Conduit Holdings (LSE:CRE) — Q3 Trading Update

0:01 Good afternoon, and welcome to the CONDUIT HOLDINGS LIMITED Q3 Trading Update. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time via the Q and A tab that's situated in the right hand corner of your screen. Just simply type in your questions. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Neil.

0:28 Good afternoon to you, sir. Hi there, and good afternoon. I'd like to spend just two or three minutes introducing the company, why we started it, then I'll hand over to the team to go through the slides. I've known Trevor since the early eighties. I I was a reinsurance broker at a company called Benfields, which is now part of Aon. Trevor, back in the day, was at a company called Folksam, then went through GE. During our lifetime, we've seen three or four insurance cycles, and people that start companies at the right part of an insurance cycle tend to make a lot of money. A very key part of our life was the the tragic events around World Trade Center nine eleven.

1:18 And Trevor became one of the founding underwriters at Arch Re, which has been the most fantastic stock to own over its twenty two year life. I was at Brit at the time. We founded Brit in '95. After World Trade Center, we raised a fair amount of money, and Brit went on to become a 1,300,000,000. It's, I think, the second largest insurer in Lloyd's today. The cycles were very strong in the early to mid two thousands, peaking in about 2012. Lots of people made a lot of money. The market then softened, and the cycle will never die. We're not cycle deniers in any way. Mark market softened, and we were aware that lots of people were losing money around two thousand sixteen, seventeen, and eighteen.

2:09 And we fortuitously met and thought we would put together a new vehicle, go off and raise a billion dollars of capital. And so we proceeded to set around the fundraise, which we finished up IPOing during COVID, which was a fascinating experience for all sorts of reasons. But we closed the deal on the 12/01/2020 in time for the 01/01/2021 renewal season. We set out in the IPO document to get to a billion of income by year five. We have surpassed that figure in year three. 2023, we made just under a 20 ROE.

2:59 It does take time to ramp up a new business. There's so many things that have to happen, and you'll never work so hard as in the early years when you're establishing yourself. But we made a 20 ROE just short of last year. On an annualized basis, we made just shy of a 20 return in the first half.

3:20 We do write a substantial non CAT and quota share book, which means we will be impacted by small to medium sized events. Means that we have a lot less exposure to tail risk or what people would call super cat. But I'll hand over to the team now to go through the update, and, obviously, we'll be happy to take any general questions on the company at the end. But, Trevor, over to you. Thanks, Nesbitt, very much. Yeah. Next slide. Okay. So we've got a series of slides here which summarize the q three trading update that we just announced to the market.

4:06 I'll move through through these and pick out the pertinent points. And Lane, our CFO, will also comment on some of the financial aspects. So through the quarter and certainly through year to date, we still saw continued growth, measured growth as we refer to it. Gross premiums written of 957,300,000 through the year to date end of September, which, as the the slide says, took us through the 23 premium totals at that stage. We've seen good growth this year across the classes. Property, casualty, and specialty all growing. But as you can see from the slide, we've pulled this out before, 25.2% growth driven by property and specialty where, specifically, we have identified some time ago, and it's still the case that that's where very good opportunities lie and certainly where we skewed our capacity allocation when we're looking at business that flows into into CONDUIT.

5:09 Through the quarter, as we said here, it's an active period for the smaller and mid sized Nat Cat and large risk events. And what that means is through q three around the globe, there were a number of sizable and notice notable Nat Cat events and also some man made events. We participate in those. We share in those losses by virtue of writing quota share business, and we've reported that our involvement in those those large risk events and the mid sized NatCats is approximately 50,000,000. Come on to that a bit later. Following loss events of the third quarter, this under combined ratio was in the mid nineties on a year to date basis and through September 30.

