Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good afternoon and welcome to the Conduit Holdings Limited Q3 Trading Update. Throughout this recorded meeting, investors will be in this learning mode. Questions are encouraged and they can be submitted at any time via the Q&A tab that's situated in the right hand corner of your screen. Just simply type in your question. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to thank the following poll I'd now like to hand you over to Neil. Good afternoon to you, sir.

Hi there and good afternoon. I'd like to spend just two or three minutes introducing the company, why we started it, and then I'll hand over to the team to go through the slides. I've known Trevor since the early 80s. I was a reinsurance broker at a company called Benfield, which is now part of Aon. Trevor, back in the day, was at a company called [Boatsam], then went through GE. During our lifetime, we've seen three or four insurance cycles, and people that start companies at the right part of an insurance cycle tend to make a lot of money. A very key part of our life was the tragic events around World Trade Center 9-11, and Trevor became one of the founding underwriters of Arch Re, which has been the most fantastic stock to own over its 22-year life. I was at BRIT at the time. We founded BRIT in 1995. After World Trade Center, we raised a fair amount of money, and BRIT went on to become a £1.3 billion. It's, I think, the second largest insurer in Lloyds today. The cycles were very strong in the early to mid-2000s, peaking in about 2012. Lots of people made a lot of money. The market then softened, and the cycle will never die. We're not cycle deniers in any way. The market softened, and we were aware that lots of people were losing money around 2016, 2017, and 2018. We fortuitously met and thought we would put together a new vehicle, go off and raise a billion dollars of capital. We proceeded to set around the fund raise, which we finished up IPO-ing during COVID, which was a fascinating experience for all sorts of reasons. We closed the deal on 1st December 2020, in time for the 1-1-21 renewal season. We set out in the IPO document to get to a billion of income by year five. We have surpassed that figure in year three. In 2023, we made just under a 20-point ROE. It does take time to ramp up a new business. There's so many things that have to happen, and you'll never work so hard as in the early years when you're establishing yourself. We made a 20-point ROE just short of last year. On an annualised basis, we made just shy of a 20-point return in the first half. We do write a substantial non-CAT-and-quota-share both, which means we will be impacted by small- to medium-sized events. It means that we have a lot less exposure to tail risk, or what people would call Super Cat. I'll hand over to the team now to go through the update, and obviously we'll be happy to take any more general questions on the company at the end. Trevor, over to you.

