Conduit Holdings Limited

Good morning and good afternoon, everyone. Welcome to the Conduitree first quarter of 2022 trading update call. Please note the disclaimer on page two. And with this, I give the floor to Neil Eckert, chairman of Conduitree, who is joining this call by Trevor Carvey, chief executive officer, Elaine Whelan, chief financial officer, and Greg Roberts, chief underwriting officer of Conduitree.

Thanks, Antonio. During the first quarter, the team have continued to do a great job. It's been a very, very busy quarter. The thing I really want to stress here is the support we continue to get from both our brokers and our clients, we punch above our weight. Gross premiums have more than doubled. More importantly, we've maintained the same sort of focused approach on selective underwriting. Elaine will then present key financials for the quarter, including the investment portfolio. This quarter has been affected by Ukraine and Trevor will cover that, hopefully highlighting the comprehensive and transparent approach that I think we have brought to investors. The market does remain attractive. We've faced a fascinating renewal season coming up, which the underwriters will talk about. And with this, I'll pass on to Trevor to update us.

Thanks, Neil. Yeah, just before moving on to the events of the Ukraine conflict, just want to point out as regards the... series of natural perils, cat events occurring during the quarter. We had a relatively low exposure to these loss events occurring predominantly in the international space, i.e. outside of the USA. Three of these industry events were Australian floods, Euro storms, and the Japanese earthquake. And all of these events currently look to be around or less than the $5 billion market loss apiece. So it's probably worth pointing out that Our current low risk profile to these events effectively makes us underweight and is largely driven by our view of general premium and rating levels in these regions. Greg can touch on that more in the underwriting section. Just so moving on to the Ukraine-Russia crisis, I think it's fair to say the team here at Condor has spent considerable time and effort over the last few weeks in evaluating the exposures. and the potential ultimate claims position for the somewhat limited number of treaties that we write and which are exposed to the event. We estimate our ultimate exposure in Ukraine and Russia to be between $15 million and $30 million, and that's net reinsurance and reinstatement premiums. And we put to net impact of 24.6, circa 25 million for the quarter. And that's across the classes, including those of aviation, war on land, sometimes referred to as political violence, and marine war. We just point out that this does reflect our ultimate estimate. of the loss to conduit and it should be remembered that given the typical structure of the reinsurance treaty contracts that we write here, which typically have event and or aggregate limitations in place, it's put us in the position of being able to arrive at the ultimate loss estimate for, as I've said, the relatively small number of contracts exposed to the crisis. In formulating the reserve estimates, they've been derived from a combination of metrics, predominantly one being updated exposure reports that you've had from clients on their insured values at risk in the region, market data, some ground-up loss assumptions, and then to a lesser degree, model loss projections. But we've been able to some significant updated information from our underlying clients, as I say, on the insured values at risk. I finally would remind the market that we're not a writer of trade credit or political risks, nor are we active in the cyber insurance space. And I think we'd be the first to admit that makes the task here more manageable in establishing the ultimate reserve position. I'm happy, obviously, to take further questions on this at the end of the presentation and pass it on to Greg for the underwriting update.

Thanks, Trevor. Morning, everyone. Moving on to slide five, we have here some narrative around pricing environment. And our point to make here is pricing remains attractive. And as the chart using Marsh's global insurance pricing index on the left-hand side, you can see although the rate is slowing by its increase at 11% in Q1 2022, we're certainly still in the midst of the best pricing environment we've seen for a very long time. And as for our pricing experience, we've continued to achieve risk-adjusted rate increases across our portfolio of property, casualty and specialty. Naturally inflation remains a key topic with our clients across all three of our divisions and we've achieved robust rate changes net of our view of inflation since the beginning of the year. As we move towards the renewals later on in the 2022 season, much of this will be dominated by what occurs with US cap renewals in the mid-year. And our teams will continue to execute the discipline and rigor that underscores our underwriting philosophy from the beginning, selecting business that meets our profitability and requirements. And you can see we have a table there detailing the net rate changes after inflation across property, casualty and specialism, giving us a weighted net of inflation rate change of 4.9%. Moving to slide six, we have here some graphics showing the growth of all three of our divisions, noting that at the portfolio level, we have grown 115% increase year on year. All three divisions showing growth compared to the first quarter of 2021. And as mentioned, our target markets remain attractive to us, particularly at the primary level. And you can see this in our product selection of quota share over excessive loss. The April renewals have confirmed our valuation and valued position among senior panels and in line with our IPO. And we've maintained a low NatCap profile with 70% of our premiums related for non-NatCap premium, which is a consistent measure from prior courses. As we approach the July renewals, we will closely be monitoring the evolution of the conditions in the North Atlantic windstorm region, and we'll continue to selectively provide capacity in line with our risk appetite and profitability requirements. With this, I'll pass over to Elaine.

