Conduit Holdings Limited (CRE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Conduit Holdings Limited Investor Presentation. [Operator Instructions] Before we begin, we would like to submit the following poll. I'd now like to hand you over to the team from Conduit Holdings. Good afternoon.

Good day, everyone, and welcome to Conduit's 2026 Interim Results Conference Call. Thank you for joining us. On the call are Neil Eckert, Chief Executive Officer; Elaine Whelan, Chief Financial Officer; and Stephen Postlewhite, 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, and welcome, everyone. Today's presentation will cover our business performance for the first half of 2026, as well as an update on market conditions and the outlook. Steve will cover performance in each of our segments, and Elaine will provide some additional detail on our financial and investment highlights for the period before closing remarks and time for questions. I'm pleased to report a solid first half performance for 2026. We generated comprehensive income of $80.3 million and a return on equity of 7.8%, while growing tangible net assets per share by 8.4% during the first half and 23.2% over the past year. These are strong levels of shareholder value creation and a meaningful improvement compared to our performance in the prior year. As market conditions have become more competitive, we have remained disciplined in our deployment of capital. We continue to grow in areas where we believe pricing remains attractive, particularly casualty, whilst reducing exposures in parts of property and specialty, where rates no longer meet our return hurdles. This included a reduction in certain quota share treaties as we continue to rebalance our portfolio. Gross premiums written were $789 million, down 1.8% from the prior year, reflecting this deliberate portfolio management. Underwriting performance benefited from a much more benign catastrophe environment compared with the first half of 2025. Our undiscounted combined ratio improved to 92.6% compared with 122.1% in the prior year period. On investments, our managed portfolio grew approximately $375 million over the last 12 months to $2.3 billion. Our growing asset base continues to support higher net investment income, which increased more than 20% year-on-year. Investment income of $46.7 million during the first half contributed meaningfully to our earnings and is expected to continue to support our overall earnings going forward. Our investment result in the first half was impacted by rising treasury yields, which resulted in unrealized mark-to-market losses and a lower overall investment return of 0.9%. We also remained active in returning capital to shareholders. During the first half of the year, we repurchased 6.8 million shares for $38.9 million, while also returning $28.7 million through dividends. These actions, combined with solid earnings generation, contributed to tangible net assets per share increasing to GBP 5.70 as of June 30. Lastly, we have continued to attract talent to the organization and strengthen our personnel with new hires across several key functions. We have recently hired an experienced Chief Operating Officer, who will be starting shortly and have several senior additions to our property team that will join the company later this year. Turning to our underwriting performance. Our focus throughout the first half has been to protect margins, manage volatility and position the portfolio for the next phase of the cycle. Overall, gross premiums written were down 2% year-over-year. This reflects continued growth in casualty where rates have remained stable, offset by reductions in Property and Specialty as we responded to softer pricing conditions. Across the portfolio, risk-adjusted rates declined approximately 6% during the first half. While pricing remains broadly adequate, we have continued to see increasing competition as the year has progressed, particularly in property and certain specialty classes. Terms and conditions have also begun to ease modestly in selected areas. Despite those pressures, underwriting performance improved significantly from the prior year. The undiscounted combined ratio was 92.6%, benefiting from a relatively benign catastrophe environment. Results were impacted by some modest exposure to events arising from the Middle East conflict and other risk losses, but those losses remain below our reporting threshold individually and in the aggregate. Importantly, we have also increased retrocessional protection during 2026. Whilst that has increased ceded costs, it supports our objective of stabilizing underwriting results and protecting our capital through the softening phase of the cycle. With that, I will hand over to Steve, who will present on performance and market conditions in our 3 segments.

