Q2 2023 SiriusPoint Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the serious point limited second quarter 2023 earnings call. During today's presentation. All parties will be in a listen only mode. As a reminder, this conference call is being recorded I would now like to turn the call over to drew Gallo.
Charter available on our website www Dot city SPT dot com. Additionally.
With me here today are Scott <unk>, our Chief Executive Officer, and Steve <unk>, Our Chief Financial Officer.
Before we start I would like to remind you that today's remarks contain forward looking statements based on management's current expectations.
<unk> results may differ.
Please refer to page two of our Investor presentation.
Additional information and the company's latest public filings at this time.
I will turn the call over to Scott.
Thank you, Chris and welcome everyone and thank you for joining our half year results call.
Second quarter has been another strong quarter for Citi as point, we continue to make good progress against our strategic priorities building on the progress made during the last three quarters.
Before we get into the results I would like to provide some comments on three other areas.
Firstly chronic message either has no serving as chair of the company's board of directors effective June 2nd after joining our board as an independent director on May the second.
He is a proven industry leader with over 30 years of insurance experience, which will further strengthen our board.
I'd like to take this opportunity to thank shut in Ludlow, who joined the board in February 2021, and has been interim chair since May 2022 for her service over the past year.
Shot and will continue to serve as a nonexecutive director and chair of Citi as points Audit Committee.
Secondly, and as widely reported at the beginning of Q2. The city's point. Both are today, who has established a special committee of independent Directors to review the proposal made by Mr. Daniel Loeb in conjunction with his 13D filing regarding a potential transaction to acquire the company.
On May the 12, Mr. Loeb uncertain affiliates filed a subsequent 13D with their decision to conclude the exploratory discussions.
Ultimately the committee was unanimous in its belief that its current strategy is the best path to deliver enhanced long term value for shareholders.
Finally culture is an important element of the city's point in transformation.
I firmly believe our people and how do we operate at a key differentiator.
As part of making cities point on underwriting first company, we've implemented a new underwriting model with the intention to achieve better results and drive higher performance and growth in each of our focus areas.
We've also enhanced our vision purpose and values as we look to improve employee engagement and behaviors. This is part of creating a high performing organization.
Our most important asset.
As we've communicated management is focused on improving performance and aligned rewards with shareholder value creation.
As I said last quarter the target bonus will only be paid if the combined ratio for the continuing operations is <unk> 95, 7%, which is the combined ratio management is targeting in 2023 and is that right and 10 points better than last year on a like for like basis.
As of quarter, two we are on track, but recognize that up two more quarters to go there is no complacency.
Moving now to the results I will share some of the key messages from the first half of 2023 before passing across to Steve who will take you through the details.
The key messages are outlined on slide five of our presentation and provide an update on our strong progress across our strategic initiatives.
Overall, we are very pleased to report continuing performance improvement in the second quarter and another PD oppose it to positive capital generation across all parts of our business underwriting MGA is on the investment.
Underwriting income for the first half of the year was strong as we delivered a combined ratio of 84, 4% for our core business.
This is inclusive of one off reserve release is linked to a loss portfolio transaction offset in part by the reallocation of $19 million of expenses to the combined ratio from outside of the underwriting result.
Portfolio actions are coming through and we have aggressively called <unk>, which are reducing potential volatility in our underwriting results.
We did not have any cat losses during the quarter. Despite this being an above.
Average cat quarter for the industry.
And we expect a reduction in <unk> to help us navigate the hurricane season better than in previous years.
PMA always for one in 100 year events are now down around 58% since Q2, 2021 and around 10% since the start of 2023 and are supported by both exposure reduction on retro purchase at one one renewals.
Our full year 2022, I said to expect greater than $50 million reduction in our cost base by 2024.
We are pleased with our progress and are on track to deliver to our stated goal.
Today, we have reduced our total cost base by more than 15% year over year as we create globally integrated functions on a total expense ratio, including acquisition costs is never owned 50% almost six points improvement on a like for like basis versus last year.
Our headline cost savings are around $25 million the underlying run rate improvement is higher in the range $35 million to $40 million when we adjust for one off items.
One off items for 2023 include restructuring and transition transaction related costs of $27 million.
We have provided additional details on costs on page eight of our presentation.
I'll review the 2024 guidance later in the year, depending on the progress we make in the second half of this year.
Our capital light fee income from our five consolidated AMG as gives us diversification and is growing strongly year on year.
<unk> revenues are up 9% versus last year, whilst the service margin is stable at around 22%.
Investment results have been strong this quarter and on a run rate basis in line to meet the top end of our previously communicated full year guidance.
