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SIRIUSPOINT LTD – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 ("Annual Report"). The statements in this discussion regarding business outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to our Introductory Note to this Annual Report and the risks and uncertainties described in Part I, Item 1A "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Our fiscal year ends
years are for fiscal years ended
For discussion of our results of operations and changes in financial condition for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on
Form 10-K , for the year ende d
whic h was filed with the
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Overview
We are a holding company domiciled inBermuda . Through our subsidiaries, we provide multi-line insurance and reinsurance products and services on a worldwide basis. We aim to be a highly diversified business with a sustainable and scalable underwriting platform, and a portfolio of insurance-related businesses. We seek to leverage our underwriting talent and capabilities, proven management expertise and geographical footprint, to build on our existing portfolio and identify new opportunities to create value. We intend to allocate our capital to the best opportunities and react quickly to new risks. We are focused on optimizing capital allocation and rebalancing towards insurance and higher margin and growth lines. As ofDecember 31, 2022 , we had equity stakes in 36 entities (MGAs, Insurtech and Other) which underwrite or distribute a wide range of lines of business. Refer to Part I. Item 1. "Business" for additional information. Products & Services
The acquisition of
expanded underwriting capabilities, geographical footprint and product
offerings. Each segment is described below.
Reinsurance Segment
We provide reinsurance products to insurance and reinsurance companies, government entities, and other risk bearing vehicles on a treaty or facultative basis. For reinsurance assumed, we generally participate in the prospective, as opposed to retroactive, reinsurance market globally through the broker market distribution channel. We primarily write treaty reinsurance, on both a proportional and excess of loss basis, and provide facultative reinsurance in some of our business lines. Inthe United States andBermuda , our core focus is on distribution, risk and clients located inNorth America while our international operation is focused primarily on distribution, risks and clients located inEurope ,Asia andLatin America .
The Reinsurance segment provides coverage in the following product lines:
Aviation & Space, Casualty, Contingency, Credit & Bond, Marine & Energy,
Mortgage, and Property.
Insurance & Services Segment
The Insurance & Services segment predominantly provides insurance coverage in addition to receiving fees for services provided within Insurance & Services and to third parties. Insurance & Services revenue allows us to diversify our traditional reinsurance portfolio and generally has lower capital requirements. We make both controlling and noncontrolling equity investments and debt investments in MGAs and other insurance-related business. In addition, service fees from MGAs and their insurance provided are generally not as prone to the volatile underwriting cycle that is common in reinsurance marketplace. The Insurance & Services segment provides coverage in the following product lines: A&H, Environmental, Workers' Compensation, and other lines of business including a cross section of Property and Casualty lines.
Investment Management
We continue to reposition our investment portfolio to better align with our underwriting strategy, while leveraging our strategic partnership withThird Point LLC . We believe that this repositioning will result in lower volatility, while taking advantage of opportunities to improve risk-adjusted returns across asset classes. Under our investment strategy, our fixed income investments, which comprise the majority of our portfolio, are outsourced to a diversified range of third-party asset managers. This includes the Third Point Optimized Credit fixed income strategy, which is predominately investment grade and managed byThird Point LLC , to which we are contractually obligated to reinvest all or part ofTP Enhanced Fund withdrawals to date.Third Point LLC continues to manage a portion of our alternative investments, includingTP Enhanced Fund ,TP Venture Fund and TP Venture Fund II, totaling 2% ofSiriusPoint's investment portfolio atDecember 31, 2022 , as well as working with us on asset-liability management strategies that are tailored to our risk and capital considerations. Our investment objective is to maximize long-term after-tax total return while (1) limiting the investment risk within prudent risk tolerance thresholds, (2) maintaining adequate liquidity, and (3) complying with the regulatory, rating agency, and internal risk and capital management requirements, all in support of the company goal of meeting policyholder obligations. 62
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Recent Developments & Business Outlook
Restructuring Plan
OnNovember 2, 2022 , we announced a restructuring of our underwriting platform to support the future shape of our business. In line with our strategy to strengthen underwriting results and align our operating platform to our business portfolio, we have made changes to the structure and composition of our international branch network (the "Restructuring Plan"). We have reduced the locations from whichSiriusPoint underwrites property catastrophe reinsurance. As a result, we are in the process of closing our offices inHamburg ,Miami andSingapore , and reducing our footprint in Liege andToronto . Following the anticipated closures and scaling of our operating platform, we will continue to serve clients and underwrite North American property catastrophe business fromBermuda , and international property catastrophe business fromStockholm . In the fourth quarter of 2022, we incurred approximately$30 million of total costs, primarily related to severance, to implement the Restructuring Plan.
Interest Rates and Inflation
We continue to see rising interest rates as a result of central banks' monetary policies across the globe. While the rise in interest rates negatively affects the fair value of current debt security holdings, it also provides higher reinvestment rates upon maturity or sales of our existing portfolio. Additionally, our 2017 SEK Subordinated Notes bear interest at a variable rate based on the Stockholm Interbank Offered Rate plus a margin. As inflation continues to increase, we have evaluated the impact on our underwriting results and reserves. We proactively adjusted trend assumptions in our pricing. As ofDecember 31, 2022 , we believe our estimate of the impact of inflation is within our established reserves given the existing provisions for uncertainty that we previously established. As the inflationary environment is dynamic with a relatively high degree of uncertainty, we will continue to monitor and analyze the inflationary environment and its effect on our portfolio in order to maintain adequate pricing and reserving estimates.
Cryptocurrencies
We continue to monitor the volatility of the cryptocurrencies and we have evaluated the impact of exposure on our investments and reserves. As ofDecember 31, 2022 , the estimate of our exposure to cryptocurrencies related to investments is$9.1 million , and it had a minimal impact on our underwriting results.Russia /Ukraine Conflict FollowingRussia's invasion ofUkraine inFebruary 2022 , theU.S. , theU.K. , and theEuropean Union governments, among others, have developed coordinated financial and economic sanctions targetingRussia that, in various ways, constrain transactions with numerous Russian entities, including major Russian banks, and individuals; transactions in Russian sovereign debt; and investment, trade and financing to, from, or in certain regions ofUkraine . The effect of theRussia /Ukraine conflict with respect to exposures and coverage interpretations is highly uncertain. We are closely monitoring the developments relating to theRussia /Ukraine conflict and assessing its impact on our business and the insurance and reinsurance sectors. The degree to which companies may be affected depends largely on the nature and duration of uncertain and unpredictable events, such as further military action, additional sanctions, and reactions to ongoing developments by global financial markets. Our current underwriting loss estimate of$17.5 million as ofDecember 31, 2022 has changed minimally from our initial loss estimates in the first quarter of 2022; however, the ultimate impact on our business remains highly uncertain. While the economic uncertainty resulting from the conflict has impacted global financial markets, the Company's investment portfolio does not have meaningful direct exposure to investments inRussia orUkraine . The conflict also created heightened cybersecurity threats to our information technology infrastructure. Other impacts due to this evolving situation are currently unknown and could potentially subject our business to materially adverse consequences should the situation escalate beyond its current scope, including, among other potential impacts, the geographic proximity of the situation relative to the rest ofEurope , where a material portion of our business is carried out. 63
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Current Outlook
Insurance & Services
The majority of insurance lines we underwrite continue to show significant rate improvement. Although some lines, such as directors & officers, are beginning to experience a slowing of rate momentum, we believe rate is still outpacing loss cost in most lines of business. In select lines, such as cyber, significant rate increases continue due to imbalances between supply and demand. We continue to see strong growth in the program business, with momentum for new MGAs, largely in casualty and specialty lines. Some of this momentum is due to the entrepreneurialism and technology disruption we are witnessing in the primary markets, which is also fueling growth for fronting companies.
Reinsurance
While the reinsurance markets are benefiting from the positive primary insurance environment, across most insurance lines, financial results have and continue to be materially affected by elevated levels of catastrophe losses in the property reinsurance market compared to historical averages. This has caused many reinsurers to re-evaluate their positions in property, reducing aggregates and moving away from ground up exposures. As a result, the property reinsurance market globally has seen significantly increased pricing for catastrophe exposed business and a tightening of contractual terms and conditions. Outside of property, in the casualty and specialty reinsurance markets, rate momentum and performance remain strong. Ceding commissions on proportional business have stabilized and reduced for some casualty product lines. The MGA market continues to show significant growth in casualty and specialty program business fueled, in part, by an increasing universe of fronting carriers. These programs and fronting carriers rely heavily on proportional reinsurance support as a primary source of underwriting capital.
Business Outlook
Our business model is diversified and differentiated compared to a traditional P&C insurer given we have three uncorrelated sources of earnings: (i) underwriting results where we are the risk taker; (ii) services fee income from MGAs we consolidate; and (iii) investment results. However, we have not taken full advantage of our business model and delivered sub-optimal and volatile returns during the last few years. We have experienced volatility from both underwriting and investment results while our service fee income from the consolidated MGAs has been growing at a steady pace. We believe we are an underwriting company first as we aim to create a business model which is simplified, fully-integrated and globally connected. We have made significant progress on our strategic priorities during 2022 and been addressing issues driving underperformance. Our vision forSiriusPoint is to be a high performing underwriter. 2023 will be a transitional year but should still show significant improvement in profitability while 2024 is the year when we expect to realize full run-rate benefits of all our strategic actions taken during 2022 and 2023. There are execution risks around delivery but we are seeing positive changes in the company performance and culture. We aim to be disciplined with our approach and want to restore credibility with our stakeholders.
Key Performance Indicators
We believe that the following key financial indicators are the most important in
evaluating our performance:
2022 2021
($ in
millions, except for per share
data and ratios) Combined ratio 96.4 % 109.1 % Core underwriting loss (1)$ (34.8) $ (163.4) Core net services income (1)$ 31.3 $ 11.0 Core loss (1)$ (3.5) $ (152.4) Core combined ratio (1) 101.6 % 109.5 %
Return on average common shareholders' equity attributable to
(19.3) % 2.3 % Book value per common share$ 11.56 $ 14.23 Book value per diluted common share$ 11.32 $ 14.10 Tangible book value per diluted common share (1)$ 10.43 $ 13.27 64
-------------------------------------------------------------------------------- (1) Core underwriting loss, Core net services income, Core loss and Core combined ratio are non-GAAP financial measures. See definitions in "Non-GAAP Financial Measures" and reconciliations in "Segment Results" below and Note 4 "Segment reporting" in our audited consolidated financial statements included elsewhere in this Annual Report. Tangible book value per diluted common share is a non-GAAP financial measure. See definition and reconciliation in "Non-GAAP Financial Measures". Core Results
See "Segment Results" below for additional information.
