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Edited Transcript of SG.OQ earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Sirius International Insurance Group Ltd Earnings Call

Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Sirius International Insurance Group Ltd earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kernan Victor Oberting

Sirius International Insurance Group, Ltd. - CEO, President & Director

* Matthew Kirk

Sirius International Insurance Group, Ltd. - Head of IR

* Monica Cramér Manhem

Sirius International Insurance Group, Ltd. - COO & President of Global Reinsurance

* Ralph Anthony Salamone

Sirius International Insurance Group, Ltd. - Executive VP & CFO

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Presentation

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Operator [1]

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Good morning, and welcome to the 2019 Third 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 Cramér Manhem, President of the Global Reassurance; 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.

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Matthew Kirk, Sirius International Insurance Group, Ltd. - Head of IR [2]

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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 statements include references to potential pricing of renewals, growth in certain segments and insurance lines, the continued diversification of our premium mix, book of business and revenue stream 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 third quarter 10-Q, which we expect to file tomorrow.

Management will make reference to some non-GAAP financial measures, including the definitions of adjusted book value per share and adjusted tangible book value per share. The reconciliation of these measures to GAAP measures can be found in our earnings release and is available on our website.

Today's call as well as our investor presentation and investor financial supplement are available through the Investor Relations section of our website, ir.siriusgroup.com.

I would now like to turn the call over to our President and CEO, Kip Oberting.

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Kernan Victor Oberting, Sirius International Insurance Group, Ltd. - CEO, President & Director [3]

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Thank you, Matt. Good morning, everyone, and thank you for joining our earnings call. During the quarter, adjusted book value per share decreased by 2.5% to $15.47. On a year-to-date basis, adjusted book value per share is up 1.5%.

This week marks our 1-year anniversary as a public company. Weather and other factors have weighed on our returns and stock price performance over this period. Behind the scenes, we are making some positive progress. This quarter, we realigned our global leadership, empowering business leaders to operate each unit with a client-centric and global focus. We also formalized our global functional leadership and added to our senior team to more effectively serve our business needs.

Change is hard on an organization, but this initiative is beginning to take root and has energized many. We will continue this push to become more nimble and efficient, and we expect steady progress over the next 18 months.

In terms of insurance markets generally, a number of peer companies have commented on thin pricing and social expense trends. We too take note of this and the impact social inflation has on increasing attritional losses as well as market-wide loss creep, resulting from recent years' cat events.

2019 was the first time in over a decade, where Sirius has experienced unfavorable development in aggregate on prior year catastrophe loss estimates.

Similar to the industry, we are seeing escalating catastrophe losses due to climate change, resulting in higher frequency of severe events; inflation of losses due to new practices, such as assignment of benefits; major increases in demand surge costs. The world is a riskier place. Pricing is moving and must move just to keep pace with loss cost increases.

In terms of actions we are taking, under our new globalized structure, we are more proactively driving tactical refinements to our inwards reinsurance portfolio mix as well as our outward retrocession partnerships. At the same time, our accident and health and newer primary specialty businesses are on the whole performing in line with our expectations, which is a great result.

During last quarter's earnings call, I also described an increasingly attractive environment for opportunistic M&A, particularly as capital providers are looking to exit due to the competitive pricing environment. We also discussed our desire to resolve our stock's unique illiquidity situation and shareholder concentration. We have run to ground a number of opportunities in various sizes, shapes and forms, but we have not yet found an accretive transaction, which would increase our public float and/or diversify our share ownership.

Certain counterparties are understandably anchored on our unreasonably low reported stock price. Larger partners are not willing to engage without a visible path to shareholder execution. The progress is not entirely within our control, but sooner or later, hopefully sooner, there will be a resolution. We will keep working on this.

I'll now turn the call over to Ralph Salamone to take you through our third quarter results, who will then pass the ball to Monica to discuss our businesses in more detail.

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Ralph Anthony Salamone, Sirius International Insurance Group, Ltd. - Executive VP & CFO [4]

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Thank you, Kip, and good morning, everyone. We generally expect natural catastrophes to impact the third quarter of any given year. This quarter was no exception. Our underwriting results were negatively impacted by $109 million of net catastrophe losses primarily from Hurricane Dorian, which hit the Bahamas as a Category 5 storm, and Typhoon Faxai in Japan.

We have Dorian recorded in our books at $44 million and Faxai at $52 million. I noted in yesterday's earnings release that our Dorian loss reflects an implied industry loss approximating $8.5 billion and Faxai reflects an industry loss estimate of around $9 billion. Weighted down by these significant catastrophes, we reported an $8 million net loss for the quarter, but still managed to produce $105 million of net income for the 9 months.

Underwriting losses in the quarter were mostly offset by gains from investments, and strong investment performance earlier in the year helped net income for the 9 months as well.

We reported a $50 million comprehensive loss for the third quarter, reducing our year-to-date comprehensive income to $34 million, which compares to $56 million of comprehensive income for the same period in 2018.

Return on equity, which is calculated as net income attributable to common shareholders on beginning common shareholders' equity, was negative 0.2% in the quarter and plus 5.8% year-to-date, in line with the 5.8% achieved for the same period in 2018. Our 9 months results incorporate the drag of $12 million from the amortization of intangibles related mainly to our acquisitions of IMG and Armada in prior years.

