Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Conduit Holdings Limited 2023 January Renewals Trading Update. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Trevor Carvey, Chief Executive Officer; and Greg Roberts, Chief Underwriting Officer, to open the presentation. Please go ahead.

Okay. Good morning, and welcome to this trading update post the January 23 renewal season. It's quite something to think this is already our third renewal season. And when we put the original plan together over 5 years, we obviously made assumptions around the way that the market would expect to unfold in the world of a plan. And as we know, the market never fails to surprise in that perspective. We all said that we wanted to build a business that would be able to respond quickly and proactively to market events -- and we can talk you through some of the actions that we've seen over the course of the last 8 weeks or so. But I think we've probably demonstrated that we're in a good place to be able to do that. So market background. Next slide, please. Thanks. Yes, so market background. I won't drill on this too long. A lot of people on the call will know the background to the industry changes. I think the key point for us is that it was a structural shift in the marketplace. Two main drivers of that are listed up there. obviously, increased inflationary environment, which is still ongoing. That really is structural, particularly on the a longer tail lines from a bottom up. Nat cat events, obviously, there were several major ones during the year but also as a reminder here of just the attritional cat if you like, that ran through and delivered north of $115 billion of insured losses through the year, and that's just obviously a big driver of what we saw at Jan 1. And then just a final reminder at the bottom there, it's not all about nat cat. Manmade losses, as we refer to them, do have a big impact on the industry. And particularly the shock of the conflict in Ukraine is a reminder just how significant that can be. And just the degree to which reinsurers and insurers need to keep the defenses up around those type of events, but that again was a big driver, as you'll see when we come to talk about our specialty segment. Next slide. So some headline numbers. And again, you would have seen these narrated in the RNS, but it's basically a tale of the tape, if you like, around the Jan 1 renewals. Great results from the team, $421 million ultimate premium written, which is 60% up year-on-year. And that certainly puts us ahead of our original 5-year plan where we were expecting to be by the time we got to year 3. So it's a great result from the team, and we'll give you some color as we go through the different sections of the presentation and also where that has flowed through across the different divisions of Property, Casualty and Specialty. A word on Property & Specialty, we said quite some time leading into the renewal season that -- that's where we saw the main opportunity property predominantly followed by specialty. And that's where that growth has largely come from in our portfolio. And it's where we focused our efforts and that's where we knew the rate and the upticks in terms and conditions in our favor were going to be. So I think the team have done a great job of ensuring that we've not only evaluated prudently those class of business but also continue to seek out through our distribution sources a wide and spread of business within those 2 segments. A quick word on casualty, good growth. I mean it's a risk-adjusted rate change of 1%, and Greg will talk more about the rate changes and some of the mechanics around that in a while. The casualty for us has been a really stable book of business. We spent 2 years building that up, seen an enormous amount of submissions, and we are sitting behind there alongside some really solid industry players. It's all about knowing the entity that you're partnering with, the level of the data they provide you and how that is being managed by them. And we have great transparency on those accounts that we write. We still see an awful lot. It doesn't make our hurdle and casualty. But year-on-year, 1% risk-adjusted rate is fine by us. It shows that the underlying clients are still staying ahead of what we call the underlying like attrition inflation and the claims inflation drivers underneath. They need to stay ahead of that and in the May. And I think we see that the industry and our clients are acting responsibly in that respect. The -- Greg is more coming up on kind of a high-level comment around the classes. But just before we move on to that and the rate changes, just a word around our [ avids of ] reinsurance. We comment here that we have an expanded panel and we bought expanded limits. That's important because obviously, we're growing the account. We operate with key tolerances around particularly on net PML, the way [indiscernible] such as Ukraine, manmade losses, but obviously also the large Nat Cat events. And our retrocession program is predominantly placed at Jan 1. So a lot of work was done in securing that placement. And our style on that is to sit down with the participants that we have, find out what is driving their needs and wants and essentially put together the program around what we know that they want to sell, and that's key. I think Greg often uses that expression as a point trying to force coverages into negotiations if there's a resistant party. So we've done a very good job, I think, of building that [ panelite ] with expanding participants. And again, it's there to secure around our long-term tolerances that we set out in the individual 5-year business plan. A couple of comments to the bottom-on ratio. This is a trading update based around obviously our -- the experience of Jan 1, so [ we're going ] into great detail on the shows, but we have reaffirmed that our previously stated comment around the mid-Asia's combined ratio and the business is certainly moving in that direction. Really pleased the way that. Also, not just on the underwriting side, where rate has moved, but obviously, as we're building scale, the cost and the operating expense of running the business becomes a much more manageable component. What is relevant to us though in this renewal update is acquisition costs as we flagged there on a new business. We saw induced acquisition, particularly on the Property & Specialty lines, and that's really where this comment is driven from -- in those areas, particularly around quota share where we are in a more of a leading or driving position, we are able to negotiate reduced acquisition costs on a considerable number of contracts and that went through on the new side as well. When we saw new business, we were able to bind those at probably lower terms than would have been expected a year ago. And again, that helps in the build-out of our business and our combined ratio target. So I think it's enough on the overall sort of general comments. Just move on to the next slide, please. So you've seen these numbers in the RNS. The basic driver, as we said, was property and specialty focused, that's where the opportunities have [ lay in ] for us. Property now at 47% of the Jan 1 business versus 41%, largely to be expected with the growth that we've seen in the rate and in the degree of new business that has flowed through. So new submissions that we've seen there have helped to build that count out. Specialty at 26% is like-for-like, obviously, in percentage terms, but when you consider that the overall pie has grown from 262 to 421, that growth in specialty premium is not insignificant. We obviously were aware post Ukraine of the -- the re-underwriting should we say the specialty market was going to have to go through, unbundling is the word that's often used. We saw a large number of submissions there that fell into our window a year ago, they wouldn't have because simply the contract forms were too opaque. Now with transparency, we're in a position where we can underwrite those, we believe, and that accounts for the growth largely in the specialty. We had a couple of strategic deals as well that we've written that gives us access to a broad base of specialty business to quota share transactions. And again, that's -- I think it's showing that we recognize the time to expand capital deployment in that space. And that's essentially what you see through the specialty. Casualty, I've touched on already. And even though, as I say, there's a 1% risk-adjusted rate and the client base is fairly stable. We were still able to increase our shares on those that continue to meet our hurdle rate and there's a degree of new business in the casualty had -- but largely that's being able to increase on some existing participations. Probably just one final word on this slide. Just around renewal retention ratio, we have discussed a number of times with -- on these calls through '21 and '22 about the degree to which business is relatively sticky. And then that was maintained through the renewal season. It's around about 85% to 90%, what I would call renewal rate. So business, some policies that we wrote a year ago, 85% to 90% of those have broadly been renewed. So it's showing that we didn't have a major exercise of having to or re-underwrite at the portfolio, we are pleased with the direction of travel and we're able to scale up aligns on a number of those. Next slide please. I'll pass over to Greg on rate change. I think. Yes.