Return on Average Common Shareholders' Equity Attributable to SiriusPoint Common
Shareholders
Return on average common shareholders' equity attributable toSiriusPoint common shareholders is calculated by dividing net income (loss) available toSiriusPoint common shareholders for the year by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the year. Return on average common shareholders' equity attributable toSiriusPoint common shareholders for the years endedDecember 31, 2022 and 2021 was calculated as follows: 2022 2021 ($ in millions) Net income (loss) available toSiriusPoint common shareholders
Common shareholders' equity attributable to
shareholders - beginning of period
2,303.7 1,563.9
Common shareholders' equity attributable to
shareholders - end of period
1,874.7 2,303.7
Average common shareholders' equity attributable to
common shareholders
Return on average common shareholders' equity attributable to
(19.3) % 2.3 % The decrease in return on average common shareholders' equity attributable toSiriusPoint common shareholders for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was due to a net loss during the year endedDecember 31, 2022 , primarily as a result of realized and unrealized investment losses and catastrophe losses for Hurricane Ian and other catastrophe events, including South African floods and French hail storms, compared to realized and unrealized investment gains for the year endedDecember 31, 2021 , partially offset by catastrophe losses for the European floods, Hurricane Ida, June windstorms and winter storm Uri in the prior year.
Book Value Per Share
Book value per common share is calculated by dividing common shareholders'
equity attributable to
shares outstanding. Book value per diluted common share is calculated by
dividing common shareholders' equity attributable to
shareholders by the number of diluted common shares outstanding, calculated
similar to the treasury stock method.
Tangible book value per diluted common share is a non-GAAP financial measure and
the most comparable
"Non-GAAP Financial Measures" for an explanation and reconciliation.
As ofDecember 31, 2022 , book value per common share was$11.56 , representing a decrease of$2.67 per share, or 18.8%, from$14.23 as ofDecember 31, 2021 . As ofDecember 31, 2022 , book value per diluted common share was$11.32 , representing a decrease of$2.78 per share, or 19.7%, from$14.10 as ofDecember 31, 2021 . As ofDecember 31, 2022 , tangible book value per diluted common share was$10.43 , representing a decrease of$2.84 per share, or 21.4%, from$13.27 as ofDecember 31, 2021 . The decreases were primarily due to the net loss in the current year. 65
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Consolidated Results of Operations - Years ended
The following table sets forth the key items discussed in the consolidated results of operations section, which includes the results from the Company's reportable segments and Corporate, and the year over year changes, for the years endedDecember 31, 2022 and 2021: 2022 2021 Change ($ in millions) Total underwriting income (loss)$ 83.3 $
(156.1)
Total realized and unrealized investment gains (losses)
and net investment income
(322.7) 312.5 (635.2) Other revenues 110.2 151.2 (41.0) Net corporate and other expenses (312.8) (266.6) (46.2) Intangible asset amortization (8.1) (5.9) (2.2) Interest expense (38.6) (34.0) (4.6) Foreign exchange gains 66.0 44.0 22.0 Income tax benefit 36.7 10.7 26.0 Net income (loss)$ (386.0) $ 55.8 $ (441.8)
The key changes in our consolidated results for the year ended
compared to the prior year are discussed below.
Underwriting results
The improvement in net underwriting results for the year endedDecember 31, 2022 was driven by lower catastrophe losses compared to the prior year period, premium growth in Insurance & Services that resulted in higher underwriting income, and a net Corporate charge of$23 million in the fourth quarter of 2021 related to the 2021 LPT. Catastrophe losses, net of reinsurance and reinstatement premiums, were$137.9 million , or 5.9 percentage points on the combined ratio, for the year endedDecember 31, 2022 , compared to$329.0 million , or 19.2 percentage points on the combined ratio, for the year endedDecember 31, 2021 . The lower catastrophe losses were a result of our significant reduction in catastrophe exposed business, with our most notable underwriting action focus centered on global property reinsurance, which represented our primary source of underwriting volatility and underperformance. We rebalanced our property portfolio by decreasing our market share and exposure in the global property catastrophe reinsurance business, as well as reducing other property reinsurance with material catastrophe exposure.
Investments
Investment Portfolio
The following is a summary of our total investments, cash and cash equivalents
and restricted cash and cash equivalents as of
December 31, 2022 December 31, 2021 ($ in millions)
Debt securities, available for sale$ 2,635.5 $ - Debt securities, trading 1,526.0 2,085.6 Total debt securities (1) 4,161.5 2,085.6 Short-term investments 984.6 1,075.8 Investments in Related Party Investment Funds 128.8 909.6 Other long-term investments 377.2 456.1 Equity securities 1.6 2.8 Total investments 5,653.7 4,529.9 Cash and cash equivalents 705.3 999.8 Restricted cash and cash equivalents (2) 208.4 948.6 Total invested assets and cash$ 6,567.4 $ 6,478.3
(1)Includes
portfolio ("TPOC Portfolio").
66 -------------------------------------------------------------------------------- (2)Primarily consists of cash and fixed income securities such asU.S. Treasuries, money markets funds, and sovereign debt, securing our contractual obligations under certain (re)insurance contracts that we will not be released from until the underlying risks have expired or have been settled. The main driver for the increase in total investments as ofDecember 31, 2022 was the deployment of our cash to short-term investments and debt securities to take advantage of rising interest rates and cash flows from operating activities. Additionally, total investments also increased as there was an increase in investment purchases to cover short positions and securities under repurchase agreements. These increases were offset by losses inRelated Party Investment Funds, primarily from the decline in fair value of our investment in theTP Enhanced Fund , in addition to net realized and unrealized investment losses, due to rising interest rates and widening credit spreads. In addition, we withdrew$581.3 million from theTP Enhanced Fund during the year endedDecember 31, 2022 , as we continue our plan to diversify and reduce the volatility of our portfolio. Our fixed income portfolio returned (2.6)% on an original currency basis. We have also positioned our fixed income portfolio backing net loss reserves at an effective duration of 2.5 years excluding cash and cash equivalents. The Company has elected to classify all debt securities purchased on or afterApril 1, 2022 as available for sale ("AFS"). This election was made as the AFS model more accurately reflects the investment strategy as we do not actively trade individual securities within our investment portfolio. The AFS portfolio has been funded by sales of the trading portfolio and reallocation of investments from theTP Enhanced Fund during the year endedDecember 31, 2022 .
Investment Results
The following is a summary of the results from investments and cash for the
years ended
2022 2021
($ in millions)
Gross investment income $ 133.6 $ 37.0
Change in fair value of trading portfolio (1) (149.4) (47.7)
Net realized investment gains (losses) (76.1) 30.8
Net realized and unrealized investment gains (losses) from related
party investment funds (210.5) 304.0
Investment results (302.4) 324.1
Investment expenses (20.3) (11.6)
Total realized and unrealized investment gains (losses) and net
investment income
(1)Trading portfolio is inclusive of all non-AFS designated investments in the
investment portfolio.
The following is a summary of net investment income (loss) by investment
classification, for the years ended
2022 2021
($ in millions)
Debt securities, available for sale $ 35.1 $ -
Debt securities, trading (115.6) (4.9)
Short-term investments 17.7 1.6
Other long-term investments (10.6) 35.2
Equity securities (0.4) (2.5)
Net realized and unrealized investment gains (losses) from related
party investment funds
(210.5) 304.0
Realized and unrealized investment gains and net investment income
before other investment expenses and investment income (loss) on
cash and cash equivalents
(284.3) 333.4 Investment expenses (20.3) (11.6) Net investment loss on cash and cash equivalents (18.1) (9.3) Total realized and unrealized investment gains (losses) and net investment income$ (322.7) $ 312.5 67
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Investment Returns
The following is a summary of the net returns, including realized and unrealized returns, for our investments on aU.S. Dollar and local currency basis for the years endedDecember 31, 2022 and 2021: 2022 2021 TP Enhanced Fund (29.0) % 27.9 % TP Venture Fund (24.6) % 20.7 % TP Venture Fund II (1) (2.2) % n/aSiriusPoint total fixed income investments (2)(3) In U.S. dollars (3.3) % (0.5) % In local currencies (2.6) % 0.2 %SiriusPoint total equity securities and other long-term investments In U.S. dollars (4.7) % 4.6 % In local currencies (4.5) % 4.7 %
(1)TP Venture Fund II was funded on
comparative return.
(2)Fixed income investments exclude cash and cash equivalents.
(3)Includes returns of (1.8)% from investments in TPOC Portfolio for the year
ended
Total realized and unrealized investment losses and net investment income for the year endedDecember 31, 2022 was primarily attributable to a net investment loss of$202.0 million from our investment in theTP Enhanced Fund , corresponding to a (29.0)% return. The return was attributable to detraction from long event/fundamental and long activist equities; credit, including corporate credit and structured credit; and from markdowns to late stage private positions. These losses were partially offset by contributions from interest rate hedges, long energy and utilities equity and short equity positions. In addition to losses on theTP Enhanced Fund , we recognized losses of$80.5 million , or a (3.3)% return, on our debt securities and$10.6 million , or a (4.7)% return, on other long-term investment portfolio due to revised valuations on private investments. Total realized and unrealized investment gains and net investment income for the year endedDecember 31, 2021 was primarily attributable to investment income of$298.5 million from our investment in theTP Enhanced Fund , corresponding to a 27.9% return.The TP Enhanced Fund return was primarily attributable to long event/fundamental equities, in particular from private positions that executed well-received initial public offerings. In addition, we recognized$11.2 million in unrealized gains in private equity and hedge fund investments for the year endedDecember 31, 2021 .
Refer to Part II, Item 7A. "Quantitative and Qualitative Disclosures about
Market Risk" for a discussion of certain risks and factors that could adversely
impact our investments results.