6:01 And then third last point around the loss activity in the year to date, and this occurring in October, Harrison Milton, which was was the pretty well reported hurricane event in Florida that went through. At the time of Milton approaching landfall, it was feared to be of a much larger scale and size. As it turned out, it it was obviously a catastrophic event for that part of Florida, but not at the at the level that it was originally feared. Nonetheless nonetheless, loss events are being reported across the industry now, and estimates being put out there. And for us, we put out a loss in the range of thirty to fifty million dollars.

6:53 It's a loss estimate at this stage, which we'll keep under review. We set a range around it around the event. There's a lot of loss information still being provided by clients and by the original homeowners and, in a number of cases, business owners. And the loss range for us is in that 30 to $50,000,000 range, which is a range that compares reasonably favorably with what you probably will see with other companies in the market. Certainly, the range around this event is still quite large. It will become more certain as more information flows through. Rate change. We're still seeing good rate change in the portfolio. We report on our net of inflation year to date across the entire portfolio.

7:41 It was 1%. And as I say, that's after providing for inflation allowances. So that's the net impact of the positive sense for us after earning for inflation. Come on to this in a moment. We've got slides around property cash in specialty, but you can see the difference in rate change across the three different currencies. Final point. Since we started in 2021, we've seen an enormous amount of business. We've got a very strong capital base and very strong client relationships going back to which, I suppose, is a reflection of the length of time that we've been in the industry.

8:26 But the partners that we have on our on our books, we share across a number of lines, property cash, especially very often. Those partner clients that we have, we trade and transact with them across all three divisions. So next slide, I think. Slide showing the gross premium is written since q three twenty twenty one. So the year to date numbers, it shows the progression. It shows quite clearly where we've been growing over the four years of our iteration, the 285,000,000 q $3.21 through to the 950 7 now. And also, you can see where the growth is coming from. The dark patches, 536,000,000 of property and specialty at the top, 197,000,000.

9:19 It's big growth in those in the in the year to date, year over year. And as we've called that a number of times, that's very much where we see opportunities and the generally, the the larger, more attractive margins for us across the reinsurance landscape.

9:38 I'll come on to it in a moment as regards to individual classes, but it's property and especially where we've seen specific opportunities. Rate change on the on the right hand side, again, that's blended across property, casualty, and specialty. The 1% risk adjusted rate change is driven, as I said, after a claims after claims inflation has been provided for. And within that, we're showing the rate change, obviously, from an index of a 100% starting point in 2021. The reality has been there's been compounding increase this over a period of years. And, And, really, the market as a whole, if you think about it, really, from 2020 started to show material uplift in rates, but generally across the reinsurance landscape. So in the time that we've been transacting business, particularly the last four years, we've been benefiting from previous compounding increases.

10:37 And as we showed to this in this current quarter and this year to date, we're still showing a positive upward trend. And that's a good place to be deploying capital into. Next slide, please. Property. So similar slides, similar makeup around property. Again, you can see that 33% growth in premium over the year to date, year over year. The points that we're making down the bottom that Credit Shepherd is portfolio, including non cash and cat, and that's important to convey that across the entire portfolio, property, casualty, and specialty. Approximately, two thirds of the premiums that we transact are non cat related.

11:27 So business across property, casualty, and specialty tend to be much lower correlated with cat events. And indeed, they're often what would produce what we refer to as risk return as opposed to cap related return. And it's an important point in building diversified portfolio. In the property book, we do have strong elements of property risk which are not yet

11:55 exposed, And that's a theme that you'll see running through property, casualty, and specialty across these these three sides. 3% risk adjusted rate change. That's very much a rate change applied across the entire property portfolio. It's important to point out that we write a geographically spread book of business, and that rate change will be a blended output from various geographies around the world given the impact in The US over the course of the last couple of months with hurricane Elaine and then hurricane Milton in October,

12:38 you'll we we are expecting to see a significant rate change in the way that that business is presented to reinsurers over the course of the coming year. The losses that are deriving from areas of Europe, you have seen in the press, will also be producing commensurate rate changes on the back of those losses. Other areas where loss events have been more benign, loss will be showing much reduced risk adjusted rate change. So it's important to point out that 3% is a blended figure across the geography and the various lines of property business that we write. Next slide.

