CONDUIT HOLDINGS LIMITED - H1 2024 results

Good afternoon and welcome to the Conduit Holdings Limited investor presentation. Throughout the presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted any time by the Q&A tab situated in the right corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. 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 draw your attention to the following poll. I'd now like to hand you over to Trevor Harvey.

Good afternoon, she says. Thanks very much and welcome to everybody. My name is Trevor Harvey, CEO of Conduit Holdings, and I'm joined by Elaine Whelan, our CFO. What we have 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 thereafter into Q&A. So thanks very much and let's move on to the next slide. And again, that's a disclaimer, thanks, that's fine.

So for us, 2024 interim results, comprehensive income of 98.1 million and gross premium written up 36.1% to 737.8 million. Those two numbers are good solid results for us as a business. Our six-month results, the market has remained pretty much in our favor through the first six months of this year. We've got disclosures here on slides around the individual divisions of property, casualty, and specialty, and there are some interesting moving parts and detail within each of those. But overall, really pleased with that result. We've shown good growth as I say to 737 million. Over the same period, the combined ratio discounted, 75.1, compared with 72.5 for the first six months of 2023. We've got some commentary around that, and myself and Elaine will go into some of the moving parts within there. But it shows that even though there wasn't a particularly significant industry event like a US landfalling hurricane or large very large natural perils event, there's still a lot of activity out there in terms of smaller natural perils events but also some man-made events, 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 99.9%. Pleasing numbers, and that's up over the previous comparable period in 2023 which was 99.1% ROE and comprehensive income of 78.6 million. But I can give you a walkthrough of some of the moving parts within that when we come to the slide later on financial highlights.

Next slide. So overall gross premiums written as I said up 36%, and the bars on the right show where that growth has come from across property, casualty, and specialty. You can see that we're still showing a good footprint across all three 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. A 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 add value to the portfolio. We have a very broad footprint across all three classes, accessed globally through broker intermediaries, and Bermuda still remains a very sound place to be transacting business and accessing business on the global stage for insurance. So for us, we still have a very selective risk approach. We aim still to create a very broad funnel of distribution, distill those risks down 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 around expenses and other operating expenses, and that trend line down from the high in 2021 when we set up and incurring those buildout costs which were perfectly natural in a startup business of north of 28%, now trending down to that level in the 5 to 4 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 2022, 2023, and 2024. We're currently at a count of 61 here in Bermuda full-time employees, and it is the one location. We made many comments previously around the way that we manage the business and the way that it's driven and controlled from and within the one location here, particularly at 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 are. So one location, and we still believe it's a great way to go to market in accessing general reinsurance business.

Next slide. So on 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 risks 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 US market in what's called the non-admitted space. The non-admitted 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. There is another class 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 quota share is in areas like the states where that non-admitted market has been really strong, has shown really good rate over the course of the last four 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 expected loss ratios through active cycles, but when hurricanes or earthquakes or large natural perils events happen, it's excess of loss account which is really picking up more exposure to those types of events. We're in that space, we balance it within the overall portfolio, but at this point of the cycle it's generally a less desirable place to be skewed towards. For us, rates have come off slightly year-over-year, particularly in parts of the US, and we've maintained the 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 net impact that we see by the time that we overlay the impact of claims inflation and other factors on the pure rate that we get. That 3% looks like a relatively low figure, but it's coming on the back of very significant compounding increases over the course of the last four years really since Conduit came into inception in 2021. 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 2023 up to 64.7. We've got some comments around that as regards some of the loss events, but in the main as I said in the opening remarks, whilst there 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, still 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've grown but 5%, and we're comfortable with that. The portfolio has been very selective from day one. We have an enormous funnel of business that flows in 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 six 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. Plainly 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 as a class, the comment I would say around the market conditions is it's really underpinned by, not so much the global, but certainly country by country the underlying inflation that sits within there. Be that in the UK or be that in the US or in parts of Europe, inflation's obviously been a big factor for everybody. That claims inflation flows through into the 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 been oscillating around plus one, plus two, flat, minus one, minus two, 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 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 elsewhere 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, yeah big growth, 59% in specialty, coming from a lower base of 93 million as opposed to property, but as we flagged 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. 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 to the overall property. But it's true to say out there in the industry, it would be fairly simple to write an increase in a specialty book, but it very often will bring significant increases in natural perils exposure. That's not what we're doing here. The specialty book for us is particularly valuable around what we call the non-catastrophe piece, the risk piece, and is currently pricing up pretty well in the main. The uptick in loss ratio in the half year from 80.7 to combined ratio sorry from 80.7 to 95.7 eyes okay. And 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. That's $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 and the vessel owners and the vessel managers would 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 as it works its way through the courts etc. So we're aware of the limits that are out there in the market that can be called upon, and we've very much weighted our ultimate estimate of 19.8 million with those limits in mind. So that's again one of the drivers of the increase in the undiscounted combined ratio over the half year.

