Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. It gives me great pleasure to open the Conduit interim results presentation for the first half of 2023. We are now seeing the best market conditions that I've experienced in my career. This is true both the pricing, terms and conditions and higher attachment points, which to some extent mitigate the increased claims activity we are seeing. We see a number of factors combining to create these market conditions. Inflationary pressures continue to persist and interest rates remain high. But what we have seen is the erosion of traditional reinsurance capital which now -- which we now believe stands at 2013, 2014 levels. Another element for me, which has not been so much discussed is a structural change in the U.S. primary markets, where the admitted carriers are withdrawing from new business in certain key states, which is driving strong growth across excess and surplus lines of markets, which are core markets for Conduit. Our underwriting team and Chief Executive will go on to discuss this in more detail. Extreme weather events are more and more prevalent and June '23 is the warmest month on record. We've also witnessed elevated cat activity during the first half, which whilst not materially affecting Conduit adds to the cocktail of driving current market conditions. Given these excellent market conditions, Conduit is delivering a strong set of numbers which are testament to the effectiveness of our strategy and a credit to our team. With this, I'll pass over to Trevor Carvey, our CEO, who will take you through our results, alongside Elaine Whelan, our Chief Financial Officer, and Greg Roberts, our Chief Underwriting Officer.

Thank you, Neil. Good morning, everyone, and a very warm welcome to this half year results call for 2023. So starting with premium income. We've shown really good growth again in the half year with gross premiums written of $542 million, which is a 52.9% increase over the first half year in 2022. This is partly an indication of the strength of the market in general, but also demonstrates our growth trajectory in our third year of trading. And the compounding effect of renewals flowing through year-on-year. Elaine and Greg will talk more on the component parts of this growth and also the net reinsurance revenue, which is showing similarly strong growth on a year-over-year. Turning to our combined ratio. We're obviously now in the new world of IFRS 17, and as such there are new definitions and terminology in broad use. For the half year and on an IFRS 17 basis, we are reporting a discounted combined ratio of 72.5%, which compares with a 99.9% on a restated basis for the first 6 months of 2022. To put the current figure into perspective, the undiscounted combined ratio for the year, no money if you like, and it was 83.1% and was achieved during a period when the industry suffered a relatively high level of cat loss activity, including Turkey, Syria quake, New Zealand flooding losses and the series of severe combatted events in the U.S. We've navigated the effect of these H1 cat events with no major loss materially impacting the business either individually or in the aggregate. In terms of comprehensive income, I'm pleased to report positive result of $78.6 million and a return on equity of 9.1% for the 6 months. As we've said previously, as the business has been maturing, our ratios have been trending and demonstrating the right signs and this result in H1 is an indication of what we set out to achieve when we founded Conduit in the middle of 2020. More color on this in the coming slides. The dividend is unchanged at $0.18 a share, again, in line with guidance. As a final remark, market conditions remain extremely favorable, and I will take this opportunity to reaffirm that we will be maintaining our approach to managing strategically, both the volatility and our capital allocation across the process, which is so important in setting us up for the times ahead. So these graphs give more detail around the remarks from the previous slide and also give a better sense for the journey we've been on since we started. For clarification, all the numbers and ratios here have been restated on an IFRS 17 basis to enable true comparisons. The half year premium growth was the result of already good all-round delivery by the team, with not just property but also casualty and specialty classes delivering good growth. Property is often spoken about in the market as a class showing very positive dynamics. And we see those 2 with the casualty and specialty lines also delivering good growth and opportunities for us. And with careful underwriting and pricing discipline, premium delivery, delivery and diversification achieved have been very pleasing. Elaine will go into more detail in her section on the component parts of our combined ratio and the progress we have made. But here are the headline number showing the progression for the past 3 years, a gain on an IFRS 17 basis. The business was formed to commence underwriting for the 2021 year. And from a standing start in January '21, we've had to respond to succession of major loss events, such as Hurricane Ida, Storm Bernd and the European flooding, Hurricane Ian and also events such as the Russia, Ukraine situation. On top of these through '22, we also saw the advent of the volatile financial markets delivering the extreme mark-to-market movements over across the industry. It was always our belief that reinsurance business needs to be able to handle these shock loss events by the nature of its diversification and good line size management and to have in a way a built-in shock absorbers to carry it through. This is what we set out to build on this platform that we are now pushing on into the market ahead. Lastly, it's worth highlighting our first catastrophe bond placement and that was executed in June this year. We sponsored $100 million multi-year cat bond, which is designed to complement the traditional retrocession program that we placed. I'm pleased to say the bond was well received in the market with a degree of oversubscription and the pricing that we achieved was pretty much in our sweet spot. From a net capacity standpoint, it puts us in a solid place for the year ahead. In terms of retrocession protection, being a multiyear instrument, it also provides us with increased certainty around these protections beyond just 2023. So this is the final slide for me before I hand over to Greg and it shows our premium progression now on an IFRS 17 basis, showing our cumulative gross premiums written since inception and broken down by category. Our view from last quarter remains broadly unchanged and that we see property and specialty space is currently offering the best margins, and our focus is directed there as you can see from the growth of these 2 segments. The largest percentage growth over the first 6 months of 2023 is property, 66% specialty at 57% and casualty at 39%. On an ultimate premium written basis, we have burned $1.9 billion since the inception of the business in December '20 and actually now have $755 million of unearned premium in our pipeline. We are also clearly maturing as a business in terms of premium income, and as a broad guide and of course with some variance between the classes. 12 months ago around 40% to 50% of contracts written were new. Over the half year that proportion now stands at broadly around 1/3 of showing the relevance and impact of the increasing renewal book year-on-year. In addition to new business bound, being able to take increasing shares on renewals, where its warranted of course, is a great foundation for growth. Writing new business will of course be a major part of what we do, but having the increasing renewal book going forward is a big plus for the team to work from. And on that note I'll hand over to Greg.

