Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Conduit Holdings Limited Investor presentation. [Operator Instructions] Before we begin, I'd like to note the following [ poll ]. I'd now like to hand you over to Trevor Carvey. Good afternoon, sir.

Thanks very much, and welcome to everybody. My name is Trevor Carvey, as CEO of Conduit Holdings and are joined by Elaine Whelan, our CFO. So what we got here is the interim results deck, which we're going to walk you through. This is as we've shared with the market earlier today. And then I think we're going to move from thereafter into Q&A. So thanks very much. And let's move on, next slide. And again, that's a disclaimer, thanks, that's fine. Yes. So for us, 2024 interim results, comprehensive income of $98.1 million and a gross premium written plus 36.1% to $737.8 million. Those 2 numbers are good, solid results for us as a business to our 6 months results. The market has remained pretty much in our favor through the course of the first 6 months of this year. We've got disclosures here and slides around the individual divisions of property, casualty and specialty. And there's some interesting moving parts, if you like, and some interesting detail within each of those. But overall, really pleased with that result. We've shown good growth, as I said, to $737 million. Over the same period. [Audio Gap] On the combined ratio, discounted combined ratio, 75.1% that compares with 72.5% for the first 6 months of 2023. We've got commentary around that, and myself and Elaine will go into some of the moving parts within that. But it shows that even though there wasn't a particularly significant industry events, we say, in terms of U.S. landfalling hurricanes or large -- very large natural peril event. There's still a lot of activity out there in the world in terms of smaller natural perils events. But also some of what we would refer to as man-made events. And in this case, events such as the Baltimore Bridge event which happened in the half year. Comprehensive income, as I said, $98.1 million and a return on equity of 9.9%, pleasing numbers, and that's up over the previous comparable period in 2023. It was 9.1% ROE. And a comprehensive income of $78.6 million. Elaine can give you a walk-through of some of the moving parts. But in that when we come to the slide later on, on financial highlights. So that's the high level in the half year and market conditions that we've got, probably best if I address those within the context of the next slides that are coming up, where we talk about property, casualty and specialty in each one in isolation. So next slide. I'm going to read it from the slide deck here on my screen, sorry, excuse me. So overall, gross premiums written, as I said, up 36% and the bars on the right will show the -- where that growth has come from across property, casualty and specialty. You can see that we're still showing a good footprint across all 3 of those divisions. We have called out probably well over a year ago now that Property and Specialty were the areas where we saw the best margin and the best place to be deploying and skewing our capacity towards, and that's really what you're seeing there. So that growth has been largely generated through the Property and Specialty divisions, I'll come on to those specifically in a moment. Point around risk selection is absolutely key for us. Risk selection in terms of the broad portfolio risk that we get shown is the way that we really have the value to the portfolio. We have a very broad footprint across all the 3 classes, accessed globally through broker intermediaries and Bermuda still remains a very [ sane ] place to be transacting business and accessing business on the global stage for reinsurance. So for us, we still have a very selective risk approach. So we aim still to create a very broad funnel of distribution. There are still those risks there into our portfolio and our analytics. And from there, we create the portfolio that is balanced and diversified across different regions and geography. Last point there really around the expenses and other operating expenses as we refer to them. And that trend line down from the high in '21 when we set up and incurring those build-out costs, which were perfectly naturally in the startup business of north of 28%. Now trending down to that level in the 5 -- 5% to high 4% range, which really is just a function of us scaling the business and being able to disseminate that cost more efficiently across the earned premium base. We are in a position where, to a large extent, the business has been scaling for a while anyway, as you can see over '22, 3 and 4. We're currently in account of 61 here in Bermuda, full-time employees, and it is the 1 location. So we made many comments previously around the way that we manage the business and the way that it's driven and controlled from centrally and within the 1 location here, particularly around that risk selection piece. It does aid our ability to spot trends, act on those and deploy capital and capacity into the classes that we see where those greatest margins. So in 1 location, and we still believe it's a great way to go to market in accessing general reinsurance business. Next slide. So on the in the property arena, good growth, 43% in the half year. The growth that we've seen has come still predominantly from what we would call our ground up quota share business. That quota share business is where we're sitting behind those original insurance carriers, sharing in those original risk of being written and reviewing those portfolios and tracking cycles alongside those existing insurance carriers. So it's where we're partnering up with them. A big area for growth that we've seen, that we've allocated specific capacity to is in the U.S. market in what's called the non-admitted space. And bear with me for a moment here, but a nonadmitted space is basically where insurance companies, operating typically on a state-by-state basis, are able to fully control their price and their policy wordings in a free open market way, should we say, there is another cost of business in the States, which is called admitted, which is more regulated by the state, and that's where the state will, in many cases, limit and cap the degree to which insurance companies can increase rate, for instance, increase price. Our focus in growing this property book, where we've grown that credit share is in areas like