Conduit Holdings (LSE:CRE) — Q1 2025 Trading Update

0:01 Good afternoon, and welcome to the CONDUIT HOLDINGS LIMITED Q1 twenty twenty five Trading Update. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses what is appropriate to do so. Before we begin, I would like to submit the

0:32 following poll. And I would now like to hand you over to executive chairman and interim CEO, Neil Eckert. Good afternoon to you. Hi there. And with effect from this morning, I'm no longer interim chairman. We have a new interim nonexecutive chairman, and I have, taken over the role of permanent CEO, which is a great honor for me. I'm very excited about it. I also have with me Nick Pritchard, who is interim chief underwriting officer, and Elaine Whelan, our chief financial officer Brett Shereff, who's head of IR and Alex Medley, who works with him in that function. So the last, two or three months, we we announced that Trevor Carvey, our CEO, was standing down, for personal reasons. He, to do with his family. He needed to return to The UK.

1:35 So I stepped in initially as interim and, as I say, have now taken over. And Nick has replaced Greg Roberts, our chief underwriting officer. So if we move on, to slide four, that shows our our bench strength. We have an extremely strong team. Elaine has been with us virtually since day one. I was founder chairman. Stuart Quinlan was also a founder member of the team. We've got Andrew Cooper, head of actuarial Greg Lund, general counsel. But but what's really important to emphasize is the bench strength in underwriting. So there's Nick with extensive experience across that, Peter Kiernan, head of underwriting, two cash the underwriters, Mario Benetti and Angus Hanson, and Mark Berman on the specialty side.

2:34 We have 22 employees in all in the underwriting function. And as I say, it's strong, as probably has been demonstrated by today's release where we recorded 15 growth in our q one underwriting. I am CEO here in Bermuda with the, entire team. And the company, its vision, its strategy, particularly on the inward portfolio, is unchanged. We will, obviously, on a dynamic basis, sort of be making decisions, changing, trimming. But it's important to emphasize on the inwards is business as usual.

3:22 What we did do was when we announced Trevor's retirement, we also, in the same RNS, announced we were buying more secondary peril coverage. And that was really designed to address issues on earnings volatility in the short term. We have had two profit warnings, Q4 and Q1 after the Los Angeles fire, and we wanted to put additional reinsurance in place to take care of that. Can we go on a slide? So as we say here, it's a refocused approach to to reduce volatility. We've had strong trading up 15%, And our three segments have always been complementary, but what we've now seen is is the portfolio balancing more growth in specialty and casualty.

4:31 We did say this morning that we are alert to some rate softening in certain segments, and we won't grow at the expense of margin. Having said that, we are experiencing good growth. We expect this to, continue across the year. Overall, across the portfolio, there was a rate reduction of minus 4%, but that's after taking inflation into account. Elaine will comment in more detail on both finances and, investments, but they've done a great job in that part of the company. The investment return was 2.1% during the quarter compared to 0.5% Q1 'twenty four.

5:17 It's a high well, I won't go through that now because Elaine will cover that in great detail. Our California loss remains unaltered as previously advised, dollars 100,000,000 to $140,000,000 net of reinsurance and reinstatement premiums. Guidance for the year, we have maintained as high single, low double digit target for this year. And the cross cycle target remains mid teens. So we do get asked questions. We bought more reinsurance. But on a recurring future basis, we still have the same targets for mid teen ROEs.

6:03 I suppose the key point about today's announcement is that we have announced that we're initiating a share buyback program. And investors do ask us about, capital and especially when the share price is is where it is. And, Elaine will comment further on our capital strategy. I mean, I would just stress that it's more a statement of intent, and it's a demonstration of policy and the fact we intend to pay attention to being capital efficient as a business. Next slide.

6:41 So this deals with the evolution of our strategy on the reinsurance we purchase. So we've always historically purchased peak peril coverage. Again, peak perils, you would define as major hurricane, major earthquake. But in my view, increasingly, secondary perils are coming into play, and LA was a catastrophic event that was five times the size of any previous recorded wildfire. And so we took the decision to buy coverage with a view to, we say here, enhancing stability.

7:28 The coverage is in two types. One is on a per event basis, which covers our exposures to within our individually disclosable loss amount. And we have a significant limit. I mean, you can't always cover you can't claim it's capped because you you can't, but we've taken it might be reasonable precaution. We bought substantial limits. But the other thing we buy is we buy what's known as aggregate cover, which protects the company against the frequency of that type of loss.

