Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good morning, and good afternoon, everyone. Welcome to the Conduit Re First Quarter of 2022 Trading Update Call. Please note the disclaimer on Page 2. And with this, I give the floor to Neil Eckert, Chairman of Conduit Re, who is joined in this call by Trevor Carvey, Chief Executive Officer; Elaine Whelan, Chief Financial Officer; and Greg Roberts, Chief Underwriting Officer of Conduit Re.

Thanks, Antonio. During the first quarter, the team have continued to do a great job, and it's been a very, very busy quarter. The thing I really want to stress here is the support we continue to get from both our brokers and our clients. We punch above our weight. Gross premiums have more than doubled. More importantly, we've maintained the same sort of focused approach on selective underwriting. Elaine will then present key financials for the quarter, including the investment portfolio. This quarter has been affected by Ukraine, and Trevor will cover that, hopefully, highlighting the comprehensive and transparent approach that I think we have bought to investors. The market does remain attractive. We've faced a fascinating renewal season come out, which the underwriters will talk about. And with this, I'll pass on to Trevor to update us.

Thanks, Neil. Yes, just before moving on to the events of the Ukraine conflict, just want to point out as regards to the series of natural perils cat events occurring during the quarter. We had a relatively low exposure to these loss events occurring, but only in the international space, i.e., ex., outside of the U.S.A. 3 of these industry events were Australian floods, euro storms and the Japanese earthquake and all of these events currently look to be around or less than the $5 billion market loss a piece. So it's probably worth pointing out that our current low risk profile to these events effectively makes us underweight and it's largely driven by our view of general premium and rating levels in these regions. Greg can touch on that more in the underwriting section. Just so moving on to the Ukraine-Russia crisis, I think it's fair to say the team here at Conduit spent considerable time and effort over the last few weeks in evaluating the exposures and the potential ultimate claims position for the somewhat limited number of treaties that we write and which we exposed to the event. We estimate our ultimate exposure in Ukraine and Russia to be between $15 million and $30 million, and that's net of reinsurance and reinstatement premiums. And we booked a net impact of $24.6 million, circa $25 million for the quarter. And that's across the clauses, including those of aviation, war on land. Sometimes we've had too as political violence and marine war. We just point out that this does reflect our ultimate estimate of the loss to Conduit. And it should be remembered that given the typical structure of the reinsurance treaty contracts that we write here, which typically have event and/or aggregate limitations in place, it's put us in the position of being able to arrive at the ultimate loss estimate for, as I've said, the relatively small number of contracts exposed to the crisis. In formulating the reserve estimates, they've been derived from combination of metrics, predominant one being updated exposure reports that you've had from clients on their insured values at risk in the region. Market data and ground-up assumptions and then to a lesser degree, modelled loss projections. But we've been able to obtain some significant updates information from our underlying clients, as I say, on the insured values at risk. And finally, we remind the market that we don't underwrite a trade credit or political risks, nor we active in the cyber insurance space. And I think we'd be the first to admit that it's the task here more manageable than establishing the ultimate reserve position. Happy, obviously, to take further questions on this at the end of the presentation. And I'll pass it on to Greg for the underwriting update.

