Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

I think, hopefully, everybody who is joining is logged on. Welcome to the Conduit Holdings trading update. We'll be talking about the 1st of January renewals. Just as a point of order, we'll be recording the call and we'll be putting up on the website with the slides later on today. We are here to talk about the 1 January renewals, and we'll be updating on our quarter 4 '21 and full year '21 on the 24th of February. And so hopefully, we can just keep the discussion to our experience in the 1st of January renewals for today. Just to introduce the team. I'm sure most people know Neil Eckert, our Executive Chairman; Trevor Carvey, Chief Executive Officer and Chief Underwriting Officer. And we also have a special guest, Greg Roberts, who's Head of our Property team, who'd be talking about some of the insights that we've had during the renewal season. So Neil, can I hand over to you?

Yes. So first of all, we've had a really good renewal season market conditions were I think, ahead of where we had expected them to be. And looking at the background, 2021 was a year fourth highest cat loss year in history between $110 million and $120 billion of claims. And notably, there are more than $500 billion of cat losses over the last 5 years. So we launched the company into what was a technically repricing market on the back of some pretty serious losses from 2017 to 2020. Last year, there was [ ILS ] less capacity and retrocession was available. We responded to that by writing more quota share. This year, we have seen a significantly -- significant withdrawal of our less capacity through funds being trapped or withdrawn. We still see inflation, both in terms of social inflation across casualty lines and economic inflation, which will affect short-tail accounts, so rate rises were needed to reflect that. And the other thing is the recognition of the impact of climate change. I mean, Q4 in itself, Uri was an unmodeled loss at the beginning of the year, the winter storms in Texas. We then saw in Q4 the Quad-State tornadoes together with the Marshall fire in Colorado in December, one doesn't normally expect to see wildfires happening in North America in December. So that creates further momentum for repricing. We've seen withdrawal of capacity from a number of players in the market, which further strengthen our conviction that our timing is good. Next slide. Trevor?

Okay. Highlight Slide. It's just not turning over on our screen.

Oh, that's my -- I apologize.