Thanks, Neil, very much. Next slide. We've got a series of slides here which summarise the Q3 trading update that we've just announced to the market. I'll move through these and pick out the pertinent points. Elaine, our CFO, will also comment on some of the financial aspects. Through the quarter, and certainly through year-to-date, we still saw continued growth, measured growth, as we refer to it. Gross premium is written at £957.3 million through the year-to-date end of September, which, as the slide says, took us through the 23 premium totals at that stage. We've seen good growth this year across the classes, property, casualty, and specialty all growing, but as you can see from the slide, we've called this out for 25.2% growth, driven by property and specialty, where specifically we have identified some time ago that it's still the case that that's where very good opportunities lie, and certainly where we skewed our capacity allocation when we're looking at business that flows into convert. Through the quarter, as we've said here, it's an active period for the smaller and mid-sized NatCAT and large risk events, and what that means is through Q3, around the globe, there were a number of sizeable and notable NatCAT events, and also some man-made events. We participate in those. We share in those losses by virtue of writing for a shared business. And we've reported that our involvement in those large risk events and the mid-sized NatCATs is approximately $50 million. We'll come on to that a bit later. Following loss events of the third quarter, undiscounted combined ratio was in the mid-90s, on a year-to-day basis, and through 30th September. And then the last part of the round, the loss activity in the year-to-date, and this occurring in October, Hurricane Milton, which was the pretty well-reported hurricane event in Florida that went through. At the time of Milton approaching landfall, it was feared to be of a much larger scale and size. As it turned out, it was obviously a catastrophic event for that part of Florida, but not at the level that particularly which we feared. Nonetheless, loss events are being reported across the industry now, and estimates being put out there. For us, we put out the loss in the range of $30 to $50 million. It's a loss estimate at this stage, which we'll keep under review. We set a range around the event. There's a lot of loss information still being provided by clients and by the original homeowners, and in a number of cases, business owners. And the loss range for us is in that $30 to $50 million range, which is a range that compares reasonably favourably with what you probably will see from other companies in the market. Certainly, the range around this event is still quite large. It will become more certain as more information flows through. Rate change. We're still seeing good rate change in the portfolio. We report our net inflation year-to-date across the entire portfolio was 1%. And as I say, that's after providing for inflation allowances. So that's the net impact with a positive sense for us after an inflation. I'll come on to this in a moment. We've got slides around property cash and specialty, but you can see the difference in rate change across the three different currencies. Final point. Since we started in 2021, we've seen an enormous amount of business. We've got a very strong capital base and very strong client relationships going back to, which I suppose is a reflection of the length of time that we've been in the industry. But the partners that we have on our books, we share across a number of lines, property cash and specialty very often. Those partner clients that we have, we trade and transact with them across all the three divisions. So next slide, I think. Slide showing the growth stream is written since Q3 2021. So the year-to-date numbers, it shows progression. It shows quite clearly where we've been growing over the four years of our iteration, the $285 million Q3 2021 through to $957 million now. And also you can see where the growth is coming from. The dark patches, $536 million of property and specialty at the top, $197 million. Big growth in those in the year-to-date, year-over-year, and we've called that a number of times. That's very much where we see opportunities. And generally, the larger, more attractive margins for us across the reinsurance landscape. I'll come onto it in a moment as regards the individual classes, but it's property and specially where we've seen specific opportunities. Rate change on the right-hand side, again, that's a blended across property, casualty and specialty. The 1% risk-adjusted rate change is driven, as I said, after the claims inflation has been provided for. And within that, we're showing the rate change, obviously, from an index of 100% at the start of 2021. The reality has been there's been compounding increase over a period of years. And really, the market as a whole, if you think about it, really from 2020 started to show material uplifting rates, but generally across the reinsurance landscape. So, in the time that we've been a transacting business, particularly the last four years, we've been benefiting from previous compounding increases. And as we showed in this current quarter and this other year-to-date, we're still showing a positive strength. That's a good place to be deploying capital into. Next slide, please. Property. So, similar slides, similar makeup, but around property. Again, you can see that 33% growth in premium over the year-to-date, year-over-year. The points that we're making down the bottom, that British FF is portfolio, including non-CAT and Cat, and that's important to convey that across the entire portfolio, property, cash, and specialty, approximately two-thirds of the premiums that we transact are non-CAT related. So, business across property, cash, and specialty tend to be much lower correlated with CAT events. And indeed, they're often what we refer to as risk return as opposed to CAT-related return. And it's an important point to build the Westside portfolio. In the property book, we do have strong elements of property risk, which are not yet exposed. And that's a theme that you'll see running through property, cash, and specialty across these three slides. 3% risk-adjusted rate change, that's very much a rate change applied across the entire property portfolio. It's important to point out that we write a geographically spread book of business, and that rate change will be a blended output from various geographies around the world. And given the impact in the US over the course of the last couple of months with Hurricane Helene and then Hurricane Milton in October, we are expecting to see a significant rate change in the way that that business presents to reinsurers over the course of the coming year. And the losses deriving from areas of Europe, which you will have seen in the press, will also be producing commensurate rate changes on the back of those losses. Other areas where loss events have been more benign will also be showing much reduced risk-adjusted rate change. So it's important to point out that 3% is a blended figure across the geography and the various lines of property and business that we write. Next slide. Casualty, so our third-party business, premium increase much lower in this class as we have been calling out really for some time that the casualty business for us is a great book of business that we've built up. We've got a great core partnership list of clients that we work with. But the casualty business, we're still seeing parts of the market where inflation is still moving ahead quite strongly in a number of cases. In assessing the treaties that we're presented with, we don't feel that we're in all cases being rewarded for that or paid for that. So it causes us to have quite a high decline rate in casualty. So we're still adding to our portfolio, but much more limited growth. And we're comfortable with that. Our approach on casualty is to deploy capital cautiously and in a measured way. And in casualty for us across the different geographies, it's a class of business that certainly we spend a lot of time researching, putting up trends and patterns around aspects such as social inflation and underlying claims inflation. Overall, after life inflation, we're showing a slight negative downwards ticking rate, down 1% year-to-date. Overall, we view our book as still very rate adequate. So we like the margins that we are achieving on the casualty book in terms of where we're dialing the pricing on it. It obviously takes time to develop through in terms of ultimate claims to be settled and developed into the portfolio. But overall, really good book of business. We're there in the market. We look for opportunities and deploy when we can. Next slide. And then this is the final one around the individual classes. So specialty. Specialty covers a very broad range of classes in the industry generally. We transact a number of those. It's probably worth highlighting those that we are either minimally involved in or we avoid completely. We don't get involved in crop business, primarily because it is correlated with natural currents and CAT events. Mortgage business, any form of life specialty we don't get involved in. And we're very light in classes such as political risks. So classes of specialty insurance that would respond to political or economic downturn is probably the best way to think about it. Trade credits and the like, we don't transact those classes. The main reason for those is that they are, again, or can be, reasonably highly correlated with the asset side of the balance sheet. So we avoid those. Especially for us, covering classes such as marine energy, liability in those classes, political violence and terrorism. So events associated around terrorist acts around the world. Those are the sorts of classes that sit within our specialty portfolio. Overall, we've seen good growth, 39%, up to $197 million a year to date. And we're still seeing areas of specialty that, in spite of, I suppose, several years of the specialty market pre-21, somewhat languishing in the doldrums rate-wise, since then we've certainly seen a good uptick across it. And overall, across the classes that we deploy in, it's showing still good rate adequacy across the piece. Net inflation, we're showing, let's say, the plus 1% in the quarter. And again, inflation can be a significant part of the specialty book. And it's a factor we track individually, third class, and very much, actually, across different geographers. So those are the three classes. Next slide, please? Elaine Whelan will comments on financial highlights.

