Good morning, ladies and gentlemen, and welcome to the SiriusPoint Limited Second Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Ms. Clare Kerrigan, Head of Investor Relations for SiriusPoint. Please go ahead ma'am..
Thank you, operator. Welcome to the SiriusPoint Limited earnings call for the second quarter of 2021. Last night, we issued our second quarter Form 10-Q and earnings press release and financial supplement and an announcement on a loss portfolio transfer transaction with Compre, all of 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-Q and the Form 10-Q for the period ended March 31, 2021, where you will find risk factors that could cause actual results to differ materially from those 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. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is presented in the company's earnings press release that is available on our website.
At this time, I will turn the call over to Sid..
Thank you, Claire, and good morning, everyone. On today's call, I'll provide a high-level overview of our second quarter financial results and provide an update on our progress executing on our 3-pillar strategy, as we work to establish sustained underwriting profitability. David will then review our second quarter results in more detail.
We were also pleased to announce yesterday a loss portfolio transfer transaction with Compre, a legacy runoff specialist, which eliminates our highest-risk long-tail reserves.
The deal between Sirius America and Sirius Bermuda with palacry, a subsidiary of Compre covers $417 million of loss reserves, subject to or associated with the transaction, including much of the legacy Sirius Group Runoff business, including Asbestos and Environmental for a premium of $430 million.
The transfer, which is subject to regulatory approval and other closing conditions, covers the bulk of the economic risk of the reserves in the Runoff segment, including most of SiriusPoint's legacy A&E exposure to our runoff specialists better able to focus on these blocks.
Assuming we receive timely regulatory approvals, this transaction will be reflected in our third quarter results.
Importantly, we will free up approximately $100 million of rating agency capital to deploy into higher growth and more profitable lines of business, allowing us to optimize capital allocation and focus on rebalancing toward insurance and higher margin and growth levels, while providing further clarity on SiriusPoint's reserve position.
Turning to our results. I'm very pleased with our team's execution and strong delivery in our first full quarter. We achieved a combined ratio of 92.8% in the second quarter of 2021, which keeps us well on track to deliver an underwriting profit in 2021 after multiple years of underwriting losses at our predecessor companies.
On a reported basis, Catastrophe losses were $12.7 million or 2.7 percentage points on the company's combined ratio, which were primarily from late June European windstorms. In addition, the team has been actively monitoring the impact of the devastating European floods in July, a third quarter event.
Even though our office in Liege, Belgium was not impacted, our paramount concern is the safety and well-being of our local team members as well as ensuring our ability to serve the needs of our clients in the region. Our thoughts are with our European colleagues and clients as they navigate this disaster and work to repair and rebuild.
That said, the actions taken to reduce our catastrophe exposure in January 1, 2021, have proven out. Through the reduction of PMLs, boosting participation rates on our existing quota shares and additional reinsurance purchases.
Based on the information we have today, we estimate our losses in third quarter from this event to be capped at approximately $30 million, absent a dramatic increase in the initial industry loss estimates.
For the second quarter of 2021, we delivered net income of $65 million or $0.37 per diluted common share and grew tangible diluted book value per share of $0.33 or 2.4% to $14.30 since March 31.
We will continue to measure our execution through our KPIs of underwriting profitability, tangible book value growth and the ability to generate double-digit returns on equity, all of which we delivered this quarter. Turning to investment income.
We earned $77 million in the second quarter of 2021, which compares to prior year second quarter net investment income of $137 million. Our investment in the Third Point Enhanced fund earned a 3.7% return for the quarter and contributed $45 million of investment income.
Underwriting this quarter continued its focus on remediation, along with reunderwriting and growth in our target insurance and reinsurance classes. We have made progress on exiting risks that do not meet our return hurdles, as well as rebalancing the portfolio to expand more into specialized lines as we continue to diversify beyond property.
We expect the growth will be in line with our revised underwriting targets and appetite.
We have conducted a policy level review across our entire portfolio, applied changes and expect our updated appetite and focus on high-quality business, which is partially reflected in our 2021 year-to-date underwriting results to be fully executed with Q1 and Q2 renewals. This will continue to emerge in the 2022 financial results.
We have cumulatively remediated 13% of the portfolio in the last two quarters and expect to remediate or non-renew an additional 11%.