the States where that non-admitted market has been really strong, have shown really good rate over the course of the last 4 years and has been a good growth area for us. We do, of course, write excess of loss. So excess of loss inherently is the part of the industry that really takes care of more volatility. So much lower like normal or expected loss ratios through less active cycles. But when hurricanes or earthquakes or large actual perils events, it's the excess of loss account, which is really picking up more exposure to those type of events. We're in that space. We balance it within the overall portfolio. But what happens there at this point of the cycle is that it's generally a less desirable place to be skewed towards. So for us, rates have come off slightly year-over-year, particularly in parts of the U.S. And we've -- we still maintained a position, but it's less of a driver for our portfolio. Rate change, we're seeing 3% risk-adjusted rate change, net of inflation. So that's the, if you like, the net impact that we see by the time that we overlay the impact of claims inflation, another factor is on the fee rate that we get. That 3% looks like a relative low figure, but it's coming on the back of very significant compounding increases over the course of the last 4 years really since Conduit came into inception in '21. So still in a really good place with really good margin, and it's a good place to still be deploying capital. Undiscounted combined ratio there, 61.9% in '23, up to 64.7%. We've got some commentary around that as regards to some of the loss events. But in the main, as I said in the opening remarks, whilst there clearly hasn't been one single large major property event, it has actually been a pretty active year globally for smaller style wind and even flood events, floods in Germany being an example of that. So in that context, still a good performance so we're really pleased with it. But it just shows that property trends and loss ratios move not just based on large headline events that you see in the press. Next slide. Casualty, commented on this at the start. Yes, we have grown by 5%. And we're comfortable with that. The portfolio has been very selective from day 1. We have an enormous funnel of business that flows through in Casualty. We're very selective in how we've supported the underlying carriers. And we've really -- the portfolio has grown with them. So we've added some new contracts to it in the course of the 6 months. But generally, that growth is really reflecting what the underlying clients are doing with their business. And that goes to the heart of Casualty, claiming there's lower margins that we price in the Casualty space, and we expect in the Casualty space. That's just the nature of where that market is at the moment. It's still a good contributor to what we do. But the clients that we're supporting are also taking action. So if they're seeing the underlying policy conditions or terms weakening, then they take action and they reduce their exposure to it. That's what we look for in our client base. So casualty overall is as a class, the comment I would say around the market conditions is really underpinned by the -- not so much of global, but certainly country-by-country, the underlying inflation that sits within there, be that in the U.K. or be that in the U.S. or in parts of Europe. Inflation has obviously been a big factor for everybody. That claims inflation flows through into a way that recoveries and policies settle ultimately. And as that trend in claims moves higher, that's what's underpinning the premiums within the class. Interestingly, in the quarter, we actually saw a 2% risk-adjusted rate change, a rate reduction in Casualty and that's on the policies that we've written in the main. It's kind of been oscillating around that kind of plus 1%, plus 2%, flat, minus 1%, minus 2%. And it's really showing that in the main, what we're seeing is that the underlying rate that we're getting is pretty much plus or minus keeping in line with or at least coping with the underlying claims inflation. So very happy with what we've produced as a portfolio. It's a great balance to what we do also in the Property and Specialty space. And the client base that we've got there is doing a really good job in underwriting those risks through for us. Next slide. Specialty. Yes, big growth. 59% in specialty, coming from a lower base of $93 million as opposed to particularly property. But as we flagged that before, a number of the Specialty areas have shown really good margin for us. The areas that we have bound into the portfolio are essentially complementary to Property and Casualty. So one of the key features for us in writing the Specialty lines of business is that we're not adding large amounts of natural catastrophe exposure, natural perils to the overall property book. It's -- I think it's true to say out there in the industry. It would be fairly simple. It is right to increase the Specialty book. But very often we'll bring significant increases in natural perils exposure. That's not what we're doing here, especially book for us is particularly valuable around what we call the non-catastrophe piece, the risk piece and it's currently pricing up pretty well in the main. The uptick in loss ratio in the half year from 80.7% to -- sorry, combined ratio from 80.7% to 95.7%. Part of that is driven by the Baltimore bridge. Obviously, an event which has been across the news screens, at least it was when it occurred a few months ago. We've provided for an ultimate estimate after reinstatements and net of reinsurance of $19.8 million, and this is $19.8 million. It's a loss event, which is, in our view, going to be very significant in the context of the Marine industry. Because whilst it was a bridge, obviously, that was demolished almost certainly the vessel owners and the vessels and managers will have a degree of liability there. That's the contract exposure that falls into the Specialty class globally. And that marine and marine liability could potentially be a very large event by the time it works its way through the courts, et cetera. So we're aware of the limits that are out there in the market that can be called upon and we very much weighted our ultimate estimate of $19.8 million with those limits in mind. So -- and that's, again, as I said, one of the drivers of the increase in the undiscounted combined ratio over the half year. Next slide.

