SiriusPoint Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts are U.S. dollars in millions unless stated otherwise. Results include Sirius Group only from its February 26, 2021 acquisition date, so year-over-year comparisons are materially affected by the transaction and are not directly comparable. SiriusPoint was formed from the acquisition and renamed from Third Point Reinsurance Ltd.
Financial performance and position
- Revenue and earnings: Total revenues were $451.1, compared with a loss of $38.7 in Q1 2020. Net income was $132.4 versus a net loss of $183.6; income available to common shareholders was $130.9, or $1.07 basic and $1.05 diluted per share. Q1 2021 included $153.2 of income from related-party investment funds and an $8.6 bargain-purchase gain.
- Underwriting: Net premiums earned were $256.0, up 75% from $146.3. Net underwriting income was $8.7 versus $2.0, and the combined ratio improved to 96.6% from 98.6%. Segment combined ratios were 84.9% for Accident & Health, 100.2% for Specialty, and 93.3% for Property; Runoff & Other recorded a $1.7 underwriting loss.
- Investments and returns: Net investment income was $186.5, compared with a $185.0 loss in Q1 2020. The related-party fund investment contributed $153.2; management reported a 14.6% return for TP Enhanced Fund. Debt securities recorded a $7.8 investment loss, while other long-term investments generated $49.2 of investment income. Results therefore reflect substantial investment-performance sensitivity.
- Cash flow: Operating activities used $48.8 of cash, versus $3.2 used a year earlier. Investing activities provided $624.0, principally reflecting the acquisition and acquired cash; financing activities provided $54.6. Cash, cash equivalents and restricted cash ended at $2,343.7.
- Liquidity and capital: Cash and cash equivalents were $932.4; restricted cash was $1,411.3, generally supporting letters of credit or reinsurance obligations. Total shareholders’ equity was $2,609.3. The company reported a new $300.0 three-year revolving credit facility, with no borrowings outstanding at quarter-end, and said it expected cash and operating cash flows to meet needs for the next 12 months.
- Debt: Total carrying-value debt was $829.0, up from $114.3 at year-end, primarily due to debt assumed in the acquisition. It comprised $406.8 of 2016 senior notes, $307.9 of SEK subordinated notes, and $114.3 of 2015 senior notes. Interest expense was $4.9. The company reported covenant compliance.
- Margins and book value: Annualized return on average common shareholders’ equity was 26.4%, compared with negative 55.5% in Q1 2020. Basic book value per share was $15.19, down from $16.88 at December 31, 2020; tangible basic book value was $14.10. Management attributed the decline primarily to dilution from acquisition-related shares and securities, partly offset by quarterly earnings.
Material changes versus prior period
- The February 26 acquisition had a total purchase price of $1,077.2 and added a global multi-line insurance and reinsurance business. The company recorded an $8.6 bargain-purchase gain and recognized $174.2 of acquired intangible assets at quarter-end.
- Gross premiums written increased to $366.6 from $125.7, largely because of the acquired Sirius Group business. The 2021 period includes only about one month of Sirius Group results; its acquired-period contribution was $146.2 of revenue and $23.3 of net income.
- Net corporate and other expenses rose to $68.3 from $6.4. Q1 2021 included $40.4 of acquisition-related corporate costs and $17.4 of expected credit-loss expense, largely associated with acquired assets.
- At acquisition, the company increased certain casualty loss reserves by $70.0 to align reserving approaches and reflect accumulated experience and social inflation trends. Q1 recorded $0.4 of unfavorable prior-year reserve development.
- Effective January 1, 2021, the company changed assumed written-premium recognition to recognize premiums ratably over policy or treaty terms. The change was applied retrospectively and had no effect on previously reported net income or equity.
Outlook, risks and unusual items
- Management described the acquisition as expanding underwriting capabilities, geographic reach and product offerings, and said the investment portfolio would be repositioned toward a more diversified, shorter-duration fixed-income allocation while retaining a strategic Third Point relationship. No quantified earnings or revenue guidance was provided.
- Management cautioned that integration, growth costs and execution could affect results; the quarter is not necessarily indicative of future performance. Internal-control processes were materially affected by the acquisition, and Sirius Group was still being incorporated into the company’s evaluation of internal controls. Management concluded disclosure controls were effective as of March 31, 2021.
- COVID-19 remains a significant uncertainty across claims, premiums, investments and counterparties. The filing disclosed $2.9 of Q1 COVID-19 losses in Specialty and cited combined estimated ultimate COVID-19 losses of $364 for SiriusPoint and legacy Sirius Group. Coverage disputes, reserve uncertainty, inflation, catastrophe losses and potential adverse legal or regulatory developments could increase losses.
- Winter Storm Uri caused $5.7 of net catastrophe losses in the reported period; including Sirius Group losses incurred before closing, management cited total Q1 catastrophe losses of $39.5.
- Key financial risks include reserve adequacy, investment volatility and concentration in TP Enhanced Fund, limited withdrawal rights and related-party conflicts, foreign-exchange exposure, credit and reinsurance counterparty risk, regulatory limits on subsidiary dividends, debt service, integration and cyber risk. A hypothetical 10% change in related-party fund values would change carrying value by approximately $120.9.
- The filing reported no material legal proceedings and no material changes in contractual obligations beyond those discussed. The company did not pay common dividends during the quarter and stated it did not intend to pay them for the foreseeable future.
Important facts for investors to verify
- How much of earnings and book value performance is sustainable underwriting versus investment gains, including the related-party fund’s returns and fees?
- How do acquired reserves develop, particularly casualty reserves, COVID-19 claims and catastrophe losses, and what portion of acquired results is representative of a full quarter?
- What are the integration costs, expected synergies and progress in incorporating Sirius Group into internal controls?
- How much reported cash and investment value is restricted, illiquid or subject to withdrawal limits, and what collateral capacity is available as business grows?
- How will debt, preference shares, warrants, contingent value rights and other acquisition consideration affect future interest costs, dilution and common-share book value?
- What changes occur in credit ratings, regulatory capital, tax-asset recoverability, or dividend capacity across operating subsidiaries?