Good morning, everyone. So I think these numbers are already visible via the RNS, et cetera. So first comment here, I mean, it was another late renewal season for the market, slightly different reasons through last year as is the case. But it's important here that some of the delays that probably experienced with others with uncertainty as to risk appetite, et cetera. We were -- I'm very pleased to say the team was benefiting again from being in one location, one team sitting together and with us so focused being looking at reinsurance risk without the distractions of other interest like running an insurance business, et cetera. So we were able to be highly efficient in our ability to look at risk and look at opportunities. And the other point to note is in a lot of this business was already evaluated in prior years. So we've talked very heavily here and we're talking about rates and the repricing of risk. I mean, a lot of these business opportunities are from good, strong clients who have great underlying businesses or very successful in their own practices, but we historically might not have been able to find margins. So really valuable to have put significant work in, in prior years to evaluate and understand the business and then have it represented in the terms of 2023, which when we contrast 2023 1st of Jan to 2022, our approach to valuation of cat, et cetera, has not changed. We spend a lot of time thinking about how we give access to cat support alongside non-cat premium. And we've talked historically and reported through 2022 about our ratio of cat premiums to non-cat premium of roughly 2/3 of non-cat premium to cat premium. And that philosophy and risk appetite hasn't changed. When we think of the quota shares, we were able again to continue to restrict the tail risk that sits inside those. And we've talked historically about the management of event limits, et cetera, and our ability to reduce those further. So as we saw the excess of loss market, and of course, lots of the reporting is largely around [ property X ] around specifically Cat, it is the case that property cat experienced very significant rate increases. And you can see here, when we talk about our risk-adjusted rate changes across Property, Casualty and Specialty, property was definitely dominated by pure rate pricing. And in Property [ XL terms ], rate online shifted significantly. Typical behaviors of clients were to retain first layers, for example, buy more limits, and there were still multiples of the expiring premium on the contract of 2023. And that's great from a disciplined perspective. It shows better alignment of interest. Clients are -- have more skin in the game, to use that phrase. Specialty. When we look at the plus 14, bigger components of that is going to be terms and conditions. That was a market where the type of product changed. And what was sold to change the coverage that was so changed significantly. And as Trevor referenced earlier on, that is not only a reflection of general hardening but lots of experience as well, noting that the Ukraine, for example, was a significant impact to the specialty market. Casualty. We see a plus 1 here. That's a mix of terms and conditions and business change. We saw some good pressure on seeds and then the management and the maintenance of combined ratios that remained attractive. Seeds had to give, I think, in certain instances. And we saw, in fact, in some instances, removal of coverage. So particularly where reinsurers and the sellers and buyers might not have been able to agree on the implied margin of a particular subclass. There are examples where clients were comfortable in retaining components of that. And that's really good again for discipline as well. And again, on casualty, just to stress the point again, lots of opportunities there and some really great business opportunities, good partners. But as we've said in the past often, our most common hurdle is our agreement on the inflationary pressures that those books are under, and that often restricts our ability to support these programs. Next slide, please.

