Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good afternoon, and welcome to Conduit Holdings Limited Investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Neil Eckert, Executive Chairman. Good afternoon, sir.

Good afternoon. And I'm joined here with Trevor Carvey, Group Chief Executive. And we also have Elaine Whelan, Group Chief Financial Officer, in case there's any corrections on finance at the end of the session. So Antonio, let's go on to the first slide. So this is our investment proposition. Conduit is a pure play the mutant reinsurer, it does not write direct business. Its value proposition is based on targeted underwriting. We underwrite Property, Casualty and Specialty. Specialty is classes of business, such as marine, aviation, energy, political violence, et cetera. [indiscernible] first started the company in 2020. We believe we've assembled -- particularly Trevor's assembled the team of really strong underwriters. We have a highly efficient operation, a very open, collaborative culture. Just behind this boardroom, there is the underwriting floor, it's all open plan. There is a high level of communication. We have a management team, as I said before, with proven track record. And more and more, the use of data is coming into the reinsurance market, the ability to analyze underlying portfolios of risk, as a reinsurer, we have access to a lot of underlying portfolio. So data plays a very big part of our business. And one of the aspects that I think makes Conduit particularly attractive is that we raised the money in 2020. Our first underwriting year was 2021. So we do not have exposure to back here legacy issues. It's a clean, strong balance sheet and investments also. The mantra is keep things as simple, it's a AA-rated portfolio. Short duration. Average duration, I think, is about 2.5 years.

Rend area.

So we will -- we can talk more about that in the Q&A. But with that, I will pass over to Trevor.

