Third Point–Sirius merger
Third Point Re will soon complete its acquisition of Sirius in a deal that has been likened to a minnow swallowing a whale. Executives of both groups believe this will create a stronger, more diversified company. Dan Malloy, Third Point Re’s chief executive, tells Bermuda:Re+ILS about the new opportunities waiting to be seized by SiriusPoint.
“The hardening market will lead SiriusPoint to focus on improving discipline and on being more precise about the coverage being offered.”
Dan Malloy, Third Point
The deal between Third Point Re and Sirius International Insurance Group is edging closer, with the two sides having agreed to merge in a $788 million deal that will create a $3.3 billion company called SiriusPoint when the acquisition closes—probably in Q1 2021.
This has been on the cards for many months and is broadly seen as a logical pairing between two companies with complementary businesses, both of which need a shot in the arm to revive their fortunes.
Sirius originally launched a process to find a buyer in March 2020 following concerns that its majority owner, China Minsheng Investment Group, was facing liquidity issues. More recently it reported a net loss of $104 million for Q3 2020, having made a loss of $7.6 million in the same quarter in 2019. This included a $39 million pre-tax loss related to COVID-19 exposures net of re/insurance and additional premiums due.
Third Point Re, on the other hand, reported a net profit of $68.7 million for Q3, turning around a net loss of $15.1 million in the same period of 2019. For the first nine months of 2020 the reinsurer, backed by US hedge-fund manager Daniel Loeb, generated a relatively modest profit of $9.1 million.
“AM Best was positive about our capital strength and its press release indicates that it understands the benefits of this merger, so we believe the deal addresses the concerns the rating agency has expressed about business profile,” says Dan Malloy, chief executive officer at Third Point Re, and soon to be senior underwriting executive of SiriusPoint.
“We are hopeful that there will be a ratings uplift over time. The market sees the strategic logic of the partnership, and the deal certainly has great timing—if we were in a softening market it would not be nearly as compelling,” he adds.
“Our businesses are complementary, with Sirius strong in accident and health as well as property, and Third Point Re being more focused on casualty and specialty. The expectation is there will be little optimisation or trimming of either business. For example, we have found only one US client that has us both on its quota share.”
Malloy sees the deal as a classic example of a combination being worth more than the sum of its parts. “SiriusPoint will have the balance sheet and the people to provide a significant capacity, while the business has better diversification than either partner has alone,” he explains.
“As the market improves there will be new opportunities that SiriusPoint will be able to support. It will allow us to operate in new areas and will make us more relevant to our clients.”
Entrepreneurial, innovative and smart
With around 40 people working at Third Point Re, compared to around 1,200 at Sirius, Malloy describes the deal as “a bit like a minnow swallowing a whale”. The integration will certainly require some cultural adjustments, but Malloy believes both sides are open to change, and predicts that a new company will emerge following the closing of the deal.
“We will see an evolution in SiriusPoint’s culture. It will be entrepreneurial, innovative with technology, and smart with its use of client data. It will be a blend of both companies with an infusion of new ideas.
“This is a merger of two companies that both have some uncertainties surrounding them, and it will lift them both. It will be a new company, not two companies bolted together,” he explains.
This new culture will be forged in the furnace of the hardening market, which Malloy notes is forcing underwriters to improve their negotiation skills.
“We have to get back to asking clients not what coverage they want, but what exposure they are looking to manage, and then working with them to find the best solution.
“We also have to get back to creating structures that are based on the performance of the underlying business and that offer incentives for controlling claims, which have fallen out of fashion in recent years.”
The hardening market will lead SiriusPoint to focus on improving discipline and on being more precise about the coverage being offered.
“We will be looking more closely at the wording and definitions we use in our policies, particularly around exposures (including contagious diseases) and coverage terms such as hours clauses,” says Malloy.
SiriusPoint will be run by Siddhartha (Sid) Sankaran, who takes the reins as chairman and chief executive. Kip Oberting, Sirius Group’s president and chief executive, will step down. Steve Fass has worked at both companies and will help with integration.
The two groups will eventually look to consolidate offices, but Malloy insists that is not a priority and will be addressed when leases come up for renewal.
Third Point Re will finance the transaction through a combination of cash in hand, Third Point Re equity issued to Sirius Group shareholders, and Third Point Re equity issued to Loeb (Third Point Re’s largest individual shareholder).
Loeb will acquire SiriusPoint shares worth approximately $50 million at closing. If necessary, the deal will lean on other debts or equity financing.
The Sirius tie-up is not the only deal Third Point Re has worked on in recent months: a partnership with the newly created Arcadian Risk Capital is set to shake things up further for the reinsurer.
“Our initiative with Arcadian Risk Capital predates our agreement with Sirius and is very exciting,” says Malloy.
“John Boylan, who heads the business at Arcadian, calls this ‘a generational hard market’ and it is quite amazing what they have done in just six months. By next year, we expect Arcadian to have gross premium exceeding $100 million.”
Malloy insists the two deals—with Sirius and Arcadian—are complementary, with SiriusPoint creating better opportunities for Arcadian than Third Point could have alone. Arcadian will write business on SiriusPoint’s Bermuda balance sheet for large corporate customers, but Third Point cannot tap into excess and surplus (E&S) business for smaller US clients.
“Sirius has E&S business in the US and paper in the UK, and it has its Lloyd’s syndicate, all of which will give Arcadian more opportunities,” Malloy explains.