Thanks, Trevor. It's been a very strong first half for our third year to build the portfolio. We continue to evaluate property, specialty and then casualty contracts, in that order as a result of the market opportunities. The first half portfolio premium has grown around 53% when compared to first half of '22. Renewing premium for existing contracts accounts for around 2/3 of our first half portfolio, the remaining grows from new contracts. We pushed forward again for the development of targeted specialty contracts. And I'm very pleased with these developments which are providing a broad spread of complementary risk of which we were able to digest in an efficient manner. This is important as not to create accumulations of clashing risks, which dilutes our return on capital and creates portfolio volatility. Our casualty portfolio now in year 3 continues to benefit from our analytical approach, reviewing underlying trends with a relentless attention to data from the primary markets. We continue to increase the speed at which this information is made available to us, further improving our forward-looking approach. There is increasing evidence that the casualty market is somewhat dislocated with both buyers and sellers responding to underlying trends in a differentiated manner. The best-in-class primary writers, handling inflationary pressures and trend accordingly and are able to maintain confidence and stable loss ratios. However, they're all areas of the primary market, well, this is not the case the reinsurers are needing to reduce ceding commissions to maintain combined ratio stability. The property market is very strong. The primary non-admitted markets have adjusted the price of their products to accommodate inflationary pressures, much faster than the admitted carriers. this inability to adjust rates efficiently has created drag for the personal lines writers, particularly with challenging areas such as auto. Our focus on ground up primary non-admitted business is continuing to develop strong margins from both growth of renewing premium and new opportunities. The cat market remained disciplined through mid year, with buyers and sellers generally able to agree terms, creating capacity. Terms and conditions remain broadly as of 1st January and pricing moved up again. The difference here for the 1st January was that the capacity was available. There was also a binary behavior around terms and conditions. As a reminder here, we continue to report our risk-adjusted portfolio metrics on a year-to-date basis after the application of our view of inflation and terms and conditions. The graphic clearly shows the property and specialty continues to compound rate through the quarter. Our portfolio year-to-date overall rate change is 15%. And the current texture of our casualty portfolio has resulted in a flat lining of risk adjusted rate change net of inflation. As I mentioned earlier, the different types of contracts in the casualty portfolio, allow for many touchpoints to respond to the underlying metrics. We are very comfortable with our portfolio, and so this data point serves as an expected checkpoint from a dynamic management of the contracts we write. They're not a significant part of our portfolio. Sectors such as public D&O have been causing placement processes to become more varied the contracts with structures that are expiring being less prospective. Terms and conditions remain a dominant factor in how risk is transferred in the specialty market, with our rate change strongly presented at plus 12%. Prices have been rising still and broadly speaking on managing inflationary pressures very well. Property has produced a year-to-date rate change of plus 30%. As mentioned earlier, the primary non-admitted market continues to push rate and value strongly, required to move ahead of inflation and organic growth and exposure. The U.S. E&S market and the more global D&F market are great examples of sectors that have responded quickly and affirmatively to improve loss ratios. The compound effect here is very powerful and in a shorttail class like this produces significant margin. The natural catastrophe market has simplified with many XOL contracts now traded on a much narrow coverage basis with significant rate increases. Our underwriting strategy remains unchanged, as we seek to rise a balanced portfolio of risk and limit our catastrophe exposure, whilst remaining nimble to adapt to opportunities ahead. In the first half of the year, we have seen opportunity with strong property cat rates, notably 1 in 100 return period level, so have adapted our plan to benefit from these stronger rates. Conversely, we have not seen a significant improvement to the more remote return periods, so we've been very selective there. The revised plan contemplates that more opportunities will be presented during the remainder of the year, recognizing however that the main renewal periods have passed. I shall now hand over to Elaine.