Thanks, Neil. Good morning, everybody, or afternoon, if it's in the U.K. you know that. Yes, so there's some summary points here to kick us off, which really encapsulates the trading update that we've announced in the RNS today. Gross premiums written $356.8 million. That's up 28% year-over-year versus the first quarter 2023. That's good growth in the reinsurer space that we're in, it's still an awful lot of the market that we see before us that is worthy for us deploying capacity into. The growth for us, as we've called out previously, Property and Specialty particularly are offering more attractive areas for us. So 37% growth in Property and 31% in Specialty, obviously driving that. And as I say, we're targeting the classes and the sectors where we've seen the best returns at the moment. But generally, the market is still very attractive for us. On risk change or risk-adjusted rate change, I should say, a 3% overall net of inflation. And that's across the blended portfolio of renewals, plus 5 in Property, down 2 in Casualty, and up 2 in Specialty. In terms of those, that's the rate change, net of inflation that we've got on our renewed portfolio. We obviously have new business as well. We're adding to the portfolio in the quarter. It doesn't form part of that competition -- computation. But overall, we're still seeing a positive environment. Casualty is interesting because it's around the edges there, where we established a core book of business going back to 2021, when we started the business. We've built on that year-over-year, as we've grown that Casualty portfolio. Some of those renewals were showing a bit of rate weakness. And so -- so you've seen that minus 2%. But we've traded through that, we've done some optimization of the portfolio, and there's new that's been added. The key for us year-over-year on Casualty is to ensure that in the overall Casualty division, we don't see combined ratio deterioration. So essentially, we're looking to trade that Casualty book through, and we're also growing it, but maintaining that margin on the overall portfolio. And that's what we're being able to achieve to date. Trading environment. Yes, I've touched on this already, but we refer to it as an underwriter's market, and that's very much how we see it, within the divisions of Property, Casualty and Specialty, we have a whole host of subsets. And that's the important point with a multiline reinsurer. We have 3 big divisions, but within those, there are lower subsectors. And the underwriters are finding still a number of those classes are very attractive. And the general rating level across all of them is in a very good position. During the quarter, active quarter for industry events, a number of net cat losses, as well either for us, they're well within planning expectations. And there certainly -- is pockets of positive impact on the rate that we're seeing within those. Mature business now in the fourth trading year. For us, it's been a question of building the platform, if you like, in the first couple of years, getting to that stable state. And really, over the last 2 renewal season, I think the business and the underwriting trading teams have been in a position, where we've got significant relevance in the market, all of our 3 divisions are trading very actively with the large clients and the large broking houses, and we're seeing -- which is really what we're expecting, this is our fourth year, still an increasing flow of business through our front door, which is a great position to be in because for us, the big mantra that we put out when we put the business together was that you need a wide spread of business to be able to select from. And as we published in previous announcements, we have a healthy review rate, so we call it for every 10 risks -- there's a lot that we review that don't make our hurdle and a smaller percentage too. So for us, that's as a good position to be in. And as long as we've got that strong funnel of distribution. It means that we're in a very strong position to select as we go forward. The last point is an important one for us, nonadmitted partnerships. That's basically a sector in the U.S. in America, where a class of carrier, which is referred to as nonadmitted has been on a very steep rate and terms and conditions increase to improving market over the last 3 years. We called that out very early. We built some very key strong partnerships through '21 and '22. And a lot of the growth that we're seeing at the moment is coming out of that area, where there is a very healthy margin. It's been referred to a lot in the industry press, but I think for us, as Conduit, we caught that out very early and have been active in that space for now getting into our fourth year. Antonio, next slide. Yes, slide here, which is, I think, inform to over -- the history of the company over the 4 years, shows what we've written on a cumulative basis since the company came into inception. So written just over $2.2 billion per premium. And the value on this slide is that you can see the Property, Casualty and the Specialty are all playing their part. So the rate of increase in Specialty has been larger in the last 3 quarters. But over the whole piece, there's always that focus on having a balanced portfolio, and that's really key for us. We're not going to see this portfolio suddenly taking a big SKU out to write a predominant portion of -- for instance cat business within the Property space, which imbalances the portfolio as an example. We're always going to keep the relative parts of the pie, if you like, in some sort of proportions that they balance, and there's a diversifying factor there. It means the company and the performance of the portfolio is more robust around absorbing shocks and losses that come through. And the portfolio is in a position where you're not overextended in any one country, region or class and that's really important for us. And also and probably just the last point here is that, given that we -- the way the reinsurance treaty business has accounted particularly the quota share that we write, that has a development pattern and an earning pattern where the premium comes in over time. So that's the reference there to a significant pipeline of -- and premium is still there from our '22, '23 portfolios in particular, that is still earning through and coming through '24. Okay. Next slide, Antonio. So these next 3 slides are really around the specific divisions, the Property and Casualty and Specialty. And is showing a bit more color around how we see these sectors. So as we said on the first slide, 37% growth in Property, premiums written going up to $217 million, Q1 2024. And on the right-hand side, is that progression of the rate change, using the base case as year-end 2021. And then what we've seen risk-adjusted coming through to where we arrived at in 2024. And you'll see this also on the [ Property ] and Specialty supplies. We started in 2021, but there was already in train a rate increase environment. So what we've been seeing in these rate increases that we've been reporting year-on-year, it's really on the back of the years that are compounding to this point. So you start to see some of the sectors now which even start to flatten out, things like Casualty at the moment. And for us, it's still sitting on a relatively high part of the cycle. So overall, across the 3 divisions, you'll see it's in the other 2. They are at -- I wouldn't say a career highs, but they're certainly at relatively high over the course of the last 