13:26 Casualty. So our third party business. Premium increase much lower in this class as we have been calling out really for some time that the casualty business for us is a great book of business that we've built up. We've got a great core

13:49 partnership list of clients that we work with. But cash to your business, we're still seeing parts of the market where inflation is still moving ahead quite strongly. In a number of cases, we in assessing the treaters that we're presented with, we don't feel that we're, in all cases, being rewarded for that or paid for that. So it causes us to have quite a high decline rate in casualty. So we're still adding to our portfolio for much more limited growth, and we're comfortable with that. Our approach on casualty is to deploy capital cautiously and in a measured way and in casualty for us across the different geographies, it's a a class of business that certainly we spend a lot of time researching, building up trends and patterns around aspects such as social inflation and underlying claims inflation.

14:48 Overall, after line for inflation, we're showing a slight negative downwards ticking rate, down 1% year to date. Overall, we view our book as still very rate adequate, so we like the margins that we are achieving on the cash to book in terms of where we're dialing the pricing on it. It obviously takes time to to develop through in terms of ultimate claims

15:14 to be settled and developed into the portfolio. But overall, really good book of business. We're there in the market. We look for opportunities and deploy when we can. Next slide. And then this is the final one around the individual classes, so specialty. Specialty covers a very broad range of classes in the industry generally. We transact a number of those. It's probably worth highlighting those that we are either minimally involved in or or we bought completely. We don't get involved in crop business primarily because it is highly correlated with natural barrels and cat events. Mortgage business, any form of life specialty, we don't get involved in. And we're very light in classes such as political risks. So classes of specialty insurance that would respond to political

16:15 or economic downturn is probably the best way to think about it. Trade credits and the like, we don't transact those classes. Maybe for those is that they are, again, or can be reasonably highly correlated with the asset side of the balance sheet. So we avoid those. But especially for us, covering classes such as marine energy, liability in those classes, political violence, terrorism, so events associated around terrorist acts around the world. Those are the sorts of classes that sit within our specialty portfolio. Overall, we've seen good growth, 39% to a $197,000,000 year to date, and we're still seeing areas of specialty that in spite of,

17:06 I suppose, years of the strategy market pre '21 somewhat languishing in the doldrums rate rate wise, since then, we certainly seen a good uptick across it. And overall, across across the classes that we deploy in, it's it's showing still good rate adequacy across the piece. Net of inflation, we're showing, say, the plus 1% in the quarter. And, again, inflation can be a significant part of the specialty book, and it's the fact that we track individually per class and very much actually across different geographies. So those are the three classes. Next slide, please.

17:52 So pass it to Lane for the comments around financial highlights. Thanks, Trevor. A lot of the numbers on this slide, Trevor's already spoken about. We're just gonna wrap them up after the the run through of the specific divisions. So gross premiums written for the year to date of $957,300,000, which is up 25.2% in the prior year. If you were following us at the half year, you would have noticed a higher growth at the half year. We did have a conversation at the half year about the fact that we had front loaded our business for

18:19 the year, and we expected that growth rate at the half year to soften a little bit until later on in the year, and that's happened. So front loading and 25% growth for the year to date, which is still very strong growth. And that translates into reinsurance revenue of $588,200,000 which is up 30.3 on the prior year. For those that aren't quite so familiar with IFRS 17, reinsurance revenue really represents under older accounting standards what gross premiums earned would have been less ceding commissions, and then a smaller adjustment for non distinct investment components. But it really follows the pattern that our gross premiums earned would have just a lower level given the ceding commission deduction. Another note there in the loss activity for the quarter, as Trevor's mentioned, no major events in the quarter, but there was a frequency of events in the small and kind of mid sized space.