Thanks, Greg. Yes, so this is actually the final slide. Just a few words before we move to Q&A. Just we've used the word a number of times, structural shift in the marketplace, something that genuinely what we saw there's no doubt that the inflation that being emerging through is being recognized by the client base -- is being recognized by reinsurers. And on top of that, you then put the presses and strains of the Cat events and the large events through the year, mark-to-market impact on -- impacting reinsurers, equity levels, and that's the situation that we find ourselves in the market. So it's been a rough ride for the industry in the market, but it's a great place for us to be in. I've actually referenced here again a legacy free balance sheet. That was a feature, I think, in our ability to engage in conversations promptly and efficiently and early in the renewal season with clients. We weren't in a position of having to unwind previous positions and exposures and that became more apparent as the renewal season went on, we were presenting with a number of requests or submissions where in the industry, there were some overhang positions have been built up, but we're having to be, if you like, laid off before those positions could then proceed into the new market. I think it was just a feature for us, but it really only struck us kind of as a renewal season was developing that we were able to deploy because we're still growing into our skin. And that's kind of the way that we like to think about that. And then, yes, finally, the Q&A that will follow now, I'm happy to engage in that and our year-end results as we've already upsized will be out at [ to movie ] back online 22nd, February '23. So happy to take Q&A now. Over to you, Antonio.

Thank you, Trevor. Maybe just too quick before we go into Q&A. Obviously, this session is dedicated to the January renewals. So very happy to answer questions on January renewals. Any questions on financials 2022 will be asked on the 22nd of February. Thank you.

[Operator Instructions] The first question is coming from Tryfonas Spyrou of Berenberg.