Thanks, Greg. Greg and Trevor have touched on the pricing and growth aspects of our premiums. Our estimated ultimate premiums were up 49.1% quarter on quarter, As Greg mentioned, that translates to about 115% increase in gross premiums written relative to Q1 last year. This slide also gives the split of our estimated ultimate and our gross premiums written across quota share and excessive loss business. So for the first quarter of this year, we've again bound a higher proportion of quota share business relative to excessive loss. But with the deferred premium from last year coming through, And with our growth aspirations for this year, we expect our top line for 2022 to be at least in line with the original IPO plan. Around 20% of the gross premiums written for the quarter is deferred premium from quota share business written last year. That brings us to around 90% of written on last year's total estimated ultimate. And by the half year, we expect to have written around 95% of that and earned around 80%. Our acquisition cost ratio is currently running at a similar level to last year, given that higher proportion of share business. We do expect that ratio to reduce a little over the rest of the year, though. On the next slide, on investments, the dramatic increase in yields in the quarter has clearly had an impact on our portfolio. We had an unrealized loss of $32.6 million for the quarter, which drove the negative total return of 2.9%. The portfolio remains high quality and highly liquid. So we'll ride out the expected rate hikes and take advantage of the expected higher reinvestment rates as the portfolio turns over. And it's not on this slide, but just to confirm, we've got a US dollar focused portfolio. We've got no direct holdings in Russian investments in there. With that, I'll hand over to Neil for some final comments.

Okay, this slide, I don't intend to dwell on, but we wanted to put it into the presentation, which goes on to the website. It's a reminder of the attributes that Conduit provides to investors, a sort of restatement of our strategy. But moving on to slide 10, The final key message is that we have maintained our trajectory of growth. I'm proud of what's been going on with Trevor and his team, what they've achieved in the last 18 months. And it's not just on the underwriting, it's IT systems, it's the culture that we've built. The results for this quarter have been impacted by the conflict. and also mark-to-market loss linked to rising interest rates. But we're enthusiastic about the foundations we've put in place and the progress of Conduit Re in our industry. Our own premium recognition is building. This is sort of, we get closer and closer to pay dirt. We look forward to growing the book on the same basis, diversified and balanced in line with all the indications we gave at the IPO. This concludes the presentation. We can now move on to Q&A.

Okay, yeah, thanks very much. Yeah, so I put it on that as well. It was really just to understand better what needs to happen for the loss to be at the low end of your estimate and what have you assumed in terms of the loss at the high end at the $30 million. And the second related question was, what would need to happen for you to incur additional losses later in the year from this event, which I think you specify in the statement. Would this assume an escalation or would there be some other elements? Thank you.

Okay. All right. Thanks, Ben. And first of all, can I just apologize on behalf of the team and the technology challenges that we've had? Thank you for your patience. In terms of the range, the range that we've established, 15 to 30, the driver of that range is essentially the uncertainty around the aviation settlement, how it falls into the market. spread between the aviation or the airlines, all risks. That's a reasonably well-documented situation that's out there in the market. And what we've done is look at the relative review treaties that we've got covering the classes, including aviation, and from the clients established where that exposure sits. And what we have is contract limits in place. So at the upper end of our range is probably where you're going, Ben, What we've done is work through broadly the assumptions that the limits on those treaters are being maxed out or activated at the top end. So for us, we're very comfortable around the upper end of the range. And as I say, it's largely driven by the scenarios that are sitting underneath it between pretty driven around the aviation. As regards through the year, I think that's obviously a topic in the broader kind of discussion in the market around how long does the conflict evolve for, what's the duration. For us, we're less sensitive to that because of the limits that we have around our contracts, particularly with aggregation limits. So... for us, the range is more driven around, as I say, the makeup of the loss rather than being particularly sensitive to the length of time and the duration that it could potentially run for.

Thank you. If you want to ask a question.

Yes. Hi. Hi, everyone. And congratulations on a very strong quarter. Just a question on premiums. I was just trying to understand if the development of gross return versus ultimate is tracking in line with your expectations. Maybe it's just me, but it just seemed a bit lower than I had anticipated. So I was wondering if you had any comments there. And then secondly, I was wondering if you can share some thoughts on the underlying profitability of the book, excluding Russia, Ukraine and Akats and how is this developing? Thank you.