As we execute our strategy to stabilize our core insurance and reinsurance portfolios, we've been aggressively reshaping our reinsurance book, which is the legacy Third Point Re-portfolio, in particular, had a small number of large transactions that are no longer within our risk appetite.
This has proved to be a headwind to premium growth where net premiums earned were $466 million for the second quarter of 2021.
Kind of balance in risk, they remain attractive areas to grow both reinsurance and insurance with strong margins that we are accessing through our existing distribution channels as well as our growing array of partnerships, including our announced transactions with Arcadian, Banyan, Hestia, Joyn, Rhino and Outdoorsy, among others.
Many of these partnerships are focused on growing our contribution to the portfolio from insurance. While the premium volume for 2021 year-to-date is modest for these activities, we expect these ventures to be strong contributors to growth in 2022 and beyond, which I'll refer to in more detail later.
In our reinsurance portfolio, market conditions remain positive with adequate pricing across global casualty, specialty and property, albeit with decelerating rate increases. Across the majority of reinsurance lines, absent a few, we believe we have passed the pricing peak.
As we allocate capital and focus on all three pillars of our strategy, we take advantage of positive market conditions, but we're not reliant on the recent hardening market. We intend to capitalize on market dislocation and believe we are well placed to move quickly and navigate changes and conditions as they evolve.
We believe we have strong services assets in our portfolio where we see good growth opportunities. Our wholly owned managing general underwriters, and agents, MGUs or MGAs, IMG and Omada, participate in areas in the market with strong macroeconomic tailwinds, including travel and healthcare.
SiriusPoint already has a distinct advantage in our services business. And with an infusion of talent capital, we see significant opportunities for us to grow here as well.
We remain bullish on the travel sector overall, particularly coming out of COVID lockdown, even though continued international travel restrictions, including restrictions on inbound travelers to the United States, have negatively impacted our top line versus expectations at IMG this quarter.
MGAs provide access to unique specialty primary insurance business, allowing us to grow premiums in the primary space with the flexibility to adjust the volume of business based on market cycles. They generate commission-based nonrisk-bearing fee income, which provides a source of income to serious point.
We're seeing MGA evaluations rise to 12 to 16 times EBITDA, up from 10 times EBITDA five years ago. The increase is driven by a huge amount of deployable capital on the buy side, reduced opportunities elsewhere in the insurance space and increased faith in the MGA model.
The market has seen an increase in new MGA start-ups, both traditional MGAs led by experienced underwriters, leading large incumbent insurers and innovative MGA start-ups founded by tech-native entrepreneurs. We're establishing SiriusPoint as a partner of choice for these MGAs.
We offer a global platform consisting of admitted and E&S licenses in the U.S., Lloyd's Syndicate 1945, Bermuda Class IV entities, a European branch network and Asian Outposts. We have an ability to be nimble, paired with the multiyear investment outlook that is not based on short-term performance.
Our approach involves taking investment takes where appropriate and offering the use of paper, balance sheet capacity, product expertise, actuarial support and MGA operation support. In some cases, we're truly incubating new businesses by working with founders from day one in setting up a new business.
Our senior leaders relationships are driving significant deal flow. We evaluated more than 100 deals, both pet driven and traditional MGAs in our first 100 days. We believe the potential partners come to us because they like our paper and platform and speed with which we can respond.
We see these deals as an opportunity to leverage into equity investments, and we see the bulk of our new premium growth coming from this area in the years ahead.
While we are seeing terrific deal flow, we'll continue to employ a disciplined process and utilize a strong screen as we evaluate investments, which is focused on a credential founding team with a defensible competitive advantage, which is within underwriting appetite and risk management limits.
The potential investment must also have strategic alignment with SiriusPoint with trusted co-investors where we have an opportunity to play an active role.
We've made strong progress on this pillar through the second quarter, building momentum with the pipeline of attractive deals and working with experienced and innovative partners to launch a number of new businesses.
We've cofound and joined an Insurtech MGA, with Suriname and her team, with extensive collective experience in the Insurtech and small commercial space. Joyn underwrites commercial insurance in the small and middle markets having positive disruption in current market offerings through digital technology, data analytics and automation.
We launched Banyan Risk and MJ co-founder with Tim Usher Jones offering custom D&O insurance risk solutions and complex risk areas, including life sciences, global initial public offerings and the technology sector.