Other Revenues
For the year endedDecember 31, 2022 , other revenues primarily consisted of$82.1 million of service fee revenue from MGAs and$27.4 million of changes in the fair value of liability-classified capital instruments. For the year endedDecember 31, 2021 , other revenues consisted of$51.1 million of service fee revenue from MGAs, a bargain purchase gain of$50.4 million and$49.7 million of changes in the fair value of liability-classified capital instruments. The decrease in other revenues is driven by the bargain purchase gain recorded in 2021 and the decrease in gain from the decline in the fair value of the liability-classified capital instruments in line with a less significant decline in share price, partially offset by higher services revenue in IMG from increased demand for travel insurance products and services, as well as continued growth in Arcadian. The 2021 bargain purchase gain represents the excess of the fair value of the underlying net assets acquired and liabilities assumed over the purchase price. The bargain purchase determination is consistent with the fact thatSirius Group's shares traded at a discount to book value. See Note 3 "Acquisition ofSirius Group " in our audited consolidated financial statements included elsewhere in this Annual Report for additional information on the bargain purchase gain recognized as a result of theSirius Group acquisition and the components of the aggregate consideration. 68
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Net Corporate and Other Expenses
Net corporate and other expenses include services expenses, costs associated
with operating as a publicly-traded company, non-underwriting activities,
including service fee expenses from our MGA subsidiaries, and current expected
credit losses ("CECL") from our insurance and reinsurance balances receivable
and loss and loss adjustment expenses recoverable and severance charges. In
addition, for the year ended December 31, 2021 , net corporate and other expenses
include costs related to the acquisition of Sirius Group and a $5.8 million gain
from the sale of Cedar Insurance Company .
The increase in net corporate and other expenses for the year ended December 31,
2022 compared to the year ended December 31, 2021 was primarily driven by
increased services expense from continued business growth in IMG, as well as
severance, compensation related expenses and professional fees associated with
executive changes during the year. In the fourth quarter of 2022, we also
incurred approximately $30 million of total costs to implement the Restructuring
Plan, primarily related to severance. The increase was partially offset by
$58.8 million of expenses associated with the acquisition of Sirius Group ,
certain professional and advisory fees and compensation-related expenses, which
were incurred in the year ended December 31, 2021 .
For the year ended December 31, 2022 , we recorded CECL of $12.7 million (2021 -
$21.0 million ) primarily due to credit exposure from Russian (re)insurers and
cedents and downgrades of certain Florida catastrophe exposed insurers. In the
year ended December 31, 2021 , we recognized an allowance for credit losses of
$16.8 million as a result of the acquisition of Sirius Group . We recorded an
expense to re-establish Sirius Group's expected credit losses provision from the
pre-merger period. See Note 14 "Allowance for expected credit losses" in our
audited consolidated financial statements included elsewhere in this Annual
Report for additional information on the credit loss methodology.
Amortization of Intangible Assets
Amortization of intangible assets for the year endedDecember 31, 2022 was$8.1 million (2021 -$5.9 million ). The increase is driven by the year endedDecember 31, 2021 reflecting only a partial quarter of expense from the legacySirius Group companies in the first quarter of 2021.
Interest Expense
Interest expense and finance costs are related to interest due on our senior and subordinated notes. Total interest expense for the year endedDecember 31, 2022 was$38.6 million (2021 -$34.0 million ). The increase is driven by the year endedDecember 31, 2021 reflecting only a partial quarter of expense on the senior notes and 2017 SEK Subordinated Notes from the legacySirius Group companies in the first quarter of 2021, partially offset by interest payments made in Swedish Krona on the 2017 SEK Subordinated Notes, which weakened in 2022 as compared to theU.S. Dollar.
Foreign Currency Translation
Except for the Canadian reinsurance operations of SiriusPoint America and certain subsidiaries of IMG, theU.S. dollar is the functional currency forSiriusPoint's business. Assets and liabilities are remeasured into the functional currency using current exchange rates; revenues and expenses are remeasured into the functional currency using the average exchange rate for the period. The remeasurement process results in foreign exchange gains (losses) in the consolidated results of operations. Foreign exchange (gains) losses exclude investment generated net realized and unrealized investment gains (losses) as addressed in Investment Results above. The foreign exchange gains of$66.0 million for the year endedDecember 31, 2022 were primarily due to$36.0 million of foreign exchange gains from our international operations and$38.0 million of foreign currency gains from the 2017 SEK Subordinated Notes, as a result of the strengthening of theU.S. Dollar. These gains were partially offset by losses on foreign currency derivatives intended to reduce foreign currency exposure. The foreign exchange gains of$44.0 million for the year endedDecember 31, 2021 were primarily due to our international operations and from the foreign currency effects of the 2017 SEK Subordinated Notes.
Additional foreign currency gains (losses) were recorded as part of the
investments results. See Note 8 "Total realized and unrealized investment gains
(losses) and net investment income" in our audited consolidated financial
statements included elsewhere in this Annual Report for additional information.
On an aggregate basis including foreign currency gains (losses) from investments, the effects of foreign exchange resulted in a benefit to net income of$34.1 million and comprehensive income of$31.4 million for the year endedDecember 31, 2022 . 69
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Income Tax Benefit
Income tax benefit of$36.7 million for the year endedDecember 31, 2022 compared to income tax benefit of$10.7 million for the year endedDecember 31, 2021 is due to an increase in losses in taxable jurisdictions in the current period.
Segment Results - Years ended
The determination of our reportable segments is based on the manner in which management monitors the performance of our operations. We classify our business into two reportable segments - Reinsurance and Insurance & Services. Collectively, the sum of these two segments constitute "Core" results. EffectiveJanuary 1, 2021 , the Company changed its accounting policy for assumed written premiums. Previously, the Company estimated ultimate premium written for the entire contract period and recorded this estimate at inception of the contract. The Company changed its accounting policy to recognize premiums written ratably over the term of the related policy or reinsurance treaty. The change in accounting policy had no impact on the previously reported net income (loss) or shareholders' equity attributable toSiriusPoint common shareholders. See Note 2 "Significant accounting policies" in our audited consolidated financial statements included elsewhere in this Annual Report for additional information.
The following tables set forth the operating segment results, and the year over
year changes, for the years ended
2022
Segment
Insurance & Measure
Reinsurance Services Core Eliminations (2) Corporate Reclass Total
($ in millions)
Gross premiums written$ 1,521.4 $ 1,884.2 $ 3,405.6 $ -$ 4.1 $ -$ 3,409.7 Net premiums written 1,199.6 1,346.0 2,545.6 - 3.6 - 2,549.2 Net premiums earned 1,213.1 1,086.8 2,299.9 - 18.2 - 2,318.1 Loss and loss adjustment 855.9 718.7 1,574.6 (5.2) 19.0 - 1,588.4 expenses incurred, net Acquisition costs, net 310.3 273.2 583.5 (118.6) (3.0) - 461.9 Other underwriting expenses 113.8 62.8 176.6 - 7.9 - 184.5 Underwriting income (loss) (66.9) 32.1 (34.8) 123.8 (5.7) - 83.3 Services revenue (0.2) 215.7 215.5 (133.4) - (82.1) - Services expenses - 179.2 179.2 - - (179.2) - Net services fee income (loss) (0.2) 36.5 36.3 (133.4) - 97.1 - Services noncontrolling loss - 1.1 1.1 - - (1.1) - Net investment losses from Strategic Investments (3.9) (2.2) (6.1) - - 6.1 - Net services income (loss) (4.1) 35.4 31.3 (133.4) - 102.1 - Segment income (loss)$ (71.0) $ 67.5 $ (3.5) $ (9.6)$ (5.7) $ 102.1 $ 83.3 Underwriting Ratios: (1) Loss ratio 70.6 % 66.1 % 68.5 % 68.5 % Acquisition cost ratio 25.6 % 25.1 % 25.4 % 19.9 % Other underwriting expenses 9.4 % 5.8 % 7.7 % 8.0 % ratio Combined ratio 105.6 % 97.0 % 101.6 % 96.4 %
(1)Underwriting ratios are calculated by dividing the related expense by net
premiums earned.
(2)Insurance & Services MGAs recognize fees for service using revenue from
contracts with customers accounting standards, whereas insurance companies
recognize acquisition expenses using insurance contract accounting standards.
While ultimate revenues and expenses recognized will match, there will be
recognition timing differences based on the different accounting standards.
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2021
Segment
Insurance & Measure
Reinsurance Services Core Eliminations (2) Corporate Reclass Total
($ in millions)
Gross premiums written$ 1,350.4 $ 897.9 $ 2,248.3 $ -$ (11.8) $ -$ 2,236.5 Net premiums written 1,124.9 652.8 1,777.7 - (43.5) - 1,734.2 Net premiums earned 1,210.9 522.8 1,733.7 - (16.7) - 1,717.0 Loss and loss adjustment 989.4 320.6 1,310.0 (2.6) 19.1 - 1,326.5 expenses incurred, net Acquisition costs, net 302.7 149.7 452.4 (67.6) 3.0 - 387.8 Other underwriting expenses 105.5 29.2 134.7 - 24.1 - 158.8 Underwriting income (loss) (186.7) 23.3 (163.4) 70.2 (62.9) - (156.1) Services revenue - 133.7 133.7 (82.6) - (51.1) - Services expenses - 120.5 120.5 - - (120.5) - Net services fee income - 13.2 13.2 (82.6) - 69.4 - Services noncontrolling loss - 2.3 2.3 - - (2.3) - Net investment gains (losses) from Strategic Investments 0.3 (4.8) (4.5) - - 4.5 - Net services income 0.3 10.7 11.0 (82.6) - 71.6 - Segment income (loss)$ (186.4) $ 34.0 $ (152.4) $ (12.4)$ (62.9) $ 71.6 $ (156.1) Underwriting Ratios: (1) Loss ratio 81.7 % 61.3 % 75.6 % 77.3 % Acquisition cost ratio 25.0 % 28.6 % 26.1 % 22.6 % Other underwriting expenses 8.7 % 5.6 % 7.8 % 9.2 % ratio Combined ratio 115.4 % 95.5 % 109.5 % 109.1 %
(1)Underwriting ratios are calculated by dividing the related expense by net
premiums earned.
(2)Insurance & Services MGAs recognize fees for service using revenue from
contracts with customers accounting standards, whereas insurance companies
recognize acquisition expenses using insurance contract accounting standards.
While ultimate revenues and expenses recognized will match, there will be
recognition timing differences based on the different accounting standards.
