Serious Change Underway at SiriusPoint

SiriusPoint has seen a cluster of challenges over the past two years—ranging from an incomplete merger integration to persistent underwriting and investment losses to several leadership shake-ups.

First there was the merger. Third Point Re merged with Sirius International Insurance Group in February 2021. Then in April of this year, hedge fund manager and major SiriusPoint shareholder Daniel Loeb announced he was looking to take the company private, which Loeb said could put SiriusPoint in a better position for a turnaround.

A month later, the company acknowledged that would not happen, with the parties unable to agree on a deal value and both sides stating that the company was on the path to profit in spite of that.

In a Securities and Exchange Commission filing, Loeb, who owns about 9.3% of SiriusPoint, reaffirmed his confidence in the company’s management team, led by its new chief executive officer, Scott Egan. The team is taking “the necessary steps to position [SiriusPoint] for long-term success by strengthening its balance sheet and enhancing its credit ratings,” according to the May 12 regulatory filing.

Yes, the company has seen some turmoil, but smoother seas could be ahead.

Although the turnaround strategy was already under way when Egan joined the company as CEO in September 2022, it wasn’t progressing fast enough, Egan admitted in an interview with Carrier Management, which took place before Loeb made his proposal. In a letter to shareholders in SiriusPoint’s annual report for 2022, Egan acknowledged that the company “has not delivered acceptable levels of performance,” and as a result, he and his team are “focused on repositioning the business” and aim to deliver a “sustainably profitable business.”

“I’m very clear that the level of performance historically has not been good enough,” he said during the interview.

Performance looked better in first-quarter 2023.

• SiriusPoint reported a profit of $138.6 million, compared to a loss of $217 million in first-quarter 2022.
• Consolidated underwriting income was $156.5 million, compared to $33.5 million for the same period in 2022.
• The company reported a core combined ratio (excluding runoff business) of 80.5, an improvement over the 97.5 reported in Q1 2022.

During the company’s first-quarter earnings call on May 4, Egan noted that the combined ratio of 80.5 was supported by significant reserve releases. “Overall, we are pleased to report continuing performance improvement in Q1 as we build on the progress made in Q3 and Q4 of last year,” Egan said. “To put this in perspective, this is the first time we have delivered a quarterly profit since Q2 of 2021. Importantly, we have seen positive capital generation across all parts of our business—underwriting, MGAs and investment returns.”

Related: The Pros and Cons of Going Private

What is SiriusPoint doing to accelerate its restructuring?

In the interview, Egan said he and his team are focusing on three key pillars to build the SiriusPoint franchise and create a stronger, more sustainably profitable business—by driving simplification, reducing volatility and enhancing profits.

Simplifying Sirius

Diving into the simplification pillar, Egan said a key part of the work in this area is to drive home the integration of Third Point Re and Sirius Group, which came together in 2021 but haven’t yet been merged completely. He emphasized, however, that integration does take some time for legacy organizations with multiple geographic locations.

“You have to work harder to make sure that you operate as one company. I think there’s more that we can do to work as one team globally, with one set of values, one approach and consistency,” he said, explaining that the cultural dimension of a merger is “hugely important.”

“We have a real opportunity to act as ‘One SiriusPoint’ and simplify the organization.”

Over his 25-year career in the insurance industry, Egan has been involved in four different mergers and acquisitions, most recently at RSA Insurance. He knows from experience what is required to bring companies together both financially and culturally.

“It’s really important to review every aspect of what the combined SiriusPoint should look like going forward. And that means we should look at our infrastructure, making sure that the company’s operating model is leveraged more effectively and efficiently. And we need to do all this through a customer lens,” he added.

A well-handled integration is vital in helping SiriusPoint deliver on its strategy, he confirmed.

During the earnings call, Egan said SiriusPoint is providing internal incentives to drive underwriting profits as part of its commitment to building a culture of strong underwriting. “[W]e are focused on creating a performance culture that rewards underwriting performance and aligns closely with shareholder value creation.”

To that end, the company has made changes to its annual incentive plan for 2023. “This sets out clearly that the target bonus will only be paid if the combined ratio for the continuing operations is 95.7,” he said during the earnings call.