No worries. No worries. Yes. So highlights of the renewal season. That'd be Okay. Thanks. Yes, so ultimate brand premiums of $262 million, that's up 70% on last year's $154 million. And actually, when we look back, I think last year was a pretty good effort from the team in establishing that $154 million from day 1. But the benefits that we got this year was plainly just having a team fully in place for the renewal season, but also it's our first renewal season. So that $154 million was due to renew. The team here fully formed, the time we got to the end of Q1, have had the year to develop the client contacts, the broker relationships, et cetera, and get that message across. So we knew we will be seeing a wide funnel of business and that's going to be exceeding our expectations. So that was great for us. We'll talk more about the individual classes in a moment. Momentum on pricing. That's definitely been a feature of this year. The underlying rate has still been moving forward. And I think the expression that's often used is that pricing is staying ahead of loss and claims inflation. And in many cases, that is correct. And we've had some really good results where the original underlying rate still moving ahead in some cases like our casualty book into high single digit, low double digit on the original rate. But what we're showing here and in this presentation and part of our metric going forward is that we believe that a true measure of, if you like, margin improvement is showing that rate to increase net of claims inflation, exposure change and to a degree in terms of conditions where they improve on or change on risks. So for us, it's a solid metric. It's one which will carry through the business, and it's one that enables us, I think, to best communicate to investors and the team's metrics -- built around that net margin improvement. So we'll talk about that in the slide that's coming up where we have that 3 individual classes. Diversified business, as we've said before, 41%, 33%, 26%. That's pretty much where we kind of had it in the plan anyway through the course of the year to but also it's what you'd expect in the renewal season and the market generally, property is more of a skew towards Jan 1. Obviously, in the U.S., we have coming up the -- what we call the Atlantic wind season, which comes up end of Q1 into Q2. But property is generally more skewed in terms of the buyers to Jan 1. Casualty 1/3 of this portfolio. Now we said a year ago that we knew our casualty portfolio that we were looking to build, which was diversified across many clients and regionally, particularly within the State, renew through the year. So for us, the casualty book is an ongoing renewal portfolio. And with that I would expect to just continue to tick through as those renewals come through plus other new clients are added. Conduit share split sort of it's in the press and you've seen it, and it's still true in our belief and in terms of our own metrics. The underlying primary rate change is really strong. And in the main, it's still moving ahead of excess of loss. There are exceptions to that, obviously, when you get to parts of the U.S. where Ida have hit, parts of Europe where burned hit those programs. Those rates have moved significantly more. And that's great, and we've taken some benefit from that. But there's no doubt in our mind that the Conduit share getting access to all of the underlying rate increase dollars is the way that we've built a portfolio here that's effectively reduced the volatility because we're able to apply tighter bank caps but also get the benefit of all of the underlying rate. So for us, it's always been a blend, and it will be a blend of the 2. But at the moment, we're firmly committed to the belief that the sharing in all of that ground up premium is a better way to us to optimize the portfolio profitability. Hit rate for us, 20% that's moved in the right direction. It's a lower number than I think the last indicator that we provided, which was 23%, 24%. That's simply a reflection of seeing that larger volume of business and continuing to be selective. And it's what we said we would do. We're sticking to that mantra, and providing we still see that business flowing through. We're able to, if you like, sift and super sift within that overall submission flow that we received. The retrocession program heavily placed at Jan 1. We will continue to add to that as we go through the year and the portfolio grows. But by far and away, the majority of it is placed at increased pricing, which is a market statement as much anything else, we budgeted to be more for that program. And we have done, but we are within budget, which is a great result for us. And we've also added by virtue of some hard work from Greg alongside me and also the brokers in Q4, we've added a number of new participants to that panel. So we've actually built out that panel overall. So I'll move on to next slide where you've got, if you like, the breakdown of the portfolio in its underlying metrics. The -- as I said, it's pretty much in line with us we'd expect through the Jan 1 renewal season. Property for us. The portfolio has continued to build out a very strong renewal book. We've added Europe to that in a selective manner. I think much of Europe, the price through on the back of Europe, I think the team here would say was generally positive, but some of them were disappointments still. So rate increases that we saw may well be in the 30% or 40% range when you're coming off of a base rate that's in the 2% to 3% range, it really still isn't attractive in a number of cases for us. But we've built that out, particularly on the quota share side by still being able to underwrite with very tighter bank caps. And Greg can talk about that slightly more in a moment. But in producing that portfolio around the property and building it regionally between tighter bank caps. I use the expression that we still managed to knock out quite a bit of volatility from that. And that has pay dividends as we've gone through 2021 with our incurred losses that we reported on Ida and burned particularly, where we have managed to reduce that impact on the portfolio considerably by skewing the portfolio away for what we would call kind of headline catastrophe excess of loss limits. Casualty large increase in terms of percentage-wise, but it was a relatively low a slower start for us a year ago. Casualty for us, it's worth pointing out is a -- we have a very large showing that comes through, and it runs with our lowest hit rate. So on the portfolio for casualty. It's currently -- we're running at about sort of 1 in 8, 1 in 9 submission to hit rate. So I think it just shows our continued sort of selectivity around that portfolio, and a recognition that claims inflation and the social inflation factors that we put into our pricing are still very much alive in the way that we view profitability. As I said, double-digit rate increase is being reported by a number of our underlying clients. But when you dial into that claims inflation, which can be kind of mid- to high single digit, we still find a number of those casualty contracts, not meeting our own hurdle rates. But overall, very good effort from the guys there. Especially for us is we still see that as a complementary set to P&C for us. We have a very limited exposure within the specialty field to cat classes, such as workers' comp or specie. We don't play in those classes and especially for us is always designed to be a firm adjunct in a complementary factor to the P&C. We see that globally. Lloyd's, to some degree, but certainly U.S. and Europe. Far East on specialty is still a very small market and relatively low volume of that actually come out of the world stage. So the Far East probably is 1 area where in specialty, it's underrepresented on the global distribution. On hit rate, I've spoken about already in terms of the overall split 41%, 33%, 26%, generally, that's in line with our planned split that we forecast for year to. And then at the bottom there, just I've already commented on the fact that we skewed this towards the quota share to purely get at that underlying primary market and get the best access to the dollars that are in play there. Okay. Okay, Tristan, I'd be happy to take more questions on this when we move to the Q&A session. Next slide. Have you turned over? It's not moving.. Okay. Greg, do you want to? I think it's probably come to your market experience.