The investment portfolio remains focused on high quality fixed income instruments with an average credit rating properly and we remain well placed to manage market volatility.
Our portfolio is performing well and we saw no defaults across the portfolio during the first half of 2020.
And we have no exposure to commercial real estate.
In summary, all three areas of our business are delivering strong results compared to prior years and our balance sheet remains strong.
We continue to maintain a prudent and conservative approach to reserving.
And our book value was flat this quarter, but X E. OCI it grew by around 3%.
Regarding the simplification over MGA portfolio, we continue to believe the MGA distribution is core to our strategy.
We have many strong MGA relationships across the market, where we are important capacity providers to them.
We have taken steps to reduce our minority equity stakes in many <unk> in line with our focused philosophy for fewer and deeper investments, which we believe will drive better performance.
Since quarter, one we sold another two equity stakes, bringing us down into holding 28, non consolidated stakes from 31 at year end.
As a reminder, we consolidate the results of five mgs into our results.
While you over five consolidated MGH is held in EDA cadence at $91 million as of June 30th.
Having a net service fee income of $28 million at the half year, 2020, which is up 9% from last year.
We believe the full value of these <unk> are not reflected in our book value given the growth profile earnings generation capability and attractive markets margins.
Onto our balance sheet, which remains strong.
Diluted book value per share was broadly unchanged during the quarter of $12 29, an impacted by mark to market on fixed income instruments, some of which has already reversed since the end of the quarter.
The loss portfolio transfer closed in June this update which released more than $150 million of capital under the S&P capital model.
We also expect the loss portfolio transfer to add over 15 points to the CR, which was 219% Q1 'twenty three.
Our asset and debt leverage have remained stable and we are exploring ways to optimize our capital structure.
This was an important quarter for us and I'm very proud of our results I'm also grateful to my colleagues for the hard work that they continue to put in these sort of results do not happen by accident.
We have achieved a great deal in the past nine months.
More importantly, we think we can still do a lot more.
We are on track to deliver against the 2023 and 24 objectives set at the start of the year.
Look forward to sharing further updates and progress next quarter.
With these remarks I will pass it across to Steve who will take you through the financials Steve.
Yeah.
Thank you Scott and good morning, good afternoon, everyone.
I'll now take you through the financial section of the presentation I will start with slide 10, looking at our half year financials for 2023.
We delivered positive profit and generated capital across all the three sources of earnings underwriting MGA fee income and investments for the first half of the year.
Net income was up $483 million versus half year 2022, as our results last year.
Mainly impacted by negative investment returns.
During the first half of 2023 core underwriting results improved materially as we delivered underwriting profits of $189 million, which benefited from a $100 million of reserve redundancy linked to the loss portfolio transaction.
Excluding the release was released is linked to the <unk> underwriting profits were $89 million with a combined ratio of 92 seven.
Our portfolio actions are having an impact given cat losses were down versus prior year, and we had no cat losses during Q2, despite a high cat quarter for the market.
During the first half period, we only experienced $7 million of cat losses, all during Q1 and primarily related to earthquake claims from Turkey.
Gross premiums written for the core business increased 5% driven by insurance and services up 209 million, partially offset by reinsurance down 119 million, while capital light net service fee income saw a steady increase of $28 million versus $25 million last.
Year.
Services revenues are up 9% compared to the first half of last year, while margins are stable at around 22%.
Total investment result was strong at $140 million and driven by $130 million of net investment income, while unrealized and realized gains including related party were $9 million and significantly higher than the $372 million loss for this period last year.
These results demonstrate demonstrates the progress we've made and rebalancing in the investment portfolio towards high quality fixed income assets in order to produce P&L volatility and capitalize on the current high interest rate environment.
Net corporate and other expenses were down to $35 million or $26 million of improvement versus the prior year, we had two moving parts here.
One we moved $19 billion of expenses above the line within our core underwriting result, which supported an improvement but on the other hand, we had $27 million of one off expenses in relation to restructuring costs and transaction costs.
Transaction cost of $8 million or in relation to the <unk> process and the loss portfolio transfer.
Other notable item was the 44 million negative impact from Mark to market on liability classified capital instrument.
As a reminder, we expect an additional 6 million of restructuring cost to come during the second half of 2023.
Yeah.
Moving to slide 11 I'll talk.
Briefly about second quarter financials.
Overall, it was a positive quarter with regards to the underwriting result, as we delivered underwriting profit of $82 million. The core combined ratio was lower at 87, 7% and the accident year combined ratio was 91, 4% down seven basis points year over year.
