SiriusPoint Ltd. (SPNT) Earnings Call Transcript & Summary

Okay. We're moving along. If you guys can find the seats. Folks on the side here, if you could push off a little bit, that'd be great. Next up is Third Point Re. And from the company is Dan Malloy, CEO. Dan joined Third Point right around its founding.

That's right.

I guess at the founding, became CEO in May of 2019. Prior to that, he was Chief Underwriting Officer. Dan began working in the reinsurance business almost 40 years ago. Sorry.

Yes. Yes.

It's in your bio.

Yes. I know. I know. I look at that. I'm amazed.

Started at Sedgwick, which most of you probably haven't heard of, but I remember the company. And of course, reinsurance is actually a very natural place to start one's career with a degree in biology from Dartmouth. Biology, reinsurance, happens all the time.

Third Point began a transition of its business last year. We're pleased to get an update from Dan. And Dan, that's kind of where I want to start. Third Point was founded with a very definitive mission and very unlike other companies. And I guess really over the -- I don't have the exact date -- you can remind me, but there has been a shift, both from an underwriting standpoint and an investment standpoint. So if you could -- let's really take a step back, talk about what went behind the decision to make this change and give us an update on how it's going.

Sure. That's great. Right. As you said, we started in 2012 with a mandate to have an underwriting strategy that I would say a do-no-harm underwriting strategy that would write premium and accumulate float to act as grist for the mill to produce superior investment returns with Third Point. So we flash forward in a world where, as you think about 2013, '14, '15, '16, no cat losses, companies growing, a lot of competitive juices flowing, what we found was the ability to run at sub-100 combines on an ex cat portfolio was very challenging. And again, I think it's interesting in an era where people are now talking about social inflation and looking at adverse development, I mean, we wrote an ex cat portfolio for 7 of our 8 years and it ran at about 105%. We've had 13 quarters of no prior period adverse development. So I think we've put a lot of effort to run at 105%. It's tough to wake up in the morning and saying, the world thinks you're a crappy underwriter because you're doing that. Now if I was to be cynical, I could say, the rest of the world was hooked on no cat losses to produce sub-100%. We had to do it without cat losses. So starting just about 2 years ago, we made the decision that we were going to have to deliberately take on more underwriting risk in order to drive our combined ratios below 100%. We're a reinsurance-only shop. We tend to have a relatively small number of bespoke -- I hate using that word. A lot of them are structured. A lot of them are very one-off to specific clients. To move away from that to writing a more market portfolio, including higher-margin business like property cat, the specialty lines. So we went out during 2018, hired teams of people. We began writing that business in the first and second quarters of 2019. And we're now seeing the positive effects that, that portfolio is having. So incrementally -- and we're in a somewhat interesting position that we don't report fourth quarter until the end of February, so I'll be telling you about third quarter numbers. Through the end of 3 quarters, our combined ratio is hovering around 103% and heading down as the earnings from the property cat came in and the changes that we are seeing in terms of favorable increases on our ex cat portfolio. So we also -- having performed well on the investment side, we're looking at about a 14% ROE through 3 quarters. We had a 12 -- a little under 13% return for the full year '19 since we have reported our investment results, which we do on a monthly basis. So we have an improved underwriting result where we believe that as the full effect of the earning in of the property cat portfolio and the specialty portfolio kicks in, in the first and second quarters that we expect to be below 100% combined for the first time in what will then be about 8.5 years. So we're very excited about that change. And in order to take on more underwriting risk, we reduced our overall exposure from Third Point to the point where it is about 1/3 of our portfolio with fixed income being the other 2/3. So what we see going forward would be underwriting being a contributor to profitability rather than a drag. We see a meaningful but not overwhelming position with Third Point, who we still think are terrific partners and great investors. And then we see a significant contribution, albeit not as dramatic, from the fixed income portfolio. So we're seeing instead of one source of earnings, 3 sources of earnings. We see ourselves well on the way to be able to produce the kind of results that we think would merit a rating or a valuation closer to our industry peers, particularly in an environment where we do not believe we have significant prior period exposure certainly from additional development on cat business because we haven't participated in those earlier years and looking very, very closely at our reserves. We're doing that on a quarter-by-quarter, account-by-account basis.

The goal to get the combined ratio down to 100%, which you suggest, really started your effort to change the mix of the portfolio, the mix of the business. If you had a combined ratio somewhere between 100% and 105% in the old model but had the kind of investment returns, the math works. I mean, you could have had a good overall ROE even with a combined ratio over 100%. So I don't quite understand why you had to -- now I could see you saying, "We want to have better balance. We think it will help the multiple." Was that really a more important factor than just saying, "Hey, we got to be below 100%?"

Well, I think it's a couple of factors. It's probably psychological. The market views 100% combined as an important number. Our rating agency, A.M. Best, views a successful reinsurance company as one that runs below 100% combined. And that was reinforced to us in 2017, again, because we didn't write property cat and we had a very good year on investments. We ran at 105% and had a 20% return on equity. And that was the point of time when it was saying, you guys are not a good reinsurance company because you're running at over 100%. So I can't fight City Hall in that sense. So what I'm pleased about is, it's incremental change that's enabling us to drive these improved results and it's a favorable trading environment and that we think we can create value on the entire portfolio to the point where even ex property cat, I believe, we have a realistic expectation that through the rate increases we're seeing, the change in terms and conditions and the change in our portfolio mix, we could run at sub-100% ex property cat. Our target for 2020 is going to be in the 95% to 97%, again, subject to mother nature.