8:15 And, you know, we have to be mindful that with weather patterns now we we have experienced two years in the last five that have been 150,000,000,000 of nat cat events, so we are mindful of that. And that is a that's moderation of strategy on the outward purchase. As I said, it's business as usual on the inwards. Next slide. So I won't dwell on this slide. It gives the headline picture, 15% increase in premiums, which I think was well received by the market today. And it shows the consolidated rating chart. It shows where the rates have come from since we IPO ed the company.

9:07 And I will pass over to Nick to go through individual accounts, the property of the casualty and the specialty. Thank you, Neil. So as Neil said, the team have have done a great job with continuing with the growth of 15%. With with respect to property, this this is slowing down a little more than the other classes, but still very still very healthy growth at just shy of just shy of 10%. Reflection on one one is that the negotiations were a little more challenging. We are we are seeing other reinsurers in the market redeploying their retained earnings. I think the general belief between the reinsurance community is that peak catastrophe is still very adequate.

9:57 And if I if I point you to the to the chart on slide eight in the in the bottom right, you can see that we're that we're close to the rate levels of 2023, which I think we can all see from looking back that that year was quite a stellar year. So we're so we are so we are comfortable that the underlying rate is is is very much adequate and the margin is there. Aside the fact of the wild card cost, putting that aside, we we are we are very comfortable that we're getting paid for the for the capital risk that we're putting out. So with respect to demand, a big part of that is is demand.

10:45 So we've we're seeing we're seeing continued increases a lot more than we perhaps would experience ten, twelve years ago just with inflation still being a factor. And we saw an additional $12,500,000,000 being purchased in q one. This will, of course, continue to be the trend going into midyear,

11:06 another $5,000,000,000 to $7,500,000,000 of Florida. So we will get to the 20,000,000,000 mark for the year. So that is a very significant amount of additional limit. And our expectations for midyear are very much with, you know, with the demand supply element we just we just discussed where rates are. We think we don't we don't see any reason to think the rate movement will be any any different to what we what we saw at q one. We think it should be quite consistent at minus five or minus 6%. So that that that gives us the the platform to to go ahead and very likely deliver on plan. So for the rest of the year, we're not looking to deviate from plan with the observations of the market so far.

11:54 So that's property. If we go to casualty on slide nine, so from a lower base of casualty of $69,000,000 from q one last year, we did experience 22% growth. This is almost all with existing clients, so we are getting closer to our clients. They are getting more comfortable with our balance sheets and our security. We're becoming a trusted and credible partner with casualty, with its long tail element. Then, of course, there is a bit more due diligence with the reinsurance panel. So we're so we're we're seeing the benefits of that of of of going into our going into our fifth year of trading.

12:40 And we are benefiting from the increase in reserve development and and the loss emergence from the years that, of course, CONDUIT weren't trading, And we are seeing the benefit of that. We've got the data and the evidence to see that our clients are putting out the appropriate limits, attachment points, and premium rates, and we're getting the benefit of that. We are, of course, being extremely cautious to to that and that, you know, if there is a a slightly elevated loss trend, then we are we are factoring that into our pricing. So as much as we are seeing some positive developments on the underlying, it's it's we're we're looking at almost a a flat rate change. We have minus one, but that's yes. So net of inflation, we're looking at about minus one per casualty.

13:26 But like I say, the the growth in that is is very much coming off a lower base and with traction with our existing existing customer base. Nick, can I just check that for a minute? So when we IPO ed the company back in '21, what we were aware of was the market was coming out of a soft cycle. It had been underpriced in its product probably from 2014 through to 2019. That is now impacting people's reserving in respect of those old years. Casualty, US terminology for liability business, the claims take a long time to litigate and settle through court. So the reserving impact that Nick was talking about is in respect to those old years that predate the formation of our business.

14:17 We are still holding a very cautious approach to reserves. That account takes five to seven years to develop. So as you will see, we haven't been releasing profits out of that account yet. So, Neil, back to you. Thanks, Neil. So on Slide nine, finally, on specialty. We are seeing some increased competition for underwriting margin outside of peak catastrophe. But like I said, with with casualty, it's coming from a lower base, and we are continuing to see business that is attractive to us and fits into our portfolio, our overall overall portfolio.

15:04 But like I said, the some clients are looking to retain more, and so which allows them to to push a little more on commissions and terms and conditions. So with all that with all that said, we are we are booking risk adjusted rate change net of inflation of minus 3%. But like I said, we, you our our capital is working hard on property, and so we therefore see the diversifying benefits of specialty. So it currently remains adequate. But as as it if we do, you know, looks like we may be starting to move into a different part of the cycle, then we will, of course, manage this. So and make sure make sure we're doing right by that. So I think that's on the underwriting, that that's it. Is there anything else to add? And I'll pass over to Elaine for the numbers. Yeah.