Yes. I'll pick up in some of these numbers here. Trevor has talked through a few of them already, but just to reiterate where I think it's important to do so. And gross premiums written of $737.8 million. That's 36.1% up in the prior year. And as Trevor has talked through, that's in line with the strategy that we had, which was a growth strategy anyway. But also taking advantage of the market conditions that we had in front of us. We still had a fairly strong lean towards quota share, which Trevor touched on as well. And where we front-loaded the book last half year, I think we've done that a little bit more this year even, again, given the opportunities that we've seen in front of us. So for the full year, we would expect that growth percentage to moderate a little bit, but still expecting strong growth for the full year. And that filters through into reinsurance revenue, which under our IFRS 17 reporting, is essentially our gross premiums earned less our cedings commission. So it's a lower number, but it is due to the offset of that ceding commission in there. Our net reinsurance revenue then shows the offset of our ceded reinsurance expenses, which were a little bit higher this year than last year, and that's in line with the inwards book and the growth that we had in that book plus a little bit of price increase at 1/1. But the overall increase in the net reinsurance revenue there of 39.3%. Trevor has mentioned a little bit about the loss environment, and it has been another half year with a fair bit of activity there that was last year too. But more in the kind of mid-sized cats and man-made losses this year that we would expect to pick something up on. So when we do look at our undiscounted loss ratio, which isn't on this page, but it's in our press release, it's 73% for this half year versus 68.1% for last half year versus a discounted loss ratio of 62.4% for this half year versus 57.5% for last half year. When we look at those kind of loss activity that we've seen year-on-year, when we back those out, our underlying is pretty much in line. So there's nothing really in there that we would call out individually. One thing that I do like to point out 3.5 year into our business is that we are still building up our reserve position and hopefully doing that with a fair bit of prudence in there. So that has an impact in terms of how we look at our loss ratios there. Expense ratios, as Trevor mentioned, have generally been trending down, and that's in the reinsurance operating expense ratio as well as the other operating expense ratio. So overall, our undiscounted combined ratio for the half year of 85.7% versus 83.1% for last half year and on a discounted basis at 75.1% this half year versus 72.5% in the last half year. Comprehensive income, Trevor mentioned that as well, $98.1 million for the half year, that was up almost 25% in the prior year and a return on equity for the half year at 9.9%. So echoing the comments there in terms of being very happy with those results to another active first half of the year. Next slide, please. On investments overall return for the half year, 1.5% this half year versus 2.1% last year. Our book yield is now sitting at 4.1% this half year versus 3.2% June 30 last year. So we are generally seeing better -- a higher yielding portfolio, so a high return from that last year saw a little bit of a benefit from [ hedged back ] compression as well. So a slightly higher return to the half year last year. But not really much change in terms of how we think about our investment portfolio. It's still pretty short duration, very focused on maintaining a high-quality, highly liquid portfolio. [indiscernible] Maturation, we are nudging that very gently up towards the duration of our reserves. So we're currently at 2.5 years on the asset side versus 3.1 on the liability side, and we've been deliberately short of the liability duration over the last few years, probably been going through the interest rate hiking cycle. And just as I said, nudging that up a little bit now. Asset allocation, currently in line with where we've been previously, has nudged up a little bit, which is really just tight in terms of some cash flow expectations. Other than that, no real changes from the prior quarter. Next slide, please.

