Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Conduit Holdings Limited Final Results Investor presentation. [Operator Instructions] I'd now like to hand over to Neil Eckert, Executive Chairman. Good afternoon, sir.

Good morning, and good afternoon, everyone. I'm Neil Eckert, Executive Chairman of Conduit Re, and I'm very pleased to present our full year '23 results as they've done a significant milestone in the development of our business. So Conduit, we are a pure-play reinsurance business, single location based in Bermuda. We have very targeted underwriting, which I'll come on to. We were formed 3 years ago in response to what myself and Trevor Carvey, our Founder, cofounding CEO perceived as a market that was destined to change and become very profitable. And the timing has proven to be excellent. We target a mid-teen return on equity across the cycle. And you'll see from these results, we've posted a 22% ROE. There is another aspect of Conduit. As a new company, we do not have exposure to the old years on the liability casualty account. We say here strong balance sheet, legacy free. Some other insurers during this result season have been having to strengthen their reserves on all years. So that gives us a competitive advantage. So here are the headlines on the results. Comprehensive income of $190.8 million. Gross income was up nearly 50% over the same period. Our discounted combined ratio is 72%, undiscounted 81%. Return on equity 22%, we're maintaining our dividend. Market conditions remain extremely favorable. And at the renewal season that's just passed, January is a key renewal date. A lot of people buy new coverage starting in January, and we just posted a further 34% rise in income for the January renewal season year-on-year. We have a very strong balance sheet -- capital ratio 381%. To put that in context, the industry norm is between 2% and 300%. So we have the headroom. Our future growth will be capitalized both by the headroom we have at the moment, but also by retained earnings. So of the $190 million, we paid roughly $50 million in dividends each year. So we have retained earnings of $140 million approximately. We say here, it's a balanced portfolio. It's split across Property, which is where we are seeing the best rate increases and we're experiencing the strongest growth. Casualty, where in Q4, rates were pretty well static. But historically, they are at levels that we regard as rate adequate. And Specialty, where we recorded further strong growth. Specialty is classes of business, such as marine energy, aviation, those types of classes that aren't basically property or casualty. We achieved overall a 16% weighted and we risk adjust for inflation. That's important. That's a much better rate increase than we recorded in '22. But there's a compound effect occurring here. So we are at historically very, very high levels, very profitable levels for the business. The scalability we are demonstrating as each half year, full year set of results come, we are further demonstrating the scalability of the business model. One of the consequences of scaling is that our operational expense ratio is now down to nearly 5%, which is by comparison to industry peers, it's a very, very efficient business model. That's demonstrated by the actual income per employee, and we've selected a range of businesses, both Bermuda and London. And we are, by some distance, the most efficient on that metric. And that is the benefit of being a pure-play reinsurer. So first, the Property segment. Further strong growth in rates. We underwrite at a very granular level. A lot of our business is quota share. We take a pro rata share of our clients' property portfolio. A 30% rate increase net of inflation and strong profits and a combined ratio of 62.4% in that sector by any stretch that's a good result. More moderate growth in Casualty, and that reflects our view on rates, but the account has moved into a profitable space with a combined ratio of 96.4%. When you are a new company, you will be forced to reserve heavily during the first years as your account is formed. So you can see that the combined ratio was at 100% for the first 2 years of the company's life. We're now starting to see the fruits of our labor. And the strong growth in the Specialty segment. The '22 result would have reflected the Ukraine aviation or Russian aviation [ confiscation ] claim where we had a loss of $24.6 million, which -- that number has held solid. So its been no deterioration in it, but that accounts to the 22 combined ratio. It's a good place to be. You can write income without getting catastrophe exposure. And that's one of the key elements of our business. We are 70% non-cat is the historic number that we gave. And what we disclosed to regulators and the insurance industry is full of 3 letter acronyms, but that's a probable maximum loss. For a 1 in 100 event would be something like a very, very large $100 billion wind, a 1 in 250 event would be a very, very large quake. And for this year, that would cost us about 8.4% of TNAV, 9.4% for the 1 in 250. So it's a very resilient business model. When one takes our 22-point ROE, you can see that an event of that scale would be an earnings event and not a capital event. We renewed our retro program at the 1st of January, in line with our objectives, and we secured a cat bond in 2023. So that's a bond instrument that gives us protection in the event of a very large catastrophe. We have plenty of capital available. As I said earlier, we talked about our capital ratios. We can sustain our planned growth without the need to issue further equity or debt. Key financials. Gross premium up 49% to $931.4 million. One of the big changes this year was obviously the net investment result. The '22 year was unrealized mark-to-market caused by the significant rise in interest rates on the bond portfolio. That has started to unwind during this year. ROE, we're proud of that. I mean the loss ratios and the -- all of those numbers, we are pleased to put on the screen, especially the combined ratio on discounts sort of 82%, which is much -- it's what we said at the time of the IPO that we would aspire to. So it's nice to be able to put those numbers on the screen. Our strategy is capital preservation. We want to take the risk on our underwriting, not on our investments. So we have a very conservative portfolio. AA credit quality. Relatively short duration. So the duration is 2.4. That's actually up from 2.3 in the last period. And the total net investment return was 5.8% for the year. We give strong considerations on ESG factors in the portfolio, the mandates on the bond portfolios contained ESG within their mandate. But as we say, and the top bullet here, its capital preservation and liquidity is the key mantra. That shows the increased contribution, but more importantly, what's occurring both on the underwriting and the investments is the compounding effect. So -- our investments are going up and we can invest our reserves, which are building the same impact on underwriting. I should mention on the underwriting side, we have an unearned premium pipeline. So that's business we've written on premium we have yet to account of $500 million. And when we account premium, that will release further profits. So that shows the compounding effect. So '23, I think, represents -- I mean, I've seen the analyst reports, there's all sorts of comments coming of age. I mean, for me, it's a reflection of the hard work. We're reaping the rewards of the work we've done over the last 2 years. And it's all about momentum building and flow and growth. We have a very strong origination platform, and that's demonstrated in the growth that we have now achieved. We used to talk about it. We've now done it. We really benefit from not having exposure to the old casualty years. The market is in a very, very positive place and in our view, will continue to be so for the medium term at least. And we have the capital base to support our planned rate of growth. So that concludes my presentation. So I think we'll now move on to Q&A.