15:51 Thank you.

15:53 Thanks, Nick. I'll take you to the first table on this slide. Dollars 410,200,000 of premium for the first quarter of twenty twenty five versus 356,800,000 for the first quarter of twenty twenty four, so 15% growth as you've seen in some previous slides. Just to comment there that we are still growing, although at a slower pace than our early years, as you would expect, given the stage that we're at now. We do expect to have strong growth for the year, but we expect that first quarter growth to moderate just a little bit. Most of our book is written by 1.7%, so less business in the second half of the year. One of the points in the footnote just to draw out, there are no reinstatement premiums within those numbers. And for those who are not so familiar with the industry, reinstatement premiums are a post loss item to reinstate coverage.

16:41 Some people include them in their gross premiums written, we do not, so they're not in that number. Table below at the bottom there, the reinsurance revenue numbers. A reminder for for those who are more used to US GAAP here as well, reinsurance revenue is basically gross premiums earned less ceding commissions, So it mostly tracks the same pattern as gross premiums earned would do, but it's a lower number after those ceding commissions. So it's a lower number than gross premiums written, but I've seen some nice growth in that number as well, which is a reflection of the growth in the salt line. Not much else to note on this slide other than the California wildfires. As Neil said, our initial range of $100 $140,000,000 net is unchanged on that.

17:26 Next on the investment portfolio. We haven't really changed very much on this in terms of strategy. It's very consistent, focused on capital preservation and liquidity as ever. Our investment return for the quarter was 2.1%, which is in part due to having a higher yielding portfolio, but our book yield is 4.1% now. But also the reduction in treasury yields that we saw in the quarter, that gave us a decent mark to market gain on the portfolio as well. Still high quality, still short duration. We have moved that duration up a little bit for two point seven years now. Our liability duration is around two point eight years. It's been in and around that level of three years, three point one years since we started, and we expect it to kind of be in and around that range. So we are just moving our portfolio up a little bit and following the interest rate hikes of the previous years and better matching that towards our liabilities.

18:20 Still very high quality portfolio, as I mentioned, double A rated there. And you can see in the charts on the left hand side, the asset allocation and the credit quality, and that really hasn't changed very much quarter on quarter. And on capital strategy, and you mentioned this as well, and this is more a reflection of where we are now. We're we're in our fifth year of business. We did have a five year plan in our initial IPO, and this is more about us just setting out what we intend to do going forward. Initially, we we raised a lot of capital, and we were deploying that capital. So we we knew that we had surplus capital, but that was intentional why we built

18:57 our book. So what we're showing on the on the chart on the right hand side of this is how we think about capital, which is looking in the light green box at what our capital requirements are, and there's a whole host of different ways of looking at that across regulatory, rating agency, and internal capital requirements. And then we put a buffer on top of that to give us the flexibility that we need to maintain those. And then any excess over and above that, we would consider that for either deployment or return. And within that, we consider a whole host of tools at our disposal across buybacks, special dividends, etcetera. And that depends on our market outlook and where we're trading in terms of our share multiple at the time as well. We have announced that $50,000,000 share buyback program today, and we do intend to ease into that and and buyback. We have that authorization through until next year's AGM, so we'll execute on that as and when appropriate.

19:48 And then I think Neil's gonna wrap up with some final remarks. Yeah. I'll do that. Then we will be through to q and a with with hopefully enough time left. Thank you, Elaine. So there have been meaningful changes to the leadership team, but the bench strength, the experience, you know, Nick alongside me, and, me and Elaine have been in the industry for more than a couple of years, but in my case, anyway. The team is energized, motivated. It's it's business as usual. We're posting growth. There's no change in our strategy on the inwards. We remain pure play Bermuda, single location reinsurer with a target of 15 well, sorry, rephrase that, mid teen returns on equity across the cycle. We are seeing there's no point in trying to shy away from the fact, we are seeing increased capacity and competition.

20:53 But we do see historically good rating levels and maintain discipline in markets, so we are still growing.

21:03 And that concludes the presentation. Very, very happy to get into Q and A. That's great, Neil, Elaine and Neil. Thank you very much indeed for your presentation. I will now turn your cameras back on. Ladies and gentlemen, please do continue to submit your questions using the q and a tab situated on the top right corner of your screen. Neil and team, if I may, I will get straight into the questions. The first one here, which reads as follows. Can you break down the drivers of growth

21:33 across casualty and specialty?

21:35 Are these sustainable or opportunistic?