We've also partnered with outdoorsy, an RV rental marketplace platform, which through Ramleth, their MGA, provides an innovative technology-driven insurance solutions globally to their 37 million followers. We invested in outdoorsy and provide risk capital to runway.
Our longer-standing investments in innovative technology-driven businesses such as PI and insurtech Nobler, which was bought by U.S.A. this quarter, have also continued to add value. as it is our partnership with John Boylan, who is successfully building out the team at Arcadian Risk, attracting the best talent from across the industry.
We aim to play a role in accelerating the growth of the companies we are partnering with and investing in to create value. We have multiple avenues to drive profitable growth over time, which will deliver value to our shareholders, including appropriate exits to realize gains.
Now let me turn the call over to David to review our financial results in more detail..
Thanks, Sid. For the second quarter, we generated net income of $65 million or $0.37 per diluted share versus $131 million or $1.05 per diluted share in the first quarter of 2021. The sequential decline was largely attributable to our investment results normalizing off of highly elevated levels achieved in the first quarter.
Additionally, our average fully diluted shares outstanding rose to $161 million as compared to $118 million in the first quarter reflecting a full quarter for the purchase of Sirius Group in the issued share count.
Importantly, we had better balance in our earnings with stronger underwriting results, including favorable prior year development and light cat losses, reduced transaction expenses and favorable movement in the value of liability classified capital instruments. Our annualized return on average common equity was 10.6% for the quarter.
We generated a net underwriting profit of $33 million, and our combined ratio was 92.8%, which compares to 96.6% in the first quarter of 2021. Our first half combined ratio was 94.2%, keeping us on track to deliver an underwriting profit for the full year 2021.
Our current quarter combined ratio included $13 million of catastrophe losses or three percentage points compared to eight percentage points in the first quarter after adjustments for three months of Sirius Group results.
We also benefited from $10 million or 2.2 percentage points of favorable development primarily from recent accident years in our European property book, which has been a strong performer over time.
Our ultimate loss pick on COVID reserves remains unchanged, and we recognized $3 million of COVID losses in the quarter earning in on our multiyear mortgage insurance book. While we continue to monitor overall developments and recent court rulings on COVID, particularly on impacted property business interruption.
We did not see anything in the quarter that would change our view on reserves where more than half are IBNR.
Our gross premiums written for the second quarter were $563 million, which compares to $949 million in the first quarter of 2021, which includes $582 million of Sirius Group's gross premiums written in the premerger period from January 1, 2021, to the merger date of February 26 as our book is seasonally weighted toward writings at January 1.
We do not view prior year comparisons as relevant given the merger and the transformation of the book as we continue to make the tough decisions necessary to pull back on contracts in books that do not meet our risk or profitability hurdles.
We continue to see strong year-over-year contributions from our MGA relationships with PI and Arcadian with promising additional contributions coming from our more recently announced ventures with the expectation that their contributions will be more material in 2022.
Underwriting expenses were $72 million for the second quarter of 2021 compared to $71 million in the first quarter which included $41 million from Sirius Group's premerger period. There was a 1.1% increase in the other underwriting expense ratio quarter-on-quarter, which was due to lower earned premiums.
Corporate expenses were $26 million in the quarter, down from $68 million in the first quarter due to the absence of merger-related expenses.
Importantly, we have begun the ongoing work of rationalizing the platforms between the two legacy companies, such as shrinking our New York area real estate footprint by half as we commit to a hybrid working model.
We have also rationalized our legal entities such as merging our two operating companies in Bermuda and reducing our intermediate holding and service companies. Since the merger date, our legal entity count is down 12% and is on track for a 25% reduction by year-end, which will simplify our operations and reduce cost.
However, we also intend to make continued investments in talent and technology. In the A&H segment, personal accident rates were up mid-single digits the U.S. medical market has seen rate changes in line with inflation. The U.S. medical market remains highly competitive as utilization remains low but is expected to rebound in the second half of 2021.
A&H produced an underwriting profit of $3 million and a combined ratio of 97%, which reflects strong results in primary reinsurance and our Medicare, while IMG, which is travel-focused, continues to be impacted by COVID.
In the Specialty segment, casualty continues to see broad hardening with rate increases of low double digits on renewing business, largely in line with the first quarter. We continue to see the benefits of the improved primary rating environment with higher adjustable bases and resulting improvement in loss ratios.