Thanks, Greg. Before I get into the numbers, just a reminder here the presentation we gave last month on our IFRS 17 transition. There is no economic or strategic impact of applying IFRS 17, nor any impact on our reserving approach. While there's a new presentation to get used to, the main impact on us is discounting and that's really a timing impact as that discount unwinds overtime. So as this is our first time formally reporting under IFRS 17, I'll take a little bit of time to run through the numbers on this page. We're focused on our results and not on IFRS 17 technical session, but there is a degree of explanations of numbers we want to provide to help with understanding them. As we previously discussed, we're still providing a measure of gross premiums written so there is some link to the old world and some comparability to U.S. GAAP reporters. That number now excludes reinstatement premiums, that's not material impact on our numbers so it's a reasonably consistent measure. Gross premiums written of $542.2 million are up 52.9% on the prior year, which is in line with both our growth strategy and with what we've just been telling you about the market conditions we've seen. We typically have written about 75% of our book by the half year on an ultimate premium basis. I would say, this year we have frontloaded the book a little more, getting the opportunities we've seen. Our proportion of quota share business remains reasonably consistent year-on-year, again reflecting where we've seen the best value. Translating that into IFRS 17 terminology, we have reinsurance revenue of $278.7 million versus $169.3 million at the prior half year a 64.6% increase year-on-year. Our reinsurance revenue is essentially gross premiums earned less ceding commission on a smaller adjustment for non-distinct investment components. And therefore, it attracts the same pattern as a gross premiums earned would have just a lower number after the ceding commission deduction. Ceded reinsurance expenses, which are essentially are ceded premiums earned, excluding reinstatement premiums are $35.9 million in the first 6 months of 2023 compared to $20.4 million for the prior year. Our average cover has increased year-on-year as the average book has grown in addition to price increases at January 1 renewals. Although it's relative added first half for losses for the industry, we don't have any individually significant loss impacting of course. Our reinsurance service expenses includes both loss and loss related amounts, but also reinsurance operating expenses and an allocation of some other operating expenses. In our release on our segment disclosure, we provided a breakout of that number into the loss and expense components. So you can see those separately and also to help with co-creating our new net loss ratio. So our losses then leading the impact of discounting to one side for now, our undiscounted net loss ratio for the half year was 68.1% versus 90.9% for the prior period with the prior period impacted by those actually put up for the Ukraine conflict. Our reported net loss ratio for the half year last year under IFRS 4 was 67.8%, so you can see the impact of rebasing the calculation to IFRS 17 has. While that impact looks fairly significant and is more so a higher loss ratio given the relative dollar impact on a lower denominator, the impact on the overall combined ratio is much less significant and I'll come on to that. Before we move on to the combined ratio though, I want to point out the discounted loss ratios, 57.5% for the half year this year and 85% for the half year last year is a 10.6 point impact this year from discounting versus a 5.9 point impact last year. So in the relative impact of the movement in rates year-on-year. A reminder that we made a policy decision to use opening rates to discount our non-specific incurred losses, so we're seeing the impact of the higher rates at the end of 2022 impacting in 2023. Our combined ratio for the half year was 72.5% on a discounted basis and 83.1% on an undiscounted basis, compared to 99.9% on a discounted basis and 105.8% on an undiscounted basis for the prior year. That compares to prior year reported combined ratio of 105.1% under IFRS 4. Under IFRS 4, we previously discussed a mid80s combined ratio emerging as our book has begun to mature. Under IFRS 17 at that level we expect around a 4-point reduction on the undiscounted combined ratio. With that divergence increasing as the combined ratio reduces, are now into 0 impact at 100% combined ratio. If the combined ratio is above 100%, further it moves from 100%, the wider the divergence gets the opposite way. If you're having a hard time picturing that, I'd refer you back to our presentation on June 30, Slide 23 in that deck shows those impacts. Hopefully that demonstrates that while there is a significant impact on the net loss ratio and the various expense ratios, the overall impact is not that significant. It's the component part of the combined ratio that have moved around a lot. Last half year's reported combined ratio is slightly lower than the reported under IFRS 17 on an undiscounted basis, which is in line with what I've just described and with what we previously stated in our IFRS 17 presentation. The undiscounted measures converge at 100%. IFRS 17 combined ratios below 100% will look slightly better than IFRS 4 and vice-versa. Our comprehensive income for the half year was $78.6 million or an ROE of 9.1%. There is a little over 1% of a benefit from IFRS 4 reporting, which is largely driven by the net impacts from discounting. There are 3 parts to the discounting impact. Those discounted impart claims is unwinding prior discount on interest accretion and is revalued to current discount rates. The latter 2 goes through our net reinsurance finance income or expense line. For the half year, most of the impact was from the unwind of prior discount, as rates and reserve balances have increased in 2022, the revaluation aspect was minimal, given how rates have moved over the period. The opposite is true for the prior period as a relatively new business with a large prior discount balance built up. The impact from revaluing was much more significant given the significant increase in rates. On the investment side, last quarter, we saw a reduction in yields. This quarter saw much of that reverse. We still managed to echo a positive return for the quarter as spreads narrowed and the portfolio is just generally yielding more now. Overall for the half year we returned 2.1% versus a negative return of 4.7% in the prior year, driven by the significant rate increases last year. We remain relatively short duration and our focus is on maintaining a high-quality highly liquid portfolio. Duration is currently 2.4 years, especially 3.2 years on our net reserves. Average credit quality is AA and you can see the usual pie chart here with our asset allocation and no real changes from prior quarters on that. I'll now hand back to Neil for closing comments.

