Siriuspoint Ltd
NYSE:SPNT
Earnings Call Analysis
Q4-2023 Analysis
Siriuspoint Ltd
The company had a year marked by impressive financial performance, delivering record net income to common shareholders. The net income showed a substantial improvement from the previous year, jumping to $339 million – a notable $742 million positive shift. This was driven by significant contributions from underwriting, with $250 million in profits, MGA fee income, and investments. Highlighting the effective risk management, the combined ratio for underwriting improved to a commendable 93.7%. Revenue growth was also solid, with consolidated MGAs of stand-alone performance posting a 10% increase, further enriching the financial narrative.
The company's prudence in reserving was evident, with positive developments in core business leading to $63 million for the full year. Strength in the balance sheet was accentuated by a robust Bermuda Solvency Capital Ratio of 257%. Additionally, the growth in book value per share showed a healthy 18% rise for the year, backed by gains on fixed income investments and positive earnings. Investors can draw confidence from the company's reinforced financial footing and commitment to maintaining an efficient capital structure.
Strategic shifts in the investment portfolio resulted in a strong total investment result of $273 million. Net investment income surpassed guidance, reaching $284 million and marking a successful derisked portfolio strategy. Gross written premiums for core business, however, faced a 3% contraction, albeit cushioned by a growth in insurance and service premiums. This diverging trend across segments signifies the company's ongoing adjustments to balance profitability with exposures.
The company not only aims for growth but also focuses on improved operational efficiency. This direction led to a 37% surge in capital-light net services fee income and a record $50 million driven by higher fees from specific segments. Expense management also surfaced as a positive, with a noteworthy $55 million reduction in net corporate and other expenses. Enhancing profitability while streamlining operations stand out as key themes that underline the organization's strategic push.
Looking ahead, the company's guidance reflects a continued trajectory of success, with a return on equity (ROE) target set at 12% to 15% for the medium term. Additionally, net investment income projections for the forthcoming year point to potential earnings between $250 million to $265 million. These forward-looking statements bode well for investors seeking both stability and growth. Alongside this, common shareholders' equity saw considerable growth, indicating a robust financial structure navigating into the future.
Given the deft portfolio management, including actions on workers' comp and cyber portfolios, the company anticipates an impact on 2024 premiums, which is counterbalanced by the underlying growth in the portfolio. With the North American program business experiencing rate increases and an average change of 3% across the reinsurance portfolio, the company is adapting to market dynamics. This adaptability showcases the firm's tactical response to industry-wide pressures and the pursuit of sustained profitability.
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Good morning, ladies and gentlemen, and welcome to the SiriusPoint Limited Fourth Quarter and Full Year 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, and a replay is available through 11:59 p.m. Eastern Time on March 6, 2024. With that, I would like to turn the call over to Sarah Singh, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good morning, good afternoon to everyone listening. I welcome you to the SiriusPoint Earnings Call for the 2023 Full Year and Fourth Quarter Results. Last night, we issued our earnings press release and financial supplements, which are available on our website, www.siriuspt.com. Additionally, a webcast presentation will coincide with today's discussion and is available on our website. With me here today are Scott Egan, our Chief Executive Officer; and Steve Yendall, our Chief Financial Officer. Before we start, I would like to remind you that today's remarks contained forward-looking statements based on management's current expectations. Actual results may differ. Certain non-GAAP financial measures will also be discussed. Management uses the non-GAAP financial measures in it's as internal analysis of results and believes that they may be informative to investors in gauging the quality of our financial performance and identifying trends in our results. However, these measures should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. Please refer to Page 2 of our investor presentation for additional information and the company's related public filings. At this time, I will turn the call over to Scott.