Thanks, Trevor. Good morning, everyone. Moving on to Slide 5. We have here some narrative around pricing environment. And our point to make here is pricing remains attractive. And as the chart using Marsh's global insurance pricing index on the left-hand side, you see the rate is slowing by its increase at 11% in Q1 2022. We're certainly still in the midst of the best pricing environment we've seen for a very long time. And as for our pricing experience, we've continued to achieve risk-adjusted rate increases across our portfolio of property, casualty and specialty. Natural inflation remains a key topic with our clients across all 3 of our divisions. And we've achieved robust rate changes, net of our view of inflation since the beginning of the year. As we move towards the renewals later on in the 2022 season, much of this will be dominated by what occurs with U.S. cat renewals in the midyear. And our teams will continue to execute the discipline and rigor that underscores our underwriting philosophy from the beginning, selecting business that meets our profitability and requirements. And you can see we have a table there detailing the net rate changes after inflation across property, casualty and specialty, giving us a weighted net of inflation rate change of 4.9%. Moving to Slide 6. We have here some graphics showing the growth of all 3 of our divisions, noting that at the portfolio level, we have grown 115% increase year-on-year. All 3 divisions showing growth compared to the first quarter of 2021. And as mentioned, our target markets remain attractive to us, particularly at the primary level. And you can see this in our product selection of Quota Share over Excess of Loss. The April renewals have confirmed our valuation and valued position among cedants' panels and in line with our IPO. And we've maintained a low Nat Cat profile with 70% of our premiums related to non-Nat Cat premium, which is a consistent measure from prior quarters. As we approach the July renewals, we will closely be monitoring the evolution of conditions in the North Atlantic windstorm region, and we'll continue to selectively provide capacity in line with our risk appetite and profitability requirements. With this, I'll pass over to Elaine.

Thanks, Greg. Greg and Trevor have touched on the pricing and growth aspects of our premiums. Our estimated ultimate premium written are up 49.1% quarter-on-quarter. As Greg mentioned, that translates to about 115% increase in gross premiums written relative to Q1 last year. This slide also gives the split of our estimated ultimate and our gross premiums written across Quota Share in Excess of Loss business. So for the first quarter of this year, we've again bound a higher proportion of Quota Share business relative to Excess of Loss. But with the deferred premium from last year coming through and with our growth aspirations for this year, we expect our top line for 2022 to be at least in line with the original IPO plan. Around 20% of the gross premiums written for the quarter as deferred premium from Quota Share business written last year. That brings us to around 90% of written on last year's total estimated ultimate. And by the half year, we expect to have written around 95% of that and earned around 80%. Our acquisition cost ratio is currently running at a similar level to last year, given that higher proportion of Quota Share business. We do expect that ratio to reduce a little over the rest of the year, though. On the next slide, on investments. The dramatic increase in yields in the quarter has clearly had an impact on our portfolio. We had an unrealized loss of $32.6 million for the quarter, which drove a negative total return of 2.9%. The portfolio remains high quality and highly liquid. So we'll ride out the expected rate hikes and take advantage of the expected higher reinvestment rates as the portfolio turns over. And it's not on this slide, but just to confirm, if we're a U.S. dollar-focused portfolio, we've got no direct holdings in Russian investments in there. With that, I'll hand over to Neil for some final comments.

Okay. This slide, I don't intend to dwell on, but we wanted to put it into the presentation, which goes on to the website. It's a reminder of the attributes that Conduit provides to investors as sort of reinstatement of our strategy. But moving on to Slide 10. The final key message is that we do -- we have maintained our trajectory of growth. I'm proud of what's been going on with Trevor and his team, what they've achieved in the last 18 months. And it's not just on the underwriting, it's IT systems. It's the culture that we've built. The results for this quarter have been impacted by the conflict and also mark-to-market loss linked to rising interest rates. But we're enthusiastic about the foundations we've put in place and the progress of Conduit Re in our industry. Our own premium recognition is building. This is sort of we get closer and closer to pay that. We look forward to growing the book on the same basis, diversified and balanced, in line with all the indications we gave at the IPO. This concludes the presentation. We can now move on to Q&A.

If you can hear me, I've got 3 questions. The first one, I wonder if you can give me a rough split of the losses from Ukraine by geography and by line. And in particular, whether not it includes aviation losses and losses from Russia? The second question I had was I wondered if you can give us an update on what happened at the 1st of April renewal season? And how do you see the outlook for rates for the rest of 2022? And lastly, it appears you've not been heavily involved in the $10 billion of weather losses in Q1. And I just wondered why that was the case. Did you have any losses? And if not, why did you avoid them?

Barrie, do you want to try and ask your question now?

Okay. I'm not sure if you heard the questions, but the first one was the -- in respect to the Ukraine. I just wondered if you can give us a split maybe by line and geography, particularly keen to find out if they include...

Ben, do you want to ask a question?

