved, absent to significant shift in the regulatory environment or coverage interpretations. Fourth, we've established a fair market liability of $135 million for the contingent consideration capital instruments issued in the acquisition of Sirius Group, including the Series A performance shares, warrants, contingent value rights and upside rights. These values may fluctuate quarter to quarter depending on the SiriusPoint stock price and other factors.
Our shareholders equity as of March, 31 was $2.6 billion and includes $200 million of newly issued Series B preference shares. We issued $58 million common shares in the acquisition to bring our total shares outstanding to $162 million.
Outstanding debt at the quarter-end was $829 million, which is comprised of the previously issued TP Re senior debt and the assumed Sirius Group senior debt and sub-debt. No new debt was issued in the transaction. The resultant debt to capital ratio is 24% at March 31. Overall capital levels remain strong with regulatory capital well above compliance requirements and above rating agency expectations.
SiriusPoint also maintains a high level of liquidity with $2.3 billion of cash, cash equivalents, and restricted cash. We also established a $300 million revolver as an additional source of liquidity if needed, which remains undrawn.
Now, let me turn the call back to Sid for concluding remarks.
Sid Sankaran -- Chief Executive Officer and Chairman
Thanks, David. I'm truly proud to be leading SiriusPoint. We've built a truly exciting new company with a differentiated culture and approach and we're set up to challenge the status quo to create new ways of conducting business. We remain committed to establishing a more balanced and diversified business through a prudent mix of underwriting and investment risk. As we execute and deliver more consistent results over time, we expect to build sustained long-term value for our shareholders. I believe that we have a bright future ahead of us built with enormous potential.
Thank you for your time and I'll turn the call back over to the operator.
[Operator Closing Remarks]
Questions and Answers:
Duration: 34 minutes
Clare Kerrigan -- Corporate Communications and Investor Relations
Sid Sankaran -- Chief Executive Officer and Chairman
David W. Junius -- Chief Financial Officer