Yes. So I think a key characteristic of the renewal season as it was very late somewhat compressed as well over the sort of latter period of mid- to late December, some effects from travel, underwriters and clients less able to travel perhaps. And noting loss activity still occurring in the final quarter, which for reasons and material impact to renewal contracts, for example, spending longer to collect that data, have a better understanding of it was very important. We show here as previously some index graphics, Guy Carpenter's, Global Rate on Line Index and Howden's here. Noting here that these are indicators of price, and they are less reflective of the underlying risk dynamics, thinking about claims inflation here and exposure metrics. But the key here is that the -- our observation here is the gradient of the slope, the momentum that's created and then obviously, they're very visual in the price is moving in the right direction, couple of characteristics here from the actual placement process of the treaties. There was an observed change in risk appetite and risk profile deployment, lower attachment point programs were more difficult to place, particularly aggregate or frequency products the market was responsive in asking for that risk transfer mechanism to be revisited. And we saw structures move in whole from aggregate to occurrence. Good example of that is Europe, post burned where in existence probably were quite a lot of aggregate products bought by cedents, the market probably did a good job in moving those to current base products. And they feel very different for the cedent buying, and it requires a different level of exposure control. So we saw that as a great positivity. Whether they're priced adequately still, that's -- I would look there to the right direction. We still think there's more work to be done there, on pricing. Comment here, referencing Trevor's point earlier on about quota shares and the capping of quota shares. So this has obviously been a strategy from us from the beginning, controlling the tail and maintaining control over the volatility that as a reinsurer is assumed by selling reinsurance. The quota share product is a value to us. It puts us as a pure play reinsurer puts us closer to the original business that we have cited as being repriced and reset in its metrics. The quota shares allow us to get close to that business, but we control the volatility and the tail upmost as our objectives, continually putting balance on those quota shares and working with the cedents and the carriers to put that in an equitable level. Next slide. So we've referenced here our net rate change across PC&S, and there's a breakdown here of how that sites cross PC&S separately. Now it's key here and Trevor referenced this. It's our objective here to produce a forward-looking metric here that indicates the expected improvement in margin. And obviously, margin is a reflection of both price and risk transfer. So what we have done here is include the effect of a forward-looking view of claims inflation. That will be an effect of both exposure valuations there of frequency and severity. That is obviously built on the concept of collecting claims data. So constantly, we're looking at the appropriateness of valuations of exposure that are shared with us for ours cedents. Claims data is a great vehicle for us to analyze that. So that's embedded in our numbers here. Coverage controls as well. Narrowing at this point of a cycle with the narrowing of coverage transferred to reinsurers by the cedent would also be included in here. So it gives us an overall weighting of plus 5% across PC&S. Noting here that, for example, in specialty, our book is less affected from some of the headline classes such as cyber, for example, where we see significant rate movement. It's not a class we're in. So making the point here that our specialty book is very specific, perhaps not as broad as some of the specialty classes we see in the press. So just as a recap there, this is an objective to create a forward-looking metric indicating our movement in margin expected.

Okay. Thanks. Neil? Yes. Neil, you've come back.

Yes. So right. So premiums bound were ahead of our expectation. And if anything, we would expect that momentum to continue more and even increase. And there are key renewal seasons coming up. One is the April renewals where some of the biggest reinsurance programs in the world are placed. That's the Japanese renewal season in one-fold. Then this key U.S. Atlantic hurricane renewal seasons in June and July. And with -- there's been a lot of people withdrawing from catastrophe business in the market. So we think there could well be -- the previous hard market was really about a technical rerating, and that's why we went for quota share and wrote primary. We could well see a shortage of capacity as the year develops. And we're obviously very pleased with the way that the brand has now been established, and we've proven that we are on and are preferred market to many brokers. So the outlook remains really positive. And the only thing need to say that our results, our final results will be out the 24th of February. And I think, Tristan, at this point, we open the floor to questions.

