Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Conduit Re January 2024 Renewals Trading Update. I'm joined this morning by Trevor Carvey, CEO of Conduit Re; and Greg Roberts, CUO of Conduit Re. And with this, I give the floor to Trevor Carvey.

Thanks, Antonio. Good morning, and welcome to this 1st January trading update. This is now our fourth renewal season, having commenced underwriting for the 2021 year, and the business has continued to push on with very good growth, again into what is a continuing favorable underwriting environment. Ultimate premiums this 1st January were $582.4 million, which is up 38% over last year. And while this figure is running ahead of our original 5-year IPO plan, it is in fact very much in line with our expectations going into this January '24 renewal season. As regards how we saw the individual parts of the market go all the way back to 2021, we called publicly then the early signs of the emerging trend in the non-admitted market and the strong skew in premium rating that we expected to see in these ground-up approach to share classes. It was the start of a structural shift that has made itself clear since then, in our view. Over the course of the last 3 years of trading, we saw significant volumes of quota share submissions in this non-admitted space. And parts of that book are again renewing through this January and to which we have added new premium as well. As we say, having repeat business with key partners in this ground-up space, some since 2021, helps us stay on top of the curve we feel in terms of spring boarding the portfolio gain in 2024. As regards rate change, Greg will go into further details later on the class-by-class makeup. But at a high level, we saw plus 3% risk adjusted rate change across the portfolio, with variations across the different segments. Over the last year, we were calling our portfolio preference to skew more to property and specialty, and our rate change measures this January 1 seemed to vindicate this. On casualty, we have played more defensive, and Greg will explain more shortly on that. So, overall rate change for us is a healthy number in our view, being positive on a risk-adjusted basis. And on top of the uplifts seen over the last couple of years, it puts the training environment still in a very good place. As regards our outwards retrocession program, we secured renewal with fundamentally the same main partners. And in the round, we would observe we were able to renew actually with some additional broader coverages included this year. But fundamentally, we purchased the program at pricing levels which were in line with our planned costs. As a reminder, we do have purchases slated for later in the year and the rollover of the cat bond in June. On the topic of cat exposure, whilst we have indeed grown the Property segment at January 1, we can report that for the net PMLs or net probable maximum loss, there was no material increase in these 1st January from what we reported to the market at the end of July. Finally, before handing over to Greg, I'd make the observation that when we set out to create a business with a genuinely diversified footprint, we did so in the knowledge that a key component was to ensure that the business always had strong channels available for the origination of business. As a reinsurer, you accept that you don't control the chain in the purest sense of the word, but you certainly can ensure that you have a long reach out through a host of channels. In that aim, I think we've done a solid job in expanding the flow and Greg and the underwriting team have certainly been able to capture a broad range of new risks to satisfy our appetite across all 3 segments. On that, I'll hand over to Greg to explain more.

