CEO Sankaran highlights SiriusPoint’s “dramatic” reallocation of capital
SiriusPoint CEO Sid Sankaran has highlighted a “dramatic” reallocation of capital at the firm, telling investors his company non-renewed around $700mn in reinsurance premium in the last 15 months and will remain disciplined in that segment, as it continues pivoting towards its “strategic partnership strategy”.
SiriusPoint on Wednesday evening reported first quarter results that included underwriting income jumping to $34mn from $9mn the year before, as it knocked 2.8 points off its combined ratio, despite facing claims from the Ukraine-Russia crisis.
Overall results, however, were dinged by a $205mn loss on the investment side of the business, which dragged the overall results down to a $217mn net loss, a reversal from $168mn in net income in last year’s first quarter.
SiriusPoint’s share price was trading down around 6 percent as of 1.30pm on Thursday, on a day when the majority of US-listed property casualty stocks were down.
Sankaran told investors on Thursday morning that the company has made significant progress in re-shaping its underwriting portfolio, and said that the work the company is doing to re-balance its investment portfolio away from its hedge fund re heritage remains ongoing.
“This has been a dramatic capital reallocation,” said Sankaran, who outlined the depth of his firm’s re-underwriting initiatives.
Heavy re-underwriting lift underway
Sankaran said Thursday he was “extremely pleased” with the underwriting progress, as the company has been “ruthlessly” executing on what he said is a “complete” re-underwriting of the reinsurance portfolio.
Among the steps taken has been a dramatic reduction in property cat exposure, with Sankaran saying SiriusPoint had cut its global property aggregate exposure by 30 percent as it pulled back from “select regions and perils” where it views there to be heightened risk and pricing to be inadequate.
The CEO said SiriusPoint has non-renewed around $700mn in reinsurance business, a figure he expects to ultimately rise to $1bn, as part of a series of moves that include the previously-disclosed decision to exit writing direct and facultative property business out of London, on top of non-renewing most of its cat-exposed property risk and US property pro rata deals.
At the same time, SiriusPoint has also exited a significant volume of US casualty pro rata reinsurance accounts. It plans to replace this with “structured and niche business” that Sankaran says is expected to outperform “high acquisition-cost, commodity business”.
Also, the company has exited what it termed legacy Third Point Re “float transactions”, while also non-renewing books of political violence, workers’ comp cat, and also cyber and war cover written out of Bermuda.
Sankaran has acknowledged in the past that the major re-underwriting exercise underway would take some time to complete, as business steadily comes up for renewal, and the company continues to balance distribution relationships with its re-positioning.
“Our re-underwriting is a continuous process, with account-by-account scrutiny across our portfolio”, Sankaran said on the earnings call. This includes a close examination of deal structures, target economics and distribution as well as other factors including the market cycle and the (re)insurer’s view of a ceding company.
To that end, the executive said his company has flagged an additional 20 percent of accounts in its reinsurance portfolio for non-renewal or increased scrutiny, with a focus particularly on where “the market cycle has peaked or conditions are deteriorating”.
Sankaran also said that SiriusPoint expects its lower property aggregate limit deployment to create a near-term drag on financial results, in light of the fixed costs tied to the retrocession cover it has in place. However, he also noted the company is retaining the option to deploy more aggregate during 1 June renewals, should pricing and terms be favorable.
“This strategy includes shifting to a more nimble, lower cost operating model so we have the ability to flex our top line up or down in response to market conditions,” he said, “and avoiding the top line pressures associated with high fixed operational retrocession expenses.”
In addition to “remediating, refining, and reduc[ing]” SiriusPoint’s underwriting appetite, Sankaran also noted that the company had executed a deal for a loss portfolio transfer with Compre that would further accelerate the business’s re-allocation of capital.
Strategic partnerships strategy takes shape
The executive said the re-underwriting and remediation efforts have been undertaken to reposition the company away from reinsurance towards primary insurance and business generated through MGA deals and strategic partnerships. And in reinsurance, the company is generally aiming to improve its position with more niche and non-commoditized business.
The changes made have been with the intention of re-deploying capital towards the growth “and expected value creation” of its insurance and services segment.
The CEO highlighted what he viewed to be his company’s competitive advantage of partnering with MGAs that have a differentiated offering. He argued that strong strategic and incentive alignment, through the formation of multi-year partnerships, was key to driving value for both businesses.
Sankaran said Thursday the company was launched in 2021 “with the capital, platform and expertise to address legacy challenges and unlock the potential that exists in our company”.
He also said that despite announcing over 20 strategic partnerships with MGAs and insurance services providers in the last year, the company has been “very selective” in its dealmaking, aligning itself only with management teams and businesses it believes can establish strong, defensible competitive moats.
“Our MGA-first model allows for sustainable value creation, with differentiating technologies more likely to be developed at small innovative organizations,” Sankaran said, noting that “the best underwriting talent is increasingly gravitating towards entrepreneurial managing general agents”.
The company began separately breaking out results for its insurance and services segment and reinsurance segment beginning in the fourth quarter of last year.
The executive highlighted that the insurance and services segment delivered $24mn in income – including $10mn of underwriting income and $14mn in fee income – to start the year, and reported a 95.5 percent combined ratio.
The noteworthy deals the company has completed include a mix of investment and capacity deals designed to incubate MGA startups by offering startup capital operational support licenses and expertise to allow entrepreneurs to launch new businesses at record time.
In the last two years the firm has thrown its weight behind MGA and insurance services businesses that include Arcadian Capital, Banyan Risk, LimitFi, Joyn, Parameter Climate, Corvus, Honeycomb, Players Health, and Vouch.
Buybacks and investment portfolio pivot
Sankaran argued that with the company having deep conviction in the path towards long-term profitable growth, it sees “significant intrinsic value” in its share price, and has been deploying capital into share buybacks.
The closing share price of $6.07 on Wednesday roughly amounts to 0.39 times SiriusPoint’s reported book value.
Sankaran called the investment loss in the quarter “very disappointing”, and said that the company was moving as quickly as possible to pivot its investment strategy away from volatile equity securities. The firm redeemed $100mn of its investment on Third Point LLC’s Enhanced Fund in Q1, which followed $450mn in Q4. The redemptions are expected to continue.
Sankaran said the company was “extremely excited” about expanding its investments in Third Point’s less-volatile managed credit fund.
The former AIG finance chief continued that much of SiriusPoint’s expected value creation is to come from the growth of its insurance and services unit, as it pivots its identity from “a traditional (re)insurer” towards a new path the executive team has said is driven by the development of its “strategic partnership model”.
The company bought back $5mn in shares in the first quarter. It currently has $57mn remaining in the company’s current share buyback authorization.