Thanks, Trevor. A lot of the numbers on this slide Trevor's already spoken about, we're just going to wrap them up after the one or two on the specific positions. So gross premiums written for the year to date of $957.3 million, which is up 25.2% in the prior year. If you were following us at the half-year, you would have noticed a higher growth at the half-year. We did have a conversation at the half-year about the fact that we had front-loaded our business for the year. And we expected that growth rate at the half-year to soften a little bit until later on in the year. And that's happened. So front-loading and 25% growth for the year to date, which is still very strong growth. And that translates into the insurance revenue of $588.2 million, which is up 30.2% of the prior year. For those that aren't quite so familiar with IFRS 17, the insurance revenue really represents under older accounting standards what gross premiums earned would have been less ceding commissions, and then a smaller adjustment for non-distinct investment components. But it really follows the pattern that our gross premiums earned would have just at a lower level given ceding commission deduction. Another note there on the loss of activity for the quarter. As Trevor's mentioned, no major events in the quarter, but there was a frequency of events in the small and mid-sized space. None of those were individually significant to us, but we did feel it was appropriate to disclose the accumulation of those events in the quarter. So $50 million across events in Canada, and hurricanes in North America, and a few other kind of risk events in there as well. So we don't typically disclose full numbers at this point in the year, but we did feel important to disclose that number and give some context around the frequency of events in the quarter. Next slide, please. On investments, reduction in yields in the quarter. So that gave us a good market gain on there, plus generally a higher yielding portfolio immediately, the rates have moved over the last number of years. So we generated a return of 3.4% for the quarter, which brings us to 4.9% for the year to date. But you'll just see there is now 4.2% versus 3.5% at the same time in the prior year. We are still fairly short duration in our portfolio, and maintaining a focus on high policy and high liquidity. Duration is at 2.5 years just now, which is slightly higher than we have been as we went through the rate hiking cycle, and that's versus two years of our reserves. So we are kind of keeping those two numbers under review in terms of making sure that our duration and our asset and our liability side are within a reasonable balance. And as the rate hiking cycle does reverse, we will end up increasing the duration of our assets just very slightly. Average credit quality there is doubling and there is a pie chart there with the asset allocation to the [indiscernible] and asset categories there, and no real changes in those over the quarters. And I'll hand that back around to the next slide, please. Eckert, then you, wrap up.

Right. I think, so that concludes – yes, that concludes the presentation that we have for today. If we can move into Q&A.

Yes, of course. Thank you very much for your presentation. What I'll do is I'll just bring your camera back up in the room for the Q&A. Ladies and gentlemen, please do continue to submit your questions. [Operator Instructions]. We have received a number of questions already throughout the session. And I'll start with the first question here, which reads as follows. How is your diversification strategy evolving to buffer against potential catastrophe events, especially with increasing frequency of natural disasters?

That's a simple outline question. The diversification strategy that we've employed from day one still holds true today. So in looking at the individual classes of business in the portfolio, we think of it as the provision that we make for attritional losses, which are day-to-day losses, then the large events, the one-off, typically man-made type events, and then the natural perils ones. Across the overall portfolio that we've got and that's been built up and developed through into the current year, the diversification has continued to act very much in our favour. The quota share book in particular has large elements of non-CAT-related premium in it. And across those geographies particularly, that's still adding significant diversification to the portfolio's impact being impacted from large risk events and or natural perils ones. As the portfolio grows, typically that tends to strengthen the diversification balancing item. That's, I suppose, largely driven by the law of large numbers to some extent. But the portfolio has currently very good diversification within it. The increased frequency that we've seen in the current quarter, where we've pointed out the $50 million around smaller Nat Cat and large man-made risk losses, is a situation of increased frequency around those particular types of events. It's not an additional concentration, it's really an increased frequency in the quarter. But overall, if you look at it in that larger timeframe, over a larger timeframe, typically over the course of a year, the pattern of diversification that we are achieving is still very good within the portfolio.