Okay, yeah, thanks Elaine. So just in conclusion, final slide. A number of these points we've covered already, but the headline and the point around multi-line insurance platform, multi-line strategy is a key one to bring out. Right from day one, when we were 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 cap modeling and high-level metrics are used to generate a view of the industry. I believe this 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. 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 multi-lines at any one point in time. That's really key for us. We talk about positive market environment and rate increases have slowed, and in some of the classes have indeed gone to negative, but we track those all individually. The portfolio 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 and the way in 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 balanced position that we're looking to create. That's a big part of the model, a big part of what we do. 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. For us, having a clean capital base without the hangover of back-year legacy, 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-year adverse claims experience being experienced in the industry in the casualty lines going back to pretty much pre-2020, and we're not encumbered by that. 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're 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.

Perfect, Trevor, and thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab which is situated on the top right-hand corner of your screen. 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 loss ratios?

Okay, yeah, I'll take that. In terms of pricing in hurricane season or our hurricane experience, in the main, the wind-exposed business 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 a client's submission to us, look at it and price it from a risk standpoint and then adjust it for the forecasts 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, etc., are having an impact on the frequency and the severity of the business, but in terms of the hurricane impact, 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 two or three decades, a hurricane has to make landfall in a place where insured values are material. So yes, while it may well be a forecast that's out there saying the industry may expect a more active year, there's not a strong correlation between the actual finally insured loss. In terms of where we are, we make provision for not just hurricanes but other large events and other large natural perils events within our pricing. Pricing picks that's provided for and tested and stress tested, but it's certainly tested back against the portfolio and in terms of general market experience and client experience. So we shall see what the next few months bring, but overall we have a very solid position, and I think as we've mentioned before, we also have a protection program 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 the portfolio. I think also just in terms of how we risk select, we are quite careful about making sure that there's balance within the book and managing volatility in the tail risk, in their PML exposures, and probably at the lower end of pure companies.

That's great, thank you very much. 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 with 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. I said earlier that the expertise that we've got is heavily grounded in the insurance market, and to be able to assimilate data from hundreds of clients from the insurance side, bring that into our portfolio, spot trends within there, and then disc plus that back and play that back with clients is really valuable. It's a bottom-up approach. So when we're doing that and engaging with clients 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 within the portfolio that we've bound during the last written in the last 12 months is 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 underwrite them. We've got a collection of individuals in one location that can bring their resources to bear on that risk, engage with that team sitting in this one location, and feedback and work with clients to find a solution that works for both of us. That is not normal in the industry. It's much more likely that reinsurers have a silo approach. There's a property unit and there's a casualty unit, and sometimes they'll be sitting in 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, apologies for that, but that is to my mind the strongest differentiator that we have.

That's great, thanks very much. How does the underwriting risk appetite compare with peers?

Tough to comment on the peers. From a capital standpoint, there are obviously larger entities out there which presumably would have larger appetites. But in terms of where we are 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 and tolerances at very sensible levels. 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 in what we believe is balance. That is very important. So I think in that respect, we have a probably broader risk appetite across classes than other reinsurers because we 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, Trevor, thank you very much. Just turn to the 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?