Yes, sure. I think there's clearly something quite strange going on because I think we can -- the other participants can hear Barrie. So I won't ask his questions. Fortunately, I had different ones and then maybe you can get him back online. I was just going to ask in terms of the range that you gave for the first quarter. If you could give us some sense in terms of what would be -- what needs to happen for the outcome at the good end of that? And what are you assuming in your $30 million at the top end? And the second part and related is you said that there could be an issue with -- you may have exposure later in the year, if you like. I'm just wondering if you could talk about the scenarios in terms of how it might develop that you're capturing in that statement? And then [Technical Difficulty]

Ben, you want to try again? We can hear you now. So please, if you can go ahead, Ben. Sorry about this technical issue.

Okay. Yes, sure. No problem. No, I was going to ask 2 things, just to give us some color around the range that you've given, what would -- what needs to happen for the loss to be at the low end? What would happen for the loss to be at the worse end? And the second question was in terms of any additional impact later in the year. What would happen -- what would need to happen for you to incur further losses above that $30 million? Okay. I guess the system is not working. [Technical Difficulty]

Ben, can you hear us now.

Yes.

Okay. Thank you. Please go ahead.

Okay. Yes. So I put on [indiscernible] as well. It was really just to understand better what needs to happen for the loss to be at the low end of your estimate. And what have you assumed in terms of the loss at the high end of the $30 million? And the second related question was what would need to happen for you to incur additional losses later in the year from this event, which I think you specify in the statement? Would this assume an escalation or would there be some other elements?

Okay. All right. Thanks, Ben. And first of all, can I just apologize on behalf of the team and the technology challenges that we've had. Thank you for your patience. In terms of the range, the range that we've established $15 million to $30 million. The driver of that range is essentially the uncertainty around the aviation settlement, how it falls into the market, spread between the aviation or the airlines or risks. That's a reasonably well-documented situation that's happening in the market. And what we've done is look at the relatively the treaties that we've got covering the clauses, including aviation and from the clients established where that exposure sits. And what we have is a contract limits in place. So at the upper end of our range, probably where you're going, Ben, what we've done is work through broadly the assumptions that the limits on those treaties are being maxed out or activated at the top end. So for us, we're very comfortable around the upper end of the range. And I say it's largely driven by the scenarios that are sitting underneath it between around the aviation. As regards to the year, I think that's obviously a topic in the broader kind of discussion in the market around how long does the conflict evolve for what situation. For us, we're less sensitive to that because of the limits that we have around our contracts, particularly with aggregation limits. So for us, the range is more driven around, as I say, the makeup of the loss rather than being particularly sensitive to the length of time and the duration, but it's a good potential you run for.

Tryf, do you want to ask a question?

Congratulations on a very strong quarter. Just a question on premiums. I was just trying to understand if the development of gross written versus ultimate. You're struck in line with your expectations. Maybe it's just me, but it just seem a bit lower than I had anticipated. So I was wondering if you had any comments there. And then secondly, on -- I was wondering if you can share some thoughts on the underlying profitability of the book, excluding Russia, Ukraine and Nat Cats. And how is this developing?

Yes. In terms of premium and how that's developing, it's really very much in line with what we expected. We expected it to be about kind of 80% written through last year, about 95% written through the half year this year and then almost for the written by the end of this year. And we expect that pattern to be similar for this year's underwriting year and ultimate premium as well. We could have talked before about where we expect the earnings to go and expect off of last year's ultimate premium to be about 80% earned by the half year this year and 80% 85% earned, and then 90% to 95% earned by the end of this year. And again, we expect that pattern to hold true for the '22 underwriting year. A little bit of a change in business mix and then type underlying type of business, but broadly the same. And in terms of underlying profitability, I think absent Ukraine, everything else is performing very much in line with our expectations.

Okay. Barrie, do you want to go ahead with your questions?

Yes. I had 3 questions, if I may. First of all, I just wondered if you could give a rough split in respect of the Ukraine losses by line and geography. In particular, just to check that it includes aviation losses and exposure in Russia. Second question, I had was in respect to the 1st of April renewal season. Just wondered how that had gone and how you see the outlook for rates for the rest of 2022. And finally, you obviously seem to avoid some of the larger cat weather-related losses in Q1. Just wondered why that was.