Yes. So we run the hands up process, first come first serve. So if you people have questions, if you could use the -- I see Tryfonas first in the queue, use the hands up and don't forget to put your hand down afterwards. Otherwise, we'll think you're asking another question. So Caroline, if you could do the muting and unmuting. Hi, Tryfonas.

Can you hear me?

Yes.

Yes, congratulations on the very strong trading segment. I have 2 questions. So the first one is on specialty. I know you touched on it briefly. Obviously, I appreciate 1/1 is more property driven. But could you perhaps comment on what you're seeing in the specialty market? And obviously, you'll be underway there? And what could have resulted in sort of the current allocation split that we saw. And the second question on -- I appreciate the planning sort of dynamic and opportunity set could change these going forward. But is the current run rate of quota share versus excess of loss. We saw a good indicator of what we should expect for the remainder of the year?

Okay. I'll take the first one on specialty. Yes, especially as I kind of touched on the incredibly diverse class, and that is the challenge for any reinsurer in, if you like, marshaling your own skill set and [ forces ] against what's presented to you, a feature this year that we saw more and more was what I would call the bundling of contracts. So whereas our preference is to write single class exposure business where we're getting paid for the coverage that we're giving, and it's very explicit. This year, there was a degree of bundling going on where some longer and short-tail classes were thrown into a combined program. And reinsurers were asked, if you like, take a view with probably less transparency in the information pack. So that was a feature of this year. We were still able to write some of those clients through specific classes, specific entries into that portfolio. But in a lot of cases, the market was trying to bundle those. So that's something that we resisted and probably a bit of a break on growth for us. The other one that Greg touched on was the cat component. We're very sensitive to cat coming into specialty. It's often referred to by the robes it's just soft cat. But if it's workers' comp, it's probably got California and if it's [ B2C ] it's got California and it's got Japan quake as well probably. So for us, we're conscious of that. Probably the last comment is around Cyber. Cyber for us is one that we have said that we would watch. And the market has definitely started to move more towards a balanced product where reinsurers can to a degree, capital the systemic scenario that hasn't been possible to date. It's starting to happen, but still some of the event caps that are being put around cyber contracts are still quite a long way out. So for that reason, we haven't participated in that cyber market. It's one that we'll watch. Elaine, do you want to comment on the...

Sure. I think in terms of where we are, we expect it to rebalance the portfolio a little bit more towards XL this year. And that's what you're seeing coming through in our 1/1 numbers. I think where we are is now is a fairly good indicator for the rest of the year, obviously, subject to how the market develops.

Thank you very much. Ben, I think you were second.

A very close second. I just had 2 questions. Firstly, on the net rate, just to be clear, that 5%. I think if we go back to the time of the IPO, you suggested that the plan that you'd set out there was based on market conditions as you saw them in 2021. Am I right in thinking, therefore, that, that 5% rate, we should see that as all dropping down to the bottom line for this year and I guess going forward in terms of our forecast? The second question I had was in terms of your catastrophe appetite and capacity to write that business, how much of an impact do you think the [ mooted ] changes to the S&P model, the difference that that's going to make? And maybe you can also comment as to the impact that you see those model changes having on the market as a whole, looking out through the course of this year.

Okay. I'll pick up on the net rate and Elaine, if you can pick up on the S&P. So when we -- when we put the plan together, we had our assumptions around the market rate change for year 2. We made some assumptions there. I've made comments sort of publicly or -- semi-publicly in the last quarter that I think where we see the market now I think it's got greater momentum than we were forecasting in our IPO plan. So we're showing a net rate change here of 5% after essentially significant allowances for claims inflation. So what's happened is that we're still seeing in casualty and property, high single-digit, low double-digit rate increases from many clients and in several classes for what we're showing here. And that is probably -- it's where the IPO was, but if not slightly ahead in terms of our plan. But what we're showing here is the impact on that dining through to, if you like, a better -- more of an accurate margin measure for us, and it's a better metric for us to have around the way that the portfolio is impacted by business that's coming through. Casualty is a good casing point, as I touched on. We saw a number of contracts where on the face of it, and you see here reported in the press that is that apparently healthy original underlying rate. But by the time you dial in a significant casualty claims inflation component, the improvement was kind of flat at best in a number of cases. Hence, we have that very low hit rate around casualty. So yes, so that's very much kind of our view on rates and how we want to measure it going forward. S&P?