Thank you much, Sarah, and good morning, good afternoon, everyone. Thanks for joining our fourth quarter and full year 2023 results call. 2023 has been a busy turnaround year for SiriusPoint, we've restructured our organized to create a business, which is simple, less volatile and now generating double-digit return on equity. Our actions have had a demonstrable impact on performance. We delivered our fifth consecutive quarter of positive underwriting results, improve the quality of our earnings and strengthen our balance sheet. We are looking to build on this progress as we go into 2024, 2023 is not a destination. Our longer-term ambition is to become a best-in-class insurer reinsurer. Before sharing the key messages relating to our results for the year, I want to recap on 2 developments from the quarter. Firstly, as previously announced, CMIG International Holdings has been taken into private receivership by its lenders in Singapore. CMIG International Holdings is the parent company of CM Bermuda, a 33% shareholder of SiriusPoint with 9.9% voting rights. I would like to emphasize that this development has no impact on the ongoing progress of the day-to-day running of our business. We are in dialogue with the receiver and trying to be as helpful as possible. S&P Global Ratings has communicated to us that this development is a neutral factor to their ratings and is unlikely to affect assessment of our business position or financial strength. Our focus remains on simplifying our business, reducing volatility and further improving the profitability of the company. Secondly, in November, S&P Global Ratings revised our financial strength rating outlook from negative to stable. This reflects their expectation that SiriusPoint will continue to post strong and improving underwriting results during 2023 to 2025. With this change, all 3 of our rating agencies now have us on a stable outlook. This is an important endorsement for our progress. I'm incredibly proud of the collective effort made by our people to get us to this point and in strengthening our platform. Moving back now to the key messages, which are outlined on Slide 5. I'll provide an update on the progress we have made across our strategic initiatives. Overall, we are very pleased to report a strong fourth quarter with a combined ratio of 93.4% for our core business and net income of $94 million. Together with the first 3 quarters, we have delivered record net income of $339 million for 2023, an improvement of $742 million as compared to 2022. We also accelerated our cost savings program and completed it in 1 year ahead of schedule as we lowered our cost base by more than $50 million versus 2022, and achieved an above-guidance return on equity of 16.2%. In our turnaround year of 2023, our ROE was unsurprisingly impacted by one-off items. And adjusting for these, we still delivered a double-digit ROE of 10.2%. During 2023, we also strengthened our capital position and improve the quality of our balance sheet. We completed a loss portfolio transfer, deliberately added to our reserve strength and grew our diluted book value per share by 18%. This has helped to reduce our asset and debt leverage during 2023. Given the strong performance of the company in 2023 versus both 2022 and our targets, we have paid our employees above target bonuses rightly rewarding the hard work and dedication to improving and creating shareholder value. With this, I will now take you through the 3 sources of income; underwriting, investment income, and net service fee income from our consolidated MGAs, all of which have delivered a higher return than last year and been strong contributors to our organic capital generation. Beginning with a strong underwriting result for 2023, we delivered a combined ratio of 89.1% for our core business, which was supported by 5 points of one-off reserve releases linked to the LPT transaction announced in 2023. Excluding the LPT benefit and other one-off items, our adjusted core combined ratio stood at a record 91.2%. This is 10.4 points of like-for-like improvement versus 2022, and shows the impact of the decisive portfolio actions taken during the last 18 months. The combined ratio has been supported by both loss and expense ratio improvement with the loss ratio improvement helped by lower catastrophe losses, which were $14 million for the full year 2020, a 90% reduction from $138 million a year ago. This tied in with our 1 in 100-year event PMLs, which are considerably lower now at around 5% of common shareholders' equity, down from 11% at second quarter 2021. However, we continue to remain conservative with regards to volatility and have purchased greater retro protection via more limits and more retention on our core U.S. property cap program for 2024. Pleasingly, this was achieved at a similar cost to 2023, reflecting a better-than-market outcome driven on the back of our underwriting progress. Our underwriting first approach remains unchanged and we will continue to prioritize underwriting profits over premium growth in 2024. That said, we expect underlying premium growth during 2024 in the areas we are targeting, as evidenced by the newly onboard the MGA partnerships, offset by the impact from the already undertaken underwriting actions in the second half of 2023 across specific parts of the portfolio, such as workers' comp and cyber. These will impact overall premium in 2024 but this should be the last year of significant impact to the top line progression. Turning