Thanks, Trevor. From a premium perspective, we have premium growth of 38% when compared to the same period in 2023. Property has grown by 58% to $311 million. Casualty has reduced by 10% to $101 million, and specialty has grown by 52% to $170 million. The resultant of this, when measured at the 1st of January, is that the portfolio has further weighted towards Property and Specialty segments. This is clearly an active portfolio management response to where we see more attractive risk-reward conditions in the classes, but also reflects the nature of the typical inception dates of the underlying classes. Casualty is a fairly linear series of inception dates throughout the year, whereas specialty is much more focused around the 1st of January. That said, it remains that our approach to portfolio management is one of balancing property, casualty, and specialty risk accordingly, recognizing the benefit of breadth of exposure where appropriate, but always sensitive to volatility and the management of the tail. Next slide, please. The 1st of January portfolio has resulted in a plus 3% risk-adjusted rate change net after the application of claims inflation. We continue to apply a heightened claims inflation view into our pricing process across property, casualty, and specialty. Now this portfolio result breaks down as follow: with property at plus 5%, casualty at minus 2%, and specialty at plus 2%. As I will describe later in the presentation, the business segment results have some very broad rate change variations within them, dependent on the subclass, the loss activity, or the risk profile. We use the description of a ground-up approach to portfolio management to emphasize the underwriting culture at Conduit. It is the case that we've built a fantastic portfolio of risks from our partners, which provides us with significant renewing premium. The ground-up approach simply means that the team evaluates and underwrites every risk, renewal or not as a new risk. This ensures thorough portfolio management and ensuring that we are supporting and consequently taking risk in the appropriate classes and subclasses for our target margin returns. Talking of property, our property footprint remains firmly in the primary market, taking on risk from the excess and surplus lines and the direct and fac markets as a ground-up reinsurer. The emerging signs from the 2023 industry performance of these portfolios underlines the underwriting discipline that has occurred over the last 36 months, which has further enhanced by a year without major peak zone cat losses. From the excess of loss perspective, loss activity was broadly the driver here. The European treaties can be thought of as plus 5% to plus 10% risk-adjusted rate change for the European-wide loss-free structures, which also looked broadly as expiring, and maintained their separation of perils. The regional European treaties where there was indeed more loss activity from events such as the French hail and Turkish earthquakes or German flooding, risk-adjusted rate changes were in the range of 20% to plus 50% risk-adjusted after inflation. Beyond the loss-affected treaty differentiation, it was noticeable that the market was able to deliver sufficient supply of risk appetite to satisfy the demand of, in particular, the high excess U.S. nationwide layers. The U.S. loss-free nationwide layer contracts were largely flat to atx small positive risk-adjusted improvements, but in some cases had a broadening of coverage from the inclusion of perils such as SRCC and domestic terror. The regional loss-free treaties were around plus 5% risk-adjusted net of inflation, with loss-affected regionals and aggregates plus 20% to plus 40% again risk-adjusted net of inflation. Moving to casualty. Our casualty risk appetite remains characterized by U.S. primary business and so we broadly observed combined ratio stability across the portfolio. We further refined this by actively managing those accounts we view to have less demonstrable cycle management. The general third-party liability market continues to evidence underwriting discipline with cedents actively balancing line size and risk appetite with the rate levels they are achieving on premium basis they attach. Our cedents continue to demonstrate to us their approach to managing a higher than normal claims inflationary environment and so increased attachment points from the excess risers remains necessary to manage risk levels, yet maintaining a view the rate levels are above underlying loss trends. Our partners continue to share granular data and more importantly their approaches with us and this transparency enables us to support them with confidence. The professional lines market does show negative risk-adjusted rate change after inflation and although still benefiting from many courses of compound rate improvement, our partners are managing their exposures down, with both economic and social inflation accounting for increases in prior year loss reserves for the industry. We will be looking to the market to adjust for this in the coming months in their approach to pricing these lines. Our international casualty treaties are broadly on an excess of loss placement basis. The team observed a number of treaty structure changes and generally speaking, the levels of risk being transferred to the sellers was in the same proportions to the underlying exposure base as per the expiring treaty. What this means is that the buyers were adjusting their treaty purchase by way of increasing attachment points to seek a stable renewal outcome. This is a sensible approach and sits very well with us. With regards to specialty, we continue to observe an increased willingness of cedents to take on more risk for certain specialty subclasses defined here as political risk, including civil unrest, war, and terror. There is a really varied approach to exposure management here from the primary market. And through the process of client meetings, and ultimately, the provision of submission data, we are able to support those who outperform here. Granularity and quality of data as presented when managing and articulating an underwriting plan in these most specialist classes is critical for a reinsurer to understand the risks they are, in fact, assuming. This is in great contrast to, for example, the property class, where it's been fairly standard and now certainly expected to be shared extremely detailed and granular ground-up exposure data. This obviously presents challenges to us. And so we are not willing to grow our exposure either by breadth of footprint or the volatility afforded from them when such data is not available. Other niche subclasses such as aviation provide evidence of improving margins for excess of loss treaty writers, whilst the primary market continues to lag more with increasing claims activity. In our view, the aviation industry remains relatively weak, perhaps a consequence of excess capacity. On specialty more generally, we had great success in converting some strategic partner relationships, which have been worked on outside of the typical renewal season activity. These sorts of deals are really appealing to us as they have low embedded volatility, whilst strong margins. And now, I hand back to Trevor.