21:43 Me? Yeah. Okay. Right. So the drivers of growth are really they're across the three classes. We posted growth in all three, but what we have seen this time is slightly more growth in casualty and specialty. The casualty market is showing the least rate reduction. It was a one point post inflation rate reduction. Takes time to establish yourself, as Nick said earlier, in the casualty market. We are on, a positive outlook now from AM Best, so, our credit rating helps. Yes. I do believe that,

22:26 particularly on the casualty, it's highly sustainable, especially where that marketplace is today. So it's growth, but it's good growth, and I would expect to continue to post growth on casualty during the year. Specialty is a more diverse market. It's pockets of business, and we liken that to a bank of sort of lift elevators, some going up, some going down. There's been significant claim activity on things like the aviation war confiscation loss in has been going through the courts at the moment and will be settled soon. The Baltimore Bridge was one of the biggest marine well, was thought to be one of the biggest marine disasters in history.

23:12 Now it looks like it's probably going to be between $1,000,000,000 and $1.3 in reserving terms. So where those markets have experienced claims, there will be opportunity, but there is also rating pressure. So our job as a reinsurer is portfolio management, and we allocate capital accordingly. And and, yes, I I do see I do see sustainability in and around those opportunities. I think one thing to add to that is that we've spent several years now building up our book, and we have a very strong renewing book. We're able to increase line sizes and exposures with existing clients to to to grow the book as well. Next question.

23:59 Thank you very much. Brian, that's for you. Perfect. Thank you very much. The next question we've got is what is the strategy around the GBP 50,000,000 buyback? Do you feel the company is undervalued compared to the broader capital allocation policyopportunities you see? The strategy around the buyback, as I mentioned, this is kind of our first foray into post IPO strategy in terms of setting out how we think about capital going forward. So we do intend to use share buybacks and special dividends as and when appropriate going forward when we have excess capital. With this one, we will execute as when we see appropriate.

24:44 We are trading kind of in and around point 7.8 times book just now, so there's an advantage there to buying back at that discounted book. Thank you, Elaine. The next question we've got is how are you managing reinvestment risk as yields fall and the duration of your book remains short? Yeah. I think I guess, we we don't really have a crystal ball in terms of where where yields are going to go. They may come down. May not. I think our approach in our investment portfolio is capital preservation and liquidity and yield is a concern after that, which obviously, it's nice to get some good income off of there. We do have a decent book yield on our portfolio, and the market yield may come off faster than book yield as we've already been able to reinvest at the higher rates that we've had recently.

25:37 And we are also quite well diversified in our portfolio, so we have some benefit and some protection from that as well. Thank you, Elaine. And perhaps one last question here is the additional reinsurance that has been purchased is for shareholders' benefit. Can its cost be expressed as a percentage of shareholders' funds? Yeah. We did actually make an announcement on that when we purchased the coverage. We didn't what we don't do is disclose specific details on individual contracts because that is just gonna I mean, when you get reinsurance contracts put in place, they're done under confidentiality, and the reinsurers themselves don't don't want them published.

26:26 But what we did say is that that, overall, the cost of the additional reinsurance purchased and some portfolio adjustments and claims activity amounted to about 4% of shareholders' funds in that. That that that was the nature of of the earnings adjustment, was it not? Yeah. In and around that range. Yeah. Yeah. So so the answer to your question is is it's not precise, but it will be roughly in and around the 3% to 4%. The only other thing I would add to what Elaine said is we have experienced volatility in investment markets, especially after the company started.

27:14 And because we match duration of assets and liabilities, we will get mark to market unrealized volatility, but that works its way through. Is that fair to say? Yeah. I mean, we don't so actively trade our portfolio, so we do tend to hold investments for longer term. I think the other thing to point out in there is because we're under IFRS 17 now, we do also mark our liabilities to market so that you get the the opposite impact of discounting there too. So there's there's a degree of offset. It's not a perfect match. Lovely. So if does that conclude the question so far? That's correct, Neil. If I may just ask you for a few closing comments before we direct investors for their feedback. Yeah. So, yeah, thank you for listening. It's this is the first announcement that we've had a quarterly update.

28:09 On quarterly updates, we don't discuss the the bottom line earnings. It it is just about it's a general trading update, how is the portfolio growth, but it's the first opportunity we've had since we announced management changes to tell the market what we've done on the volatility side, what we've done with capital, what we are doing. We've announced a share buyback, and And we're able to announce the top line growth. So today has been, well, a good day for us, I think, the management team. I'm delighted to be in my new post. Really excited about that. And I think that's it. So thank you very much for joining.

28:57 Fantastic. Neil, Lane, Nick, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of CONDUIT HOLDINGS LIMITED, we would like to thank you for attending today's presentation, and good afternoon to you all.