So in summary, we are delighted with these results. We have achieved solid comprehensive income and our dividend is now covered for the first time. As you would have seen during the presentation, we continue to grow strong rate, and believe that this will persist. We do enjoy the benefit of a young legacy free balance sheet, which has meant that we do not have to contend with reserving issues being experienced elsewhere in the industry. Our investment portfolio is conservative, but we are now able to invest at higher rates, as our existing portfolio rolls over. We feel that we have now reached a stage where we have a mature business, one that is scalable, where the key ratio is moving in the right direction. Finally, we do have a strong balance sheet with ample capital to support our continued growth plans. With that I will close the presentation, and we will open for Q&A.

Thanks, Neil. Let's open the Q&A. As a reminder, let's keep it to 2 questions per person.

[Operator Instructions] We'll take our first question from Derald Goh of RBC Capital Markets.

Can I just start off with a clarification please? Elaine, you're saying that-- is it a full point translation between IFRS 1, IFRS 17 on the mid-80s' combined ratio guidance. Was that what you said?

Derald, you have that spot on and there is some language in prepared remarks around how that moves. I have also referred about the slide presentation, so you can see how that moves as it moves away from 100% unless it moves over 100% as well, but at the mid-80s combined it's around a 4% impact.

Okay. Got it. That helps to frame my question. So my 2 questions, the first one. So you're implying that say now you're shooting for low 80s being a normal level and you've done 72.5% this first half. Is the variance mainly from things like lower than expected nat cat? And my second question is that, ignoring the accounting translation is the low 80s still the right number because from the way I see it, it looks like you've written more property cat, you've taken a more XL over quota share, and it looks like you've got better-than-expected rates as well.

Derald, I'll start with that one. I think just to be clear in the difference between the discounted and the undiscounted basis the mid80s combined on IFRS 4 basis per se is around a 4 point difference on the undiscounted basis, the low 70s that we're producing is taken into account the discount as well. And in terms of our book, it's pretty much shaping up as we expected and there's nothing in there that we see that changes the guidance that we think of being about mid80s combined emerging under an IFRS 4 basis. So you're right to translate that it's low 80s now.

Derald, a comment here from me on the cat, so to put the proportionality of cat and the makeup of our portfolio remains unchanged, our strategy of writing cat and non-cat in balance has remained the same. So we talk about the sort of 70%, 30% split for 70% of our premium being non-cat related largely remains the same. So no change there.

Our next question is from Tryfonas Spyrou of Berenberg.

I have a question on the revised sort of 100 PMLs. It looks like you revised it upwards and you're not there yet in terms of that revised. And I guess what would it take for these to trend towards your revised plan for this year. I appreciate there are not any major renewals left. And I guess related to the comment earlier on the nat cat versus cat exposure. I guess your PML is increasing then I would assume that the sort of the split is sort of becoming more towards cat must opposed to staying sort of flat. So sort of comments on how we can square the 2?