Core Results
Collectively, the sum of our two segments, Reinsurance and Insurance & Services, constitute our "Core" results. Core underwriting income, Core net services income, Core income and Core combined ratio are non-GAAP financial measures. We believe it is useful to review Core results as it better reflects how management views the business and reflects our decision to exit the runoff business. The sum of Core results and Corporate results are equal to the consolidated results of operations. Core Premium Volume Gross premiums written increased by$1,157.3 million , or 51.5%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Net premiums written increased by$767.9 million , or 43.2%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Net premiums earned increased by$566.2 million , or 32.7%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increases in premium volume were primarily a result of growth across Insurance & Services segment, strong growth in A&H and an increased contribution from strategic partnerships for the year endedDecember 31, 2022 , as well as the year endedDecember 31, 2021 reflecting only a partial quarter from the legacySirius Group companies in the first quarter of 2021. Core Underwriting Results We incurred an underwriting loss of$34.8 million and a combined ratio of 101.6% for the year endedDecember 31, 2022 , compared to an underwriting loss of$163.4 million and a combined ratio of 109.5% for the year endedDecember 31, 2021 . The improvement in underwriting results in 2022 was primarily driven by lower catastrophe losses and higher premium 71
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growth in Insurance & Services that generated underwriting income, partially
offset by lower favorable loss reserve development.
For the year endedDecember 31, 2022 catastrophe losses, net of reinsurance and reinstatement premiums, were$137.9 million , or 6.0 percentage points on the combined ratio, including$80.8 million for Hurricane Ian and$57.1 million for other catastrophe events, including South African floods and French hail storms, compared to$326.0 million , or 18.8 percentage points on the combined ratio, including$133 million for the European floods and$97 million for Hurricane Ida, as well as$41 million from June windstorms and winter storm Uri, for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , losses from theRussia /Ukraine conflict, including losses from the political risk, trade credit, and aviation lines of business, were$12.2 million , or 0.5 percentage points on the combined ratio. Losses incurred included$13.5 million of favorable prior year loss reserve development for the year endedDecember 31, 2022 compared to favorable prior year loss reserve development of$32.1 million for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , favorable prior year loss reserve development was due to loss reductions on COVID-19 and A&H reserves due to better than expected loss experience, with the most significant offsetting movements being reserve strengthening in recognition of the inflationary environment, on Workers' Compensation reserves based on reported loss emergence, and on prior year catastrophe events.
Core Services Results
Services revenue was$215.5 million for the year endedDecember 31, 2022 compared to$133.7 million for the year endedDecember 31, 2021 . The increase was primarily due to higher services revenue in IMG from increased demand for travel insurance products and services, as well as continued growth in Arcadian. The year endedDecember 31, 2021 reflected only a partial quarter from the legacySirius Group companies in the first quarter of 2021. We generated net services income of$31.3 million for the year endedDecember 31, 2022 compared to$11.0 million for the year endedDecember 31, 2021 . The increase is primarily due to higher margins achieved in our IMG business. For the year endedDecember 31, 2022 , net services fee income increased to$36.3 million compared to$13.2 million for the year endedDecember 31, 2021 . The increase is primarily due to increased services revenues from IMG, Armada and Arcadian for the year endedDecember 31, 2022 , as well as the year endedDecember 31, 2021 reflected only a partial quarter from the legacySirius Group companies in the first quarter of 2021. 72
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Reinsurance Segment
Reinsurance consists of our underwriting lines of business which offer Aviation
& Space, Casualty, Contingency, Credit & Bond, Marine & Energy, Mortgage, and
Property on a worldwide basis. The following table sets forth underwriting
results and ratios, and the year over year changes for the Reinsurance segment:
2022 2021 Change
($ in millions)
Gross premiums written $ 1,521.4 $ 1,350.4 $ 171.0
Net premiums written 1,199.6 1,124.9 74.7
Net premiums earned 1,213.1 1,210.9 2.2
Loss and loss adjustment expenses incurred, net 855.9 989.4 (133.5)
Acquisition costs, net 310.3 302.7 7.6
Other underwriting expenses 113.8 105.5 8.3
Underwriting loss (66.9) (186.7) 119.8
Services revenues (0.2) - (0.2)
Net services fee loss (0.2) - (0.2)
Net investment gains (losses) from Strategic Investments (3.9)
0.3 (4.2) Net services income (loss) (4.1) 0.3 (4.4) Segment loss$ (71.0)
Underwriting Ratios: (1) Loss ratio 70.6 % 81.7 % (11.1) % Acquisition cost ratio 25.6 % 25.0 % 0.6 % Other underwriting expenses ratio 9.4 % 8.7 % 0.7 % Combined ratio 105.6 % 115.4 % (9.8) %
(1) Underwriting ratios are calculated by dividing the related expense by net
premiums earned.
Premium Volume Gross premiums written in the Reinsurance segment increased by$171.0 million , or 12.7%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase is primarily due to the year endedDecember 31, 2021 reflecting only a partial quarter from the legacySirius Group companies in the first quarter of 2021, offset by decreases in both Property and Casualty lines as we rebalance the portfolio towards Insurance & Services.
Underwriting Results
The improvement in underwriting results of$119.8 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , was primarily due to lower catastrophe losses, partially offset by lower favorable loss reserve development and$12.2 million of losses from theRussia /Ukraine conflict. For the year endedDecember 31, 2022 , catastrophe losses, net of reinsurance and reinstatement premiums, were$136.3 million , including$79.2 million for Hurricane Ian and$57.1 million for other catastrophe events, including South African floods and French hail storms, compared to$324.5 million , including$133 million for the European floods,$95 million for Hurricane Ida and$41 million for the June windstorms and winter storm Uri, for the year endedDecember 31, 2021 . Net favorable prior year loss reserve development was$8.8 million for the year endedDecember 31, 2022 primarily due to COVID-19 reserve releases, offset by reserve strengthening in recognition of the inflationary environment and adverse development on prior year catastrophe events. Net favorable prior year loss reserve development was$18.6 million for the year endedDecember 31, 2021 as a result of better than expected loss reserve emergence on historical property events relating to multiple accident years and better than expected attritional loss experience. 73
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Insurance & Services Segment
Insurance & Services offers a comprehensive set of services for startup MGAs and insurance services companies including risk capital and equity and debt financing. Furthermore, we offer expertise in underwriting, pricing and product development to businesses with whom we partner. The Insurance & Services segment predominantly provides insurance coverage in addition to receiving fees for services provided within Insurance & Services and to third parties. The Insurance & Services segment provides coverage in the following product lines: A&H (including business generated by IMG and Armada), Environmental, Workers' Compensation, and other lines of business including a cross section of property and casualty lines. The following table sets forth underwriting results, net MGA results, and ratios for the segment results, and the year over year changes for the years endedDecember 31, 2022 and 2021: 2022 2021 Change ($ in millions) Gross premiums written$ 1,884.2 $ 897.9 $ 986.3 Net premiums written 1,346.0 652.8 693.2 Net premiums earned 1,086.8 522.8 564.0 Loss and loss adjustment expenses incurred, net 718.7 320.6 398.1 Acquisition costs, net 273.2 149.7 123.5 Other underwriting expenses 62.8 29.2 33.6 Underwriting income 32.1 23.3 8.8 Services revenue 215.7 133.7 82.0 Services expenses 179.2 120.5 58.7 Net services fee income 36.5 13.2 23.3 Services noncontrolling loss 1.1 2.3 (1.2)
Net investment gains (losses) from Strategic Investments (2.2)
(4.8) 2.6 Net services income 35.4 10.7 24.7 Segment income$ 67.5 $ 34.0 $ 33.5 Underwriting Ratios: (1) Loss ratio 66.1 % 61.3 % 4.8 % Acquisition cost ratio 25.1 % 28.6 % (3.5) % Other underwriting expenses ratio 5.8 % 5.6 % 0.2 % Combined ratio 97.0 % 95.5 % 1.5 %
(1) Underwriting ratios are calculated by dividing the related expense by net
premiums earned.
Premium Volume Gross premiums written in the Insurance & Services segment increased by$986.3 million , or 109.8%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , primarily driven by growth across Insurance & Services, including growth in premiums from strategic partnerships and A&H, as well as the year endedDecember 31, 2021 reflecting only a partial quarter from the legacySirius Group companies in the first quarter of 2021.
Underwriting Results
The increase in underwriting income of$8.8 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was primarily driven by the premium growth that generated underwriting income, partially offset by lower favorable prior year loss reserve development. Net favorable prior year loss reserve development was$4.7 million for the year endedDecember 31, 2022 , and was primarily due to better than expected loss experience in A&H reserves, which was partially offset by worse than expected loss experience in Workers' Compensation. Net favorable prior year loss reserve development of$13.5 million for the year endedDecember 31, 2021 was due to better than expected loss experience in A&H for recent accident years. 74
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Services Results
The increase in services revenue of$82.0 million was primarily due to higher services revenue in IMG from increased demand for its travel products and services, as well as continued growth in Arcadian. The year endedDecember 31, 2021 reflected only a partial quarter in the first quarter of 2021 from the legacySirius Group companies.
The increase in net services income of
higher margins achieved in our IMG business.
Corporate
Corporate includes the results of all runoff business, which represent certain classes of business that we no longer actively underwrite, including those that have asbestos and environmental and other latent liability exposures and certain reinsurance contracts that have interest crediting features. Corporate also includes the results from the 2021 LPT. The following table sets forth underwriting results and the year over year changes for the years endedDecember 31, 2022 and 2021: 2022 2021 Change ($ in millions) Gross premiums written$ 4.1 $ (11.8) $ 15.9 Net premiums written 3.6 (43.5) 47.1 Net premiums earned 18.2 (16.7) 34.9
Loss and loss adjustment expenses incurred, net 19.0 19.1 (0.1)
Acquisition costs, net (3.0) 3.0 (6.0)
Other underwriting expenses 7.9 24.1 (16.2)
Underwriting loss $ (5.7) $ (62.9) $ 57.2
The underwriting loss of $5.7 million for the year ended December 31, 2022 is
primarily driven by the Russian/Ukraine conflict losses of $5.3 million ,
compared to an underwriting loss of $62.9 million for the year ended December
31, 2021 as we recognized a net charge of $23 million , including $4 million of
federal excise tax expense, in the fourth quarter of 2021 relating to the 2021
LPT. In addition, for the year ended December 31, 2021 , other underwriting
expenses include $5.1 million of accelerated expenses related to interest
crediting features in certain reinsurance contracts.
