Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good day, everyone. Welcome to Conduit's 2025 Interim Results Presentation. We appreciate your time today as we discuss our performance for the first half of the year. Joining me on the call are Neil Eckert, Chief Executive Officer; Elaine Whelan, Chief Financial Officer; and Nick Pritchard, Interim Chief Underwriting Officer. Please note our disclaimer language on Slide 2. I will now turn the call over to our CEO, Neil Eckert.

Thanks, Brett. Welcome to our presentation. I'm today joined by Elaine Whelan, our CFO; and Nick Pritchard, our Interim CEO. Today's presentation will cover our results for the first half of 2025, our view of the market and our updated outlook for this year and beyond. I will begin with a summary of our interim results. Nick will then provide a more detailed segment level performance review. Elaine will cover our financial and investment highlights, and I will close with some key takeaways and thoughts on the future of Conduit. For the first 6 months of 2025, we delivered growth in gross premiums written across all 3 of our segments. Property and Casualty experienced strong increase in premium, while the growth in Specialty was more modest relative to recent periods. We have seen increased competition during Q2, causing us to reduce certain parts of the portfolio. In line with our plans, we have started to add more excessive loss business to our portfolio at midyear renewals. As most of the business has been written for '25, we will continue on these initiatives throughout next year. Moving to performance. The first half was marked by elevated loss activity, including wildfires, severe convective storms, aviation events and the recent High Court judgment regarding Ukraine war loss. These events contributed significantly to our undiscounted combined ratio of 122.1%. The California wildfires alone added 31.6% to our combined ratio for the half year. Our investment portfolio continued to deliver with a 3.9% return during the first 6 months, producing a net investment result of $63.8 million. Importantly, a large component of our investment return was from the income generated by our growing investment portfolio, which now totals $1.9 billion. Ultimately, we reported a disappointing comprehensive loss of $13.5 million for the first half, largely a result of elevated loss activity. 2025 is a transitional period across multiple dimensions for Conduit, including portfolio composition, both inwards and outwards and personnel. During the second quarter, we undertook a number of strategic actions in response to evolving market conditions and elevated loss activity. These developments have unfortunately led us to revise our expectations for the return on equity for this year. We now anticipate our ROE to be in the mid-single digits for 2025. This updated guidance reflects both the actions taken and the loss experienced during the second quarter of 2025, which includes the following: we have increased our reserves related to Ukraine following the U.K. High Court judgment, which has significantly increased the industry's insured loss from the event. We have also taken a more conservative stance on several aggregate excess of loss contracts given the heightened loss activity in the first half of the year. Our guidance incorporates losses from other aviation-related losses that occurred during the first half of 2025. Further, as previously disclosed, we have made targeted portfolio adjustments, including purchasing additional reinsurance and reducing certain quota share business. Whilst these actions are part of our long-term strategy, they are expected to result in lower premium growth in net revenue in 2025. The most significant driver of our result for the second half of the year will be the Atlantic wind season. We plan on a mean basis and our guidance assumes an average hurricane season. Moving forward, we remain focused on our long-term strategy and are committed to improving the company's performance. We continue to invest in our business, both in terms of people and technology, and Conduit is guided by a highly experienced leadership team with decades of proven success in building and managing reinsurance and insurance companies. You would have seen that our most recent hire was William Randolph, who recently joined as our Chief Risk Officer. We are very pleased to have William on board and look forward to the contributions he will make at our risk function. We have also hired a new Head of Exposure Management. And later this year, we will welcome a new Head of Claims and a highly experienced specialty underwriter to partner with Marc Bearman. These are experienced and well-regarded professionals, and we are pleased with the positive reception from the market. Collectively, the leadership team is committed to delivering Conduit's long-term vision and strategy. We will exercise discipline, managing risk thoughtfully and ensure that we are allocating capital where it can generate the best outcomes. With this approach, we believe our cross-cycle mid-teens ROE objective remains achievable whilst recognizing the near-term challenge of the 2025 results. Now turning to our underwriting performance for the first half of the year. We achieved 8.9% growth in gross premiums written, reaching $803.3 million. This growth reflects both targeted new business and increased participations on accounts where we saw strong alignment with our underwriting approach. Our balance between Property, Casualty and Specialty remains similar to the prior year, and each of our segments have gained scale. We are taking steps to refine our book, reducing exposure to business that no longer meets our return thresholds. This was most apparent in specialty during the second quarter. Our underwriting decisions will be margin led, and we are willing to walk away from underpriced business. Overall, across the portfolio, risk-adjusted rates have reduced by 3% net of inflation through the first half. In our view, rates remain relatively strong in our target classes. Pricing has come off historical highs but remains near 2023 levels. Despite the elevated loss activity during the last 2 years, industry capacity remains near peak levels, and this excess capital is driving more competition. Regarding losses, this has been an historic year for catastrophes. The first half of 2025 was one of the most loss-intense periods on record for the industry. Insured catastrophe losses are expected to reach at least $100 billion for the first 6 months, which is more than double the long-term average and the second highest first half total ever recorded. Over 90% of these losses occurred in the U.S., which is where the majority of our property exposure lies. Catastrophe activity was driven by a combination of severe convective storms and the devastating Palisades and Eaton wildfires, which together accounted for over $40 billion of the total. Our undiscounted net loss net of reinsurance and reinstatement premiums for the January California wildfires is $118.3 million, which is within our previously disclosed range of between $100 million and $140 million. The majority of this impact was concentrated in our Property segment with some exposure in Specialty as well. On top of this, we have experienced development on losses relating to the conflict in Ukraine as well as several large risk losses such as the Air India aviation crash. As discussed last quarter, we have made meaningful changes to our reinsurance program since the wildfires and have purchased considerable protection against large secondary perils. Our aim is to reduce volatility going forward from these types of events. Looking ahead to 2026, our intention is to embed secondary peril protection more structurally into our core program, reducing our net exposure to large secondary perils. These changes reflect our intent to reduce volatility and manage gross to net more effectively as a core part of our underwriting strategy. With that, I will hand over to Nick for a deeper dive into our market experience across divisions.