10 to 15 years. So the industry at the moment that we're trading in -- in the regional space is a strong place to be active and to play into. The -- just one comment at the bottom that cat capacity increasing is a slightly dampening effect as we get into the midyear renewals, catastrophe reinsurance, excess of loss reinsurance, there's a big renewal season that's due up in the U.S., particularly, and that as we go into the hurricane season, a lot of those reinsurance contracts renew through May, June and July. There's more capacity that's come into the market, sitting around, particularly at the very remote end. It's not really where we play. We're not big writers if that part of the spectrum, but there's not capacity that's evident and just come into the market, and the top end or higher remote end of catastrophe reinsurance, we'll certainly see some rate fall off, some rate drop off this coming midyear. I think we referred to that in our call earlier today. It's an area, which we'll observe, we'll watch it. We're not massively skewed or heavy in that space, but it's something which we're very comfortable trading through this midyear. Next one, Casualty. Yes, the Casualty single-digit growth 6%, which even though we saw a negative 2% on our renewals, which is the point, we are still very comfortable growing that marginally over the quarter. As I referred to earlier, you see a lot of new business, an awful lot of new business, which we pick and sifted our way through. And when we rank that business up, some of those have been very attractive for us to write in the quarter. So we added some new, which is contributing to that 6% growth in Casualty. But actually, particularly with the January renewals [ form ] part of the first quarter, we did let some Casualty business go at the margins relatively small amounts. But we, if you like, reoptimize the portfolio, added some new better blended margins and cycled out some of the business that we thought was showing signs of weakening earlier and other classes, of Casualty. And that's a perfect natural course of action that you'll see us actively participate in, looking at the portfolio month-to-month and quarter-to-quarter. We're very comfortable the new business that we see that is like a better replacement for current portfolios, we're happy to optimize the portfolio within that, and it's a healthy activity, which a lot of reinsurers talked to in my experience, but often don't carry out, but we're very comfortable making sure we maintain those margins in the portfolio. Next slide, Specialty. Yes. So good growth here, Specialty classes cover a very wide spectrum. There are certain things that we don't do, particularly motor, mortgage, political risk. We don't trade in those spaces. They are very acute classes, where you need some very specialized expertise and very specific capital allocation tools. In our experience, those are areas where we can't punch by our weight, so we avoid them. And I think that's -- it's a healthy discipline knowing what -- where your strengths are as opposed to where they're not. So the team -- it's have grown within our Specialty arena, 31% growth in Specialty, still showing good risk-adjusted rate change. And if you see from 2021, across our blended renewal classes, it's at 13% over that time, which is a really good place to be. There are various losses over that period of time in the industry, Ukraine came through. Obviously, over the course of the last 18 months, there's been a lot of talk of that in the market. That caused price increases through in the Aviation space, which were relatively small in, but it's an example of where the market does react. And then there's the Baltimore bridge loss, which is still very much being ascertained to the scope of the industry. So there's still a lot of work to do in terms of where that loss will ultimately go to in the market. But that again will probably cause uptick in rate within the Marine Specialty classes, as that loss comes to, if you like, fruition in the market over the course of the next few quarters, and indeed over the course of the next year or so. So the Specialty market does react. We're active in it, but it's about being disciplined, knowing the strengths, knowing where to play and where to keep a feather dry. And I think the team has done a very good job through the course of the quarter in growing that Specialty. And to a large extent, that's probably just a final word, especially for us, is essentially lower in the net cat contributions. There are some Specialty classes that in the industry can be written, but do bring large natural payrolls accumulations for us. We try and focus on those classes, is that essentially complementing our Property Cat portfolio and doesn't add to our overall corporate catastrophe profit and massive loss accumulations. Next slide. Financial highlights. So just summarizing really within each of the divisions, where we are Property, Casualty and Specialty, $78 million gross written premiums. And you can see a lot of that's being done through that Property space, the 36% change we referred to before. Lot of rate coming through, a lot of new business in the Specialty space, as I say, which helps to diversify, and Casualty, you can see as I referred to before. We're still growing that marginally, but recycling some of the thinner margin business and putting in some of the newer attractive business. We referred there to no event loss individual in the aggregate within the quarter had a material impact. And that's a reference both to the Baltimore bridge and also a series of natural payroll losses, which are still quite prevalent. Lot of them don't make the big industry press, but a lot of losses through parts of America, tornado, hailstorms, unless they're not the front-page hurricanes. There's a lot of insured loss out there in the underlying, particularly in the Property market space, where natural payrolls losses are more frequent. And certainly, it's something which we track. So we plan and budget for those expectations largely. So for us, you would [ recover ] losses in the portfolio, but there's nothing out size for us. And that goes to losses also in Europe, the Italian hailstorms, which, again, you'll see that being reported quite significantly through the European reporting season. But again, for us, they're well within expectations. Okay. Next slide. Neil touched on this at the start, our quality investment portfolio. For us, it's about capital preservation and making sure we've got the liquidity to support the underwriting side of our activities. Low-risk strategic, portfolio allocation, you've got split back there, the asset allocation that the end of March. Total investment return in the quarter, 0.5%. Yes, high-yielding portfolio coming through, but that's offset by the increase in the market impacts from interest rate changes on the market -- mark-to-market valuation. You'll see that through, as we've seen today, pretty much in -- sort of the quarterly reporting that's coming through. That's a trend that's just been there, through to the interest rate changes in the quarter. Portfolio duration Neil, touched on this earlier, and then the sort of that within. We do have a consideration of the ESG factors in the management of the investments. So that's still a key part of how we review and how we manage the allocation of the portfolio through the ESG sector. And it's something which we're very active in with our managers. Okay. So final slide for me. And I think then we move to Q&A.