Non-GAAP Financial Measures
We have included certain financial measures that are not calculated under standards or rules that compriseU.S. GAAP. Such measures, including Core underwriting income, Core net services income, Core income, Core combined ratio, accident year loss ratio, accident year combined ratio, management basis gross premiums written and tangible book value per diluted common share, are referred to as non-GAAP financial measures. These non-GAAP financial measures may be defined or calculated differently by other companies. We believe these measures allow for a more complete understanding of our underlying business. These measures are used by management to monitor our results and should not be viewed as a substitute for those determined in accordance withU.S. GAAP. Reconciliations of non-GAAP measures to the most comparableU.S. GAAP measures are included below. Core Results Collectively, the sum of the Company's two segments, Reinsurance and Insurance & Services, constitute "Core" results. Core underwriting income, Core net services income, Core income and Core combined ratio are non-GAAP financial measures. We believe it is useful to review Core results as it better reflects how management views the business and reflects our decision to exit the runoff business. The sum of Core results and Corporate results are equal to the consolidated results of operations. Core underwriting income - calculated by subtracting loss and loss adjustment expenses incurred, net, acquisition costs, net, and other underwriting expenses from net premiums earned. Core net services income - consists of services revenues which include commissions, brokerage and fee income related to consolidated MGAs, and other revenues, services expenses which include direct expenses related to consolidated MGAs, services noncontrolling income which represent minority ownership interests in consolidated MGAs, and net investment gains from Strategic Investments which are net investment gains/losses from investment in our strategic partners. Net 75
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services income is a key indicator of the profitability of the Company's
services provided, including investment returns on non-consolidated investment
positions held.
Core income - consists of two components, core underwriting income and core net
services income. Core income is a key measure of our segment performance.
Core combined ratio - calculated by dividing the sum of Core loss and loss adjustment expenses incurred, net, acquisition costs, net and other underwriting expenses by Core net premiums earned. Accident year loss ratio and accident year combined ratio are calculated by excluding prior year loss reserve development to present the impact of current accident year net loss and loss adjustment expenses on the Core loss ratio and Core combined ratio, respectively. These ratios are useful indicators of our underwriting profitability.
See Note 4 "Segment reporting" to our audited consolidated financial statements
for additional information and a calculation of Core income (loss).
Management Basis Gross Premiums Written
For 2021, management basis gross premiums written were$2,808.7 million , which is the sum of 2021 total gross premiums written of$2,236.5 million plus$571.2 million of total gross premiums written recognized bySirius Group for the 2021 pre-merger period fromJanuary 1, 2021 , to the Acquisition date ofFebruary 26, 2021 . Management basis gross premiums written consists of Reinsurance segment gross premiums written of$1,787.9 million and Insurance & Services segment gross premiums written of$1,031.0 million summing to Core gross written premiums of$2,818.9 million . Management basis gross premiums written is a non-GAAP financial measure and we believe it allows for a more complete understanding of our underlying business. 76
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Tangible Book Value Per Diluted Common Share
Tangible book value per diluted common share, as presented, is a non-GAAP financial measure and the most comparable GAAP measure is book value per common share. Tangible book value per diluted common share excludes the total number of unvested restricted shares, at period end, and intangible assets. While restricted shares are outstanding, they are excluded because they are unvested. Further, management believes that effects of intangible assets are not indicative of underlying underwriting results or trends and make book value comparisons to less acquisitive peer companies less meaningful. The tangible book value per diluted common share is also useful because it provides a more accurate measure of the realizable value of shareholder returns, excluding intangible assets. The following table sets forth the computation of book value per common share, book value per diluted common share and tangible book value per diluted common share as ofDecember 31, 2022 and 2021:December 31 ,December 31, 2022 2021 ($ in
millions, except share and per
share amounts)
Common shareholders' equity attributable to
shareholders
$ 1,874.7 $ 2,303.7 Carrying value of Series A preference shares issued in merger - 20.4
Diluted common shareholders' equity attributable to
common shareholders
1,874.7 2,324.1 Intangible assets (163.8) (171.9)
Tangible diluted common shareholders' equity attributable to
$
1,710.9
Common shares outstanding 162,177,653 161,929,777
Effect of dilutive stock options, restricted shares, restricted
share units, warrants and Series A preference shares
3,492,795 2,898,237 Book value per diluted common share denominator 165,670,448 164,828,014 Unvested restricted shares (1,708,608) (2,590,194) Tangible book value per diluted common share denominator 163,961,840 162,237,820 Book value per common share$ 11.56 $ 14.23 Book value per diluted common share$ 11.32 $ 14.10 Tangible book value per diluted common share $
10.43
Liquidity and Capital Resources
Liquidity Requirements
Liquidity is a measure of a company's ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations.SiriusPoint's insurance and reinsurance operations are subject to regulation and supervision in each of the jurisdictions where they are domiciled and licensed to conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, reserves for unpaid loss and loss adjustment expenses, reinsurance, minimum capital and surplus requirements, dividends and other distributions to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders.SiriusPoint manages its liquidity needs primarily through the maintenance of a short duration and high quality fixed income portfolio.SiriusPoint is a holding company and has no substantial operations of its own and its assets consist primarily of its investments in subsidiaries. Its cash needs primarily consist of the payment of corporate expenses, interest payments on senior and subordinated notes, strategic investment opportunities and dividends to preference shareholders.SiriusPoint may also require cash to fund share repurchases. Cash at the subsidiaries is used primarily to pay loss and loss adjustment expenses, reinsurance premiums, acquisition costs, interest expense, taxes, general and administrative expenses and to purchase investments. The insurance and reinsurance business of our operating subsidiaries inherently provide liquidity, as premiums are received in advance of the time losses are paid. However, the amount of cash required to fund loss payments can fluctuate significantly from period to period, due to the low frequency/high severity nature of certain types of business we write. 77
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Dividend Capacity
SiriusPoint's ability to pay expenses or dividends or return capital to shareholders will depend upon the availability of dividends or other statutorily permissible distributions from its subsidiaries. The ability to pay such dividends and/or distributions is limited by the applicable laws and regulations of the various countries and states in whichSiriusPoint's subsidiaries operate, as well as the need to maintain capital levels to adequately support insurance and reinsurance operations, and to preserve financial strength ratings issued by independent rating agencies. See Note 22 "Statutory requirements" in our audited consolidated financial statements included elsewhere in this Annual Report for additional information. For the year endedDecember 31, 2022 ,SiriusPoint received$125.0 million (2021 -$74.0 million ) of distributions fromSiriusPoint Bermuda Insurance Company Ltd. ("SiriusPoint Bermuda"), its immediate wholly-owned subsidiary. We believe the dividend/distribution capacity ofSiriusPoint's subsidiaries, which was approximately$713.5 million as ofDecember 31, 2022 , will provideSiriusPoint with sufficient liquidity for the foreseeable future. In addition to the regulatory and other contractual constraints to paying dividends, we manage the capital of the group and each of our operating subsidiaries to support our current ratings from AM Best, Fitch and S&P. This could further reduce the ability and amount of dividends that could be paid from subsidiaries toSiriusPoint .
For the year ended
its common shareholders.
Sources of Liquidity Our operating subsidiaries sources of liquidity have primarily consisted of net premiums written, reinsurance recoveries, investment income and proceeds from sales of or dividends or distributions attributable to investments. Other potential sources of liquidity include borrowings under our credit facilities and issuances of securities. EffectiveFebruary 26, 2021 , the Company entered into a 3-year,$300.0 million senior unsecured revolving credit facility (the "Facility") withJPMorgan Chase Bank, N.A . as administrative agent. The Facility includes an option, subject to satisfaction of certain conditions including agreement of lenders representing greater than a majority of commitments, for the Company to request an extension by such lenders of the maturity date of the Facility by an additional 12 months. The Facility provides access to loans for working capital and general corporate purposes, and letters of credit to support obligations under insurance and reinsurance agreements, retrocessional agreements and for general corporate purposes. Loans and letters of credit under the Facility will become available, subject to customary conditions precedent. As ofDecember 31, 2022 , there were no outstanding borrowings under the Facility. In addition, as ofDecember 31, 2022 ,SiriusPoint was in compliance with all of the covenants under the Facility.
Financing
We expect that our cash and cash equivalents on the balance sheet and cash flow from operations will provide us with the financial flexibility to execute our strategic objectives. Our ability to generate cash, however, is subject to our performance, general economic conditions, industry trends and other factors. To the extent cash and cash equivalents on the balance sheet, investment returns and cash flow from operations are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing shareholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business. There is no assurance that we would be able to raise the additional funds on favorable terms or at all.
Our debt and equity instruments as of
below.
2017 SEK Subordinated Notes OnSeptember 22, 2017 , we issued floating rate callable subordinated notes denominated in SEK in the amount ofSEK 2,750.0 million (or$346.1 million on date of issuance) at a 100% issue price ("2017 SEK Subordinated Notes"). The 2017 SEK Subordinated Notes were issued in an offering that was exempt from the registration requirements of the Securities Act of 1933 (the "Securities Act"). The 2017 SEK Subordinated Notes bear interest on their principal amount at a floating rate equal to the applicable Stockholm Interbank Offered Rate for the relevant interest period plus an applicable margin, payable quarterly in arrears onMarch 22 ,June 22 ,September 22 , andDecember 22 in each year commencing onDecember 22, 2017 , until maturity inSeptember 2047 . The 2017 SEK Subordinated Notes are listed on the Euronext Dublin exchange. As ofDecember 31, 2022 and 2021 the carrying value of the 2017 SEK Subordinated Notes was$258.6 million and$296.3 million , respectively, and reflected as debt in the in the consolidated balance sheets. 78
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2016 Senior Notes
OnNovember 1, 2016 , we issued$400.0 million face value of senior unsecured notes ("2016 Senior Notes") at an issue price of 99.2% for net proceeds of$392.4 million after taking into effect both deferrable and non-deferrable issuance costs. The 2016 Senior Notes were issued in an offering that was exempt from the registration requirements of the Securities Act. The 2016 Senior Notes bear an annual interest rate of 4.6%, payable semi-annually in arrears onMay 1 , andNovember 1 , in each year commencing onMay 1, 2017 , until maturity inNovember 2026 . The 2016 Senior Notes are listed on theBermuda Stock Exchange . As ofDecember 31, 2022 and 2021, the carrying value of the 2016 Senior Notes was$404.8 million and$406.0 million , respectively, and reflected as debt in the consolidated balance sheets.