Thank you, Greg. Just a couple more slides for me, and we can go to Q&A. This slide is really just highlighting the key drivers in the broader reinsurance marketplace currently as we see it. Importantly, how it presents to us a Conduit. Some of these drivers you would have seen as mentioned before and are largely unchanged, but there are some new factors at play now worth highlighting. Firstly, on new capital coming into the market, we've definitely seen an increase this year-end in capacity being offered for the high attaching more binary property cats and property retro products. On the whole, we saw rating levels generally holding, but the collateralized market saw an increase in assets under management for these binary property products. And that trend fits equally with the increased capacity for indexed properties seen in the cat bond market since mid-year 2023. I referred to this in my opening remarks in the context of our own retro purchasing for this January, and we definitely saw this in effect in our pricing there as a buyer. Turning to the terms and conditions. These were an interesting space this year across the different segments. In property cat, there were signs of some buyers looking for a broadening in coverage, for example, rolling in terror and political violence cover into the natural perils programs. And whilst it was not something we encouraged or significantly supported, it was an area we very much kept under watch through the renewals of U.S. property cat excess of loss and actually cause us to modify our alignments on in some programs. In specialty likewise, it had similar moments with coverage discussions this renewal season involving more negotiations around more definitions and event coverage issues, although in the main, these were resolved in the final analysis, and were really a continued tidy-up required from a year ago. On the general level of demand for cat that continues to be high, and whether that's down to the embedded general protection gap or the impact of regulatory and cat model change coming down the pipe, it certainly is keeping the demand high in our view. Lastly, on inflation, whilst we have seen the headline number start to drop in the broader economic environment, there is no doubt that it is still the main topic of debate between reinsurance buyers and sellers. And if we add in the underlying legacy reserving challenges, then this is generally underpinning the market now and producing a healthy treaty reinsurance environment as we see it stretching ahead. Premiums and pricing in the various casualty classes are, of course, moving at different speeds, but we observed the main thread running through it all is the background inflation number, and that serves to keep underwriters and the actuaries focused on the task at hand. So to summarize briefly where we are. Firstly on premiums, the growth we have shown this Jan 1 was very much in line with our expectations and with the property and specialty risks delivering, we took the opportunity to skew growth deliberately in those disciplines, with casualty more under-watched by the team. On business flow, I would describe that as very much coming to us. We pushed on an open door quite often and the distribution chains we have built are very much delivering year-over-year in our target classes. Both brokers and key partners alike are combining here for us. The attention we started paying to the non-admitted space 3 years ago was a call we are very comfortable with. Next, on capital. We continue to deploy and we've remarked previously, and it's worth reiterating, that our 5-year forward business plan from here does not involve any requirement for an additional capital raise through equity or debt and our goal is to continue to grow and build the business, the current capital base and retained earnings doing the work over time. Lastly, our market outlook. This remains positive and we expect to continue to actively manage across the cycles between different classes and of course, optimize the portfolio year-over-year and quarter-to-quarter. We have done that at 1st of January, and you've seen us grow in certain classes and shrinking others. And to our minds, this is a genuinely normal behavior for a business where cycle management is a key driver of long-term performance and management. So on that, I will finish. Thank you all for your time and I'll hand back to Antonio.