Thanks, Elaine. Yes. So just in conclusion, the final slide, a number of these points we've covered already, but the headline and the point there on multiline reinsurance platform, multiline strategy is a key one to bring out. Right from day 1 when we're building the team and the strategy around building a balanced portfolio. We were at pains to make sure that the expertise that we put into the business comes from a big part of the insurance market, often you see reinsurance platforms created particularly around some of the property areas where it's almost like a top-down approach where cat modeling and high-level metrics are used to generate a view of the industry. And [ ours ] view is completely divergent from that in that having the insurance practitioners and a lot of insurance experience in a reinsurance company means that you can more confidently engage with clients, understand the cycle market movements and it's hard work. It's hard yards doing that in a number of cases but it's the way that you really build into the business, a sense of where the market is within these multilines at any one point in time and that's really key for us. We always talked about positive market environment and rate increases have slowed and some of the classes have indeed gone to negative. But we track those all individually. The portfolio is built with that in mind. And I think it's safe to say, and we've said this before that when we put the portfolio together quarter-to-quarter, year-to-year, the way in which it's built in a way which it's optimized as we progress is really key. Since we started the business, we've written over $2.6 billion in written premium. And when you consider that we probably within each of our Property, Casualty and Specialty divisions have more than a dozen subclasses. You can see that there's a lot of moving parts where we're constantly looking at where they sit in relation to each other and how they complement each other when we fold that through into our sort of balanced position that we're looking to create. And that's a big part of the model, a big part of what we do. The rate environment generally at the moment is still positive. As I say, a bit of a transitionary phase in some of the classes. But overall, it's still a very good place to be deploying and underwriting into. And for us, having a clean capital base without the hangover should we say, of back year legacy. So it's still being reported, obviously, in the broader industry, even in the reporting season that we're in now. There's still some back here, adverse claims experience being experienced in the industry and the casualty lines going back to pretty much pre-2020. And we're seeing that. We're not encumbered by that. And for us, that's really important and it helps us to be able to still continue to deploy a clean balance sheet into the market that we are now in. So very pleased with life in terms of the way it's presenting itself to us. And I think we still have some good times ahead in terms of this year and beyond. So happy to move to Q&A.

[Operator Instructions] We have received questions, so we'll dive straight in with the first one here, which reads as follows. Given the forecast of an unusually active hurricane season, how much of that is priced in? And how concerned is management of the potential impact of the active hurricane season on the loss ratios?