Yes. Sure. I think the S&P changes, it's a little hard to tell at this point. They haven't released a model yet, so it's hard to check that against previous ones. And obviously, we're not rated by S&P at the moment. But I think our general view is that the increase in risk charges is probably offset by the diversification benefits. I think the bigger question or the bigger issue is around the treatment of debt and what that means for some people that have got senior debt and our capital mix and the lack of grandfathering in there, which is not favorable for that kind of debt. So I think that that's a -- we'll have to wait and see I guess, S&P's commentary around it is that they don't expect there to be bigger impacts across the industry. It's kind of 10% of an impact of rating changes and they said it's up and down. So if you read into that, again, not a big impact for the market, but for individual people, it could have a bigger impact.

Barrie, I think you're next.

I've just got 3 questions, in fact most of mine have already been answered. But I wonder if you could just comment on the proportion between quota share and excess of losses as to whether or not that might swing back during 2022 more towards your original anticipated split. I appreciate it obviously doesn't make a huge amount of difference, but obviously, in timing, it does. So if you could clarify that. Secondly, Trevor, you mentioned there about potentially keeping an eye on cyber. And I just wondered what's needed, if you like, for you to dip a toe and start writing cyber. And the last question I had was, obviously, you've acquired staff during the year to build the portfolio. Is everybody now on board? Or are you still waiting for people to join?

I'll take the last 2, and then perhaps you can comment on the query to XL, in reverse order as they say. So from a staffing standpoint, had a great year in terms of the senior members of the team continue to recruit and build out within their teams and underneath them. For us in the main, it's adding what I would call second and third string capabilities to the team. So building out within underneath -- the claims building out underneath with the underwriting administration and the like. And then also around on finance, Elaine's got some plans just to continue to build out really at the more junior level. So we're in a position where when we went live, we had the heads of the functions pretty much in place, which is a great commitment for them in joining a newly formed or forming IPO. And it's really been a question that has been building out a more junior level since. On cyber, yes, I did touch on it what's needed -- what needs to happen for us is for a better balance in the contract SKU, if you like. At the moment, there's still too much passing through a systemic loss to reinsurers without sufficient caps around it in essence. So we can obviously observe the underlying rate, which has been moving ahead significantly. We still need to complete our own work on where the underlying claims trends are going, and that's obviously the big part of it. I've made the comment publicly that I think the cyber insurance market has been doing its R&D in public for the last 2 to 3 years. And it's been an evolving pattern. But for us, the main metric is that there needs to be tighter bank caps around that systemic loss. There's always challenges being thrown at it. The last one we heard from the client that we respect significantly. I was talking about their cyber experiences and he said, when you think you've kind of got this thing in a box, you said the next thing that they're picking up is the emergence of crypto currencies. And the way that, that seems to be feeding additional rents and where claims are coming into the crypto space -- the cyber space. So there's always something there which is a challenge. And I think our mantra is we prefer to underwrite what we understand at the end of the day. And I don't think we prefer to be experts in that. So we prefer to sit and watch.

So quota share versus excess loss. Yes, we continue to review and find an opportunity to provide more excessive loss into the accounts, particularly as we mature and the portfolio grows. We look forward to kind of midyear conditions, probably March through to midyear in fact, where we are watching -- sort of characterized by property, for example, tend to think of excess of loss in the property world, impact to gross line deployments. We think these are -- there are some parts of the market coming up, Japan, end of Q1, North Atlantic windstorm, midyear, where we expect to see perhaps some changes in the way in which reinsurance products have bought. Reinsurers, we write a diversified book. So when we see reinsurance treaties, broken down and allowing us to find the diversification. For example, a nationwide contract breaking up into regional towers, for example, that becomes more appealing to us. So we think some of the conditions are heading in that direction, and we are preparing ourselves to be part of that.

Andreas?