Two questions from my side. Obviously, very strong renewals for you guys at 1/1, and outlook seems to be quite strong. I was wondering if you can give us a helicopter view on your expectations for the remainder of the year in terms of what parts of the market do you think will become even more attractive both in terms of business lines but also maybe geographies and presumably through areas you're looking to deploy more capital. And then the second question is on Casualty. You indicated obviously that part in this market are still attractively priced. Can you maybe indicate on which sort of subclass of Casualty fall within your hurdle rate and which don't? And I guess the third question to that is risk-adjusted rates seem to be sort of relatively flat, maybe slightly up. Same time, inflation expectations looking ahead have seemed to be still quite a high. Do you see any risk here for the market? I guess there are some participants have talked about high investment income and high discount rates and looking to sort of couple those with casualty. So maybe any comments on that would be, again, appreciate it.

Okay. Thanks, Tryf. Greg, do you want to take the first piece on the geography and the unfolding, and then...

Yes, sure. So I think as we've said before, Casualty is a very, not linear, but it's quite progressive through the year. It's less 1/1 driven and is obviously less sort of geographic in the nature of the peril. Specialty is probably a little 1/1 heavy compared to other classes. We still believe that there are likely to be developments from activities and losses in 2022 that will influence what happens in the specialty market through the rest of the year is kind of a sensible thing given the delta in reported Ukraine losses versus the narrative on the industry assumptions. So I think there are a few factors still to play through there from specialty opportunities. Property is well trodden renewal phase sensitive to geography and perils. Midyear, June, July always highlighted by some North Atlantic windstorm trades, particularly Florida, very big in June. March is obviously the good -- a big period for the Japanese renewal season. There will be a lot of speculation, I suppose, on the rating environment for Japan, given what's happened in the U.S. and Europe at 1/1. I think the point to note here is Japan a very big buyers of excess of loss cat reinsurance. And when you factor in an inflationary environment that is now ticked through to positive, there's probably a connection there we need to buy more limits as well. So again, thinking of supply and demand, those are all sort of basic factors that will flow in there. So yes, lots of moving parts for the year ahead. Trevor?

Okay. Yes. And just to comment around the casualty. I think you were highlighting at the end there around the impact of interest rates and discount factor. Probably just to cover that off to start with. That is a feature which we discussed internally here and just the presence and whether that start to emerge in rating models. We don't embed that in our pricing for casualty. So our casualty pricing model is what I would call pure model. It is particularly prevalent in classes such as motor. I think there's been some talk some more in the industry of seeing the discount rate being embedded into the motor-type models. It's not a class that we transact, but I think that may be something which does start to emerge more and more, which would impact pricing on those more minimal margin line, should we say. Just in terms of some of the classes just as examples, the likes and the dislikes. Classes like third-party liability, excess third-party liability, that is general third party. If you like to think of it as reinsurance of the Fortune 1000 big commercial enterprises. That's had a very strong uptick. We still like that class. The limits that have been provided in those policies over the last 3 or 4 years have been compressed significantly and that still offers opportunities, even though the rate of increase has fallen away. At the other end of the spectrum because of that public D&O, we don't have a big exposure to that. But again, that's seen a big dropoff in the industry in terms of rate. Probably hoping get sent terms of conditions, but in terms of pure rate, it will probably start to fail more than others in meeting our hurdle. And then you have a large middle ground, which we evaluate on a case-by-case basis, some we match and some we don't. And that's kind of the professional lines, management liability, professional liability in the financial lines. I think still hold their own in the main, but it's very much a question of who's underwriting on your behalf and as a quota share reinsurers -- reinsurer you really need to get into the weeds as to how they're performing that analysis, which I'm pleased to say they share more and more. So yes, so I hope that gives you a bit of a sense a bit of color around the casualty.

The next one is from Andrew Ritchie of Autonomous.

