Enstar Group Q2 2023 Earnings Call Transcript

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August 1, 2023

There are 3 speakers on the call.

Operator

Hello, everyone. I'm Peter Kalev, Group Treasurer. Thank you for listening to NSTAR's Q2 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 Enstar'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 over to Dominic.

Speaker 1

Thank you, Peter. It was another solid quarter for NSTAR as we continued to generate positive results, Grow our portfolio and strengthen our balance sheet, positioning us well for the second half of the year. A few notable highlights. We completed both our $2,000,000,000 LPT transaction with QBE and our $179,000,000 LPT transaction with RACQ Insurance Limited. We generated strong net investment income of £172,000,000 largely driven by improved year over year performance in our investment portfolio, which was supported by the impact of rising interest rates on our floating rate assets and the investment of new assets from our transactions with QBE and RACQ at over 5% yields.

Speaker 1

We refinanced and upsized our revolving credit agreement from $600,000,000 to 800,000,000 and extended its term by 5 years through May 2028, thereby strengthening our balance sheet and further increasing our liquidity position. Our pipeline continues to be robust, and we remain disciplined in our search for appropriate opportunities that meet our internal hurdle for risk adjusted returns. Finally, we were pleased to receive an upgrade from S and P on our long term issuer credit rating to BBB plus which comes on the heels of last year's upgrade from Fitch. These actions by the rating agencies further validate the outstanding performance, leadership and strong capitalization, which we've consistently demonstrated over time. As we look to the remainder of 2023, the overall macro environment continues to be challenging.

Speaker 1

However, we remain confident that our proven business model, Operational excellence and strong capital position will support both our near term and longer term growth. We've built an incredible business over the past 30 years with sustainable competitive advantages. And through continual risk management and innovative capital release solutions, We expect to remain the leader in the runoff space for years to come. Thank you again to our employees for their commitment, our partners, regulators and advisers for their trust and our shareholders for their loyalty. Over to you, Matt.

Speaker 2

Thanks, Dominic. Our positive momentum for the Q1 of this year continued into the 2nd quarter as we recorded net earnings of $21,000,000 compared to a net loss of $434,000,000 in the Q2 of 2022. We generated a return on equity or ROE of 0.5% and adjusted ROE of 2.1%. Adjusted ROE is a performance measure that excludes net realized and unrealized gains and losses on fixed maturity investments and funds held directly managed,

Operator

as

Speaker 2

well as other adjustments as detailed in our 10 Q. 2nd quarter results were once again largely driven by positive investment performance $159,000,000 Breaking down our results further, we generated $172,000,000 of net investment income or NII due to the investment of consideration received from new business, reinvestment of fixed income maturities and interest income on our approximate 3,100,000,000 of floating rate assets with SOFR rates now above 5%. We also experienced favorable returns on our non core equity investments of 77,000,000 driven by global equity market performance. The positive non core returns and NII were partially offset by net realized and unrealized losses on our fixed income portfolio of $90,000,000 driven primarily by interest rate increases. We recorded runoff liability earnings or RLE of $10,000,000 and adjusted RLE of $8,000,000 driven by favorable development in the 2021 acquisition year, primarily from the claims experienced in our workers' compensation book.

Speaker 2

As a reminder, 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. This quarter, we assume claims management control on 2022 LPT agreement with Argo in accordance with our terms and conditions. As a result, we increased ULA reserves by $21,000,000 to account for the anticipated cost associated with the active claims management of this business. As part of gaining claims control, We believe we will benefit from improved RLE results over the remaining settlement period given our track record of best in class claims management and the benefits of the AnStar effect. We have consistently delivered book value growth over our 30 year history and that has continued in 2023 as we delivered growth in book value per share year to date as of June 30 of 8.6% and 7.9% on an adjusted basis.

Speaker 2

As we noted last quarter, growth in our book value was negatively impacted year to date by the adoption of New accounting standards related 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 set with the novation of the affected liabilities and therefore the combined impact of these items is book value neutral. However, the restatement of opening equity reduced our year to date growth in book value per share and adjusted book value per share. Excluding the impact of LDTI, growth in year to date book value per share and adjusted book value per share would have been 15.7% and 14.9%, respectively. Turning to other strategic highlights. We are pleased to have completed our LPT transactions with QBE and RACQ during the quarter.

Speaker 2

To provide a bit more color, in the QBE transaction, We assume net loss reserves of approximately $2,000,000,000 are receiving consideration of $1,900,000,000 and recording a deferred charge asset of 179,000,000 For the RICQ transaction, after adjusting for claims paid as of the closing date, we assume net loss reserves of $179,000,000 in exchange for consideration of $179,000,000 These transactions are further testament to our depth of experience and our ability to structure and execute innovative solutions for our partners across jurisdictions worldwide. Our capital and liquidity position remains strong to to support future transactions. As Dominic mentioned, we refinanced and upsized our revolving credit facility this past which remains fully unutilized and available to us at June 30. We ended 2022 with a group solvency ratio of 210% and we continue to maintain a solid group solvency ratio after allocating capital to the QBE and RACQ transactions. In conclusion, it was a strong first half of twenty twenty three for NSTAR in the face of challenging market conditions, and we remain optimistic for the second half of twenty twenty three and beyond.

Speaker 2

As we continue to execute our strategy and build on our success as the dominant legacy player, our strong balance sheet, highly disciplined approach and best in class team of experts will continue to ensure that we are on the right path towards generating additional long term value for our shareholders. Thank you for your time and your continued interest in Enstar.

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Key Takeaways

  • Completed $2 billion LPT transaction with QBE and $179 million LPT transaction with RACQ, deploying new assets at yields above 5%.
  • Generated strong net investment income of £172 million, driven by rising interest rates on approximately £3.1 billion of floating rate assets and reinvestment of transaction proceeds.
  • Turned Q2 net earnings positive at $21 million versus a $434 million loss in Q2 2022, delivering a ROE of 0.5% and adjusted ROE of 2.1%.
  • Refinanced and upsized the revolving credit facility from $600 million to $800 million, extended its term to May 2028, and kept it fully unutilized to strengthen liquidity.
  • Received a long-term issuer credit rating upgrade to BBB+ from S&P, following last year’s Fitch upgrade, reflecting strong capitalization and operational performance.
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Earnings Conference Call
Enstar Group Q2 2023
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