We do. Yes.

Yes. Yes. So we've spoken about the growth in the quarter, but it's just sort of kind of a comment here to what happen in April, and then actually through beyond that. It's -- that was a good April for us. That momentum continued; we're certainly still continue to see in the midyear renewals. A very healthy trading environment and rating levels. As I say, it's a following wind largely. We referred to it as an underwriter's market. And the point there is where we see clients doing a really good job and the markets still in our favor, we're really comfortable growing the shares and developing those positions appropriately. And the appropriate really does refer to keeping the balance in the portfolio. And the underwriters are certainly always have that within their key drivers where they allocate capacity. All 3 divisions playing their part, Property Casualty and Specialty. They all had a good role in 12 months, but certainly a good quarter. And even in the areas of Casualty, which is showing signs of softening. We've got a really good hold on the performance year-over-year and what our underlying core partners are doing in deploying in that space. Strong balance sheet. As we've said, we've become presently relevant with clients continue to expand the business with those clients that we are comfortable in the way that they deploy their own line sizes in their own portfolios, and the low 80s undiscounted combined ratio certainly continues to emerge within our overall portfolio. Final word, as I think I've said, because I say high-quality new business is what we look to focus on. It's not an easy task. Anyway, it tells you, you can sit in the reinsurance market, open the doors and all the business are close to this top notch is not being entirely truthful with you, I would say. So we continue to do a really good exercises of sifting through a very broad portfolio. What's distilled out of that is probably the word is a core book of business, which we're really happy and supporting through. So I think that's probably from me, Neil.

Yes. I think we can now move on to Q&A. Thank you, Trevor. Hopefully, that gives you a feel. I would stress that we don't report results on a quarterly basis. This is a trading update. Our next results will come out at the end of July for the first half. But with that, Antonio, let's pass into Q&A.

[Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed by our Invested dashboard. [Operator Instructions] The first question that we have here reads as follows. Can you give us your view on the overall profitability of the market today? And where do you think it's heading, and the growth you envisage for a Conduit way in this market environment?

Okay. Yes. So kind of a general high-level question. Profitability in the marketplace. I think it's sector and class specific, if you look at class of Property, for instance, on a global basis, trying to boil the ocean here to a degree, I suppose, but there are very specific areas where our view is, and I think if the industry is honest, there are better returns than others. If you look through Europe on the Property space, some of those margins, and we see a lot of business -- a lot of those margins leave a bit to be envisaged to put it mildly. We see it, we put it to our model, and it's really not worth deploying materially into that space. If you look at Property that has presented to us through the U.S., generally, the ground up business, i.e., the non-cat business is showing some really good margins. That's a function of the way that, to a large extent, the regulation and the insurance carriers are licensed in the states. They're much more regionally focused. And within that kind of spectrum, we are able to focus in on some really good opportunities. Casualty is interesting, Casualty is class specific. So if you look at Casualty areas such as public, D&O directors and offices and professional liability have started to, certainly, over the last 12 months, we've seen rates softening appearing more and more in that space. We follow it, we track it. We know what our clients are doing to manage that. But that's class specific. There are other classes within the Casualty space, which are still holding up and presenting very well to us. Specialty, I would say again, class specific, especially has a very wide spectrum of short- and long-tail business within it. There are a whole host of [indiscernible] margin returns that sit along that scale. It's probably too much in this session now to go into that into great depth. But the value in the Specialty portfolio that we see in the way that it refers into overall blended margin and profitability, providing that's not contributed, as I said, to large natural payrolls accumulation. Which has a capital cost for us, providing it to bring in the reverse of that, which is individual risk diversification with a margin. That's a really good space to be. And I think probably the wrap-up for me here on this one is. I think you'll see us, as we referred to in some of our messaging from the last 2 or 3 quarters, pushing on in that Specialty risk space. And that brings good diversification, it brings good new margin, which it sits within our overall portfolio very nicely.