Okay. Thanks, Barrie. Probably split that question amongst the 3 of us here. The first one in Ukraine and the makeup of the loss. The broad outline of it is that aviation is a significant component, but it's probably in our range of our probabilistic estimates between 1/3 and a half. So depending on how the loss would fall in the underlying market. And in our range of $15 million to $30 million, the aviation is 1/3 to half at the upper end. The class is embraced in there. We just confirm it do include the political violence and the war on land, making up the balance. And also marine war. There's obviously an exposure to that within the marketplace. We again have relative few contracts that could get triggered by that, but we have made a provision within the overall loss estimate, but it's very much a sort of a minimal part of the overall. The majority is the political violence, war on land and aviation.

We have also had a look at clauses outside of what's in the release there as well. So there's a little bit in there in terms of any other kind of exposures we might have. Not much, but...

Yes. So renewable energy, have a lot of contracts that have exposure to that. So we got provision for the renewable energy.

A couple of comments on the underwriting for Q1. We -- I was thinking of April, in particular, described as an orderly renewal season. We saw risk-adjusted rate increases across property cash in specialty. On reflection, pricing haven't really reflected any of the activity in Ukraine. So the drivers of Q1 were outstanding issues plus some of the cat activity occurring. Kind of 3 major events, we kind of monitor there being Australian floods, some European storm activity. And in fact, there was a Japanese earthquake of significance, just prior to the Japanese renewals at the 1st of April. All of these events so largely around $5 billion industry or something like that, I think, generally is recognized. Specifically, to your question on sort of how we look at Q1 on those cats, our sort of risk profile terms and conditions and the way we structure our risk appetite. Generally means we had a limited exposure to those sorts of events. We're aware of them. We see them in our portfolio, but we are reminding you of the sort of balanced nature of our portfolio. We are perhaps less sensitive than others to some of these specific scenarios. And then just a comment, just thinking of more Ukraine and Russian complex specific contracts, a lot of those are sort of 1st of April. And we saw a mixture there with the market in some elements of dislocation, looking at a combination of renewals and extensions and changes in contract terms and conditions. And we sort of navigated our way through that.

Okay. [ Daryl ], do you want to go ahead with your questions?

A few questions, please. Just -- so the first 2, just going back to the war. I think you mentioned in a statement that you had some property treaties that were affected as well. Is this the political violence part that you're referring to? I guess where I'm coming from is that just in terms of the number that you reported, it seems like quite big based on the volume of specialty that you've written so far. I mean were there any surprises in the loss exposures just based on how the treaties were underwritten? And then the second one on the war. In terms of the outward reinsurance programs that you have, could you speak to what kind of structures you have in place? And does it overlap with some of the traditional Nat Cat protections that you have? And the third question is just on inflation more generally. I mean, clearly, it's a risk and it's top of mind at the moment. I'm just keen to hear how are you managing this, especially through some of the Quota Share contracts. Is there a risk that some of your primary cedants are underpricing inflation? And how are you managing that? Yes, that's it from me now.

Okay. Thanks very much. On the narrative that we've put in, the losses split between the property and the specialty. That's where it's driven from. The short answer is no, there weren't any major surprises on the property treaties that we have where the losses leaked in unexpectedly. We refer to property in the sense that within our property account, we also cover some of the specialty clauses. So the terrorism contracts, for instance, they've written some of those within our property account. Although in the broader sort of definition of clauses, it really is a casualty -- sorry, a specialty class. So no great surprises on the inwards portfolio in terms of coverages that have been provided. On the outwards reinsurance, our outwards program that we've purchased is broadly split into 2 pillars and non-Nat Cat man-made pillar, which is where loss such as the Ukraine would reside and then natural perils catastrophe pillar, which sits alongside and then on top of. So we don't have a great degree to any extent of sharing coverage between the program. It was [indiscernible], but it's not really material in this context. And so for us, as we go through the year, we feel we're in a pretty good place entering into the, let's call it, the wind season. In terms of the cover that remains, though, obviously, we'll keep that under review, as you would expect us to do as the year evolves. Greg, do you just want to on the managing inflation, please?