Congratulations on the renewal. First question, I mean, Trevor, you're very well respected and been around in the industry for some time in previous renewals like this. Are you not seeing any sign of new capital entering? Or have you had opportunistic approaches from capital suggesting things like side cars, et cetera? I'm just trying to get some perspective as to whether there was any shift at all or any sense at all of any new capital entering the renewal progressed? Or would you expect signs of more capital entering particularly now, particularly ahead of 6/1? I'm just trying to compare and contrast with previous episodes on the capital influx or lack of in the industry. Second question, apologies if I missed this, I got on the call a bit late. What did you say about the shape of your property exposure in terms of the layers where you're participating in the overall exposure in terms of where you're sitting on PMLs? And is there any -- have you moved up more materially shifted in terms of typical attachments?

Okay. Okay. Thanks, Andrew. Yes, I'll handle the capital question and then Greg you pick up on the property. No, you're right. There's no doubt that, obviously, as the year unfolded, there were significant departures from the scene as it were. And I think if you look back to what we saw through the 1/1 renewal, there was actually limited new capital that came in, in our experience. There were some capital raises from incumbent carriers through '22. But in the scale of things, that really hasn't made a dent in the kind of supply demand imbalance. So in terms of where we are and how we see it, I think there will, be through the year, increased interest in particularly the property Cat space, largely because looking at previous years, as you say, and we've seen it in the past, there's a lower hurdle to entry there and you're not having to set up that rated carrier. And the rated carrier is really there to service the business that is beyond the 1-year term. So that's why we have a lot of traction on the specialty and quota share and obviously casualty lines as a rated carrier. And that's not something that the alternative entrants can easily get at that's the way to think about that. But I think probably that with the attraction of midyear rate probably Greg will talk about in a moment, probably around things like Florida. I think you will see that coming into the Cat space. And possibly you'll sell the retro. At the back end, there's an element in the industry where the tail does wag the dog. And we've seen probably a bit of additional capacity being made available to Jan 1 renewal, very, very late in the day around the retro product as a -- probably an aversion still to U.S. win, but there is an increase in interest there. So yes, I think I see it probably as a trend, but I don't think, a, it will be enough to make a significant dent in the supply-demand imbalance that we see. And I think it probably will largely be related to those areas of property Cat where non-rated carriers connected more quickly. Greg?

Andrew, so yes, our underwriting philosophy to -- when we're talking Cat here [indiscernible] P&L, I suppose. It hasn't changed. So where we deliver Cat capacity via quota share, our philosophy and approach remains that we're very conscious and part of our initial interaction is a lot of conversation and development around the management of the tail. So the use of event limits and aggregate limits, payroll restrictions, et cetera, and any quota share we work on. The excess of loss is an interesting area of 1/1, there's a lot of movements and behaviors by buyers. A best example by at one end of the spectrum, the sort of nationwide U.S. carriers who are big -- who are buyers of big limits clear evidence there that the commoditization of Cat met that were what we call capacity pricing. So there were minimum rates on lines to clear limits regardless of how first loss the risk was. And then you sort of work backwards from there effectively. So that was a good sign, probably observe the same in Europe, a bit of a switch between regional and multi-country. Again, the multi-country buyers are the buyers of bigger limits, bigger programs, saw more evidence there of peril-specific buys. So instead of the old perils, fully broad contract catch all-type approach. It was much more specific, European windstorm only or European earthquake coverage at a level. And in the U.S., going back to the U.S. on a regional basis, I think I mentioned earlier on, so good evidence, good discipline and easier to confirm alignment of interest between buyer and seller of reinsurance. When you see the buyer retaining first layers, buying more limits, they're buying taller programs, attaching at a higher attachment point, again, very excess of loss comment here with more premium on the slip. So all those things have widened the ability.

Sorry, you're not able to sort of say, on average, we would have attached a typical -- this kind of return period and now the portfolio attaches at this return period. I mean, is that just is very hard to say.

Yes. No, we don't comment on that, Andrew.

The next one is from Abid Hussain from Panmure Gordon.