I'll now turn to our performance in each of our business segments, along with respective market conditions and outlook. With the $65.5 million of year-to-date growth, $41.8 million was driven by our Property segment, which grew 9.5% to $483.6 million. This was supported by a continuation of increased demand from U.S. carriers in addition to inflation-linked exposure growth. In line with our Q1 commentary, we observed more limit purchase through midyear in the U.S. As we anticipated, renewal negotiations were more challenging than in 2024. Risk-adjusted rates net of inflation declined by approximately 5% through June 30. Outcomes vary significantly by region, peril and layer. This reflects broader market dynamics, including increased capacity and high ILS participation. The ILS market continues to show strong appetite, contributing to increased capacity and competitive pricing on certain layers. Our growth rate has moderated. And depending on market conditions, this trend could continue as we prioritize risk that satisfies our return hurdles. During the year, we continued to increase our line size on high-performing treaties, and we actively reduced exposure to accounts where pricing or structure no longer fits with our risk appetite. We made progress on several new placements in Q2, notably on excess of loss business, but also in select quota share deals. These steps support our strategic goal to increase excess of loss business over time. We're actively managing our portfolio to achieve this shift, including adjusting line sizes, targeting new excess of loss opportunities, along with refining and marketing our underwriting strategy to support this evolution. As Neil mentioned, the first half of 2025 was one of the most active catastrophe periods on record, particularly in North America where most of our exposure lies. The largest event was the California wildfires in January, but there was also several large severe convective storms and other smaller events that contributed to results. Our undiscounted combined ratio for the Property segment reflects this loss activity and increased to 132.5% for the first half of 2025. Looking ahead, we remain selective in deploying capital as we make careful adjustments to the portfolio. This also includes a revised outwards reinsurance program for the remainder of 2025, which will better protect against large sector perils going forward. I'll now turn to our performance in the Casualty segment. Casualty experienced the strongest growth rate among our underwriting segments during the first half of the year with gross written premiums up 14% to $169 million. Growth was concentrated in U.S. general liability classes where we have deepened our partnerships with several key participants in the excess and surplus lines market. These are mostly existing clients where we have observed strong underwriting behaviors, and we therefore sought to increase our line size on their programs. Equally, as we manage our casualty portfolio for changing conditions, we have reduced exposure to segments where pricing has been more competitive or rate adequacy is deteriorating, such as D&O and financial institutions. For the period to the 30th of June, the risk-adjusted rate change for casualty was plus 1%, with positive momentum in U.S. general liability offsetting softer trends elsewhere. Ceding commissions have moderated slightly, improving net economics as we look forward. Overall, the reinsurance market is showing strong demand to deploy capacity in casualty classes. However, we would characterize the market as generally remaining disciplined given some of the recent experience in the industry from back in deterioration. For the first half of the year, our casualty segment undiscounted combined ratio was 103.8%. Historically, our full year ratio tends to improve relative to the half year result, reflecting the timing of earnings and loss emergence. The 2025 ratio also reflects an increase to our unallocated loss adjustment expense estimate given the overall casualty claims environment. Prior year reserves remain stable. And in our opinion, our booked ratios include prudent allowances for inflation and uncertainty through our risk adjustment margin, which we expect to unwind over time as claims are paid. Due to the long-tail nature of the business, we will continue to be selective in casualty classes and prudent with our reserving. Overall, we believe our portfolio is well positioned and resilient. Our focus remains on long-term partnerships, disciplined underwriting and selective diversification beyond the U.S. market. Finally, moving on to our Specialty segment. We have built an attractive diversified portfolio of specialty risks. We will look to expand this over time with the addition of underwriting resources and as market conditions warrant. Gross premiums written in Specialty rose 2% to $150.7 million during the first half of 2025, with growth constrained by softening rates and our selective underwriting approach. The moderation in year-to-date premium growth to 2% for the half year from 25% in Q1 is largely attributable to a combination of timing-related effects and more market competition in the second quarter. While Q1 benefited from strong new business momentum and favorable prior year comparisons, during Q2, we came off a few treaties where pricing or terms and conditions did not meet our standards. We also reduced our offered line on certain programs, while some accounts experienced slower-than-expected exposure growth or structural changes that reduced our premium capture. Risk-adjusted rates net of inflation declined by approximately 4% through June 30, with pressure across most classes, including marine and energy. However, wordings and terms and conditions have largely held. Specialty classes have been exposed to some significant risk losses, including the Baltimore Bridge and several aviation events. We have been disappointed that pricing in these classes has not responded to significant claims for the industry. The undiscounted combined ratio for the first half of the year was 105%. This result considers impacts of our aviation and war-related exposures, including developments linked to Ukraine. A small portion of our California wildfire exposure also sits within the specialty book. Regarding Ukraine, the situation remains complex, and we are monitoring legal developments and working closely with partners to assess outcomes. Looking ahead, we have reinforced relationships with proven partners and are seeing increased traction in multiline and excess of loss opportunities. Submission flow has increased, and we are maintaining discipline on event limits and loss ratio caps. While top line growth is modest, we're prioritizing quality of underwriting. I'll now hand over to Elaine for the interim financial results.