2015 Senior Notes
OnFebruary 13, 2015 , we issued$115.0 million of senior unsecured notes (the "2015 Senior Notes") dueFebruary 13, 2025 . The 2015 Senior Notes bear interest at 7.0% and interest is payable semi-annually onFebruary 13 andAugust 13 of each year. As ofDecember 31, 2022 and 2021, the carrying value of the 2015 Senior Notes was$114.6 million and$114.4 million , respectively, and reflected as debt in the in the consolidated balance sheets. See Note 15 "Debt and letter of credit facilities" in our audited consolidated financial statements included elsewhere in this Annual Report for additional information on the 2017 SEK Subordinated Notes, 2016 Senior Notes, and 2015 Senior Notes.
Debt Covenants
As of
under the 2017 SEK Subordinated Notes, 2016 Senior Notes, and 2015 Senior Notes.
Series A Preference Shares
OnFebruary 26, 2021 , certain holders ofSirius Group shares elected to receive Series A preference shares as consideration with respect to theSirius Group acquisition. The Company issued 11,720,987 of designated Series A preference shares, with a par value of$0.10 per share. The Series A preference shares rank pari passu with the Company's common shares with respect to the payment of dividends or distributions. Each Series A preference share has voting power equal to the number of Company shares into which it is convertible, and the Series A preference shares and Company shares vote together as a single class with respect to any and all matters. As ofDecember 31, 2022 , the estimated fair value of the Series A preference shares was$1.8 million and is reflected in liability-classified capital instruments in the consolidated balance sheets. During the year endedDecember 31, 2022 , the Company did not declare or pay dividends to Series A preference shareholders.
See Note 3 "Acquisition of
statements included elsewhere in this Annual Report for additional information.
Series B Preference Shares
The Company has 8,000,000 of Series B preference shares outstanding, par value$0.10 . Dividends on the Series B preference shares are cumulative and payable quarterly in arrears at an initial rate of 8.0%. The preference shareholders have no voting rights with respect to the Series B preference shares unless dividends have not been paid for six dividend periods, whether or not consecutive, in which case the holders of the Series B preference shares will have the right to elect two directors. OnJune 28, 2021 andAugust 12, 2021 , the Company entered into Underwriting Agreements with the Series B preference shareholders (the "Selling Shareholders") pursuant to which the Selling Shareholders sold to the public market all 8,000,000 Series B preference shares. The Company did not receive any proceeds from the sale of the Series B preference shares by the Selling Shareholders. The transaction did not change the underlying conditions of the Series B preference shares. The Series B preference shares are listed on theNew York Stock Exchange under the symbol "SPNT PB". 79 -------------------------------------------------------------------------------- As ofDecember 31, 2022 , the carrying value of the Series B preference shares was$200.0 million and reflected in shareholders' equity attributable toSiriusPoint shareholders in the consolidated balance sheets. During the year endedDecember 31, 2022 , the Company declared and paid dividends of$16.0 million to the Series B preference shareholders.
See Note 17 "Shareholders' equity" in our audited consolidated financial
statements included elsewhere in this Annual Report for additional information.
Letter of Credit Facilities
As ofDecember 31, 2022 ,$1,270.4 million of letters of credit had been issued. Each of the facilities contain customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements and a minimum rating from rating agencies. Each restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, under any of the letter of credit facilities, our subsidiaries could be prohibited from paying dividends. We were in compliance with all of the covenants under the aforementioned letter of credit facilities as ofDecember 31, 2022 . See Note 15 "Debt and letter of credit facilities" in our audited consolidated financial statements included elsewhere in this Annual Report for additional information.
Cash Secured Letter of Credit Agreements
Under the cash secured letter of credit facilities, we provide collateral that consists of cash and cash equivalents and debt securities. As ofDecember 31, 2022 , total cash and cash equivalents and debt securities with a fair value of$1,428.7 million were pledged as collateral against the letters of credit issued.
We believe that we have adequate capacity between our existing cash secured
letter of credit agreements as well as available investments to post in
reinsurance trusts to meet our collateral obligations under our existing and
future reinsurance business.
For further details and discussion with respect to cash secured letter of credit agreements, see Note 15 "Debt and letter of credit facilities" in our audited consolidated financial statements included elsewhere in this Annual Report.
Cash, Restricted Cash and Cash Equivalents and Restricted Investments
Cash and cash equivalents consist of cash held in banks and other short-term, highly liquid investments with original maturity dates of ninety days or less. We invest a portion of the collateral securing certain reinsurance contracts inU.S. treasury securities and sovereign debt. This portion of the collateral is included in debt securities in the consolidated balance sheets and is disclosed as part of restricted investments. In addition, restricted investments also pertain to limited partnership interests inTP Enhanced Fund securing the Company's contractual obligations under certain reinsurance contracts that the Company will not be released from until the underlying risks have expired or have been settled. Restricted cash and cash equivalents and restricted investments increased by$355.0 million , or 17.3%, to$2,410.6 million as ofDecember 31, 2022 from$2,055.6 million as ofDecember 31, 2021 . The increase was primarily due to an increase in investments securing reinsurance contracts and letters of credit. For additional information on restricted cash, cash equivalents and investments, see Note 5 "Cash, cash equivalents, restricted cash and restricted investments" in our consolidated financial statements included elsewhere in this Annual Report.
Cash Flows
Our cash flows from operations generally represent the difference between: (1) premiums collected and investment income and (2) loss and loss expenses paid, reinsurance purchased, underwriting and other expenses paid. Cash flows from operations may differ substantially from net income (loss) and may be volatile from period to period depending on the underwriting opportunities available to us and other factors. Due to the nature of our underwriting portfolio, claim payments can be unpredictable and may need to be made within relatively short periods of time. Claim payments can also be required several months or years after premiums are collected. In addition, as discussed above,SiriusPoint has access to the$300.0 million Facility that provides access to loans for working capital and general corporate purposes, and letters of credit to support obligations under insurance and reinsurance agreements and retrocessional agreements. 80
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Operating, investing and financing cash flows for the years ended
2022
2022 2021
($ in millions)
Net cash provided by operating activities $ 293.3 $ 1.6
Net cash provided by (used in) investing activities (1,304.3) 208.6
Net cash provided by (used in) financing activities (23.7) 24.3
Net increase (decrease) in cash, cash equivalents and
restricted cash
(1,034.7) 234.5
Cash, cash equivalents and restricted cash at beginning of
year
1,948.4 1,713.9
Cash, cash equivalents and restricted cash at end of year
$ 1,948.4 Operating Activities Cash flows provided by operating activities can fluctuate due to timing differences between the collection of premiums and reinsurance recoverables and the payment of losses and loss expenses, and the payment of premiums to reinsurers. The increase in cash flows from operating activities in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to increased premium volume in our Insurance & Services segment.
Investing Activities
Cash flows used in investing activities for the year endedDecember 31, 2022 primarily relates to the increase in purchases of debt securities during the period resulting from increased premium volume as well as increased investing in short term and fixed income agency investments to in response to rising interest rates. Cash flows provided by investing activities for the year endedDecember 31, 2021 primarily relates to the acquisition ofSirius Group , which comprised of$740.3 million of cash and restricted cash acquired, partially offset by$108.4 million of cash consideration. Additionally, during the year endedDecember 31, 2021 , the Company redeemed$200.0 million of investments from its Related Party Investment Funds, which was offset by purchases of fixed income investments which exceeded sales and maturities during the period.
Financing Activities
Cash flows used in financing activities for the year endedDecember 31, 2022 primarily consisted of$16.0 million for cash dividends paid to preference shareholders and$14.0 million for payments on deposit liability contracts, partially offset by proceeds from repurchase agreements of$17.6 million . Cash flows provided by financing activities for the year endedDecember 31, 2021 primarily consisted of cash receipts of$48.6 million from the issuance ofSiriusPoint common shares pursuant to the equity commitment letter between the Company,Third Point Opportunities Master Fund Ltd. and Daniel S. Loeb in connection with closing of the acquisition ofSirius Group .
See Note 3 "Acquisition of
statements included in this Annual Report for a more detailed discussion on the
Financial Condition
As of
compared to
due to a net loss of
81
--------------------------------------------------------------------------------
Contractual Obligations
Our contractual obligations as ofDecember 31, 2022 by estimated maturity are presented below: Less than More than Total 1 year 1-3 years 3-5 years 5 years ($ in millions) Debt (1)$ 779.3 $ -$ 115.0 $ 400.0 $ 264.3 Scheduled interest payments (1) 473.6 42.1 77.4 48.1 306.0 Subtotal - Debt obligations 1,252.9 42.1 192.4 448.1 570.3 Loss and loss adjustment expense reserves (2) 5,268.7 1,850.4 1,863.7 680.5 874.1 Operating leases (3) 33.1 9.2 10.5 6.7 6.7 Deposit liabilities (4) 140.5 21.5 47.5 24.7 46.8 Total (5)(6)$ 6,695.2 $ 1,923.2 $ 2,114.1 $ 1,160.0 $ 1,497.9
(1) See Note 15 to our audited consolidated financial statements included
elsewhere in this Annual Report for detailed information on our debt
obligations.
(2) We have estimated the expected payout pattern of the loss and loss adjustment expense reserves by applying estimated payout patterns from actuarial analyses. The amount and timing of actual loss payments could differ materially from the estimated payouts in the table above. Refer to "Critical Accounting Policies and Estimates - Loss and Loss Adjustment Expense Reserves" for additional information. The timing of claim payments is subject to significant uncertainty.SiriusPoint maintains a portfolio of marketable investments with varying maturities and a substantial amount of short-term investments to provide adequate liquidity for the payment of claims. We have not taken into account corresponding reinsurance recoverable amounts that would be due to us.
(3) See Note 21 to our audited consolidated financial statements included
elsewhere in this Annual Report for detailed information on our leases.
(4) For purposes of this table, we have included estimates of future interest accruals and the amount we expect the deposit liability contracts would settle for at their probable settlement dates. (5) We have future binding commitments to fund certain other long-term investments. These commitments totaled$16.0 million as ofDecember 31, 2022 . These commitments do not have fixed funding dates. Therefore, these commitments are excluded from the table above.