19:14 None of those were individually significant to us, but we did feel it was appropriate to disclose the the accumulation of those events in in the quarter. So $50,000,000 across events in Canada and hurricanes in North America and and a few other kind of risk events in there as well. So we don't typically disclose full numbers at this point in the year, but we did feel important to disclose that number and give some context around events in the quarter. Next slide, please. On investments, reduction in yields in the quarter, so that gave us a good mark to market gain on there, plus generally a higher yielding portfolio given the way the rates have moved over the last number of years. So we generated a return of 3.4% for the quarter, which brings us to 4.9% for the year to date.

20:04 Book yield you see there is now 4.2% versus 3.5% at the same time in the prior year. We are still fairly short duration in our portfolio and maintaining our focus on high policy and high liquidity. Duration is at 2.5 just now, which is slightly higher than we have been as we went through the rate hike cycle, and that's versus three years in our reserves. So we we are kinda keeping those two numbers under review in terms of making sure that our duration on our asset and our liability side are are within a reasonable balance. And and as the rate hike cycle does reverse, we will end up increasing our duration of our assets just very slightly. Average credit quality there is double a, and and there is a pie chart there with the asset allocations. We can see the the asset categories there, and no real changes in those over the quarters.

20:58 And I'll hand that back now to the next slide, please, for whoever to wrap up. Right. I think so that concludes There was one summary slide. Yeah. That concludes the presentation that we have for today. If we can move into q and a. Yes. Of course. Thanks very much for your presentation. What I'll do is I'll just bring your camera back up in the room for the q and a. Ladies and gentlemen, please do continue to submit your questions, and you can do that just by using the q and a tab, which is situated on the top right hand corner of your screen. We have received a number of questions already throughout the session. And I'll start with the first question here which reads as follows.

21:47 How is your diversification strategy evolving to buffer against potential catastrophe events especially with increasing frequency of natural disasters? Okay. That's a simple outline question. The diversification strategy that we've employed from day one still holds true today. So in looking at the individual classes of business in the portfolio, we think of it as the provision that we we make for attritional losses, which are the day to day losses, then the large events, the one off, typically man made type events, and then the natural perils ones. Across the overall portfolio that we've got and that's been built up and developed through into the current year, The diversification has continued to act very much in our favor.

22:44 The quota share book, in particular, has large elements of non cat related premium in it. And across those geographies, particularly, that's still adding significant diversification to the portfolio's impact being impacted from large risk events and or natural. As the portfolio grows, typically, that tends to strengthen the diversification balancing item. That's, I suppose, largely driven by the law the law of large numbers to some extent. But the portfolio has currently very good diversification within it. The increased frequency that we've seen in the current quarter where we've pointed out the $50,000,000 around smaller Nat Cat and large man made risk losses is a situation of increased frequency around those particular types of events.

23:48 It's not it's not an additional concentration. It's really an increased frequency in the quarter. But overall, if you look at it in that larger time frame over a larger time frame, typically over the course of a year, the pattern pattern of of diversification that we are achieving is still very good within the portfolio. Perfect. Thanks very much. The next question here, are there plans to expand into new reinsurance lines or geographic markets? We're always alive to it. We receive a number of, if you like, offers from clients, typically clients that are already on the books, the multinational clients, where they're expanding into new territories. We are certainly cautious about underwriting contracts and increasing our profile in territories where the rule of law, should we say, and contract law particularly is on a different level to what we see in The US, Europe, or The UK.

24:54 So we receive a lot of offerings from territories, which on the face of it would certainly introduce diversification to the portfolio, but the point is for us at what cost and at what terms. In terms of a general comment where we are now, Europe, given the incidence of loss that's occurred there over the course of the last certainly, last year in the property world, so higher incidence of floods and storms in Europe. We are currently, should we say, under deployed in Europe. That's deliberate because of the level of pricing that we've seen there. It's not been that attractive to deploy into Europe.