Well, my seaweed on the wall hasn't turned whatever color it has at the moment, so that's the nature of these forecasts as I've said. So it doesn't concern me in terms of where we sit as a business. Perhaps if we were a standalone single-class property catastrophe reinsurer writing business, it would, but that's not what we are. So I think we've got a robust portfolio where each deal is priced individually to bring a margin to the portfolio and create that greater degree of stability. So no, in the main, no, it doesn't.

Could you expand a bit on what classes of business are included within casualty and specialty?

How long is a piece of string for that? Very broadly, within casualty and specialty, we would have about a dozen main classes. As examples, in casualty you could have professional liability to liability to professions, architects, engineers, the like, doctors, management liability which is essentially the same, D&O so directors and officers liability, general liability which would be the liability of corporations to miss-selling of products, or indeed an event that could happen to them within their corporate environment. Railroads for instance, railroads buy large amounts of cover to cover themselves against causing damage to third party or to bodily injury to the general public. So casualty classes are in that and those are the main ones probably for us. Reasons I've cited those first, those are the ones that are more prevalent in our portfolio. We don't have a major exposure to medical liability or hospital liability, and that's a big part of the business. Also auto or motor, be referred to in the UK, that's not something we write, and that often if you're having broader definitions cited of casualty, it would probably include quite often motor liability. We don't write that class for various reasons I won't go into now. In specialty, for us it falls into the marine, the energy, the aviation, renewable business, renewable structures if you like, wind turbines and the like, and then both the physical damage to those and the liability. So specialty kind of has a double up in the number of classes. A good example would be the bridge and the Baltimore loss. Specialty covers the vessel which is damaged, so that's the damage to the vessel, it covers the cargo on the vessel, but then the underwriters under separate policy cover the liability of the vessel. So specialty covers both first and third party and is fairly broad class. As a point just to highlight, and we've said before, we don't write trade credit and we don't write mortgage business, which sits within the specialty arena sometimes as a sizable cohort of specialty accounts, but we don't primarily because it's correlated with the asset side of our balance sheet. So that's a bit of a highlight anyway in terms of some of the classes we do have. In our year-end financial statements, in our risk disclosures and the description of the classes of business that we underwrite, so if you want to go to that as a reference after this presentation then you'll find that there.

The next question is really around the dividend. Your interim dividend is unchanged. Is this an indication that the same might happen with the full-year dividend?

Thank you very much, Elaine. The last question we've got here: I've read that the ILS market is raising considerable sums for catastrophe bonds. Is this likely to either increase Conduit's underwriting capacity or alternatively put pressure on rates or attachment levels?

Yeah, it's a good question. Bit of both. We obviously are in the cat bond space currently and benefit from the protection that that issuance provides for us. We'll keep that under review in terms of the scale to which we utilize the cat bond market. More capacity coming in has undoubtedly and almost certainly will suppress some of the spreads in that space. That does have a knock-on effect also as you allude to on the pricing of our inwards business and the business that we write. It tends to fall though in a kind of relatively limited area. The cat bond space likes the more remote risk, the more binary triggers, so tends to put capacity into the areas that respond to not many of the smaller, but the very large one-offs. That's not an area we really deploy a lot of capital into when we're writing a competing product to the cat bond market. We tend to operate in the area where our insurance knowledge adds more value, and that's generally at the lower level that responds to series of smaller claims which the cat bond market is not particularly set up to accommodate effectively. So I don't think it has a major impact on what we are seeing on our own property experience and where certainly the majority of our premium exposure comes from, but it may offer us potentially more opportunity on the purchasing side.

That's great, Trevor. Elaine, thank you very much for answering those questions from investors. Of course the company can review all the questions submitted today and we'll publish those responses on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which is particularly important to you both, Trevor, could I just ask you for a few closing comments?

Yes, thanks very much. Yeah, thanks for coming online and listening to the presentation. We think it's a fundamentally good set of numbers and it's what the business was articulated to be able to do, to generate returns of this level. In the market that we're in, it's a good place to be deploying. So thanks very much for being online and look forward to speaking to you again at the next gathering, should we call it.

Perfect, Trevor. Elaine, thank you once again for updating investors today. Could I please ask investors not to close the session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will 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, I would like to thank you for attending today's presentation and good afternoon to you all.