Enstar Group Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

Key Takeaways

  • Strong Q1 net earnings of $424 M vs. a $67 M loss year-ago were driven by robust investment returns of $355 M and a 9.5% total investment return, producing a 9.5% ROE.
  • Completed a $1.9 B ground-up LPG deal with QBE and an approximately $245 M LPT with RACQ, showcasing innovative runoff liability solutions and an expanded M&A pipeline.
  • Recognized a $194 M non-recurring gain from the unwind and novation of Enhanced Re, which delivered an inception-to-date return above 23% per annum.
  • Repurchased $341 M of non-voting convertible ordinary shares at a 13% discount to year-end 2022 book value, simplifying capital structure and enhancing shareholder value.
  • Maintained a strong capital and liquidity position with an estimated solvency ratio exceeding 200%, no debt maturities until 2029, and a fully unutilized $600 M revolving credit facility.
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Earnings Conference Call
Enstar Group Q1 2023
00:00 / 00:00

There are 3 speakers on the call.

Operator

Hello, everyone. I'm Peter Kalev, Group Treasurer. Thank you for listening to NSTAR's Q1 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 pending and future transactions, runoff liability earnings, the performance of its investment portfolio and the impact of rising interest rates on NSTAR'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 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.

Speaker 1

Thank you, Peter. After a positive end to 2022, we have maintained the momentum into the Q1. A few notable highlights. We delivered strong net earnings through improved performance in our investment portfolio as well as a non recurring gain from the unwind of Enhance Re, From which we earned an inception to date return in excess of 23% per annum. 1 off liability earnings or RLE was in line with our expectations.

Speaker 1

We announced a $1,900,000,000 ground up LPG transaction with QBE, which following regulatory approval, we completed in April. This transaction differs from other LPTs we've undertaken in the past and opens new opportunities for us. Not only are we providing our usual cover for discontinued lines, but we're also delivering our expertise on season liabilities within active lines of business. This innovative structure is clear testimony to our ability, applying our creative and entrepreneurial spirit to the ever changing needs of our partners. We also announced an approximate $245,000,000 LPT with RACQ Insurance Limited, which we expect to close shortly.

Speaker 1

We have ample capacity to execute on additional M and A opportunities beyond these two transactions, provided, of course, they meet our internal hurdle for risk adjusted returns. Lastly, we repurchased the remaining $341,000,000 of non voting convertible ordinary shares At a 13% discount to year end 2022 book value as presented in our 2022 10 ks, Creating value to our shareholders and simplifying our capital structure. Prudent capital management is critical to NSTAR and we remain focused on deploying capital to the most value We announced several management changes during the quarter. Following the retirement of Long Term Group President, Paul O'Shea, Paula Gregory became our new President, while Paul Brockman was named Chief Operating Officer in addition to his role as Chief Claims Officer, And Matt Kirk was appointed Chief Financial Officer. We have the utmost confidence in this team's ability to step up into larger roles at a critical time in NSTAR's development.

Speaker 1

Looking ahead, while the macro environment remains challenging, we're confident that we are well positioned and there appears to be more attractive opportunities for us In addition to P and C run off solutions, we remain open and are formally evaluating assumed life opportunities as we believe that they should provide an attractive diversified earnings profile with the appropriate risk award. On a final note, Our company turned 30 years old on April 8. Thank you to all who have worked with us along the way to help create our company today, Our employees for their commitment, our partners, regulators and advisors for their trust and our shareholders for their loyalty. We are proud to have pioneered Runoff Solutions as a mainstream part of the insurance industry and intend on continuing to provide innovative and differentiated risk management and capital release to our global partners long into the future. We owe a big part of our history to Rod Fraser, who sadly passed away in March.

Speaker 1

Walter was instrumental in investing in our Castlewood business back in 2000 and in the merger transaction that formed the NSTAR of today. Ward was more than just a wonderful businessman. He was a friend and a man of the utmost integrity and a magnificent champion of our company. And I want to end by saying just how grateful we are for his guidance and massive contribution. Over to you, Matt.

Speaker 2

Thanks, Dominic. We had a profitable Q1 recording $424,000,000 of net earnings compared to a net loss of 2 $67,000,000 in the Q1 of 2022. We generated a return on equity or ROE of 9.5% and adjusted ROE of 6.8%. Adjusted ROE is a performance measure that excludes 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. Our solid Q1 performance was largely driven by strong investment results of $355,000,000 Of this total, we experienced favorable returns on our non core equity investments of $147,000,000 as a result of the rally in the global equity markets, dollars 41,000,000 on our fixed income portfolio due to a decline in interest rates and $156,000,000 of net investment income.

Speaker 2

The increase in net investment income is nearly double when compared The Q1 of 2022 and reflects an increase of approximately 170 basis points in our investment book yield. This was due to a combination of investment of new premium from deals completed in 2022, reinvestment of fixed maturities at higher yields and the impact of rising rates on our $3,000,000,000 floating rate portfolio. All of this, plus gains on our AFS portfolio, Contributed to a strong total investment return or TIR of $442,000,000 or 9.5 percent on an annualized basis. We also recorded $194,000,000 non recurring gain in the quarter from the completion of our unwind of Enhanced Re and the novation of its business, which had previously been noted during our year end filing. In addition, we recorded runoff liability earnings or RLE of $10,000,000 and adjusted RLE of $36,000,000 We saw favorable development in the 2021 acquisition year, driven primarily by claims experience in our workers' compensation book.

Speaker 2

We complete most of our annual loss reserve studies in the second half of each year and as a result tend to record the largest movements during that period. For Q1, We reported growth in book value per share of 7.8% and on an adjusted basis 7.1%. These returns were negatively impacted by the adoption of new accounting standards relating to long duration contracts or LDTI, which required us to retrospectively increase open equity by $273,000,000 The impact of which was offset with the novation of the affected liabilities. The combined impact of these items is book value neutral, But the restatement opening equity reduced our growth in book value per share and adjusted book value per share for the quarter by 7% in each case. Such returns would have otherwise been 14.8% 14.1%, respectively.

Speaker 2

Our capital and liquidity position remains strong to weather market volatility and execute on opportunities as they arise. We maintain access to a $600,000,000 unsecured revolving credit facility, which was fully unutilized at March 31. We are currently in the process of renewing the facility with a view to finalizing prior to the August 2023 maturity. Further, we have no debt maturities until 2029 and currently all of our debt is fixed rate at attractive cost of capital. We closed 2022 with an estimated group solvency ratio in excess of 200%.

Speaker 2

We have since allocated a portion of this excess capital to our M and A transactions with QBE and RACQ and our $341,000,000 share repurchase. The repurchase was done at a 5% discount to trailing 10 day volume weighted average price of our voting ordinary shares at the close of business March 22, 2023. While the banking sector continues to grapple with Volatility leading to an increasingly challenging macro environment, NSTAR's balance sheet remains well positioned. As of March 31, NSTAR had no material exposure either directly or indirectly to the impacted U. S.

Speaker 2

Regional banks and held only an immaterial amount of senior investments and deposits with Credit Suisse. However, we will continue to monitor the situation closely. As we look ahead, our strategy, financial strength and best in class team of experts ensures that we will continue to generate Long term value for our shareholders and maintain our position as the dominant legacy player. Our proven ability to consistently drive high performance and our careful and thorough approach continues to be evidenced by the NSTAR effect and our consistent RLE outperformance. Thank you for your time and your continued interest in NSTAR.

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