Enstar Group Ltd (ESGR) 2022 Q2 法說會逐字稿

Hello, everyone. I'm Matthew Kirk, Group Treasurer and Head of Investor Relations. Thank you for listening to Enstar's second quarter 2022 earnings audio review with our CEO, Dominic Silvester, and our CFO, Orla Gregory.

Before we begin, I'd like to remind everyone that this presentation contains forward-looking statements and non-GAAP financial measures. Important information regarding these statements and measures is outlined in the text that appears below the link to this recording. With that, I will turn it over to Dominic.

Thank you, Matt. And thank you to all for listening today. Before we get into the quarterly results, I'd like to mention our recent announcement.

We've signed an agreement for a loss portfolio transfer with Argo Group to reinsure a number of its US casualty insurance portfolios, including construction relating to accident years 2011 to 2019. Enstar will provide ground up cover of $746 million. The transaction provides the opportunity for Enstar to bring our legacy expertise to Argo's US casualty book while collaborating with Argo to support them with their risk management objectives.

Much like the first quarter, ongoing economic uncertainty, which led to rapid inflation and rising interest rates, drove unrealized losses in our investment portfolio and adversely impacted our results. While our second quarter losses fell short of our expectations, we expect these unrealized losses, particularly those relating to our core fixed income portfolio, to be temporary. And we remain confident that our investment strategy can generate strong value for the long term.

Beyond the industry-wide market dislocation, we had several accomplishments in the quarter, including completing and integrating the industry's third largest-ever loss portfolio transaction with Aspen, maintaining a strong and disciplined balance sheet which is particularly helpful during times of the economic uncertainty. Whilst our book value was impacted by the continuing volatility, we have significant liquidity to support policyholder obligations.

We're also pleased that we completed our near-term refinancing needs prior to interest rates moving higher. All of our debt obligations have a low cost of capital and non-mature before 2029.

Lastly, we received an upgraded rating from Fitch and our Bermuda solvency capital position has increased since year end. Importantly, we have significant financial capacity to continue to execute on larger and more complex opportunities, where we have a competitive advantage due to our scale, depth of experience, and our ability to drive positive claim outcomes.

In fact, our pipeline remains robust and we are evaluating a substantial number of global opportunities in various sizes and structures. We remain disciplined in our underwriting approach.

And we will only commit to a transaction when it satisfies all of our due diligence criteria, properly considers the current interest rate and inflationary environment, and is clearly accretive to shareholder value. As we continue to execute on our strategy and build on our success as a leading provider of capital release solutions, we remain focused on providing attractive returns to our investors over the medium to long term.

Before I turn over to Orla, I wanted to spend a few moments on our recently announced management changes. Paul O'Shea has decided to retire in March 2023 after 28 years with Enstar.

I'm delighted that he will remain as an Enstar director. We've worked on many projects while building Enstar from a niche start-up into the leading global run-off specialist of today. Paul has been critical to our success. On behalf of myself, the Board and our 830 employees, I thank Paul for his dedication and support.

David Ni, who is our Chief Strategy Officer, will oversee M&A. David has been driving our M&A platform since he joined our company nearly three years ago and is a great asset to Enstar and a key player in the future leadership of the company.

Finally, we formalized Orla's appointment as our Group CFO. Paula has served in numerous roles at Enstar over the past 18 years, including COO. Her extensive experience make her particularly suited for this leadership position, and she will continue to drive and support our growth. I'll now turn it over to Orla.

Thank you, Dominic. During the second quarter, we experienced negative investment performance, driven by the rapidly rising interest rate environment and other economic uncertainties as Dominic noted.

We recognized $591 million of net unrealized investment losses, which brought our six-month total to $972 million. These results drove our second quarter net loss of $493 million and our six-month net loss of $775 million, as well as return on equity for the three- and six-month periods of negative 9.8% and negative 13.9%, respectively.

From a technical perspective, we recorded positive prior period development, or PPD, of $79 million in the quarter and $222 million for the six months ended June 30. The six-month result translates to an annualized run-off liability earnings, or RLE, of 3.7%.

On an adjusted basis, our six-month RLE was 0.5%. As is typical with our business model, we anticipate favorable PPD in the second half of the year as we complete our annual loss reserve reviews in the third and fourth quarters.

Positively, our solvency or economic balance sheet became stronger during the second quarter. This is driven by two factors -- first, while our solvency ratio reflects losses on investments, it also reflects the impact of a higher discount rate on our reserves.

Second, our insurance assets are shorter in duration than our insurance liabilities. As a result, the adverse impact of rising rates on our investment portfolio has been outpaced by the larger increase in reserve discount, resulting in a strengthening of our solvency metrics.

Given our strong solvency position and balance sheet, we purchased $163 million of the company's shares during the six months at a weighted average discount to book value of 20.3%, while retaining ample capacity that can be deployed for future M&A. In addition, as our fixed income assets mature and we complete future transactions, we will be able to invest fixed income assets at higher interest rates, which improves our return profile.

Dominic mentioned that we closed our transaction with Aspen in the quarter, bringing an incremental $1.9 billion of loss reserves onto our balance sheet. We have assumed full claims control for this portfolio, taking on 38,000 claims, which is almost a 40% increase in our total claims population across the group.

We believe this demonstrates our scalability in our operational capabilities. Our approach to active claims management is highly differentiated and key to our success in our run-off business. As such, we consider this our front office and core competency.

On the investment side, we have deployed $1 billion into non-core mandates since the beginning of the year. While the market continues to be volatile, we believe these assets will generate strong risk-adjusted returns over the long term.

While global equity markets are expected to remain turbulent in the second half of 2022, we remain committed to our investment strategy and asset allocation and expected to provide higher risk-adjusted returns and diversification benefits over the medium to long term. Further, we continue to seek investment opportunities that have inflationary pass-through components, including investments in private credits, real estate, and infrastructure asset classes.

Inflation continues to be a focus for both our current reserves and prospective transactions. As we assess new opportunities, we use our decades of experience to consider inflation when determining whether to proceed with the transaction.

For potential new deals, we consider excess and social inflation when projecting actuarial best estimate reserves. We vigorously challenge and validate seed and inflation [inceptions] and, where appropriate, add an allowance based upon our independent assessment of their book and market experience.

As we also consider past loss experience to date and present-day knowledge of excess and social inflation, we have better insights into the lines of business and jurisdictions that carry the greatest risks, which we diligently address in our pricing and structuring. For carried reserves, we have noted last quarter that we expect the impact of inflation to be mild on claims, and so far, that's exactly what we are seeing.

While we continue to closely monitor inflation, we believe our philosophy of settling claims expeditiously helps reduce the risk of adverse developments. In summary, although we can't control external macro factors, we will continue to focus on what we can control. And we remain confident in our long-term strategy, particularly given our balance sheet is in excellent shape.

We have a very active and growing M&A pipeline and our scale and capital buffers allows Enstar to execute on transactions of significant size and complexity. We believe we will benefit from the higher rate environment over the long term, given our asset leverage.

And lastly, we have best-in-class M&A and claims functions, which will continue to drive value. With nearly 30 years of experience in the business, including operating in all of the critical insurance jurisdictions, we have confidence that Enstar can prosper through varying economic cycles.

In fact, often in times of stress, partners need us the most and we stand ready to provide solutions. Thank you for your time and for your continued interest in Enstar.