25:41 You could see for us receiving increased number of submissions from parts of Europe. They're gonna be showing rate increases going forward into '25 that could well now move into our pricing hurdle, our pricing window. So that that could could be be an an area area where where I expect to see us perhaps deploy slightly more than we have done in in the current year. Perfect. Thanks very much. The next question here, how sustainable the growth rates in particularly in the property and specialty segments? It's a good question. The if you look where we've come from, there were some very large numbers to nature of the starting up business. Obviously, everything's new that you write in your first year. You then add new to your existing renewals.

26:31 And where we are now is there's a compounding impact of renewals that we're seeing on the on the books, renew through, and then we add new to it. What we are seeing is that that growth rate that you've seen well, two growth rates around property and specialty. It's not just about much in pure new. Renewals that we have on the books, come through renewal. And, typically, in contracts that we write, we have a percentage share. As examples of property contracts, we may have a 5% share on a contract with a a client. Client. We really like what that client's doing. It comes up for renewal. We can move that to a six or seven or 8%. You know, we you could increase that. So there's still some headroom to to lift those shares up with clients, certainly.

27:22 The rate pure rate, as a simple mathematical exercise, is trending down as we rely more on the new business and not pure pure new. But I think we still are expected to focus on property and specialty as the main areas for us. And I think, you know, we still got reasonably good designs on growing that portfolio going forward. Although, quite correctly, the absolute number that will trend down. Thanks very much, Trevor. Next question we've got here. Following the interim dividend, what is your approach to shareholder returns amidst growth and capital reinvestment needs? Yeah. We have a standard dividend policy that we've been following since we started. So matching interim final dividend, and there's nothing at this point that makes us want to change that policy.

28:12 We are very much still at the point of deploying the capital that we raised at IPO. So in the near term, it's more about putting that money to work and maintaining the dividend policy that we we have. That's great. Thanks very much, Elaine. And the last question we've got so far is you mentioned resilient pricing environment. What factors contribute to this outlook? As a general comment across the classes, it's twofold. One is the demand from clients. Obviously, demand, we all understand that. There is still enormous demand from clients for limits for protection. Property is an example. There was a a sort of an industry quoted or reported number that in 2022, across all of The US, the insurance companies who are our clients here, basically bought $22,000,000,000 more limit.

29:06 The current number for the '24 is rumored to be in the 9 to 10 range. Those those are industry figures, which they can't generally report it. So that demand has to find a home somewhere, and that is still underpinning pricing in the property space, particularly. On casualty, especially, it's more inflation driven. You know, we're still seeing signs of what you would refer to or refer to as social inflation, the tendency for juries, for example, to award in The States of nuclear type verdicts, the general approach to more litigious society. That's underpinning casualty pricing.

29:52 So for two different aspects, demanded on property, more inherently led by underlying inflation trends in casualty. That's what's driving these, you know, the demand for the product that we sell and really adds resilience to the pricing. Thank you. That's great. Thank you for answering those questions from investors. Of course, the company can review all the questions submitted today. We will publish those responses out on the Investor Meet company platform. But just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Neil, could I just ask you for a few closing comments? Yeah. So thank you for your time. And, I mean, my closing comments is that we are in the middle of an extremely hard reinsurance market.

30:40 This is demonstrated by the year to date growth of 25%. Markets are in generally a resilient and profitable position. This quarter, we have seen claims volatility, but I would in spite of that claim volatility for this particular quarter, I would still expect to see a satisfactory result at year end. And we're looking forward to the '25 renewal season, which is almost upon us, and we expect continued growth there. So thank you. Neil, Trevor, Elaine, thank you very much for the update today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

31:28 This will only take a few moments to complete. This time should be greatly valued by the company. On behalf of the management team at CONDUIT HOLDINGS LIMITED, we'd like to thank you for attending today's presentation, and good afternoon to you all.