[Operator Instructions] I'd like to remind you the recording of the presentation and all company slides, published Q&A can be accessed by your investor dashboard. Neil I'm going to put your camera, if I may. And I will go through and let's pick up the first question. If you bear with me one second. Right -- the first one here we go. Investors have concerns about casualty lines as there have been billions of reserve strengthening recently. What is your view? And will this have a positive impact on pricing?

I believe it will have to. I mean the one thing that's really important for people to understand, the Casualty is not one class of business. There are a myriad of subclasses, and they have different types of profile. So auto liability, bodily injury. I mean, we avoid auto wherever possible. The back year is that are really truly manifesting themselves. It's 2015 through to 2019 when the market was soft. And investors are right. The industry has been having to shore up reserves. I mean one of the biggest reinsurers by themselves have strengthened to the tune of $2 billion in just 12 months. The beauty of Conduit is it is legacy free, new balance sheet. Will it have an impact on rates? -- the people are starting to try to improve terms and conditions. We have shown and posted the lowest rate of growth across all our segments. And yes, I think that could come to pass. I will know -- or we will know as a company a lot more as we get through this year. But that's the one area where we want to see rates continue to rise everywhere, but casualty. I think one is hopeful as the back year loss experience will drive people to need to keep posting further rates on casualty.

Next question here, Stephen. P. Congratulation Neil on the sparkling set of results. You've mentioned in the past that you would be increasing the headcount in order to build out the capacity to gain business. I read the uplift in renewals as on January and note the 40% rise in other admin costs in the full year accounts. Does all this mean that you've now reached your optimum size? Or should we expect to see more staff hire and therefore, more growth in '24?

Yes. I mean the good thing is that yes, we are spending more money on people. And I mean, the most important part of our business is people and having the right quality of people. But as a percentage, the operating expense ratio is coming down. We will make a few further hires. And I think our headcount is just over 60. We could probably peak somewhere around the 70 -- early 70s mark. And that will be supported by the future growth in revenue and earnings. So thank you for your question and your kind observation on our results. And yes, but we've really finished building the business in terms of systems, key positions, premises, distribution, all of those things are built, but we will continue to strengthen from the people perspective. But we still want to keep that expense ratio down around the 5 level. That was always the target that we set at the IPO and it's nice to have got there.

Next one, we've got here. A strong ROI. Can we expect this to continue at comparable rates? Also, how much scope do you have to increase premiums written from the current balance sheet?