Thanks, Trevor. Before we move to the Q&A, I would like to remind everyone that this call is dedicated to the 1/1 renewals. Therefore, any questions you may have on the full-year results will be answered on the 21st of February. So let's move on to Q&A's, and let's keep it to 2 questions per person. Thank you.

[Operator Instructions] We'll take our first question from Tryfonas Spyrou from Berenberg.

Two questions from my side. If you can maybe talk a little bit more about the E&S opportunity you seem to have now begin to capitalize on? And how long do you see the runway for growth here? And do you expect sort of the market conditions to be more prolonged than perhaps in the traditional XoL nat cat programs when pricing seems to have nearly peaked? And maybe a side question to that is how does the increase in your exposure in property here change your overall nat cat footprint? I appreciate, Trevor, I think you mentioned PMLs are sort of flat, but is there more traditional cut sort of exposure coming onto the book? The second question is on casualty. I was just wondering in your thoughts on why there isn't more pressure on rates here given clearly this sort of loss trends emerging from prior underwriting years, which obviously you don't have any exposure to, but a lot of the industry players do. Is it the high interest rate environment? Or is it players looking to deploy capital here to balance out the property cat exposure? So any thoughts around that will be appreciated.

Greg?

Yes, sure. Good morning, Tryf. So your first question on the sort of non-admitted property space, I think as Trevor outlined, it's an area of the business that we invested in from the outset and the sort of partnerships we established there have been writing business, and we have been, therefore, assuming business over those about 36 months to this point of our existence. So what we're also seeing here is the compound effect of the rate that has been flowing through that segment of the market. So as a reminder, we obviously talk about risk-adjusted rate change, net after inflation, the actual absolute rate, and therefore, premium growth associated with that is generally larger. So, some of that premium growth we show in absolute terms is just pure rate coming through on that existing business. With regards to runway, I don't have a crystal ball on that. But I would say that that market is still growing and if we kind of recap on some of the comments we made in prior quarters and in fact years, was that a lot of that business is from the admitted sector moving into the non-admitted sector, and that was initiated due to the need for repricing and the change in way in which the product sold, the coverages, et cetera. I mean I don't see a reversal of that. I think we are -- we've talked about fundamental shifts and changes in the sector and I still believe that's largely the case. And of course, just one last comment there on the exposure side that comes with that premium growth is we continue to structure all our deals. And we spend a lot of time building those with caps and collars, and that's business as usual for us on that side of things, so that obviously is ultimately the controller of exposure. With casualty, yes, you're quite right, there are growing observations of losses affecting back years, nominal claims coming through. These will be feeding through into actuarial analysis across the industry. And I suppose there are always differing reactions to that from the reinsurance community, dependent on whether this was business you were already on, or if you're looking at as new business, or purely moderating your position from prior years. So, I can't really comment on how everybody behaves around that. What I can say is that our ground-up approach to evaluating that business means that our partners who are able to articulate and help us understand the behaviors of the underlying business and how that relates now compared to prior years, particularly in the way in which they deploy their risk appetite is ultimately how we find confidence in supporting and managing those positions.

Our next question comes from Andreas Van Embden of Peel Hunt.

Two questions, please. The first one on the renewal book. You mentioned that increasing share on programs is increasing or fueling your exposure growth. I just wondered, is this broad based across all the panels you sit on? Are you taking share of those panels and growing exposures across your book? Or is it very much concentrated on a number of larger accounts? And the second question is on Europe. I just wondered, where are you expanding in Europe? Is this with the larger -- sort of the larger insurance companies in Europe or the regionals? Or is it actually within Lloyds here in London where you're increasing your European exposures?