Egan anticipates that its simplification efforts will reduce costs by more than $50 million by 2024.

Reducing Volatility

Moving on to discuss the second pillar of SiriusPoint’s drive toward more sustainable performance—the reduction of volatility—Egan said this is being done in two ways.

“The first is in our underwriting, where we took some strong decisions in our international business at Q3 [2022] around reducing our property-cat exposures,” Egan said, noting that this move has had a huge impact on the company’s volatility profile, cutting its probable maximum losses for property-catastrophe by 50% on a per occurrence basis. It has largely exited property-catastrophe reinsurance for international risks, although it still maintains a U.S. property-cat book.

“You cannot be an underwriting-focused business and not make money. I’m afraid that tends not to work for very long,” he said.

The company’s losses of $81 million from Hurricane Ian are evidence that the work to reduce underwriting volatility is working, Egan said. (Industry losses from Hurricane Ian are estimated at $50 billion-$65 billion, according to Swiss Re). “If you look at the impact of Hurricane Ian for us as a company versus many of our peers, it was about 4% of our book value as a hit. That put us very much at the lower quartile of industry impact.”

He said the market average was somewhere between 6.5 and 7%, while some companies had as much as 9% of their book value. “So, for us, Hurricane Ian was an excellent proof point that the actions that we’d taken to reunderwrite our U.S. exposures worked.”

Another important area of work to reduce volatility is with the company’s investment portfolio. One of SiriusPoint’s predecessor companies, Third Point Re, was incorporated in October 2011 with the backing of Loeb’s hedge fund Third Point LLC. Known at the time as a “hedge fund reinsurer” or a “total return reinsurer,” Third Point Re aimed to write a lot of long-tail business and make money on the investment side—on the float—while absorbing underwriting losses.

However, investment returns weren’t meeting expectations in volatile financial markets, at the same time SiriusPoint was reporting underwriting losses with average combined ratios of 105.6 in the years from 2014 to 2018. As a result, in 2019, AM Best revised Third Point Re’s outlook to negative and said the company needed to “deliver a sustainable level of technical profitability going forward.”

Third Point Re began reunderwriting its insurance portfolio and de-risking its investments.

In April 2023, AM Best affirmed SiriusPoint’s Financial Strength Rating of “A-” (Excellent) and Long-Term Issuer Credit Ratings of “a” (Excellent) of the rated operating subsidiaries. “The ratings reflect SiriusPoint’s consolidated balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management,” said AM Best.

In March, Fitch Ratings revised SiriusPoint’s rating outlook to Stable from Negative, affirming SiriusPoint Ltd.’s ratings, including its “BBB” Long-Term Issuer Default Rating (IDR), “BBB-” senior debt rating and “A-” (Strong) Insurer Financial Strength (IFS) rating of SiriusPoint’s operating subsidiaries. The rating outlook has been revised to stable from negative.

Generating Profits

During the CM interview, Egan went on to discuss the third pillar of SiriusPoint’s strategic plan: its focus on generating profits and targeting a double-digit return on equity (ROE) by 2024.

“I’m very clear that we need to improve our performance. If I look back at 2022, it showed good improvement on 2021, and I feel confident…that we are on a good flight path,” he said. “We are absolutely focused on rebuilding that credibility and track record with the market, but there’s no room for complacency.”

Third Point Re reported its first underwriting profit in the first quarter of 2020 and its successor, SiriusPoint, returned to a quarterly profit in first-quarter 2023—its first since second-quarter 2021. For the full year ending Dec. 31, 2022, SiriusPoint’s core results included a loss of $3.5 million, compared to a loss of $152.4 million for 2021.

The 2022 loss comprises an underwriting loss of $34.8 million (101.6 combined ratio) and net services income of $31.3 million, compared to an underwriting loss of $163.4 million (109.5 combined ratio) and net services income of $11.0 million for 2021. Despite the losses, the fundamentals are moving in the right direction, analysts say.