The GAAP combined ratio in the third quarter was 123% compared to 111% a year ago. Catastrophe events added 29 points and prior year development added 2 points to our third quarter combined ratio. The Global Accident & Health segment, which includes our MGU businesses, contributed $18 million of underwriting income, including net service fee income in the quarter. Our Global Property, Specialty & Casualty and Runoff & Other segments posted losses of $74 million, $26 million and $3 million, respectively.

Property results were impacted by catastrophes. Specialty & Casualty results were impacted by $9 million of unfavorable reserve development from recent Casualty reinsurance business as well as a $6 million loss attributable to the Thomas Cook bankruptcy.

On a year-to-date basis, the GAAP combined ratio was 107% compared to 94% a year ago. Both the quarter and year-to-date combined ratios include a roughly 1 point impact from the investment costs associated with scaling up our U.S. specialty lines of business.

Our Global A&H segment produced $38 million of underwriting income, including net service fee income for the year compared to $41 million for the same period last year. The strong results for 2019 include a drag of about $4 million related to our growth initiatives at ArmadaHealth.

Global Property, Specialty & Casualty and Runoff & Other segments have posted losses of $55 million, $36 million and $14 million, respectively, which are due primarily to catastrophes and unfavorable prior year development.

We wrote $414 million of gross premiums in the quarter and $1.5 billion for the 9 months ended September 30, 2019. We continue to diversify our premium mix with Global Property making up 47%; Global A&H, 30%; and Specialty & Casualty, 22% 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 diversify our revenue streams and underwriting portfolios, most notably the build-out of our primary specialty platforms in the U.S.

Our investment portfolio generated a total return of 1.2% in original currencies and 0.8% in U.S. dollars during the quarter.

Year-to-date returns are 4.8% in original currencies and 4.4% in U.S. dollars. The average credit quality of our fixed income portfolio remains at AA, with an average duration of 1.6 years.

I would now like to turn it over to Monica to provide an update on our underwriting results and recent operational reorganization.

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Monica Cramér Manhem, Sirius International Insurance Group, Ltd. - COO & President of Global Reinsurance [5]

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Thank you, Ralph, and good morning. As Kip has mentioned, we took a fresh strategic look at many of our business lines and leadership across the globe, and which has led us to reorganize our global business into 6 distinct business units to serve our clients more cohesively and to provide operational relevance.

Under one Sirius Group global brand, our business lines are now grouped into the following 6 customer-facing units: Property Reinsurance, International Specialty, Casualty Reinsurance, U.S. Specialty Insurance, Global A&H and Global Runoff Solutions.

I will point you to Slide 16 of this quarter's investor presentation found on our website for additional details related to the business lines and reporting segments.

Ralph has already provided you with some of our financial results. On our Global Property segment, net written premiums were $537 million for the 9 months, which is down 6% when compared to prior year. The quarter is not significant when it comes to renewals, but the result is heavily impacted by the losses coming from Typhoon Faxai and Hurricane Dorian. Our thoughts and condolences are with the many victims and their families.

We can see that 2019 is the third consecutive year of severe catastrophe reinsurance losses for the market, dwindling favorable reserve development from prior years and a low interest rate environment, all of which add up to a continued erosion of earnings.

After the close of the third quarter, Japan was hit by Typhoon Hagibis, bringing intense flooding and landslides. This will mean that Japan has had an unprecedented 12-month period of losses from both the frequency and severity perspective. This frequency and severity of catastrophe losses seems to be the new norm and does not apply only to Japan. Our industry must be prepared to adapt to these new challenges.

Sirius has continued to shed underperforming accounts and treaties, where terms and conditions are not in line with our expectations. We will continue to do so at the forthcoming January renewals. There is a clear momentum in direct rates in various regions as well as a tightening retrocessional market, and this may well help to drive rate increases on the reinsurance side as well as improvements in terms and conditions.

As always, we remain prepared to take advantage of opportunities that we see in markets and regions, where these 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 have increased 23% from the first 9 months of 2018. This is due in part to higher direct writings primarily for risks originating from the U.S. but also to continued reinsurance opportunities globally. During the quarter, we expanded our reinsurance offerings of Group life business through a team based in our Zurich office.

Gross written premiums in the Specialty & Casualty segment were $338 million for the 9 months, up 34% from prior year. Increases in casualty reinsurance as well as the continued development of our U.S. specialty insurance lines are driving this growth. Though the third quarter is not a significant renewal period for this segment, rates continued to improve, particularly in the aviation and space lines, but also in the casualty lines, where significant rating improvements continued to gain momentum.

The final segment is Runoff & Other, which includes runoff in legacy transactions led by Sirius Global Solutions. The solutions team provides runoff solutions to sellers looking for an exit and has had an excellent historical track record. The team observed an uptick in runoff deal flow this quarter and 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.

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Operator [6]

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(Operator Instructions) This now concludes the question-and-answer session. I would like to turn the conference back over to Kip Oberting for closing remarks.

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Kernan Victor Oberting, Sirius International Insurance Group, Ltd. - CEO, President & Director [7]

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Thank you, operator, and thank you for your participation. The questions were a little light, but I'm sure it's because of our fulsome commentary.

In any event, on a serious note, we are not happy with minimal growth in book value over the past 9 months. We have a great long-term track record for delivering for our owners, and our success is a result of our long-term partnerships with like-minded partners and clients. We are not taking our eye off this ball ever. But we are now focused on improving our internal efficiency and effectiveness and more proactively driving the shape of our reinsurance portfolio and doing what we can to deliver realized value for our shareholders. So we're digging in. We're focused on the long-term business opportunities. And hopefully, we'll resolve our shareholders' situation. Thank you.

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Operator [8]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.