Good morning, Andreas. So on the renewal book, so part of that is increasing shares of treaties, but part of that growth is simply growth in the books of business that the underlying quota shares produced from our partners. So if you think that we've spent a lot of time evaluating and opting to support a partner, we're happy to see them grow their business at the right margins and consequently share data with us in an environment where we understand the risks that we're being seeded. That's really great news. And so a big part of that is actually continued growth from existing partners. We did find some opportunities to write some new, new business. Some of that came from existing partnerships, where we found abilities to expand our footprint with them into other niche sectors, and some was with some absolutely new partners. So, a little bit of a mix of all of the above, I'm afraid. And when it comes to Europe, I would say that our interest in Europe is much like last year, no significant change in our risk appetite or approach where we saw the market sort of move in the bigger, heavier capacity programs, the sort of multi-country European cat ex XoLs. There was probably more opportunity there, in my opinion, than on the regional side, much as a part the inflation is well understood by the larger European-wide companies. And in fact, they saw this is an opportunity to perhaps further protect their balance sheet with increased demand for reinsurance capacity. And it was sought to be bought on a very similar basis to last year with sensible separation of peril and otherwise, meaning that the structures were sensible, and we found position to be there and exist. So, yes, it was a good result, but I'd say skewed more towards the larger European big capacity programs than the regional side.

And just to follow up on that. What was the demand within Lloyds? You write part of your specialty book at Lloyds, and that's grown quite quickly. Are you seeing a ramp-up in demand for cover -- reinsurance cover from the Lloyds' syndicate?

Yes. So, it was interesting. If you think of more the specialty side of the business, a lot of the marine and energy business, obviously, that flows through Lloyds. We observed some interesting approaches there to the original line size and risk accumulations that were being absorbed by the syndicates. There's definitely some variation there. There were some examples of syndicates holding their exposures back and driving price, but there were equally others who were willing to put bigger accumulations out there for similar monies. And so as a reinsurer of books, we have to certainly do the ground-up work there and evaluate the moves we make as to controlling our own accumulation, so a few varied approaches, I have to say.

Probably just one other comment to add to that, Andreas. Over mine many years in the industry, Lloyds has been a consistent buyer and a regularly renewing buyer of cover year-on-year nature with the neutralization. And the way in which cover is bought. So we've seen it again this year that the renewals to Lloyds' entities generally seem to be more reliable in coming through than perhaps other larger capitalized entities, and that's just the nature of Lloyds, and the way that it manages its own [ neutralized ] risk demand.

Our next question comes from Derald Goh of RBC Capital Markets.

My two questions. So, the first one is just in your portfolio composition. Could you remind us, what was the quota share in excess of loss of split that you had in 2023? And how has that changed in '24 at its renewals? And kind of the second question related to portfolio composition as well. If I heard correctly, in your opening remarks, you said that you've written a range of new risks that satisfied your risk appetite, what are those, please?

Related to composition?

Yes, sure. I actually didn't catch the second question quite. But the first question, portfolio composition, we're not articulating a split between quota share and XoL at this point. I think the question was actually around '23. And bearing in mind this is a Jan 1 update, Derald, I'd say. I would just say that the composition of the portfolio is broadly similar to prior year. So, the focus here is the non-admitted business is largely driven from that proportional support through the reinsurance product delivery, and very similar to last year. No changes there, so same as before, I'm afraid.

On the second point, I think, Derald, your question was around a new range of risks, is that right?

We couldn't hear you properly. Would you mind repeating it louder Derald?

Yes. So if I heard correctly in your opening remarks, you're saying that you've written a range of new risks that satisfied your appetite. Maybe you could elaborate on what those misses were?

Okay. I think probably the reference there was around some of the specialty contracts. So, we've been able to -- I think we use expression partner with a number of entities around the specialty space where a number of specialty class has been brought to us as a group from them, we're able to work with them very closely going through those kind of line by line and if you like, data set by data set. Clients have been very open in the way that those individual lines of working and we've been able to write that as a block, that's probably the way to think around it. But it's been a very good way to us to access broad range of diversifying specialty business with clients that have been very open in the way that the business has been priced and managed over a period of years. So probably that's the reference I would make to some new range of risk. We were doing it before, but there's been an increased demand for that.