to investments. Our investment results are strong and supported by higher net investment income, which is ahead of our Q3 revised guidance of $250 million to $260 million. Net income of $284 million in 2023 surpassed our revised expectations, mainly due to the strong rate performance in the first half of the fourth quarter as well as continued rotation into high-quality spread products. Our portfolio continues to perform well, and we saw no defaults across our fixed income portfolio during 2023. Overall, our investment strategy remains unchanged as we continue to operate a fixed income portfolio with an average credit rating at AA. Looking forward to 2024, we expect net investment income to be in the range of $250 million to $265 million based on the current forward yield curve. Next, we come to our distribution strategy and our consolidated MGAs, which have delivered record fee income. Our distribution strategy remains important to us and we've continued to onboard new MGA underwriting partners whilst rationalizing our existing equity stakes during the fourth quarter. We made great progress towards concentrating on deeper and more meaningful MGA relationships with the sale of 9 equity stakes in 2023. This includes Banyan, which we no longer consolidate but continue to provide underwriting capacity, too. We have since sold our stake in Corvus in January, bringing our total holdings to 25 MGAs today, down from 36 at the end of 2022. At full year '22, we outlined our intention to enhance our MGA platform, focusing on partnering as a [indiscernible] and capacity provider without [ kicking ] and equity space. We added a total of 9 new MGAs in 2023, choosing to partner with teams that display deep underwriting talent and proven track records. During the fourth quarter, we provided new capacity to poverty underwriters and Nirvana, strengthening our footprint in professional liability and non-fleet commercial auto. In the start of 2024, we have onboarded a new partnership with car sale focused on supply chain, marine insurance and launched a new European marine business with Alta Signa, one of our consolidated MGAs. More recently, we partnered with Ryan Specialty Nordics offering coverage for onshore wind farms as well as packages for small to medium-sized enterprises, which includes commercial property and legal liability insurance. Whilst we are taking underwriting action as part of our transformation, you can also see strong evidence of building and growing in our targeted areas. Our consolidated MGAs of stand-alone performance was strong, with revenue growth of 10%, margin improvement of 4 points to 21% and a record $50 million of net service fee income. Also, we saw a 2% increase to SiriusPoint premiums underwritten to $651 million from these 4 consolidated MGAs. Despite the strong underlying performance, the book value of our consolidated MGAs is only $90 million, and we continue to believe that the actual economic value is significantly higher. I will again reemphasize that I believe the value of these MGAs is not fully reflected in SiriusPoint's share price. Moving on to our reserves and our philosophy around reserving. We continue to maintain a prudent approach to reserving, as evidenced by our positive prior year development in 2023. For Q4 discrete, this was $55 million for our core business and $63 million for the full year, excluding any benefits linked to the LPT. Similarly, reserve releases were positive for our consolidated business, excluding LPT at $6 million in Q4 and $46 million for the full year 2023, which includes increasing our reserve prudence by $50 million during Q4 after a strong performance year. Our strong results, coupled with the LPT, we completed at half year, allowed us to further strengthen our balance sheet position as we move forward into 2024. Overall, our balance sheet is strong. Our Bermuda Solvency Capital Ratio is 257% at the end of the third quarter. Also asset and leverage has improved following the 10% growth in diluted book value per share during the fourth quarter. Growth in book value was driven by mark-to-market gains on the fixed income portfolio and the positive earnings generation during the quarter. Full year book value per share growth was strong at 18%. Although our capital levels are strong, the structure is not fully optimal, and we are reviewing our capital instruments to make sure we operate with an efficient framework. Our aim is to be a prudent [ share ] of capital, and we are updating our ROE guidance to 12% to 15% during the medium term. We are pleased and proud to have not only hit but surpassed all the financial targets that we set for 2023. I'm grateful to my colleagues who have pushed hard this year to create shareholder value. That said, the numbers we delivered this year are not a destination, and we aim to do better. I have said before, there is no complexity. As we move away from restructuring, we are focused on being a value-creation company that delivers consistent profit while operating at best-in-class levels. We know this is an ambition but one which we feel has more credibility after our strong 2020 performance. I would like to thank all our stakeholders, shareholders, customers and employees for their support and patience during a turnaround year, which is never taken for granted. We believe the future is bright at SiriusPoint , and we are excited for 2024. With these remarks, I will pass it over to Steve, who will take you through the financials.