(6) The Series B preference shares contain both a mandatory conversion and
optional redemption features, with the optional redemption features allowing for
settlement in either common shares or cash. Obligations arising from these
incentives are excluded from the table above.
Critical Accounting Policies and Estimates
See Note 2 "Significant accounting policies" in our audited consolidated
financial statements included elsewhere in this Annual Report for a summary of
our significant accounting and reporting policies.
Our consolidated financial statements are prepared in accordance withU.S. GAAP, which requires management to make estimates and assumptions. We believe that the accounting policies that require the most significant judgments and estimations by management are: (1) premium revenue recognition, including evaluation of risk transfer, (2) loss and loss adjustment expense reserves, (3) fair value measurements related to our investments, (4) valuation of loss and adjustment expenses reserves and intangible assets relating to the Value of Business Acquired ("VOBA") and other intangible assets as part of theSirius Group acquisition, and (5) income taxes. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.
Premium Revenue Recognition Including Evaluation of Risk Transfer
Premium Estimates
EffectiveJanuary 1, 2021 , the Company changed its accounting policy for assumed written premiums. Previously, the Company estimated ultimate premium written for the entire contract period and recorded this estimate at inception of the contract. For contracts where the full premium written was not estimable at inception, the Company recorded premium written for the portion of the contract period for which the amount was estimable. In 2021, the Company changed its accounting policy to recognize premiums written ratably over the term of the related policy or reinsurance treaty consistent with the timing of when the ceding company has recognized the written premiums. Premiums written include amounts reported by brokers and ceding companies, supplemented by the Company's own estimates of premiums where reports have not been received. The determination of premium estimates requires a review of the Company's experience with the ceding companies, familiarity with each market, the timing of the reported information, an analysis and understanding of the characteristics of each class of business and management's judgment of the impact of 82 -------------------------------------------------------------------------------- various factors, including premium or loss trends, on the volume of business written and ceded to the Company. On an ongoing basis, the Company's underwriters review the amounts reported by these third parties for reasonableness based on their experience and knowledge of the subject class of business, taking into account the Company's historical experience with the brokers, ceding companies or MGAs. See Note 2 "Significant accounting policies" in our audited consolidated financial statements for additional information on premium revenue recognition and the retrospective impact from the change in accounting policy on the Company's consolidated financial statements. Changes in premium estimates are expected and may result in adjustments in any reporting period. These estimates change over time as additional information regarding the underlying business volume is obtained. Along with uncertainty regarding the underlying business volume, our contracts may also contain a number of contractual features that can significantly impact the amount of premium that we ultimately recognize including commutation provisions, multi-year contracts with cancellation provisions and provisions to return premium at the expiration of the contract in certain circumstances. In certain contracts, these provisions can be exercised by the client, in some cases provisions can be exercised by us and in other cases by mutual consent. We regularly monitor the premium estimates for each of our contracts considering the cash premiums received, reported premiums, discussions with our clients regarding their premium projections as well as evaluating the potential impact of contractual features. Any subsequent adjustments arising on such estimates are recorded in the period in which they are determined. Changes in premium estimates may not result in a direct impact to net income or shareholders' equity since changes in premium estimates do not necessarily impact the amount of net premiums earned at the time of the premium estimate change and would generally be offset by proportional changes in acquisition costs and net loss and loss adjustment expenses.
The following table summarizes premium estimates and related commissions and
expenses by segment as of
December 31, 2022 December 31, 2021
Amount Included Amount Included
in Insurance in Insurance
and Reinsurance and Reinsurance
Premium Commission Balances Premium Commission Balances
Estimates Estimate Receivable, Net Estimates Estimate Receivable, Net
($ in millions)
Reinsurance $ 948.6 $ (164.9) $
783.7
Insurance & Services
426.1 (142.9) 283.2 283.2 (85.4) 197.8 Corporate 5.6 0.9 6.5 3.7 0.9 4.6 Total$ 1,380.3 $ (306.9) $ 1,073.4 $ 1,269.4 $ (319.6) $ 949.8 Risk Transfer Determining whether or not a reinsurance contract meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to recognizing premiums written and is based, in part, on the use of actuarial pricing models and assumptions and evaluating contractual features that could impact the determination of whether a contract meets risk transfer. If we determine that a reinsurance contract does not transfer sufficient risk, we use deposit accounting.
Loss and Loss Adjustment Expense Reserves
Loss and Loss Adjustment Expense Reserves by Reportable Segment
The following table summarize loss and loss adjustment expenses reserves net of
reinsurance recoveries separated between (i) case reserves for claims reported
("Case") and (ii) incurred but not reported ("IBNR") reserves for losses that
have
83
--------------------------------------------------------------------------------
occurred but for which claims have not yet been reported and for expected future
development on case reserves as of
December 31, 2022 December 31, 2021
Case IBNR Total (1) Case IBNR Total (1)
($ in millions)
Reinsurance $ 1,117.4 $ 1,776.4 $ 2,893.8 $ 1,109.8 $ 1,712.6 $ 2,822.4
Insurance & Services 145.1 593.2 738.3 81.8 296.4 378.2
Corporate 57.8 202.6 260.4 45.7 379.8 425.5
Total $ 1,320.3 $ 2,572.2 $ 3,892.5 $ 1,237.3 $ 2,388.8 $ 3,626.1
(1)Excludes deferred charges on retroactive reinsurance contracts.
In order to reduce the potential uncertainty of loss reserve estimation, we obtain information from numerous sources to assist in the reserving process for both our reinsurance and primary business. Our underwriters and pricing actuaries devote considerable effort to understanding and analyzing a ceding company or MGA's operations and loss history during the underwriting of the business, using a combination of client and industry statistics. Such statistics normally include historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided and the risk characteristics of the underlying insureds, loss reporting and payment patterns and rate change history. In cases where there is limited history or no history for a particular cedent, we rely on other available information based on industry data or other sources. Our analysis is used to project expected ultimate loss ratios for each contract or MGA during the upcoming contract period, which are considered in the loss reserving process. We rely heavily on information reported by MGAs and ceding companies, as discussed above. In order to determine the accuracy and completeness of such information, our underwriters, actuaries, and claims personnel perform audits of certain MGAs and ceding companies, where customary. Generally, ceding company audits are not customary outsidethe United States . In such cases, we review information from ceding companies for unusual or unexpected results. Any material findings are discussed with the ceding companies. We sometimes encounter situations where it is determined that a claim presentation from a ceding company is not in accordance with contract terms. Most situations are resolved without the need for litigation or arbitration. However, in the infrequent situations where a resolution is not possible,SiriusPoint defends its position in such arbitration or litigation.
See Note 12 "Loss and loss adjustment expense reserves" in our audited
consolidated financial statements included elsewhere in this Annual Report for
additional information regarding loss and loss adjustment expense reserves
including reserving methodologies.
As part of our risk management process, we periodically engage external actuarial and claims consultants to independently evaluate the adequacy of the net carried loss and loss adjustment expense reserves. Management considers the results of the independent analysis as a supplement to internal recommendations when determining carried loss and loss adjustment expenses reserve amounts. The following table details our prior year loss reserve development of liability for net unpaid claims and claim expenses for the years endedDecember 31, 2022 and 2021: 2022 2021 Unfavorable Unfavorable (favorable) (favorable) development development ($ in millions) Reinsurance $ (8.8) $ (18.6) Insurance & Services (4.7) (13.5) Corporate (7.8) (10.5) Total net unfavorable (favorable) development $ (21.3) $ (42.6) 84
--------------------------------------------------------------------------------
Loss and loss adjustment expense development - 2022
The
•$8.8 million of net favorable prior year reserve development in the Reinsurance segment primarily due to COVID-19 reserve releases, partially offset by reserves strengthening in recognition of the current high inflationary environment and increases on prior year catastrophe events; •$4.7 million of net favorable prior year reserve development in the Insurance & Services segment which was primarily driven loss reductions in A&H reserves due to better than expected loss experience, partially offset by reserve strengthening in direct Workers' Compensation reserves based on reported loss emergence; and
•$7.8 million of net favorable prior year reserve development in Corporate due
to runoff surety exposures and property losses.
Loss and loss adjustment expense development - 2021
The
•$18.6 million of net favorable prior year reserve development in the Reinsurance segment as a result of better than expected loss reserve emergence on historical property events relating to multiple accident years and better than expected attritional loss experience; •$13.5 million of net favorable prior year reserve development in the Insurance & Services segment as a result of better than expected loss experience in A&H for recent accident years; and
•$10.5 million of net favorable prior year reserve development in Corporate as a
result of better than expected loss experience on property and contingency
classes moved to runoff in 2021.
Sensitivity Analysis
Actual Results vs. Initial Estimates
Generally, initial actuarial estimates of IBNR reserves not related to a specific large event are based on the loss ratio method applied to each class of business.SiriusPoint regularly reviews the adequacy of its recorded reserves by using a variety of generally accepted actuarial methods, including historical incurred and paid loss development methods. Estimates of the initial expected ultimate losses involve management judgment and are based on historical information for that class of business, which includes loss ratios, market conditions, changes in pricing and conditions, underwriting changes, changes in claims emergence, and other factors that may influence expected ultimate losses. If actual loss activity differs substantially from expectations, an adjustment to recorded reserves may be warranted. As time passes, loss reserve estimates for a given year will rely more on actual loss activity and historical patterns than on initial assumptions.
For major events, particularly natural catastrophe,
assessments of the ultimate losses associated with each individual event.
Estimates are based on information from ceding companies, third party and
internal catastrophe models, and by applying overall estimates of insured
industry losses to
Changes in all estimates will be recorded in the period in which the changes occur. In accident years where the updated estimates are lower than our initial estimates, we experience favorable development. Conversely, in accident years where the revised estimates are higher than our original estimates, there is adverse development on prior accident year reserves.