Reserve presented redundancy linked to the loss portfolio transfer was $17 million for the quarter with $10 million attributable to the core segment.
Core gross premium written increased 5% from the second quarter in 2022, driven by insurance and services up $29 million and reinsurance up $9 million.
Net income of $66 million was an improvement versus the $61 million loss during the prior year quarter and was supported by positive earnings from underwriting investments and the MGA fee income.
Underwriting and investment results were higher versus the quarter in the previous year at engineered films E fee income was lower due to one off movement in.
<unk>, excluding these one off service margin for the five consolidated MGH was stable at 20% diluted book value per share. It at $12 29 was broadly unchanged during the quarter and impacted by one offs and mark to market movements on fixed income securities.
Moving to slide 12, we focus on the premium churn trends and I'll also provide an update on the July renewals.
Gross premiums for the core segment were up 5% half year over half year, mainly driven by the 23% growth in insurance and services.
The growth in premiums is driven by organic growth in both strategic partnerships and across our accident and health lines.
This growth was partially offset by a 13% reduction in reinsurance mainly driven by the already announced portfolio restructuring actions, we have taken in the international property segment.
On the topic of renewals around 11% of our business renews in July and we experienced similar trends as with the January one and April one renewals.
We experienced positive rate increases with an average rate change around 7% across our portfolio, excluding north American program business, mainly driven by around 30% rate increases in the U S property portfolio.
In addition to rate strengthening we continues to see the same improvement experienced experienced for the January one and April 1st renewals and contractual terms and conditions across most classes, including reinstatement provisions and tightening of exclusions and coverage.
Slide 13 shows the change in combined ratio versus half year 2022 for our core business and breaks the movement into individual sub components.
Our portfolio actions are yielding positive results as the combined ratio for our core business on a like for like basis has improved by six nine percentage points year over year.
Our headline core of 84, 4% has benefited from eight points of reserve releases linked to the loss portfolio transaction. However.
However, the expense reallocation of 19 billion results in around a two point drag.
Adjusting for these two results like for like combined ratio of 91, 1% compares to 98.0% for the first half of 2022.
Attritional loss ratio is higher at 63% or one one points up on the previous year.
And as partly impacted from mix changes between insurance and services and the reinsurance segment.
The mix changes have also resulted in better profit commissions were captured in the acquisition cost ratio, which has resulted in a two seven point improvement.
At both of the moving parts together results in a net improvement of one six points year on year.
Moving on to the investment portfolio investment results on slide 14 and 15.
We have made progress as we delivered a strong net investment income figure increased our overall asset duration to two and a half years from two one years at first quarter of 2023 and locked in attractive reinvestment yields in excess of 4% on our investments.
Total investment result is higher at $140 million versus a loss of $347 million at half year 2022, due to mark to market movements in the portfolio.
We have invested over $1 billion year to date and increased our exposure to corporate and asset backed securities.
Our investment strategy remains unchanged and focused on maintaining a high quality fixed income portfolio.
73% of our portfolio is now fixed income of which 92% is investment grade with an average create a credit rating unchanged at double a.
P&L volatility is lower and we had was helped given 85% of the fixed income portfolio was designated as available for sale up from 76% at Q1, 2023, and none at year end 2021.
That percentage will continue to grow in the latter half of 2023 as we continued to rebalance the fixed income portfolio and reduce volatility.
Slide 16 looks at our balance sheet.
Our balance sheet is strong ending the quarter with $2 3 billion of shareholders' equity stable since the prior quarter.
Total capital, including debt was $3 billion.
Our Bermuda solvency capital ratio is strong and improved to 219% at the end of first quarter 2023.
We expect it to further improve by more than 15 points once adjusted for the completion of the LPT at Q2.
Our issue debt is unchanged, while our debt to capital ratio reduced to 25, 4% from 25, 8% at the first quarter of 2023 and means well within our target range.
With this we conclude the financial section of our presentation. Overall, we had a positive first half of 2023 and are in a good position to handle market volatility.
We are on track to see significant improvement in profitability in 2023 as demonstrated by our half year results.
We are focused on achieving double digit return on average common equity for the full year, including the benefit from the loss portfolio transfer.
Looking to next year, we expect to realize full run rate benefits of all of our strategic actions in 2024 as well as deliver a double digit return on average common equity.
I would like to thank you again for your time. This morning for any questions. Please contact our Investor relations team at Investor Relations at Sirius P. T Dot com.
I'll now turn the call back over to the operator.
This concludes today's conference call you may disconnect. Your lines at this time, we thank you for participating in the serious point limited second quarter 2023 earnings call have a great day.