Thanks, Nick. Gross premiums written of $803.3 million are up 8.9% on the prior year. That compares to the 15% increase that we discussed in our first quarter trading update. As mentioned then, we expected that growth rate to moderate somewhat with the half year, given timing around our renewing book plus some premium adjustments. So our growth of nearly 9% is in line with those expectations. That growth will moderate a bit more over the rest of the year, but we still expect to have a healthy level of growth for the full year. Our proportion of quota share business currently remains reasonably consistent year-on-year, again, reflecting where we've seen the best value. Although as you've heard, we are just beginning to tilt a little to some excess of loss deals where we're seeing some more deals meet our return hurdles and as we seek to rebalance our book a little. We have reinsurance revenue of $433.3 million versus $382 million at the prior half year, a 13.4% increase year-on-year. Our reinsurance revenue is essentially gross premiums earned less ceding commission and a smaller adjustment for non-distinct investment components. It therefore tracks the same pattern as the gross premiums earned would have, just a lower number after the ceding commission deduction. Generally, ceding commissions have ticked up a bit, so we're seeing a higher deduction for those, which, of course, impacts our reinsurance revenue. Ceded reinsurance expenses, which is essentially our ceded premiums earned, excluding reinstatement premiums, were $53.4 million for the first 6 months of 2025 compared with $43.8 million for the prior year. Our[outwards] cover has increased year-on-year as the inwards book has grown in addition to price increases at the January 1 renewals plus some additional cover purchase around secondary perls following the California wildfire loss in January. On losses then, the first 6 months of 2025 was another highly active period of natural catastrophe events and risk losses for the industry, including the California wildfires, severe convective storms in the United States and several aviation losses amongst others. The California wildfires were the most significant event and our undiscounted net loss net of reinsurance and reinstatement premiums is $118.3 million, which is within our previously disclosed range of between $100 million and $140 million. California wildfires contributed 31.6% to our undiscounted net loss ratio. Absent this event, our undiscounted net loss ratio would have been 78%, which is more in line with the prior year undiscounted loss ratio of 73%. Other smaller impact came from taking a more conservative stance on a number of aggregate excess of loss contracts given the elevated loss activity in the first half of the year and also strengthening our Ukraine reserves a little, given the outcome of the U.K. High Court ruling. While some of our [cendents] may appeal the ruling, we felt it's prudent to bolster reserves now given the updated information available. I remind you that our reinsurance service expenses includes both loss and loss related amounts, but also reinsurance operating expenses and an allocation of some other operating expenses. In our interim financial statements segment disclosure, we've provided a breakout of that number into the loss and expense components so that you can see those separately and also to help with calculating our net loss ratio. Our undiscounted net loss ratio for the half year was 109.6% versus 73% for the prior period. Our discounted loss ratio was 95.8% for the half year this year and 62.4% for the half year last year. Our combined ratio for the half year was 122.1% on an undiscounted basis and 108.3% on a discounted basis compared to 85.7% and 75.1%, respectively, for the prior year. Our comprehensive loss for the half year was $13.5 million or an ROE of negative 1.3% compared to comprehensive income of $98.1 million and an ROE of 9.9% for the prior period. On the investment side, yields have decreased a fair bit this year and the portfolio is generally yielding more now, maintaining a current book yield around 4.2%. Overall, for the half year, we returned 3.9% versus 1.5% in the prior year, where we saw yields move the other way. We remain relatively short duration, and our focus is on maintaining a high-quality, highly liquid portfolio. Duration is currently 2.8 years, which is the same as our net reserves. Average credit quality is AA, and you can see the usual pie chart here with our asset allocation and other than cash, cash equivalents and short-term investments reducing a bit, which is largely timing, no real changes from prior quarters in that our strategy. The business continues to grow and we remain highly cash generative. Our invested assets also continue to grow. As our portfolios become higher yielding over time, we produce more income and as our investment leverage increases over time, that contributes more to our ROE. I'll now hand back to Neil for closing comments.