Thanks, Neil, and good morning, everyone. Through the midyear renewals, the team worked hard to secure our positions on renewals and select new business that aligns to our portfolio objectives as we seek to gradually shift towards excess of loss business in Property and Specialty segments, protect our margins as pricing soften and manage underwriting volatility. We are comfortable with the portfolio reducing modestly in this environment as some business will not meet our technical pricing requirements. Turning to the Property segment. Gross premiums written declined 9% to $454.8 million. This reduction was anticipated and reflects our continued strategy of reducing quota share participations with more marginal profitability characteristics while selectively increasing excess of loss business where we believe the risk return profile is more attractive. We have also been successful in securing international opportunities, which add diversification to our portfolio. We remain committed to progressing the portfolio towards a greater proportion of excess of loss business, which should improve portfolio margin and provide a more balanced risk profile over time. Property risk-adjusted pricing declined by approximately 10% during the first half with some acceleration observed during the year as we expected. Industry capital continues to grow, supported by strong returns over recent years and increased participations from both traditional and alternative capital providers. Property cat excess of loss rates were generally off 15% to 20% at midyear with some variation around that range. The quota share treaties saw continued upward pressure on ceding commissions. Despite the softer market backdrop, underwriting performance improved materially year-over-year. The property undiscounted combined ratio improved to 72.8% from 130.5% in the prior period, reflecting the absence of major catastrophe losses such as the California wildfires that affected results in 2025. Turning to casualty. In our view, casualty continues to represent an attractive segment of the market, although some classes demonstrate firmer prices than others. We have continued to focus on areas of the casualty market with more sustainable pricing momentum. During the first half, gross premiums written increased 21% year-over-year to $217 million, consistent with the growth rate we achieved during 2025. Growth was driven through expanding our relationships with preferred clients that continue to demonstrate disciplined cycle management behavior in their underwriting approach. These broader client relationships have added diversification in classes and geographies to our casualty portfolio. We have also selectively trimmed or non-renewed areas of the portfolio where loss experience or the underwriting approach didn't align with our objectives. Pricing remains relatively stable with risk-adjusted rates down approximately 1% during the first half, demonstrating the relative resilience of the casualty market. Market conditions vary across classes and territories, but overall remain broadly consistent with our expectations, and we continue to find attractive opportunities to deploy capital. The general third-party liability class continues to see the strongest original rate increases and has driven much of our growth in casualty. Underwriting performance remains stable with an undiscounted combined ratio of 102.9%, broadly consistent with the prior year period. We remain aware of industry loss trends and carefully consider frequency and severity dynamics in our pricing approach. Our reserving philosophy remains consistent, and the portfolio continues to perform in line with expectations. Turning to Specialty. Competition continues to increase, and we have scaled back the portfolio slightly during the first half with premiums reducing 5% compared to prior year to $117.2 million. We have reduced participations in classes where competitive pressures increased or pricing no longer met our expectations. While overall market conditions have softened, the Specialty segment remains highly diverse. We continue to find opportunities in selected areas where pricing is improving, including aviation, political violence and terrorism classes. In Aviation, we saw strong submission activity and have successfully written several new attractively priced excess of loss and quota share accounts at midyear. Risk-adjusted rates were down 7% during the first half. Attractive diversification characteristics continue to draw capital from new and existing markets into many specialty classes. Recent loss activity has helped stabilize pricing in certain classes, but we expect the market will remain competitive. The undiscounted combined ratio during the first half was 104.8%. This result includes the impact of losses associated with the conflict in the Middle East. Overall, our approach remains highly selective. We will continue to prioritize margin over volume and focus our participation on opportunities where expected returns remain attractive. We also remain ready to capitalize on any class-specific shifts in pricing as we are actioning in aviation currently. One of the most important strategic actions we have taken over the last year has been to strengthen our retrocession program. As market conditions become more competitive, reducing volatility and protecting capital become an increasingly important part of our underwriting strategy. And during 2026, we expanded our retrocession coverage across both peak and secondary peril exposures. This included increased limit and lower retention within our core program. We also maintain cover for second and third event scenarios. The benefit of these actions can clearly be seen in the reduction of our modeled net PMLs, both at the 1 in 100 and 1 in 250-year return periods. Net exposures are lower than they were at the beginning of 2025 and 2026 with further improvement achieved at the 1st of July 2026. While this enhanced program increases retrocession costs, we believe it provides valuable earnings stability and balance sheet protection as we move into the peak Atlantic wind season. I will now hand over to Elaine to go through our financial and investment highlights.