Yeah, hi. In terms of premium and how that's developing, it's really very much in line with what we expected. We expected to be about 80% written through last year, about 95% written through the half year of this year, and then almost fully written by the end of this year. And we expect that pattern to be similar for this year's underwriting year, ultimate premium as well. We could have talked before about where we expect the earnings to go, and we expect... off of last year's ultimate premium to be about 80% earned by the half year this year and 85% earned and then 90 to 95% earned by the end of this year. And again, we expect that pattern to hold true for the 22 underwriting year, a little bit of a change in business mix and type underlying type of business, but broadly the same. In terms of underlying profitability, I think, absent Ukraine, everything else is performing very much in line with our expectations.

Okay. Barry, do you want to go ahead with your questions?

Yes, thanks. Thanks, everybody. And good morning. I have three questions, if I may. First of all, I just wondered if you could give a rough split in respect to the Ukraine losses by line and geography. In particular, just to check that includes aviation losses and exposure in Russia. The second question I had was in respect to the 1st of April renewal season. Just wondered how that had gone and how you see the outlook for rates for the rest of 2022. And finally... You obviously seem to have avoided some of the larger CAT weather-related losses in Q1. Just wondered why that was. Thank you.

Okay, thanks Barry. Probably split that question up amongst three of us here. The first one on Ukraine and the makeup of the loss. The broad outline of it is that, you know, aviation is a component, but it's probably in our range of our probabilistic estimates between a third and a half. So depending on how the loss would fall in the underlying market. And in our range of 15 to 30, the aviation is a third to a half at the upper end. The classes embraced in there, we just confirmed, do include the political violence and the war on land, making up the balance, and also marine war. There's obviously an exposure to that within the marketplace. We again have relatively few contracts that could get triggered by that, but we have made a provision within the overall loss estimate, but it's very much a sort of minimal part of the overall. The majority is the political violence, foreign land and aviation.

have also had a look at classes outside of what's in the release there as well so there's a little bit in there in terms of any other kind of exposures we might have not not much but yeah so renewable energy you know a handful of contracts that have exposure to that so we've got a provision for the renewable engine a couple of comments on the on the underwriting for q1 uh

You know, thinking of April in particular, described as an orderly renewal season. You know, we saw risk adjusted rate increases across property, cash and specialty. On reflection, pricing hadn't really reflected any of the activity in Ukraine. So the drivers of Q1 were, you know, outstanding issues plus some of the cash activity occurring. Three kind of three major events we kind of monitor there being Australian floods, some European storm activity. And in fact, there was a Japanese earthquake of significance just prior to the Japanese renewals at the 1st of April. You know, all of these events. sort of largely around 5 billion industry loss, something like that I think generally is recognised. Specifically to your question on sort of how we look at Q1 on those cats, you know, our sort of risk profile, terms and conditions and the way we structure our risk appetite generally means we had a limited exposure to those sorts of events. We're aware of them. We see them in our portfolio, but we are, you know, reminding you of the sort of balanced nature of our portfolio. We are perhaps like less sensitive than others to some of those specific scenarios. And then just a comment, just thinking of more Ukraine and Russian conflicts, specific contracts. A lot of those are the first of April. And we saw a mixture there with the market in some element of dislocation, looking at a combination of renewals and extensions and changes in contract terms and conditions. And we sort of navigated our way through that.

That's great. Thanks so much.

Okay. Daryl?

Hi, everyone. Hope you're well. A few questions, please. So the first two, just going back to the war. I think you mentioned in your statement that you had some property treaties that were affected as well. Is this the political violence part that you're referring to? I guess where I'm coming from is that just in terms of the number that you've reported, it feels quite big based on the volume of specialty that you've written so far. I mean, were there any surprises in the loss exposures just based on how the treaties were underwritten? And then the second one on the war, in terms of the outward reinsurance programs that you have, could you speak to what kind of structures you have in place and does it overlap with some of the traditional net cap protections that you have? And the third question is just on inflation more generally. I mean, clearly it's a risk and it's top of mind at the moment. I'm just keen to hear how you're managing this, you know, especially through some of the quota share contracts. Is there a risk that some of your primary seedings are underpricing inflation and, you know, how are you managing that? Yep, that's my three for now. Thank you.