Thank you, Elaine. Before we close, I would like to reflect on this transitional phase for Conduit and our strategy. Conduit has made significant achievements since the IPO and our efforts to better position the business for the future are progressing. As the market changes, our strategy must evolve. As a start-up company, we achieved scale with our quota share focus, which enabled us to capitalize on the hard market conditions and grow into our capital base. Through the start-up phase, we have developed strong client and broker relationships to access risk. As we move forward, we are looking to achieve balance between quota share and excess of loss business, which is consistent with the business plan we originally designed at the IPO. We believe this adjustment, which will take time to achieve, will affect our business in a few ways: reduce our exposure to attritional losses, which is more difficult to control when rates are softening, improve diversification within our portfolio, allow us to better control our net exposures through retro coverage, retro being our outward reinsurance protection. We recognize our transition will involve additional investment in people and resources. We have started to make progress with recent hires who are bringing fresh perspective and expertise to the company and are supported by our long-standing executives who are providing strategic consistency and operational stability. Our goal is to create a stronger, more resilient Conduit that generates more consistent returns. Our path forward requires building on strong leadership, underwriting expertise and a collaborative culture. Returning to this year's performance, we are disappointed to report the first half loss of $13.5 million, primarily driven by industry-wide losses relating to the California wildfires. Market conditions have become more competitive. However, business generally remains adequately priced. We will continue to deploy capacity where we see sufficient margin and our underwriting teams are starting to manage the cycle in classes where there is more intense pressure on rates, terms and conditions. Our strategy is bottom line driven, with growth during 2025 enabled by renewal support from our clients and selective expansion with preferred partners. Conduit's balance sheet remains strong with over $1 billion of shareholders' equity. Our capital strategy remains focused on supporting underwriting whilst returning value to shareholders over time. Our conservative investment portfolio has reached $1.9 billion and is now generating meaningful investment income to support our returns. We are committed to long-term value creation, and we believe necessary strategic actions are underway. That concludes today's presentation. Thank you for your time. We will now turn it over to Q&A.

[Operator Instructions] I'll start the Q&A session with the first question, which reads as follows. How are you measuring progress against the strategic objective of delivering more consistent returns through the cycle?

So how are we measuring progress? I mean the first thing that happens there is we're about to enter a very intense phase of business planning for 2026. We have today announced the sort of transition as part of the H1 announcement. We are looking to drive -- split of account from in excess of 70% quota share towards a 50-50 over time. I mean the way we measure success in terms of reduction in volatility is ultimately in results. What we can do in the planning phase is tailor our reinsurance to meet with volatility as it relates to both secondary and primary perils. So yes, the measurement is done on a constant basis. We report quarterly. Half yearly, we report results, combined ratios. But the big thing is the business planning process, the key performance indicators we set ourselves internally, net risk appetite, that's modeled against historic outcomes, which are all adjusted for inflation, and we do create internal metrics to measure our progress. We have our own internal business plans that are set up and generate the ROE forecast and return on capital at a very detailed and micro basis. So those are the measures we use internally to measure the progress we make against those changes.

Perfect. The next question here, how does the high cat bond issuance year-to-date impact you?

So I mean, cat bonds are part of what the market refers to as alternative capital, ILS. And they supply a fairly significant amount of the reinsurance capacity that comes in. And very often, that capacity comes in from ILS into the retro market. So an increased issuance in cat bonds is ultimately part of the capacity stack within the reinsurance market. It's a minority part of the piece. I said it's significant. It is a significant minority. Therefore, increased issuance in cat bonds represents, if you like, is substitute capital. So it represents more capital in the business. And our business is one where capital and risk appetite are matched against demand for risk purchase. So it ultimately does impact the market in terms of the overall capacity. I think unless have you -- Elaine, you got anything to add on there?

No, other than that we do actually monitor that market and if there are any opportunities for us, then we take advantage of that in terms of our own reinsurance purchasing.