Thank you, Scott, and good morning, good afternoon, everyone. I will now take you through the financial section of the presentation, starting with our full year financials on Slide 13. We had a strong year and delivered record net income to common shareholders of $339 million, an impressive $742 million improvement on 2022. All 3 sources of earnings, underwriting, MGA fee income and investments contributed positively to the results. Core underwriting results improved significantly as we delivered record underwriting profits of $250 million. The 2023 results include a one-off benefit of $105 million due to reserve redundancy linked to the loss portfolio transfer transaction, which itself demonstrates our prudent reserving philosophy. Excluding the releases linked to the LPT, the result was still a record for us with underwriting profits of $145 million and a combined ratio of 93.7%.
Our portfolio actions are having a clear impact with catastrophe losses for the core business down 90% to $14 million, and other parts of the portfolio are also improving. More detail on our reduction of underwriting volatility is available on Slide 8. Whilst our consolidated gross written premium was stable, the top line for our core business decreased 3%, reflecting the ongoing portfolio actions. Reinsurance premiums decreased by $250 million, largely due to pulling back in international property. This was partially offset by growth in the Insurance & Services segment, which increased by $156 million. During 2023, we took additional actions on our workers' comp and cyber portfolios, which will have an impact on our 2024 premiums and offset the underlying growth in the portfolio. Capital light net services fee income increased 37% to a record $50 million, driven by higher fees from Arcadian and IMG. Service revenues are up 10% versus last year, while Service margins increased 4 points to 21% for 2023. Total investment result was strong at $273 million and driven by $284 million of net investment income, which surpassed the revised net investment income guidance of $250 million to $260 million given in the third quarter. Unrealized and realized losses, including from related party investment funds were $11 million and significantly better than the $436 million loss in 2022. Net corporate and other expenses were down to $258 million for the year, a $55 million improvement versus the prior year. We have 2 moving parts here. One, we moved $42 million of expenses above the line within our core underwriting result, which supported an improvement. But on the other end, we had $38 million of one-off expenses in relation to restructuring costs and transaction costs. Transaction costs of $8 million were in relation to the 13D process and loss portfolio transfer, whilst restructuring costs were $30 million for the year as we accelerated our cost savings program. Other notable items impacting net income during the period included a $59 million loss from mark-to-market on liability classified capital instruments, $35 million foreign exchange loss and a $101 million tax benefit from the accretion of a deferred tax asset as a result of the changes to the Bermuda income tax fees. Moving to Slide 14. I'll talk briefly about fourth quarter financials. Overall, it was a strong quarter with all 3 earnings engines positively contributing to net income and up year-on-year. For the underwriting result, this marked the fifth consecutive quarter of positive income since we committed to building a culture driven by strong underwriting. Our core underwriting profits increased 19% to $37 million with the combined ratio down 1.4 points to 93.4%. This includes 2.9 points of short-term incentives for staff, which when excluded would equate to a 90.5% combined ratio for the core business compared to 94.8% in 2022 or improvement of 4.3 points. Gross premiums written decreased 3% quarter-on-quarter in our core business. Top line growth was impacted by reductions in premiums in the Reinsurance segment, where premiums are down $49 million compared to the fourth quarter last year. This was partially offset by insurance and service premiums, which increased by $26 million or 6%.