Potential Variability in Loss Reserve Estimates
There are possible variations from current estimates of loss reserves due to changes in key assumptions. In order to quantify the potential volatility in the loss reserve estimates,SiriusPoint employs a stochastic simulation approach to produce a range of results around the central estimate and estimated probabilities of possible outcomes. Both the probabilities and the related modeling are subject to inherent uncertainties. The simulation relies on a significant number of assumptions, such as variation in historical loss development patterns and industry losses for major events, potential mis-estimation of the initial expected loss ratios during the pricing process, and unanticipated inflation. 85
--------------------------------------------------------------------------------
Fair value measurements
Fair Value Hierarchy
Fair value measurements are categorized into a hierarchy that distinguishes
between inputs based on market data from independent sources ("observable
inputs") and a reporting entity's internal assumptions based upon the best
information available when external market data is limited or unavailable
("unobservable inputs"). Quoted prices in active markets for identical assets or
liabilities have the highest priority ("Level 1"), followed by observable inputs
other than quoted prices, including prices for similar but not identical assets
or liabilities ("Level 2"), and unobservable inputs, including the reporting
entity's estimates of the assumptions that market participants would use, having
the lowest priority ("Level 3").
The availability of observable inputs can vary from financial instrument to
financial instrument and is affected by a wide variety factors including, for
example, the type of financial instrument, whether the financial instrument is
new and not yet established in the marketplace, and other characteristics
particular to the instrument. To the extent that valuation is based on models or
inputs that are less observable or unobservable in the market, the determination
of fair value requires significantly more judgment. See Note 6 "Fair value
measurements" to our audited consolidated financial statements for additional
information on the framework for measuring fair value established by U.S. GAAP
disclosure requirements.
Strategic Investments
The Company's Strategic Investments are carried at fair value, using the equity
method or the cost adjusted for market observable events less impairment method.
For Strategic Investments carried at fair value, management uses commonly
accepted valuation methods (i.e., income approach, market approach). Where
appropriate to utilize equity method, the Company recognizes its share of the
investees' income in net realized and unrealized investment gains (losses).
Where criteria to be accounted for under the equity method is not met, we have
elected to value our Strategic Investments at the cost adjusted for market
observable events less impairment method, a measurement alternative in which the
investment is measured at cost and remeasured to fair value when determined to
be impaired or upon observable transactions prices becoming available.
As of December 31, 2022 , the Company's Strategic Investments totaled
$262.0 million . See Note 6 "Fair value measurements" to our audited consolidated
financial statements for additional information on the framework for measuring
fair value established by U.S. GAAP disclosure requirements related to
investments.
Investments measured using Net Asset Value
We value our investments in limited partnerships, including our investments in Related Party Investment Funds, at fair value. We have elected the practical expedient for fair value for these investments which is estimated based on our share of the NAV of the limited partnerships, as provided by the independent fund administrator, as we believe it represents the most meaningful measurement basis for the investment assets and liabilities. The NAV represents our proportionate interest in the members' equity of the limited partnerships. The fair value of our investments in certain hedge funds and certain private equity funds are also determined using NAV. The hedge fund's administrator provides quarterly updates of fair value in the form of our proportional interest in the underlying fund's NAV, which is deemed to approximate fair value, generally with a three month delay in valuation. The private equity funds provide quarterly or semi-annual partnership capital statements with a three month delay which are used as a basis for valuation. These private equity investments vary in investment strategies and are not actively traded in any open markets. Due to a lag in reporting, some of the fund managers, fund administrators, or both, are unable to provide final fund valuations as of the Company's reporting date. This includes utilizing preliminary estimates reported by its fund managers and using other information that is available with respect to the underlying investments, as necessary. See Note 6 "Fair value measurements" to our audited consolidated financial statements for additional information on the framework for measuring fair value established byU.S. GAAP disclosure requirements related to investments measured using NAV. 86 -------------------------------------------------------------------------------- Valuation of components of purchase consideration, loss and adjustment expenses reserves and intangible assets relating to VOBA and other intangible assets as part of theSirius Group acquisition
Purchase consideration
As a part of the total consideration related to the acquisition ofSirius Group , the Company issued various financial instruments, including preference shares, warrants, and other contingent value components, as discussed further in Note 3 "Acquisition ofSirius Group ". The majority of these instruments were valued utilizing model simulations that included assumptions around equity volatility and other market-based inputs. The Series B preference shares were valued by considering the results of three separate analyses: (i) a comparison to the observed market yields on similar publicly traded preferred shares of other insurance industry peers; (ii) a build-up method whereby an appropriate yield is based on a base level plus incremental amounts for relative risk and liquidity factors; and (iii) a comparison to the observed or implied yields of other securities in theSiriusPoint capital structure.
Loss and loss adjustment expense reserves
As a part of the acquisition ofSirius Group , we recognized an adjustment to the acquired loss and loss adjustment reserves of$80.6 million as ofDecember 31, 2021 to reflect the fair value of the acquired reserves as of the acquisition date. The adjustment to loss reserves is included in loss and loss adjustment expense reserves in our consolidated balance sheets and is based on the present value of future payments plus a risk margin. Management applied judgment in estimating the fair value of loss reserves using historical loss payment patterns and risk margins. As ofDecember 31, 2022 , the unamortized fair value adjustment to loss reserves was$53.7 million (2021 -$65.6 million ). On an annual basis, or as other factors necessitate such as an assessment, we evaluate the fair value adjustment to loss reserves for impairment. As ofDecember 31, 2022 , there were no indicators of impairment.
VOBA
As part of the acquisition ofSirius Group , we recognized VOBA of$147.9 million . As ofDecember 31, 2022 , VOBA was fully amortized and therefore had no carrying value (2021 -$50.0 million ). In the year endedDecember 31, 2022 , amortization of$50.0 million (2021-$97.9 million ) was recorded in acquisition costs, net in the consolidated statements of net income (loss). The VOBA related asset is included in deferred acquisition costs and value of business acquired, net on our consolidated balance sheet. Management determined the fair value of the VOBA intangible asset by calculating the difference between the unearned premium reserve and estimated risk-adjusted future losses and expenses associated with the policies and contracts that were in-force as of the closing date of the acquisition, discounted to present value. Management applied judgment in estimating the VOBA intangible asset, which involved the use of significant assumptions related to the discount rate and expected profitability associated with the unearned premium reserve, which includes an associated risk margin.
Intangible Assets
As part of the acquisition ofSirius Group ,SiriusPoint recognized identifiable intangible assets. As ofDecember 31, 2022 , these identifiable intangible assets had a carrying value of$163.8 million and consisted of the following, and are included in intangible assets on the Company's consolidated balance sheet: •Distribution relationships - refers to the relationshipsSirius Group has established with external independent distributors and brokers to facilitate the distribution of its products in the marketplace. As a result of owning the distribution relationships, management will not have to duplicate historical marketing, training, and start-up expenses to redevelop comparable relationships to support business operations. The fair value of the distribution relationships intangible asset was determined using a variation of the income approach. Management applied judgement in estimating the fair value of the distribution relationships intangible asset, which involved the use of assumptions related to the discount rate and customer attrition rate, as well as the expected revenue growth rates and profitability margins (which are used to determine the amount and timing of expected future cash flows); •MGA relationships - refers to relationships with managing general agents on the direct insurance business. Through the MGA relationships,Sirius Group generates a predictable and recurring stream of service fee revenue. The fair value of the MGA relationships intangible asset was determined using a variation of the income approach, which 87
--------------------------------------------------------------------------------
involved the use of assumptions related to the discount rate and customer
attrition rate, as well as the expected revenue growth rates and profitability
margins;
•Lloyd's Capacity - Syndicate 1945 - relates to relationships associated with
the right to distribute and market policies underwritten through Lloyd's
Syndicate 1945. The Lloyd's Capacity intangible asset was valued using the
market comparable transaction method;
•Insurance licenses -
to maintain licenses to produce and service insurance contracts. Insurance
licenses are estimated to have an indefinite life and are therefore not
amortized, but are subject to periodic impairment testing. The insurance
licenses were valued using the market comparable transaction method;
•Trade name - represents the value of the Sirius Group brand acquired. The trade
names intangible asset was valued using the relief from royalty method; and
•Internally developed and used computer software - represents the value of
internally developed and used computer software utilized by the Company.
Intangible assets are assessed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that is more likely than not that an impairment exists. Such events or circumstances may include an economic downturn in a geographic market or a change in the assessment of future operations.
There was no evidence of potential impairment of intangible assets as of
Income Taxes
We have subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The jurisdictions in which our subsidiaries and branches are subject to tax areAustralia ,Belgium ,Canada ,Germany ,Hong Kong (China ),Ireland , Luxembourg,Malaysia ,Singapore ,Sweden ,Switzerland , theUnited Kingdom , andthe United States .
Recoverability of Net Deferred Tax Asset
We record a valuation allowance against deferred tax assets if it becomes more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in income tax expense in the period of change. In determining whether or not a valuation allowance, or change therein, is warranted, we consider factors such as prior earnings history, expected future earnings, carryback and carryforward periods and strategies that, if executed, would result in the realization of a deferred tax asset. It is possible that certain planning strategies or projected earnings in certain subsidiaries may not be feasible to utilize the entire deferred tax asset, which could result in material changes to the deferred tax assets and tax expense. Uncertain Tax Positions Recognition of the benefit of a given tax position is based upon whether a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more likely than not recognition threshold, we must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. As ofDecember 31, 2022 , the total reserve for unrecognized tax benefits of$2.3 million . With few exceptions, we are no longer subject toU.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2018.
Earnings of Certain Subsidiaries
SiriusPoint has capital and liquidity in many of its subsidiaries, some of which may reflect undistributed earnings. If such capital or liquidity were to be paid or distributed to us or our subsidiaries, as dividends or otherwise, they may be subject to income or withholding taxes.Sirius Group generally intends to operate, and manage its capital and liquidity, in a tax-efficient manner. However, the applicable tax laws in the relevant countries are subject to change, possibly with retroactive effect, including in response toOrganisation for Economic Cooperation and Development ("OECD") guidance. Accordingly, such payments or earnings may be subject to income or withholding tax in jurisdictions where they are not currently taxed or at higher rates of tax than currently taxed, and the applicable tax authorities could also attempt to apply income or withholding tax to past earnings or payments. 88
--------------------------------------------------------------------------------
See Note 16 "Income taxes" in our audited consolidated financial statements
included elsewhere in this Annual Report for additional information on income
taxes.
Recent Accounting Pronouncements
See Note 2 "Significant accounting policies" in our audited consolidated
financial statements included elsewhere in this Annual Report for additional
information on recently issued accounting standards.
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