Just hanging on to the next question here, which has 2 parts. The first part read as follows: can you in Layman's terms run me through what the differences between gross premiums written and reinsurance revenue is the terminology as much as anything?

Sure, I will take one. We were -- our IFRS 4 report and IFRS 17 came in last year, and we implemented and adopted that standard and reinsurance revenue is an IFRS 17 term. Gross premiums written doesn't really exist under IFRS 17 anymore, but we've chosen to keep that as a KPI in our financial reporting. So that as you can see how things are going and kind of old school money, if you like, and still able to see the growth there. Reinsurance revenue is akin to gross premiums earned, but that is netted down further by ceding commissions and then there's a smaller adjustment for nondistinct investment components, which is essentially profit commissions and -- or a component of profit commissions. So it is a derivative of gross premium written, but if you go back to kind of old-world accounting is gross premiums and new [indiscernible] commissions, essentially.

And the next part of that question reads, is your build out staffing the admin cost now sufficient from further revenue growth?

Yes, that's an interesting question. Certainly, when we put the original plan together, we saw that trend line in terms of operating expense to broadly a percentage to where we are now. In the round, we are very scalable from here. So we've got a good robust systems and operations divisions that are supporting the underwriting -- underwriting teams. Have been largely kind of fully staffed certainly to the last 18 months. We're adding ancillary support underwriting personnel, lower down in those teams. So it's really about processing and the administration of the policy anniversary growth, but the business as it stands at the moment, is in a very scalable state. You'll see us still adding personnel now to it, so the head count will go up. We're still continuing to invest in systems. But as a pure metric and the percentage cost of it relative to the premium, we're at that level where I think we said, we would be trending to when we got the original plan together...

I think also very importantly, we have the balance sheet to sustain that future growth without needing to issue new shares or debt. And now that we've matured, we actually have on top of the existing balance sheet, the potential of retained future earnings.

The next question here reads, given the focus on profitability and underwriting discipline, how we're managing the balance between growth and risk, especially in high-growth segments like Property and Specialty reinsurance?

Yes. That's the conundrum that all reinsurance leaders, managers run every day. That's exactly the point. I think a lot of it goes to our approach, and I think that one of our underwriters referred to is certainly a good way of thinking about it is, we manage the exposures through the front door on the way in. There are reinsurance models out there where companies and balance sheets are not comfortable taking very large positions on the inputs business and then seeking to solve that problem, if I call it that, through intercession and as it's passed out and laid off. That's not what we do. So the front portfolio, growing the premium, growing the scale of the business. But keeping always in mind the need to balance the portfolio through the front door, which is kind of what we're thinking about it as we write, is really important to us. There is no quick answer. There is no gold and -- golden arrow you can point at it and say that's the way to solve it. It's just hard work and its continual evaluation of the portfolio as it evolves. And I think we do a good job of that. And -- so my comments around Specialty and risk being not cat-related goes to a big part of that. We're very conscious of if we're selling a product, we want to get paid for the component parts. And that's really important to what we do. And if we're selling a -- especially policy that's got some net referrals in it, we want to make sure we get paid for that. The industry isn't always good at doing that. And products do get sold whereby there coverage is -- I won't say hidden in there, but are included that are perhaps not price. And that's a big part of what we do, every policy we write. We strip it apart and break it down to just component parts. And I think goes a long way towards sort of answering that question. I think that's how we measure that we're getting paid for the exposures that are building up in the portfolio and making sure they're balanced.

I think also where we've seen the opportunity in the portfolio from the very beginning of the company, we've chosen to write more quota share in excess of loss, which also helps us to manage the volatility around our combined ratio as well.