Core MGA revenues increased by 21% to $56 million compared to the prior quarter and were driven mainly by growth from Arcadia and IMG. Margins increased -- improved by 16.7 points to a strong 22%, while we grew our MGA net service fee income to $12 million for the quarter. The total investment result for the quarter was strong at $65 million. This was driven by $78 million of net investment income, which is up by $27 million compared to the prior quarter as the derisked portfolio continues to benefit from rate increases. Unrealized and realized losses, including from related party investment funds were $13 million. Net income of $94 million was a significant improvement versus the $27 million loss during the prior year quarter. Other items impacting income included a $6 million restructuring charge, $19 million of foreign exchange losses and the previously mentioned onetime deferred tax benefit of $101 million related to Bermuda's new income tax law. This quarter also includes a $30 million increase to our reserve margin within the corporate segment. As Scott mentioned earlier, this has been done from a position of strength on the back of strong performance, and we look to improve the quality of our balance sheet. Common shareholders' equity grew 13% during the quarter, supported by the mark-to-market movements on fixed income investments and growth in net income. Adjusting for AOCI, common shareholders' equity growth was 6% in the quarter. Moving to Slide 15 and focus on premium trends, including 1/1 renewals. During 2023, we continue to take actions to improve the profitability of the book with additional actions during the second half of '23 related to cyber and workers' compensation segment. We believe these actions will impact our underlying premium growth during 2024, which will be driven by positive rates across our portfolio and volume growth in areas like North American program business, Accident & Health and International, which we are actively looking to grow. Rating trends in Q4 have remained broadly similar to the first 9 months of 2023. Less than 10% of our overall book gets renewed in Q4, excluding North American program business, which has experienced average rate increases of around 7%. The North American program business saw a 6% rate increases during Q4, excluding cyber on workers' compensation, which have both been under pressure and where we have taken portfolio actions to manage the profitability of our book. Moving to the topic of renewals. At the January 2024 renewal period, we experienced positive rate increases across the majority of the business, with an average rate change at around 3% across our reinsurance portfolio. This was mainly driven by U.S. Casualty and U.S. Property business. Overall, the renewals were orderly and in line with our expectations. Next, Slide 16 shows the year-to-date change in combined ratio for our core business and breaks the movements into individual subcomponents. Our portfolio actions have significantly improved the underwriting profitability with the combined ratio for our core business being 10.4 points better year-over-year on a like-for-like basis. Our headline combined ratio of 89.1% has benefited from 4.6 percentage points of reserve releases linked to the LPT transaction. However, the expense reallocation of $42 million results in around a 2-percentage point drag. Adjusting for these 2 and the short-term incentives previously mentioned results on a like-for-like combined ratio of 91.2% compared to 101.6% in 2022. The core attritional loss ratio is marginally better at 64% or 1 percentage points up on the previous year and is partly impacted from mix changes between Insurance & Services and the Reinsurance segment and also from the large losses in the International business. The mix changes resulted in better profit commissions, which are captured in the acquisition cost ratio and has resulted in 1.4 points of improvement. Looking at both of the moving parts together results in a net improvement of 0.4 points year-on-year. Slide 17 and 18. We look at the investment portfolio and investment results. We have made clear progress during the year as we delivered a strong net investment income figure, increased our overall asset duration of 2.8 years from 1.8 years at Q4 2022, and locked in attractive reinvestment yield in excess of 4.5% on our investments during the year. We rotated our portfolio throughout 2023, investing over $1.8 billion as we increased our exposures to corporates and asset-backed securities. Portfolio rotation and higher rates have supported our net investment income during 2023, and we expect trend to continue as we aim to deliver a stronger net investment income between $250 million to $265 million during 2024. Overall, our investment strategy remains unchanged and focused on maintaining a high-quality fixed income portfolio. 74% of our investment portfolio is now fixed income, of which 99% is investment grade with an average credit rating unchanged at AA. We didn't experience any defaults in our fixed income portfolio during 2023. P&L volatility is significantly lower compared to last year and has helped given 90% of the fixed income portfolio is now designated as available for sale, up from 88% at Q3 2023 and none at year-end 2021. Moving on to Slide 19, which looks at our balance sheet. Our balance sheet is strong, ending the quarter with $2.2 billion of common shareholders' equity, which is up 23% since the beginning of the year and 13% during the quarter, driven by the growth in net income. Total capital, including debt, stood at $3.3 billion. Our issued debt is unchanged while our debt to total capital ratio is 23.8% and remains within our target range. Debt leverage improved by 1.4 points and asset leverage is lower at 3.3x versus 3.6x at the end of the third quarter. With this, we conclude the financial section of our presentation. Our 2023 results were strong and showed a significant turnaround in 2023. We delivered record net income of $339 million, achieved a 16.2% annualized return on average equity and delivered $50 million of cost savings ahead of schedule, which contributed to a consolidated combined ratio of 84.5%, an improvement of 11.9 points year-on-year. We expect to build on this performance and aim to deliver 12% to 15% return on average common equity in the midterm. I would like to thank you again for your time this morning. For any questions, please contact our Investor Relations team at investor.relations@siriuspt.com. I now turn the call back over to the operator.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or lock up the webcast and enjoy the rest of your day.