Yes. Yes, quick comments on inflation. I mean, obviously, we factor in inflation into our pricing models. We gather a lot of information from our cedants and manage that into our sort of price picks. Particularly in casualty, it's how you weigh casualty, you price ahead of the underlying rise in claims inflation. Where we don't see that occurring, we don't support that business simply, but we're constantly updating our benchmarks and continually building our view of the market.

James, do you want go ahead with your question? James is covering today for Philip, okay?

So yes, the first one is also just on Ukraine. So there's been a fair bit of coverage, obviously, on aviation war policies, generally including a cancellation or exclusion clause which tends to be around 7 days, I believe. So just interested to get your take on that and how you think that might mitigate ultimate losses and whether you think those exclusions will hold. And then I guess on from that, I suppose the timing of the loss trigger event will be quite important. So I'm just quite interested to hear what your base case is with regards to that. Next question is just on rising interest rates. So just wondering how we should think about that in terms of bottom line impact over the next couple of years. So should we assume that higher reinvestment returns all drops to the bottom line? Or will some of those profits be passed on to customers in the form of lower pricing?

Okay. Thanks, James. Yes, good question on the -- if a limited guidance of not just cancellation clauses but also sanctions -- the impact of sanctions clauses also been referred to. In our work, we're not in a position to look through into our individual clients' behaviors or policy clauses that have been strictly activated or not. So when we've come up with our estimates, we've done that very much from a full basis. any defenses which materialize and come through into the market and our clients achieve, if you like, would flow through to us to a less degree, depending upon whether it's Quota Share or whether it's Excess of Loss. But in the main, we're not in a position to make an alarms for those that we haven't done so. That remains to be seen. And there are greater legal minds than myself in terms of the trigger and the timings that could be interpreted. It will depend on those underlying insurance policies in place. And how indeed they are sort of -- yes, interpreted and debated over the coming months and possibly years.

On the interest rates. Yes, I guess the short answer is we do expect that to come through an investment portfolio. It's fairly short duration. So we will reinvest that. We've already seen our book yield creep up a little bit. And it will take a bit of time for that to happen. Of course, in terms of how that factors into underwriting pricing, I would say it doesn't really. I'll let Greg take that one.

Yes. I mean, ultimately, it's not a factor in giving us variability in our risk appetite. We're aware of cost of money, but essentially, we are rating on exposure and expected clients before us.

Yes. Andreas, do you want to go ahead with your questions?

Yes. I just had a question around your comments on one of your slides around the July renewals. You mentioned you're closely monitoring North America windstorm exposures, particularly Florida. Just wanted to ask what would it take for you to expand your risk appetite in the Florida market, which is quite a difficult market to move into. And you also commented about the supply shortages in the cat market in other geographic areas. Where would you be looking to increase your risk appetite? And then will it be material? So will it have an impact on your P&Ls?

Thanks for the question. So Yes, I think in July, we sort of made the point a few times now that we believe we are compared to some peer metrics underweight in areas like Florida. This isn't just about price. It's also about sort of structure and the element of risk transfer between cedants and reinsurers. And we probably, in the general, have looked for a better balance than has existed to this point. Looking forward, we do see signs of some capacity constraints perhaps. It's a little early. But based on anecdotal, certainly, it's looking to be a tougher renewal season than in the past and perhaps price won't be the only -- price would -- might not solve it, frankly. The way we've constructed our portfolio balanced and diversified, we are a progressive builder of our portfolio. So we wouldn't likely change the texture of that very rapidly. But as the book grows as a whole, we are able to consider additional risk across the portfolio.

Okay. So thanks, everyone. It looks like we don't have other questions. Of course, I'm available, and the rest of the team here. If you have follow-up questions, get in touch. We'd be very happy to answer that. Thank you very much for joining, and have a nice day.