Yes, I had 2 questions, please. First of all, could you maybe discuss ceding commissions. Has that materially changed or increased the amount of ceding commissions you have had to play on your quota share programs to get access to that sort of ground-up rate? And is the benefit on your attritional loss ratio exceeding that to the increase in that ceding commission? Or is that ceding commission also included in your plus 5% rate assumption? And my second question is on property cat. Could you maybe disclose how much property cat you wrote at 1/1 and whether your risk appetite has materially changed or will materially change as you go through the renewal season in Asia and the U.S.

Okay. Thanks, Andreas. Okay. Just on the first point, I'll pick that one up. So ceding commissions, yes, attracted a lot of sort of interest in the press as the renewal season was pushing through. In essence, you can think of it in kind of 2 ways, split by class. On the casualty space, there was an increased level of request, I think, in the market generally. This is general observation for ceding commissions to move up in recognition of the fact that the loss ratios are still modeling out to very healthy and advantageous levels. The issue that I think reinsurers face is that if you are absolutely honest and genuine about your claims assumptions, and as we factor that into our pricing, then in many cases, that ceding commission could not be justified. I've already touched on the fact that we have a -- the lowest hit rate for us is in the casualty class. In the main one, we are modeling those through and modeling through the impact of ceding commissions to your second point, that is in our net rate assumptions. When we modeled through the portfolios, generally, the loss ratios that we're pulling those through. We're comfortable with them, and they work for us. But the cedes overlaid on top of that was probably the main reason for us failing to come to terms with the contracts that were being offered. So that was the dynamic of the casualty class and for us we have a very high showing. We've been grateful for that the brokers and clients. And from there, we distill that down to the portfolio that you see in front of you, and you'll see through '22. The property side was different, on the property side, where -- on quota shares, where there's much more concept of private deals. Casualty isn't -- casualty is in market terms and pretty much everybody signs up to that, and that's the market price on property credit share for us. Our portfolio is typified by what I would call private contracts, but we negotiate those. And in a number of cases, the ceding commissions went the other way. So we were able to -- if you use the benefit of the creditor contract to the client, which we understand and they appreciate. And we were able to, in a number of cases, as Greg referred to, not only bring down the event caps to make it less volatile for us, but we go to move the quota share commissions and ceding commissions the other way. And overall in our credit share property portfolio, ceding commissions are less this year than they were last year. And that obviously, that doesn't make the press normally, it's not such exciting news, but that was a reality for us. Greg, do you want to talk about cat?

Yes, the comments on cats here. I mean cat is a finite resource for us, whether it's across all pieces in fact, whether you're thinking to work on for Marine or property, and it's more kind of a well-known state. So we continue to evaluate cat exposure across all classes. We price for it. It's, as I said, limited resource. So it's embedded in our view of any risk. And we see the price of it moving, that's for sure. Claims data is the key there to understand are you getting the right dollar of premium for dollar of exposure there. And is it behaving as you might expect. So we look through the rest of the year that there is a significant amount of cat traded at 1/1. But the sort of headline grabbing pieces are probably more midyear, North Atlantic windstorms heavily traded in June, July, a lot of loss-affected business coming up in midyear. We expect to see a lot of restructuring and changing in the amount of risk transferred to reinsurers. So our plan is much like last year in the same way we approach cat, no change there. It's about balance and progressively building our portfolio without creating accumulations or spikes anywhere.

Philip?

I was wondering if you could comment briefly on the placement of your outwards reinsurance program and the panel and the prices and the terms that you received for that?

Yes, Greg, you can take that. I'm not sure we can divulge in the public space, the prices. But yes, talk...

What we can say is our outwards program is aligned to our plan and as we stated in the IPO. We grew the program as our portfolio grows as exposures build our outwards program goes with it. We did place a bigger program 1/1 this year versus last year as planned. Our incumbent supporters are on that program and stayed with us and have worked with us to grow. We've introduced some new security as well to build out the bigger program, and that will be a continual theme.

Right. I think if there aren't any other questions, thank you, everyone. Thank you attending the presentation. And yes, hopefully, those questions clarified any outstanding issues. And there's a little left to say other than I look forward to speaking to you all on the 24th of February.