Tryfonas, we can't hear you very well. We only got the first question, we can't hear the rest of it.

Sorry. Can you hear me? I can hear you.

Tryfonas, do you want to ask the questions again, both of them if you don't mind? Okay. Yes, for some reason we cannot communicate, I mean, let's go to the next question, and then we'll get…

Please ask your question again.

Sorry about that. I guess the question is on the revised 100 PML, it looks like you're not quite there yet in terms of your revised sort of July plan. I guess my question is, would it take for this to trend towards the plan or whether you don't have any -- we don't have any major renewals left? And again, related to that a comment you made earlier on the sort of the split between the cat and the non-cat sort of proportion staying roughly the same. How should we square this given that sort of you're revising your PML or which means you probably have a bit more cat exposure on the books than previously anticipated?

Tryfonas, sorry about the technical pieces there. So to understand your question, I mean to answer this in the context of the proportion of our portfolio split between the volatility components like cat and non-cat remain the same. We have a little headroom, based on the 1 in 100 revised number which as you pointed out much of the cat business, specifically has been written traditionally by the industry by mid-year. But we have headroom, we continue to grow our business. But the key here is the proportionality of 70%-30% that we referenced in the past with 70% of our portfolio being non-cat related premium remains the same. So it's a reflection of us just growing our total portfolio.

And is that mainly sort of -- is it driven mainly by specialty, non-cat specialty, or is it across the board including casualty sort of growth offsetting that higher property growth?

Yes, property, casualty and specialty, but noting that there is property risk as well it is largely non-cat derived as well, which we continue to find opportunity through the year. And so though the cat renewals are very specific around sort of January, March, April, June, July there are other opportunities throughout the year.

That's helpful. And I guess one more question from me, on the E&S market, really sort of the comment you made are quite sort of bullish, I guess in terms of the dynamics. How long do you think this can last and how do you think you can -- how long you can benefit from the increased sort of flow in the E&S market and increase rates with sort of that moving market at some point starting to come again attractive, so any comments there?

Well, I'll make a comment I think Trevor has something to say. But I would say there is market conditions are certainly moving in our interest. E&S market is reflecting the fact that the admitted carriers are struggling to keep up with rate and inflation required to cover off loss cost rises. In automated market obviously, is able to respond to that much faster. So we see a lot of development still to happen there with I think a pretty long continuation of that trend.

Yes, thanks. Tryf, Trevor here. I'll just add a couple of -- little color to that. Yes, we referenced the changes in the admitted and non-admitted market in the States, in our introductory remarks. In terms of reference to the fact it is a new item. It's a big industry, change, if you like a potential step change in the U.S. But I'd make the comment at the time when you look at the portfolio that we are currently writing in fact from '21 when we started, we have a skew into that space already. Those signs on stamping off this premium changes were emerging in '21 and '22. So if you're bifurcation or the split that's appeared between admitted and the non was really starting 18 months ago. So we're kind of in that space. Happy with the business we see and we secure out of the E&S and the non-admitted space. And this forms a part of our general underwriting and portfolio build. But the point I'm really making is that we're trying to get in that space significantly already. And it's just an ability for us to continue to sort of grow and see the opportunities.

Our next question is from Abid Hussain of Panmure Gordon.

Just 2 questions from me. Firstly on pricing. Clearly, another quarter to positive pricing post the rate coming through. [Technical Difficulty] versus Q1. Is that just because you've got sort of the bigger in line items coming through at 1 Jan? And then sort of just related to that, how the pricing momentum over July -- I mean 1 July are you after the improvement, result period. And my second question is on your expense ratio. So if we look at your total expense ratio, it looks like it's remained broadly flat at around 15%. It's backdrop being huge, substantially grown your book. So just wondering if this is an accounting thing and if this should trend down over time or something else looking on here?

Abid, I'll take the expense one first. I think there's a bit more noise around our expenses now with the implementation of IFRS 17. So what was previously acquisition cost is now split because ceding commission is being offset again the top line, and brokerage goes into our reinsurance operating expense ratio. Our old operating expenses, G&A is now split between other operating expenses and the reinsurance operating expenses. So I think the guidance that we gave on OpEx previously was 5% to 6% in old money, if you like, and we had said that we hope that, that would trend into the success this year. So I think we still expect that trend to continue and our cost base is increasing in dollar terms as we grow the earnings base, the company is also growing to about 15% that you see there. We would expect that to nudge down a little bit over time. We're not giving any guidance on an absolute number on that at this stage.