Right. So we can't give you any exact number as to where we can get to because it's to an extent, dependent on the future level of retained earnings, and we're not in the business of giving future profit guidance. But what we can say -- what we've tried to do, and it will be on our website. There are some slides on capital. And what we're doing is telling people what our BSCR ratios are versus industry norm, which will allow people to calculate the potential headroom that we have of the current balance sheet. And then you can add to that future for retained earnings. And I mean, there are analyst forecasts out there, which will allow you to -- they may be right or wrong, but at least the people are attempting to estimate our future profits and retained earnings. So yes, we can support substantial growth. And we grew 34% at 1/1. You can't extrapolate that for the entire year because there's different renewal dynamics in different classes of business come up at different times of year. But yes, the strong growth can continue, and we have sufficient capital to support that growth.

A question here from Damian. What's your long-term exposure to catastrophe reinsurance written since IPO where you need to keep reserves? How long do you have to wait to release these reserves?

So on the catastrophe account, it's almost -- which is only 30% of our business. The answer to that question is not very long because catastrophe losses by definition are headline events. And so you can reserve for them quite quickly and accurately. They may take a few years to settle out. If one takes a -- there's a very big hurricane like Hurricane Ian. It could be a long time before all the repairs and rebuilds have finished, but you can reserve very quickly. Where the reserving element takes time to work through is on the casualty account, the liability because by definition, those claims to become settled have to go through court, and that will always be a drawn out process. So on the casualty side, it's a 3- to 5-year tail before everything has worked through. And that manifests itself in the relative combined ratios. Property is much quicker to settle through and requires less in the way of reserving. But even with property, you have to hold reserves to take into account the time for settlement of claims. Specialty, it's probably next. It sits in the middle and then casualty is the longest.

Question from Marcus. Which market segments do you see as the most promising for expansion in '24.

I think it will be more of the same. Casualty could start to harden and if it does, we might recall slightly stronger growth. But I mean things are really, really strong on the property side. And they're good on the -- and very good on the specialty side. And we publish our rate rises, we actually had a market update on the 21st of January, where we talked about the 1st of January yields. So people can start to get a view on the '24 marketplace. I mean these results are all about '23. But it's more of the same. So yes, continue -- we did see better terms and conditions in Europe, which we comment on in our report and accounts. So yes, it's -- we are excited about both property and specialty, and I think that the casualty account could turn over time.

And just a follow-up from Damian and I think you have touched on some of these points. Is most of the catastrophe exposure in the Property segment and in what geographics or geographies are you most exposed?

So it depends on the nature of the catastrophe. Unfortunately for me, I've been around long enough to remember things like World Trade Center, where that was a very different types of catastrophe loss and that would have involved property, aviation, life, casualty, all sorts of things, but a normal, natural catastrophe basically impacts mainly property, but with potential for some specialty. For example, 2005, Katrina, it affected offshore platforms, which would be in the specialty account and it affected onshore property. So some losses -- if they're big enough can clash across 1 or 2 sections of the account. But by and large, most of the catastrophe exposure sits in the property account, although I would reemphasize the fact that we are non-cat, a lot of our accounts is non-cat exposed.

Question here from Christopher. Do you plan or do you have any plans actually for any share buybacks?

No. At the moment, we are faced with a market that as well rated. We are growing strongly, and we believe that it's in everyone's interest for us to continue to deploy all of our capital in that marketplace.

Question from Robert. Given the high levels of profitability of the industry this year, to what extent will the additional capacity being employed, increased competition and softened pricing?

It depends whether that question relates to us. I mean we are $1 billion. In a global industry that's about probably $500 billion on the balance sheet. So by ourselves. And we are already very well established with our portfolio. So for us to increase our shares on the business to be right or attract new business should be following. What we have seen and Trevor uses the expression, the elevators don't always go up and down at the same rate and together. We have seen softening in small pockets, especially where capital is applied to one class of business. And we have seen capital come into the market on the retrocessional side. We don't write retro. We buy it. So that actually works for us. But capital has come back into that side of the business. It's amazing what one year without major cat does to investor appetite. But at the moment, we see discipline. We see very, very high rates. And as I said before in the presentation, the rate increase now is compounded on the back of 4 years of rate increases. So it's in a good place. So I mean competition, if it starts to drive or manifest itself in rates and at the moment, we've seen rates continuing to rise in '22 -- sorry, in '23, they rose hard.

How is Conduit likely to evolve when rates inevitably start to soften? How far away could this become an issue?

Well, I think there's 2 questions there. One is how do we evolve and how far away. I mean at the moment, I think that this market is going to stay strong and profitable for a while to come. And it's at levels which are very profitable. Cycle management is very much in the heart of where Trevor does business. And we've already demonstrated that we -- at 1/1, we wrote, if you look at the press release and RNS, its on our website. But you can see that we started to dial back some areas of casualty. So we will apply our capital to the areas where we think the rates and the profitability is best. But cycle management is at the heart of how you run a business. And I do believe we understand cycles. The timing of the launch of the company has proven to have been excellent. And -- but we're now in a very, very strong place and the outlook and continued growth for the next few years is the plan.