Okay. Yes, I'll take that. Yes, in terms of pricing in hurricane season or hurricane experience. In the main, when the wind-exposed business, let's call it that, is priced year-on-year, it does have a small weighting in some cases, towards the season that's forecast but usually in this industry, not. So it's very unusual that we would take clients' submission to us, look at it and price it from our standpoint and then adjust it for the forecast, which apparently are out there this year. In terms of the industry and correlation, one of the important points around the hurricane season is I think it is acknowledged that climate change, sea surface temperatures, et cetera, having an impact on the frequency and the severity of the business but in terms of the hurricane impact. But there's generally quite a weak correlation between the frequency of hurricanes and the actual insured loss. If you go back over time, go back certainly over 2 or 3 decades, that hurricane estimate landfall in a place where insured values are material. So yes, while there may well be a forecast that's out there saying the industry may expect a more active year, it's not a strong correlation between the actual final insured loss. In terms of where we are, we make provision for not just hurricane, but other large events, another -- large natural perils events within our pricing picks that's provided for and that's tested and stress tested. But it's certainly tested back against the portfolio and in terms of sort of general market experience and client experience. So we should see what the next few months bring. But overall, we have a very solid position. And I think as we've mentioned before, and we also have a protection program, should we call it that, that sits around large events within the business. And we have a degree of ability to lay off or hedge large events if they do impact on the portfolio.

I think also just in terms of how we risk select, we are quite careful to making sure that this balance within the managing volatility, the tail risk and our P&L exposure is probably at the lower end of peer companies.

That's great. Turning to the next question. What is Conduit Holdings unique competitive advantage versus other listed P&C reinsurers?

Okay. The one that I've always cited here and the one that I think becomes more apparent in every year that goes by for us is the ability to use the insurance knowledge from the ground up to engage with the broader client base. So I said earlier that the expertise that we've got is heavily granted in the insurance market. And to be able to assimilate data in from hundreds of clients from the insurance side, bringing that into our portfolio, spot trends within there and then discuss that back and play that back with clients is really valuable. It's a bottom-up approach. So when we're doing that -- excuse me, turn the volume down, when we're doing that and engaging with clients on in that insurance space. I wouldn't say it's unique, but it's certainly a way and a strategy of dealing with risk that's being assimilated which is different to a lot of other companies. What we've seen is within the portfolio that we've bound during the last -- written in the last 12 months has certainly seen risks, which are more varied and more broad in nature. So maybe they have some Specialty and some Property in there. Those are risks which there's less markets around that can assimilate those risks and under write them. We've got a collection of individuals in 1 location that can bring their resources to bear on that risk, engage with actuarial that's sitting in this 1 location and feedback and work with clients to find a solution that works for both of us. That is not normal in the industry. In the industry, it's much more likely that we insurers have a silo approach. There's a Property unit and Casualty unit and sometimes they'll be sitting in a completely different parts of the world. And that is a big advantage in being able to negotiate with clients and strike a balance on contracts that work for both parties. So long-winded answer, so apologies for that. But that is, to my mind, the strongest differentiator that we have.

That's great. How does the underwriting risk appetite compare with peers?

Tough to comment on the peers. The -- from a capital standpoint, there are obviously larger entities out there, which presumably would have larger appetites. But in terms of where we -- and how we gauge our risk appetite in terms of the portfolio positions we take, for instance, as a percentage of tangible net asset value. We have a position there where we set our probable maximum loss intolerances, I think, at very sensible levels. And by that, I mean that we have exposure to large events like the bridge, like hurricanes and earthquakes and the like. But we're always putting that exposure on the books subject to an overall tolerance that keeps it what we believe in balance, and that is very important. So I think in that respect, we have a -- probably a broader risk appetite across classes and other reinsurers because you want that diversification. But I would be proud to accept the fact that we have perhaps less of an appetite to any one large event that could imbalance the portfolio.

Perfect. Just turning to next question. I think you have touched on it, but if you could maybe provide some more color. It would seem that we might be in for a bad hurricane season. Does this concern you?