Enstar Group Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 3 speakers on the call.

Operator

Hello, everyone. I am Peter Kalev, Group Treasurer. Thank you for listening to Enstar's Q3 2023 earnings audio review with CEO, Dominic Sylvester and CFO, Matt Kirk. Before we begin, I'd like to remind everyone that this presentation contains forward looking statements and non GAAP financial measures. Forward looking statements in this presentation include, but are not limited to, statements about NSTAR's expectations for future and pending transactions, runoff liability earnings, the performance of its investment portfolio and the impact of rising interest rates on Enstar's business.

Operator

These statements are inherently subject to risks, uncertainties and assumptions that may cause actual results to differ materially from the statements being made as of the date of this update or in the future. Additional information regarding these statements and our non GAAP financial measures is outlined in the text that appears below the link to this recording. With that, I'll turn it over to Dominic.

Speaker 1

Thank you, Peter. In the Q3, we continued to execute on value accretive transactions for our shareholders, while delivering year to date growth in book value per share. A few notable highlights. We announced a new agreement with AIG, which completed recently to provide up to $400,000,000 of protection against adverse developments on the carried loss reserves underwritten by Validus Re. This transaction is further validation of our leading ability to structure and execute innovative bespoke capital release solutions for our partners worldwide.

Speaker 1

We generated strong net investment income of $143,000,000 largely driven by improved year over year performance in our investment portfolio, supported by higher interest rates on our floating rate assets and the investment of new assets from our 2nd quarter transactions with QBE and RACQ at over 5% yields. Finally, subsequent to the end of the quarter, we agreed to repurchase ordinary shares from CPP Investments and its affiliates. We are pleased to execute this accretive buyback of shares while retaining ample capital resources to seamlessly continue our long term operational strategy. Matt will cover these transactions in more detail later. As we look to the end of 2023, we continue to diligently watch the ongoing uncertain macro and geopolitical environments, taking them into account as we consider how best to grow our business.

Speaker 1

With that said, given our proven business model, operational excellence and strong capital position, NSTAR is well placed to continue to lead the runoff market while creating significant value for our shareholders in the years ahead. Over to you, Matt.

Speaker 2

Thanks, Dominic. During the quarter, we recorded net earnings of $38,000,000 compared to a net loss of $432,000,000 in the Q3 of 2022. We generated a return on equity or ROE of 0.9% and adjusted ROE of 2.5%. As a reminder, adjusted ROE is a performance measure that excludes the net realized and unrealized gains and losses on fixed maturity investments and funds held directly managed, as well as other adjustments as detailed in our 10 Q. 3rd quarter results were once again largely driven by positive investment performance of $146,000,000 Breaking down our results further, we generated $143,000,000 of net investment income or NII due to the investment return on consideration received from new business, reinvestment of fixed income maturities and interest income on our floating rate assets with term SOFR rates above 5%, which comprise 18% of our total investable assets.

Speaker 2

We also experienced favorable returns on our non core equity investments of $83,000,000 primarily driven by the impact of Q2 2023 global equity market performance and tightening of high yield credit spreads on our non core equity investments recorded on a 1 quarter lag. The positive non core returns and NII were partially offset by net realized and unrealized losses on our fixed income portfolio of $80,000,000 driven primarily by interest rate increases. We recorded runoff liability earnings or RLE of $15,000,000 and adjusted RLA of $32,000,000 driven by favorable development across multiple acquisition years. This was primarily from favorable claims experience in our workers' compensation and property lines of business as well as reductions in our provisions for ULAE. Partially offsetting this was adverse development in our general casualty line of business driven by a small number of larger losses on excess policies across multiple portfolios.

Speaker 2

We completed approximately 18% of the value of our planned annual reserve reviews in the Q3. Consistent with prior years, most of our annual reserve reviews occur in the Q4 and this is where we have historically seen the largest movements in our RLE and adjusted RLE metrics. As of September 30, we delivered a year to date growth in book value per share of 7.7% and 7.0% on an adjusted basis. As we previously noted, growth in our book value has been negatively impacted year to date by the adoption of new accounting standards relating to long duration contracts or LDTI, which required us to retrospectively increase opening equity by 273,000,000 the impact to our closing equity was offset with the novation of the affected liabilities and therefore the combined effect of these items is book value neutral. However, the restatement of opening equity reduced our year to date growth in book value per share, both on an adjusted and unadjusted basis.

Speaker 2

Excluding the impact of LDTI, growth in year to date book value per share on an unadjusted basis would have been 14.7% and 14% on an adjusted basis. Due primarily to the rapid increase in interest rates over the past 2 years, we've incurred a cumulative $1,200,000,000 of unrealized losses on our fixed maturities and funds held directly managed as of our balance sheet date. This has adversely impacted book value per share by approximately $79 and adjusted book value per share by approximately $78 these assets provide liquidity to our policyholder liabilities as they come due. As such, we generally hold these investments to maturity with the view that unrealized losses will naturally reverse as the securities approach maturity. Our capital and liquidity position remains strong to support future transactions.

Speaker 2

Our revolving credit facility remains fully unutilized and available to us as of September 30th. We ended 2022 with a group solvency ratio of 210% and we continue to maintain a solid group solvency ratio after allocating to recent transactions and our most recent share repurchase. As Dominic noted, subsequent to the end of the quarter, we agreed to repurchase $191,000,000 worth of ordinary shares from CPP Investments and its affiliate and from the Trident V funds managed by Stone Point Capital LLC at a price per share of $227.18 which represents a 5% discount to the trailing 10 day weighted average price of our shares as of November 3, 2023. In addition, Dominic will purchase $10,000,000 of shares from the Trident V funds at the same price. This transaction further aligns his interest with our new and current shareholders.

Speaker 2

Following these transactions, CPP Investments and the Trident V funds will hold 4.3% and 9.6% of Enstar's outstanding ordinary shares, respectively. From a regulatory standpoint, we continue to monitor the active landscape, including any upcoming enhancements to the Bermuda Monetary Authority's supervision of insurance groups and the proposal of global minimum tax rate. We understand that regulations are not static and we are committed to adapting to them while ensuring we continue to create shareholder value. In conclusion, we continue to solidly execute on our core strategy of delivering attractive capital release solutions despite the ongoing market and geopolitical conditions. We maintain our disciplined approach toward buying new business and our best in class team of experts remain well positioned to take advantage of a healthy pipeline and create additional long term value for our shareholders.

Speaker 2

Thank you for your time and your continued interest in Enstar.

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Enstar Group Q3 2023
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