And the ongoing exposure of about 1/3 of your portfolio to Third Point LLC, the hedge fund, is that a fluid number or are you guys going to lock that down and that's what you're going to be running with?

It's fluid. Now it's fluid subject to some constraints in that there's a risk charge associated with the assets invested in Third Point that are significantly higher than our fixed income portfolio and big parts of our liabilities. So if, for instance, Third Point had successive year-on-year of 20 and 25 and that 35 grows to 45 or 50, it's going to be dragging down our BCAR score. So we want to make sure that we are keeping the highest level of -- our BCAR score needs to be in the highest category while we are driving down the combined ratio and we're looking to grow the company. So there's a couple of points that we have to navigate around, a couple of guardrails that we want to make sure we're not bumping up against.

Now that makes sense. So you haven't announced 4Q numbers yet, but here's a question. Since you've been assuming catastrophe risk, have your cat losses been in line with what you might have expected given the events that have occurred?

Good question. When we started writing property cat, the team and I sat down and we said, "Listen, we do not want to be going into property cat and creating surprises." So we are looking to write a portfolio that, as opposed to being optimized in and of itself, is going to be optimized for profitability. And so that translates from our perspective into looking at peak zone exposures where the models are at least well proven. We won't say accurate. So that would speak to Gulf Coast, East Coast, West Coast U.S. It speaks to Japan. It doesn't speak to writing in the swaths of the world where we don't think the models work, nor do we need that to fill in our portfolio because we have asset risk. We have risk from our existing casualty portfolio. We have our mortgage portfolio. And so we get a diversification credit for that. So we want to optimize profitability on property cat so we created a personal lines, well-modeled peak zone portfolio. And the portfolio performed as we would have expected it to through the 3 cat losses that have come in, in 2019.

No big surprises?

No big surprises.

So in other words, you don't have to necessarily have a diversified cat portfolio because cat is a diversifying risk for you?

Is inherently diversifying. So the marginal return on our regulatory capital is extremely high because we've basically done the reverse of what most other companies did. They started writing cat and diversified into other lines of business. We wrote everything but cat and backed in the property cat. So that $63 million of property cat through the first 3 quarters of 2019 ends up being something close to free for us in terms of additional capital. Now the next $50 million of cat would attract more capital and it would get progressively more difficult. Now we freed up capital by disinvesting a portion of our Third Point exposure. We can't keep pushing that button indefinitely because our expected returns drop, and the capital benefit progressively get smaller and smaller as that portfolio would shrink. So we're trying to get into this Goldilocks blend where we're taking advantage of the efficiencies and the diversification of these different portfolios and we're not going to be overweight.

So net-net, taking on more cat risk, reducing the hedge fund risk, you net-net freed up capital?

Yes.

Which you can deploy by growing the business more or buying back stock, if you wanted to?

Yes. Growing the business is another part in addition to moving into higher-margin lines of business. Since we currently don't enjoy a currency that is trading at a multiple of book, what we're looking to do is to make strategic acquisitions, very directed investments. I should say investments rather than acquisitions. We have a number of clients who are looking to grow in an improving market. And they might be distribution. They might be start-ups. They might be people looking for balance sheets or acquiring additional balance sheets. And reinsurance isn't always the right answer for them. So some small directed investments where we can then guarantee ourselves a preferred showing of reinsurance over a multiple year period allows us to sort of selectively invest and lever the attractive business to us.

In your past parts of your career, have you ever tried that model where you're making some investments? Not many companies have really tried that.

Yes. We certainly saw that in my days at Centre Re with a greater or lesser degree. We're attempting to be a lot less ambitious than that. We certainly saw it when I was at Benfield, where sort of small directed investments and our clients kind of locked in a preferred position. David Govrin, who is ex-Berkshire Hathaway, ex-Goldman, is the guy leading that initiative. He's here in the U.S. So I think that we are very comfortable. We've done 3 of these transactions, one of which has been announced. And we're very comfortable in terms of developing a closer tie to people that we want to be in business with. And that might take the form of not only writing that check and getting a long-term reinsurance arrangement, but we might be an observer on a Board or we're acting more like partners rather than just a reinsurance provider.

Yes. Do you worry about the risk you're taking? You're taking reinsurance risk and now you have an equity risk as well in the company. I guess these are relatively small.

Yes. These are relatively small positions that we're taking on.

The one you announced, how big an investment was it?

$3 million.

$3 million.

Yes. Yes.

Okay. So relative to your balance sheet...

Right. Relative to $2.5 billion balance sheet, we did, again, very small, very directed.

Got it. So in the model you started the company with, you had a risk management framework you were managing the company with. When you change the model, can you take that same framework and just apply it to a somewhat different model or do you have to think about risk management a little bit differently? I'm not sure that's the right question, but do you have to change how you think about risk management?

Clearly, the risks that we're assuming in these higher-margin businesses are more subject to event risk, shock risk, turning on the TV in the morning and seeing what's going on. We're largely a liability portfolio, often very highly structured, have more of an actuarial sort of longer term sort of economic exposure. So again, keeping track of aggregations and keeping track of exposures is important and it's both real-time and over the long term. So we think we have a pretty robust risk management environment. And it helps -- again, we're a tight group. There's 35 of us. We have probably 10 people that are engaged in the actual production of that risk and management of that risk. And we have senior people who are working very closely, actuarial side, finance side and risk management side.

How many people are in Bermuda of the 35?

22 of the 35 are in Bermuda, and we have 2 in London and the balance here in the U.S.

Got it. I'm going to visit the Bermuda location, if you don't mind.

Yes. You should. Yes. Jersey City is lovely this time of year, though.