Sirius picks growth segments as it aims to attract investors

Sirius International Insurance Group is on the hunt for private investors, which could ultimately pave the way for its completing an initial public offering (IPO), Allan Waters, the company’s chief executive, has told Intelligent Insurer.

The company’s owner, CMIG International, which acquired Sirius from White Mountains Insurance Group for $2.6 billlion (originally $2.2 billion) in 2015, has always stated it plans to float Sirius at some point.

Now, Waters says, it is mulling first raising around $400 million privately, which could mean adding two investors, each with an equity stake of below 10 percent.

“We are working on the capital raise,” he says. “We have been in conversation with strategic investors.”

He explains that it was always part of the plan to bring in some third-party capital along the way. “Then perhaps down the road we will have an IPO,” Waters adds.

“It can actually be helpful to have other investors come in and make investments in advance. They help to establish the value of the company,” he says, noting that there is no hard plan or timetable for an IPO in place yet.

Growth through acquisitions

As well as wanting to make the company more attractive to investors, Sirius has been seeking expansion into sectors where rates are more resilient to the overcapacity created by alternative markets. Waters says the company has been growing and diversifying through a mixture of acquisitions, strategic partnerships and organic growth.

Sirius has been busy on the M&A front recently, particularly in accident and health (A&H) insurance, in an expansion helped by its Chinese owner.

In April 2017, it acquired US-based healthcare specialist ArmadaCorp Capital, which provides supplemental healthcare insurance products and administration services in the US.

One month later, the firm acquired International Medical Group (IMG), a provider of global medical insurance products and assistance services.

IMG offers temporary coverage for customers’ medical expenses and emergency evacuations when travelling outside their home country, coverage for expats and global citizens, as well as coverage for trip interruption and cancellation, lost baggage and travel delays.

Sirius has been doing business with IMG for quite some time, Waters explains. IMG uses Sirius paper for almost all its products while taking some of the business back to its own captive.

“They have always been very focused on the bottom line, not only the top line,” he says.

Sirius’ Chinese owners are also supporting the company in its latest acquisition. In November 2017, it agreed to buy Israeli conglomerate Delek Group’s remaining 47.35 percent holdings in insurer Phoenix for a cash sum of NIS 2.3 billion ($656 million). In September 2017, Sirius had already agreed to acquire 4.9 percent of Phoenix.

Phoenix is one of Israel’s major insurance and services companies. Through it, Sirius expects to be able to offer new products to the Israeli market, and receive access to the country’s technology capabilities and the opportunity to develop insurance technology solutions while enhancing Sirius’ financial results.

“It will be a freestanding operation,” Waters says, describing the Israeli insurance market as “a government-sponsored oligopoly”.

“The government has a lot of input into product design and works with the insurance industry to provide, in essence, through employers, insurance benefits to the citizens of Israel,” he explains.

Life, health, pensions, and savings benefits are provided through payroll production in Israel.

Waters is keen to point out that the Phoenix management has been pursuing profitability as opposed to just growing the top line, while adding some non-insurance businesses such as an investment management company and a clearing house operation.

“The changes have propelled Phoenix to a top performer in the industry,” Waters says. “Our job is mostly to be happy owners,” he adds.

The company also has growth plans in Asia. “With our new ownership we have strong connections in the Far East and China especially, and IMG is about to introduce, with a local partner, its travel medical product in China,” Waters says.

Sirius sees significant potential for A&H products in Asia, particularly in China. IMG, together with a local Chinese insurance company, and Sirius are working closely to prepare policy wording policies, and obtain the licences and approval from the Chinese authorities to initiate a sale of these products in China, explains Monica Manhem, CEO of Sirius International Insurance Corporation (pictured left). The products will target Chinese students travelling abroad, she adds.

“We are using that as a first step in the expansion in the Chinese A&H field,” Manhem says.

The plan includes a local carrier providing the paper and Sirius’ Lloyd’s platform reinsuring the business, and Sirius is looking to develop and bring further products to the Chinese market. “We see a lot of real interest in the products,” she says.

A&H is, behind property, Sirius’ second-largest line of business and has been, for the past several years, its fastest, most rapidly growing line of business, Waters explains.