Are there plans to expand into new reinsurance loans or geographic markers?

We're always alive to it. We receive a number of offers from clients, typically clients that are already on the books, the multinational clients, where they're expanding into new territories. We are certainly cautious about underwriting contracts and increasing our profile in territories where the rule of law, shall we say, and the contract law particularly, is on a different level to what we see in the US, Europe or the UK. So we receive a lot of offerings from territories which, on the face of it, would certainly introduce diversification to the portfolio, but the point is for us at what cost and at what terms. In terms of a general comment where we are now, Europe, given the incidence of loss that's occurred there over the course of the last year in the property world, so higher incidence of floods and storms in Europe, we are currently, shall we say, under-deployed in Europe. That's deliberate because of the level of pricing that we've seen there. It's not been that attractive to deploy into Europe. I think you could see for us receiving an increased number of submissions from parts of Europe, they're going to be showing rate increases going forward into 2025 that could well now move into our pricing hurdle, our pricing window. So that could be an area where expect to see us have to deploy slightly more than we have done in the current year.

How sustainable are the growth rates, in particular in the property and speciality segments?

If you look where we've come from, there were some very large numbers to nature of the starting up a business. Obviously, everything's new that you write in your first year, you then add new to your existing renewals, and where we are now is there's a compounding impact of renewals that we're seeing on the books, renewed through and then we add new to it. What we're seeing is that that growth rate that you've seen, or two growth rates around property and specialty, it's not just about writing pure new, it's renewals that we have on the books, come through renewal, and typically in contracts that we write, we have a percentage share, as examples, property contracts, we may have a 5% share on a contract with a client, we really like what that client's doing, it comes up for renewal, we can move that to a 6% or 7% or 8%, you can increase that, so there's still some headroom to lift those shares up with clients, certainly. The rate, pure rate, as a simple mathematical exercise, is trending down as we rely more on renewal business, not pure new, but I think we still are expected to focus on property and specialty as the main areas for us, and I think we've still got reasonably good designs on growing that portfolio going forward, although, quite correctly, the absolute number may well trend down.

Following the interim dividend, what is your approach to shareholder returns amidst growth and capital reinvestment needs?

We have a standard dividend policy that we've been following since we started, so it's a matching interim and final dividend, and there's nothing at this point that makes us want to change that policy. We are very much still deploying the capital that we raised at IPO, so in the near term, it's more about putting that money to work and maintaining the dividend policy that we've had.

You mentioned a resilient pricing environment, what factors contribute to this outlook?

As a general comment across the classes, it's twofold. One is the demand from clients. Obviously, supply demand, we all understand that. There's still enormous demand from clients for limits for protection. Property is an example. There was an industry quoted, a reported number, that in 2022, across all of the US, the insurance companies who are our clients here, basically bought $22 billion more limit. The current number of 24 is rumored to be in the 9 to 10 range. Those are industry figures which are generally reported. So that demand has to find a [indiscernible] somewhere, and that is still underpinning pricing in the property space, particularly. On casualty, specialty, it's more inflation-driven. We're still seeing signs of what you would refer to as social inflation, the tendency for juries, for example, to award in the States for nuclear-type verdicts, and the general approach to a more litigious society. That's underpinning casualty pricing. So there are two different aspects. Demand on property, more inherently led by undying trends in casualty. That's what's driving the demand for the product that we sell, really adds resilience to the pricing.

Thank you. That's great. Thank you for answering those questions from investors. Of course, the company can't review all the questions submitted today. We will publish a response on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Neil, could I just ask you for a few closing comments?

Yes. So thank you, for your time. And I mean, my closing comment is that we are in the middle of an extremely hard reinsurance market. This is demonstrated by the year-to-date growth of 25%. Markets are in generally a resilient and profitable position. This quarter, we have seen claims volatility. But I would -- in spite of that claim volatility for this particular quarter, I would still expect to see a satisfactory result at year-end. And we're looking forward to the '25 renewal season, which is almost upon us, and we expect continued growth there. So thank you.

Neil, Trevor, Elaine, thank you very much for the update today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This going to take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Conduit Holdings Limited, we'd like to thank you for attending today's presentation, and good afternoon to you all.