Christian here. Will AI have an effect on the industry in Conduit in particular?

We already use technology for things like pricing models. We use technology for exposure management. So if you went back 20 to 30 years, the ability to actually track proxy values per ZIP code in the States, post code in Europe was not there. And there are all sorts of new tools, pricing tools. AI could well improve efficiency and reduce cost on documentation and administration. But one of the things that I personally like about Conduit is the simplicity of its business model. It's a very small number of transactions as a pure-play reinsurer. If we're writing direct business to write $1 billion, there'd be tens of thousands of contracts and the premium per contract will be much smaller. So our business model is simple. There'll be tools and our tools coming across the industry on pricing exposure management, which could help. It has the potential to reduce administration and cost in the industry. But it's -- I don't think it's a fundamental driver in the short term.

And what kind of risk is handled in the specialty area?

So specialty. So it's -- basically, it's everything that isn't casualty or property. And it could be -- and I'll give you examples, some of them we don't write. But energy, upstream, downstream; marine, hull, marine cargo, kidnap and ransom, political risk, satellites. It's all of those specialist areas that are away from the main core property and casualty. And what you get in the specialty account, if you write it properly, which I firmly believe we do is you get diversity, you get different types of exposures that don't clash and access to a strong, diverse, stable base of premium. And that's now starting to reflect in our numbers and the combined ratio.

Next question. Congratulations on the results, Neil. Why is it such an advantage to be in a single location? Can you still access all the business you wish?

Right. So the distribution -- the reinsurance marketplace distribution is concentrated into relatively a small number of broking houses, I Think we have very strong relationships with the key brokers. So from a distribution perspective, where we sit is -- I mean, Bermuda is a great place to do business, by the way. It's got one of the largest concentration of pure-play reinsurers in the world. And it's a small island with a lot of companies and some very, very good companies as well. The -- could you repeat the question, I just want to get the first part of the question again?

Absolutely. Bear with me one sec. I'll make a scrubber for you there. Why is it such an advantage to be single in a single location? Can you still access all the business?

Right. So yes, thank you for refreshing them. So where I think we can differentiate ourselves -- how a decision is taken, if it's in one location with our underwriters assessing risk and peer review, but we can make a decision quickly and we can give a good level of service and response to our customers. If Conduit was a global business with offices in Asia, South America, Europe, the states, it becomes much more complex in so many different ways. It's operationally complex. The risk decision is more complex with a lot of companies that run these global offices, the -- overseas offices become origination centers and their premium income driven, and I think it's harder to underwrite. You also tend to spread yourself across much more classes of business. And one of the things about Trevor, which I really love to see, at the size we are, we don't need to play in all classes, in all territories. We can be selective and we can be nimble. And so we don't -- lots of types of business that we really don't write such as cyber, such as crop, we don't write credit risk. So we can choose. But the single location and the actual size of the company, I think, is a great advantage. We're small enough to see what we want to see, but we're -- sorry, we're big enough to see what we want to see, but we're small enough to be nimble and to operate out of one location, which brings with it the simplicity I've described.

Last question we've got here at the moment is from John. Any view on a more progressive dividend policy?

So at the moment, we are in deployment mode. We've maintained our dividends since the IPO. That was a commitment we gave and we have some income funds. We've invested on this. But at the moment, we are absolutely deploying as hard as we can, and we need the retained earnings in the balance sheet.

Now that has covered off and taken all the questions we've had through from investors. So thank you very much indeed for that. Any further questions that comes through, Neil and the team will have opportunity to review those. Before redirecting, investors should provide you their feedback, and it's particularly important to you and the company. Neil, can I ask you for a few closing comments, please?

Yes. Well, thank you for attending this presentation. I mean -- my real takeaway here is the company has grown. It has gone from a startup into one that's now establishing a track record. A lot of the work we did 2 years ago manifests itself in this result and the future results will be manifested off what we're doing today. We have momentum, and we can continue to grow. So that's my closing comment. And apart from that, it's just to thank everyone. And I look forward to hopefully doing this again after the interims.

Fantastic. Neil, thanks indeed for updating investors today. Can I please ask investors not to close the session. It should be automatically redirected to provide your feedback in order the management can better understand your views and expectations. It's only going to take a few moments to complete and most greatly valued by the company. On behalf of the management team of Conduit Holding Limited, I would like to thank you for attending today's presentation, and good afternoon to you all.