Seeking investors

While Sirius can shoulder half of the Phoenix acquisition price through existing capital, its parent owner has committed to providing the rest. Nevertheless, Sirius is seeking to raise further capital from third parties. Should it succeed in raising $400 million that would mean a dilution of the CMIG International equity holdings in Sirius. This also happened in the IMG acquisition, when Sirius issued convertible preferred stock to finance the deal.

But even after the inclusion of new investors, CMIG International will retain the majority in Sirius which had a regulatory capital of $2.6 billion and gross written premium of $1.3 billion as of 2016-end.

Receding pressure on rates

Finding profitable growth is not easy in a subdued P&C rate environment, caused in part by excess capital due to strong growth of alternative markets, driven by investors seeking higher yields in a historically low interest rate environment. But Waters expects pressure on rates from alternative capital to recede as interest rates rise and also as a consequence of significant losses experienced in 2017.

“While I don’t think that pension funds or hedge funds will leave the risk class because of higher interest rates, it may slow the appetite for growing it,” Waters says. “The driver of their growth into the risk class will be moderating with increasing interest rates over time,” he adds.

Furthermore, while insurance-linked securities (ILS) participants have reloaded after large natural catastrophe losses in 2017, events such as hurricanes Harvey, Irma and Maria will have consequences.

“A lot of the money that has been invested in 2017 is going to be locked up in trusts for some time while claims work their way through the systems,” Waters says.

“Property cat is not a short tail business as it used to be,” he notes. Hurricane Harvey was a flood event, and there is increasing litigation surrounding such loss events.

“We might see a lot of that money locked up for several years,” Waters says. While this is unlikely to affect pension funds, hedge funds might be put off by the fact that their clients’ money is locked up for a long period of time. “That might slow them down next time there is another big event,” Waters says.

While a moderation of the risk appetite in the alternative market might take a while, Sirius has adapted to the current operating environment.

“We have been operating in a softening market for a long time. We are getting used to it and we can handle what the market is giving us,” Waters says.

Manhem adds: “We have strong market positions in areas where capital markets are not very important or significant and where ceding companies are not very interested in expanding their relationships to the capital markets”.

Seeking organic growth

There are still pockets of growth in areas where alternative capital is less active, for example in smaller company markets, and parts of Europe and Asia, Manhem explains.

Sirius is therefore diversifying and rebalancing the book of business through a combination of insurance and reinsurance in property catastrophe as well as A&H.

“That’s a way of balancing yourself over the various market cycles,” she says.

Sirius has recently added three lines of business. Because management expected a turn in premium rates for US casualty the company established a casualty reinsurance underwriting team. The unit set up shop and began underwriting at the beginning of 2017.

“We are seeing rates beginning to improve there,” Waters says.

Sirius has also identified surety and environmental risks as insurance areas in the US where profits remain robust and has hired teams to grow theses business lines.

Remaining traditional

While not excluding any options when looking to buy reinsurance, Sirius tends to stick to the traditional sources of capacity.

“We have a good track record as being strong in the property arena and we have, over the years, structured proportional reinsurance contracts which mirror our portfolio,” Manhem explains.

“They are without event limits, without caps, they are completely on a proportional basis.

“It gives us huge protection which you would never be able to find in the capital markets arena,” she adds.

Bermuda stays attractive

While the advantages of operating out of Bermuda from a tax perspective are shrinking on the back of tax reforms in the US, this does not change Sirius’ strategy.

The Tax Cut and Jobs Act of 2017 has reduced the statutory federal income tax rate from 35 percent to 21 percent, effective January 1, 2018.

“You have to take a look at the whole picture in determining whether you are still better off writing business in Bermuda, and the answer for us is: yes,” Waters says.

While Sirius does not see the need for restructuring its operations in Bermuda, it might rejig how business is shared by intra-company quota shares and other intra-company reinsurance arrangements around the globe. In the long run, Sirius expects to benefit from the tax changes as it will incur lower taxes in the US.

In addition, flexibility on the labour market may facilitate any required potential shifts in the business mix or geographic rebalancing.

“We are seeing a lot of talent in the marketplace, more than at any other time,” Waters says.