Okay, thanks very much. On the narrative that we've put in, the losses split between the property and the specialty, that's what it's driven from. The short answer is no, there weren't any major surprises on the property treaties that we have where the losses leaked in unexpectedly. We refer to property... in the sense that within our property account, we also cover some of the specialty classes. So the terrorism contracts, for instance, they've written some of those are within our property account, although in the broader definition of classes, it really is a specialty class. So no great surprises on the Inwards portfolio in terms of coverages that have been provided. On the Outwards Reinsurance, our Outwards programme that we've purchased is broadly split into two pillars, a non-NATCAT or man-made pillar, which is where a loss such as the Ukraine would reside, and then a natural perils catastrophe pillar, which sits alongside and then on top of. So we don't have a great degree to any extent of sharing coverage between the program. There is element of it, but it's not really material in this context. And so for us, as we go through the year, we feel we're in a pretty good place entering into the, let's call it the win season, in terms of the cover that remains. Although obviously we'll keep that under review as you'd expect us to do as the year evolves. Greg, do you just want to...

Yeah, quick comment on inflation. I mean, obviously we factor in inflation into our pricing models. You know, we gather a lot of information from our sedents and manage that into our sort of price picks. You know, particularly in casualty, it's, you know, it's how you rate casualty. You know, you price ahead of the underlying rise in claims inflation. where we don't see that occurring, we don't support that business simply because we're constantly updating our benchmarks and continually building our view of the market.

Thank you.

James, do you want to go with your question?

James is calling today for Philip Kett. Yeah. Hey, guys. Thanks for taking my question. So, yeah, the first one's also just on Ukraine. So there's been a fair bit of coverage, obviously, on aviation war policies, generally including a cancellation or exclusion clause, which tends to be around seven days, I believe. So just interested to get your take on that and how you think that might mitigate ultimate losses and whether you think those exclusions will hold. And then I guess on from that I suppose the timing of the loss trigger event will be quite important so I'm just quite interested to hear what your base case is with regards to that. Next question is just on rising interest rates. So just wondering how we should think about that in terms of bottom line impact over the next couple of years. So should we assume that higher reinvestment returns all drop to the bottom line or will some of those profits be passed on to customers in the form of lower pricing? Thank you.

Okay, thanks, James. Yes, good question on the mitigants of not just cancellation clauses, but also sanctions, the impact of sanctions clauses also have been referred to. In our work, we're not in a position to look through into our individual clients' behaviours or policy clauses that have been specifically activated or not. So when we've come up with our estimates, we've done that very much from a full basis. Any defenses which materialize and come through into the market and our clients achieve, if you like, would flow through to us. to less degrees, depending on whether it's credit share, whether it's excessive loss. But in the main, we're not in a position to make an allowance for those, so we haven't done so. That remains to be seen. And there are greater legal minds than myself in terms of the trigger and the timings that could be interpreted. It will depend on those underlying insurance policies in place and how indeed they are interpreted and debated over the coming months and possibly years.

on the interest rates. Yeah, I guess the short answer is we do expect that to come through in the investment portfolio. It's fairly short duration, so we will reinvest that. We've already seen our book yield creep up a little bit. It'll take a bit of time for that to happen, of course. In terms of how that factors into underwriting pricing, I would say it doesn't really. I'll let Greg take that one.

Yeah, I mean, ultimately it's not a factor in giving us variability in our risk appetite. You know, we're aware of, you know, cost of money, but essentially we are rating on exposure and expected claims performance.

That's very helpful.

Thank you. Andreas.

Yes, thank you. Good afternoon. Just had a question around your comments on one of your slides around the July renewals. You mentioned you're closely monitoring North America, windstorm exposures, particularly Florida. I just wanted to ask, what would it take for you to sort of expound your risk appetite in the Florida market, which is quite a difficult market to move into? And you also comment about there's supply shortages in the cat market and other geographic areas, where would you be looking to increase your risk appetite and will it be material? So will it have an impact on your PMLs? Thank you.

Thanks for the question. Yes, I think in July, we sort of made the point a few times now that we believe we are, you know, compared to some peer metrics underweight in areas like Florida. This isn't just about price. It's also about sort of structure and the element of risk transfer between students and reinsurers. And we probably, in the general, have looked for a better balance than has existed to this point. Looking forward, I do see signs of some capacity constraints, perhaps. It's a little early, but based on anecdotals, it certainly is looking to be a tougher renewal season than in the past. And perhaps price might not solve it, frankly. The way we've constructed our portfolio, balanced and diversified, we are a progressive builder of our portfolio, so we wouldn't likely change the texture of that very rapidly. But as the book grows as a whole, we are able to consider additional risk across the portfolio.

Okay, so thanks, everyone. It looks like we don't have other questions. Of course, I'm available and the rest of the team here. If you have follow-up questions, get in touch. We'll be very happy to answer them. Thank you very much for joining and have a nice day.