The momentum this quarter suggests the market is continuing to correct for years of soft pricing and reserve deficiencies as well as increasing loss cost trends. Aviation saw an average rate increased near 20%, up slightly from the first quarter. Marine and Energy saw high single-digit rate increases, also off slightly from Q1. U.S.
mortgage continues to see strong double-digit premium increases driven by increased new home sales and higher home values, although rate per risk unit has flattened as we are seeing more reinsurance capacity into the market. Our Specialty segment accounted for 51% of gross premium written in the quarter.
Underwriting income was largely breakeven with a 100% combined ratio and reflects prudent loss picks in the growing Arcadian, PI 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.
In the property segments, rates reflected April one Japan and June one Florida renewals and were up mid-single digits, off slightly from the prior quarter. Florida Gulf programs saw a rate change of plus 20% and loss impacted first layers and 0% to 5% in top layers.
But generally, we observed the market is trending back to flat on non-loss-affected programs in layers, which were oversubscribed to rates flat to up mid-single digits. We have pulled back our Florida limits approximately 15% as of second quarter end, and we non-renewed accounts where we viewed pricing as inadequate relative to shifting exposures.
In U.S. pro rata, rates were up in the high single digits, with loss-affected accounts getting more, especially post winter storm, Yuri, in Q1, but there is rate fatigue. And generally, rates seem to have peaked after about 40 consecutive months of hardening.
Our Property segment accounted for 38% of gross premium written in the quarter, producing an underwriting profit of $30 million and a combined ratio of 80.4%.
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 one of next year.
The Runoff segment had negative production in the quarter due to a canceled rewrite of a discrete contract and overall, no underwriting gain or loss.
Net investment income for the second quarter was $77 million, which compares to net investment income of $187 million for the first quarter of 2021 as gains from our investment in the Third Point Enhanced fund were $45 million, representing a 3.7% return in the quarter primarily driven by gains in long equity versus a 14.6% return in the first quarter as well as the nonrecurring nature of the $35 million Pie valuation write-up in Q1.
While investment returns normalized from the strong gains in the first quarter, second quarter returns were still above our annual expected return assumption.
We continue to be very pleased with our results and our partnership with Third Point LLC Overall, risk assets were $1.8 billion, consisting primarily of $1.2 billion in the Third Point Enhanced fund and $441 million in legacy Sirius Group alternative assets, in total, which were 25% of the total investment portfolio, unchanged from March 31.
The balance sheet continues to improve in the quarter as shareholders' equity increased by $74 million to $2.7 billion. Total capital, including debt, was $3.6 billion. Our debt to total capital ratio was unchanged at 24%.
The change in value of liability classified capital instruments in the quarter was $16 million, the details of which can be found in our posted financial materials.
As stated on last quarter's call, we do expect the value of these instruments to change from quarter-to-quarter based on the passage of time on the option like elements of these instruments as well as fluctuations in SiriusPoint stock price, among other factors.
In the second quarter, the contingent value rights or CVRs, and the warrants issued in the purchase of Sirius Group were listed on the OTX QX Exchange under the symbol SSPCF and pinch market under the symbol SSPFF, respectively, giving holders of these securities additional avenue for liquidity.
Also in the quarter, the cornerstone investors in the Series B Preferred shares sold 5.5 million of their eight million shares to the public in a registered offering and these securities now trade on the New York Stock Exchange under the symbol SPNT-PB.
The cornerstones may seek our support for additional registered offerings under the contractual terms of their Series B investment. Now let me turn the call back over to Sid for concluding remarks..
stabilizing our portfolio and improving our profitability, revitalizing and growing our core insurance and reinsurance book and building alternative business models, partnering with and investing in innovative businesses and teams in the insurance industry.
This delivery is an important first step as we work to establish SiriusPoint's underwriting profitability and future development and growth by being best-in-class allocators of capital, diligently managing our risk and growing higher margin and differentiated businesses, while investing in technology.
I'm extremely proud of the top team and partnerships we have assembled and the talent in the organization. I believe we're going to continue to be the partner of choice for entrepreneurial and best-in-class capital allocators who intend to build disruptive and innovative businesses.
I look forward to updating you on our continued progress next quarter. Thank you for your time, and I'll turn the call back to the operator..
Thank you for attending today's presentation. The conference has now concluded. You may disconnect..
End of Q&A:.