“SiriusPoint is expected to report adequate operating performance over the underwriting cycle. However, recent technical performance has been weak, demonstrated by combined ratios of 120 and 107 (as calculated by AM Best) in 2021 and 2022, respectively,” said AM Best in its April ratings commentary. “Underwriting profitability is expected to improve and be more stable as SiriusPoint’s management continues to rebalance the group’s business mix away from catastrophe-exposed property business toward less volatile accident and health and specialty lines.”

“The outlook revision to ‘stable’ reflects recent underwriting performance improvement under a revamped [SiriusPoint] management team, including a new CEO in September of 2022, that has strategically repositioned the re/insurance underwriting portfolio to improve profitability and lessen overall volatility, including meaningfully decreasing property-catastrophe risk,” said Fitch Ratings in its March ratings statement for SiriusPoint. “The company has also sizably reduced its exposure in Third Point LLC hedge funds and reinvested into less volatile, high-quality, fixed-income investments.”

The company’s future balance sheet will also benefit from a loss portfolio transfer to Compre, a Bermuda-based legacy acquisition company announced in March, which is expected to be completed in the second quarter. The LPT covers approximately $1.3 billion of reserves, underwritten by SiriusPoint’s international reinsurance business and its Lloyd’s Syndicate 1945. The portfolio comprises several classes of business from 2021 and prior underwriting years, with SiriusPoint retaining claims handling authority on ongoing business.

The LPT will enable SiriusPoint to release more than $150 million of capital, “which gives us future capital flexibility, further strengthening an already strong balance sheet,” Egan said during the earnings call. In August 2021, an initial LPT had Compre acquiring a $417 million portfolio of legacy liabilities from SiriusPoint.

Main Sources of Earnings

Egan said the three most important sources of earnings for SiriusPoint are underwriting, investments and MGA fee income, which is capital light, attractive and an important earnings producer in its Insurance & Services segment. “I think these three key sources of uncorrelated earnings, which are actually important from an investor perspective, give us a very strong and powerful business model.” (Its other principal segment is Reinsurance.)

Discussing its MGA business, Egan said SiriusPoint is a “happy owner or equity investor” in MGAs, where they complement underwriting. SiriusPoint wholly owns or is a majority investor in five large MGAs, which provided nearly $700 million of premiums in 2022: Alta Signa, Arcadian Risk Capital, ArmadaCare, Banyan Risk and International Medical Group (IMG).

The company also has an additional 30 equity stakes in MGAs and InsurTechs, which Egan said require a lot of time and attention—and is too high a number for a company of SiriusPoint’s size to manage. However, in many cases, SiriusPoint will retain an underwriting relationship despite the change in investment strategy.

“We are reviewing our options to optimize the number of equity stakes we have with the aim of having fewer and deeper” ties, Egan said during a fourth-quarter earnings call. (During the first-quarter call, Egan reported that SiriusPoint sold an equity stake in Distinguished Programs for $7.5 million, releasing roughly $4 million of capital while agreeing on a multiyear program to provide capacity. In January, Distinguished announced a new partnership which has a team of 24 SiriusPoint professionals moving to Distinguished to write environmental, construction pollution and professional insurance—still on SiriusPoint paper.)

“Our philosophy is to be more focused and to have fewer and deeper relationships with MGAs that align strongly with our underwriting appetite,” he said. No time scales have been set for reducing the company’s commitments to MGAs.

Is Bigger Better?

When Egan was asked if he’d like SiriusPoint to be larger in size as a reinsurer—because some say that bigger is better in the world of reinsurance—he emphasized that it’s not the size of the company that drives him. (SiriusPoint was ranked 32nd on AM Best’s list of reinsurance groups in 2021.)

“I have an ambition over the medium to long term to grow this business. I think predominantly that growth will come from our Insurance & Services segment rather than reinsurance, but I’m very happy with our reinsurance business, because it gives us great flexibility and agility to enter markets in different ways.”

One of the key cultural traits SiriusPoint is pursuing is maintaining its flexibility to access markets in the best economic way for the market conditions. “Sometimes that will be via the reinsurance route and there’ll be other times where it’s via the Insurance & Services route.”

This article first appeared in Insurance Journal’s sister publication, Carrier Management.