Thanks, Steve. Gross premiums written of $789 million are down 1.8% on the prior year. We mentioned front-loading our book a little last quarter as we expected the market outlook to worsen, and that has certainly been the case, particularly in property. We non-renewed a few quota share deals this quarter that no longer hit our hurdle rates. We've also taken a more conservative view on our premium estimates given our market outlook, and that's also part of the reason for the small reduction year-on-year. While we are still seeing adequately priced business as the bulk of our book is written in the first 6 or 7 months of the year, we would now expect our gross premiums written for 2026 to be a little behind 2025 levels. We have reinsurance revenue of $455.9 million versus $433.3 million at the prior half year, a 5.2% increase year-on-year. Our business mix has an impact on reinsurance revenue with excess of loss writing and earning faster than quota share, we continue to see some benefit of prior underwriting years earning into this year. Ceded reinsurance expenses, which are essentially our ceded premiums earned, excluding reinstatement premiums, were $73.3 million for the first 6 months of 2026 compared with $53.4 million for the prior year. Our average cover has increased year-on-year due to additional cover purchased with the aim of reducing volatility. On losses, while the first 6 months of 2026 were relatively light from an event perspective, the Middle East conflict had an impact with the industry, along with various severe convective storms and other smaller natural catastrophes. We haven't recorded any particularly material losses, but did put some reserves up for the Middle East conflict in our Specialty division. 2025, of course, at the California wildfires and our undiscounted net loss net of reinsurance and reinstatement premiums at June 30 last year was $118.3 million with that number holding relatively steady through this half year. The California wildfires contributed 31.6% to our undiscounted net loss ratio last year. 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 provided a breakout of that number into the loss and the 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 80.7% versus 109.6% for the prior period. Our discounted loss ratio was 68.5% for the half year this year and 95.8% for the half year last year. Our combined ratio for the half year was 92.6% on an undiscounted basis and 80.4% on a discounted basis compared to 122.1% and 108.3%, respectively, for the prior year. Our comprehensive income for the half year was $80.3 million compared to a comprehensive loss of $13.5 million for the prior period. Lastly, on this page, on ROE, we have adopted an amended measure, which is the internal rate of return of the change in fully diluted book value per share. This measure of ROE versus the previous measure of return on opening equity is a more sophisticated holistic and comprehensive measure of return, which captures all aspects of performance and capital management actions. Under this method, our ROE for the half year is 7.8% versus a negative 1.4% for the prior period. ROE has also been presented on a prior basis for comparison, and we also have some more detail on comparatives in the appendices. On the investment side, yields have increased this year, although spread narrowing has offset that to a degree. The portfolio is generating a good level of income, though, maintaining a current book yield around 4.2%. Overall, for the half year, we returned 0.9% versus 3.9% 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 2.7 years, which is in line with 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 or our strategy. On this slide, you can see that as the business continues to grow and we remain highly cash generative, our invested assets also continue to grow. As our portfolio has 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.

Thanks, Elaine. Let me conclude with a few observations. We've delivered a strong first half result, producing $80.3 million of comprehensive income and a 7.8% return on equity, whilst continuing to grow our tangible book value per share. Our underwriting strategy is evolving as we carefully manage the pricing cycle. We are growing where returns remain attractive and scaling back where pricing no longer meets our standards. We have continued to strengthen the resilience of the business through an enhanced retrocession program with broad coverage for all perils. We continue to effectively manage our capital to increase shareholder value. During the first half, we returned approximately $68 million to shareholders through dividends and accretive share repurchases. Looking ahead, we expect competition and price softening to persist across many lines of business. In this environment, our ability to be nimble and focus on capital discipline and margin rather than market share will become increasingly important. We believe Conduit is positioned to navigate these conditions. The last 12 months has been continuous enhancement in terms of people and process, reaffirmed ratings and results that have been at or in excess of market consensus. This is an ongoing process, and our focus remains on generating attractive risk-adjusted returns, preserving balance sheet strength and creating long-term shareholder value. Thank you, and we can now open the call for questions.

[Operator Instructions] Guys, we have received a number of questions. So perhaps if we dive straight into it. The first one that we have here asks, what do you consider to be your particular strength and why?

Okay. So when we IPO-ed the company, that was after a period of a soft market. There was significant unreserving on casualty. So we have a strong, clean balance sheet. We reserved our casualty to 100% ever since we started writing it. We now have gross assets under management of 2.3x net tangible. So we have $2.3 billion of gross assets, which means we start each year with a strong flow of investment income, probably somewhere between $90 million and $100 million, which gives us a strong start. We are 0 tax being Bermuda based from a corporate tax point of view, and we get tax credits for employing staff on the island. Most of the multinational -- all of the multinational companies, international companies do pay global corporation tax. We're single location specialist pure play. At $1 billion, we, in our view, are big enough to matter and to have an A- rating, but we are small enough to be nimble. So managing the business is more easy. The business model is simple. And then there's the sort of specialization. We basically write property casualty specialty. It's pricing, it's culture, it's service and alignment. But we do feel we can -- the combination of those factors give us an edge. And it's also cycle management and risk management, which hopefully this set of announcements demonstrate our approach.

And just turning to the next question. What internal metrics do you use to monitor most closely to ensure underwriting quality isn't compromised during periods of growth?

So I would say the primary metric on each and every contract that we underwrite, we have a pricing basis. So that allows us to understand the margin that we have in every contract and that's something we report on review regularly. Around that also, we have a very clear risk appetite and risk set right up from things like how much limit we'll give to any individual contract right through to what our P&Ls are, what our kind of man-made RDS scenarios need to look like. We have also the absolute level of rate change and monitor of business combined ratio at an aggregated level. So all metrics come into making sure that we steer and have clear guardrails around what we do when we're growing or shrinking, doesn't we do that on every contract.