Conduit Holdings Limited 2022 Interim Results

RNS Number : 8398T

Conduit Holdings Limited

27 July 2022

 

Conduit Holdings Limited 2022 Interim Results Announcement

Conduit Holdings Limited ("CHL" or the "Group") (Ticker:CRE)

Pembroke, Bermuda - 27 July 2022

CHL is today announcing its interim results for the six months ended 30 June 2022.

Trevor Carvey, Group Chief Executive Officer, commented:

"We are seeing strong demand for our offering and we continue to take a highly selective approach to our underwriting in a market which is exhibiting increasingly strong fundamentals. The business is normalising, our combined ratio will be trending towards our target of mid-80s steady state and the business is in an excellent position to continue to capitalise in our chosen markets."

Underwriting - Strategically Well Balanced Portfolio

• Approximately 70% of the portfolio is non cat business - a key benefit of Conduit's focused and highly diversified approach

• Conduit's robust risk selection and contract structuring process means it has experienced relatively low levels of catastrophe losses in H1 despite higher than average levels of insured catastrophe losses in the market

• Weighting towards quota share business allows Conduit to participate in the significant price rises and improved terms and conditions experienced in the primary markets at this point in the cycle, whilst reducing volatility.

Financials - Headlines

• Estimated ultimate premiums written increased by 49% on H1 2021 to $496.7 million

• H1 comprehensive loss of $61.4 million after the impact of:

• $24.6 million estimated loss in relation to Ukraine (net of reinsurance and reinstatement premiums) including an estimate of the impact of potential aviation claims

• Net unrealised loss on investments of $54.3 million reflecting the mark to market adjustment driven by expectations of rising interest rates

• Potential to unwind over time: portfolio c. 92% fixed maturity with an average duration of 2.4 years and average credit quality of AA

• Opportunity for enhanced investment income going forward in a higher interest rate environment

• Interim dividend of $0.18 (approximately 15 pence) per common share declared

Momentum - Very Well Positioned for Growth

• Strong, legacy free, unencumbered balance sheet with limited exposure to issues such as claims inflation on reserves

• Market conditions remain strong with continuing rate increases and improvements in terms and conditions; 2022 year-to-date indicative renewal rate increase of 4% net of inflation

• Reinsurance market is significantly capacity constrained which is driving strong demand for Conduit's unencumbered capacity and strong balance sheet

• The business is still in a significant growth phase. As premiums continue to earn through to the income statement the impact of premiums ceded to reinsurers and other operating expenses will form a smaller component of the combined ratio

• 51 employees, one operating location benefiting from an open culture and a modern and efficient infrastructure

• Engaged with all major reinsurance broking houses, using management's long-term relationships to access high quality business

Neil Eckert, Executive Chairman today added:

"We have built a quality underwriting operation which is perfectly positioned at a time where there is a shortage of reinsurance capacity in the market - Conduit's business model was constructed for precisely these circumstances. The continued hardening of the market provides Conduit with a substantial opportunity for profitable growth to build out the business."

Trevor Carvey, Group Chief Executive Officer, added:

"Conduit has quickly built a reputation for underwriting discipline and focus, as well as great service. We have now passed $1 billion of ultimate premiums written since IPO and it is great to see the validation of our underwriting and approach."

Key financial metrics:

Financial highlights	Six months ended 30 June 2022 $m	Six months ended 30 June 2021 $m	Year on year change %
Estimated ultimate premiums written	496.7	333.1	49.1%
Gross premiums written	359.0	210.3	70.7%
Net premiums written	313.4	188.5	66.3%
Net premiums earned	210.0	47.7	340.3%
Underwriting profit	6.2	0.5	1,140.0%
Comprehensive loss	(61.4)	(12.4)	(395.2%)

Financial ratios	Six months ended 30 June 2022 %	Six months ended 30 June 2021 %	Year on year change %
Return on equity	(6.3)	(1.2)	(5.1%)
Net loss ratio	67.8	70.0	(2.2%)
Net acquisition expense ratio	29.3	28.9	0.4%
Other operating expense ratio	8.0	28.3	(20.3%)
Combined ratio	105.1	127.2	(22.1%)
Total investment return	(4.7)	0.1	(4.8%)

Business review

During the first half of 2022, Conduit Re continued to show growth across all segments thanks to improving rates and, primarily, to new business. Client count and submission numbers have increased in line with the Group's growth strategy. Rate change continues to be positive, outpacing inflation.

Underwriting activities

Our estimated ultimate premiums written for the six months ended 30 June 2022 and 30 June 2021 were as follows:

Segment	2022 $m	% of total	2021 $m	% of total	Year on year change %
Property	230.5	46.4%	157.0	47.1%	46.8%
Casualty	171.0	34.4%	115.2	34.6%	48.4%
Specialty	95.2	19.2%	60.9	18.3%	56.3%
Total	496.7	100.0%	333.1	100.0%	49.1%

Our gross premiums written for the six months ended 30 June 2022 and 30 June 2021 were as follows:

Segment	2022 $m	% of total	2021 $m	% of total	Year on year change %
Property	188.3	52.4%	129.5	61.6%	45.4%
Casualty	111.6	31.1%	44.1	21.0%	153.1%
Specialty	59.1	16.5%	36.7	17.4%	61.0%
Total	359.0	100.0%	210.3	100.0%	70.7%

The split of our estimated ultimate premiums written between quota share and excess of loss for the six months ended 30 June 2022 and 30 June 2021 were as follows:

Type of business	2022 $m	% of total	2021 $m	% of total
Quota share	354.8	71.4%	235.8	70.8%
Excess of loss	82.3	16.6%	38.9	11.7%
Quota share of excess of loss	59.6	12.0%	58.4	17.5%
Total	496.7	100.0%	333.1	100.0%

The split of our gross premiums written between quota share and excess of loss for the six months ended 30 June 2022 and 30 June 2021 were as follows:

Type of business	2022 $m	% of total	2021 $m	% of total
Quota share	232.9	64.9%	130.7	62.1%
Excess of loss	82.3	22.9%	38.8	18.5%
Quota share of excess of loss	43.8	12.2%	40.8	19.4%
Total	359.0	100.0%	210.3	100.0%

Both pricing and terms and conditions continue to improve in many of the markets we are targeting, particularly at the primary level, hence our focus has remained towards ground-up quota share business.

Pricing

The Group's overall indicative renewal price changes for 2022, net of inflation, were estimated to be:

Period / Segment	Property	Casualty	Specialty
Year to date	+7.8%	+1.4%	+2.4%

Ceded reinsurance premiums written

Ceded reinsurance premiums for the six months ended 30 June 2022 were $45.6 million compared to $21.8 million for the six months ended 30 June 2021. The increase in cost relative to the prior period reflects the growth in our inwards portfolio plus additional limits purchased.

Losses

Conduit has had minimal exposure to the natural catastrophe activity of the first quarter, or the large loss activity of the second quarter.

The most significant event of the year so far remains the Ukraine conflict. Conduit continues to have potential exposure to the crisis across its property and specialty books via war on land, marine war and aviation. There is significant uncertainty in estimating losses emanating from the Ukraine conflict, not least as it is an ongoing event. However, Conduit's previous guidance regarding loss expectations is unchanged. The estimated ultimate net impact, after reinsurance and reinstatement premiums, is $24.6 million, including for aviation-related claims. We have not received any loss notifications to date so our loss estimate continues to be derived from a combination of market data and ground-up assumptions, modelled loss projections and information from cedants. We will continue to keep these estimates under review while we await more detailed information and reporting from our cedants.

Our net loss ratio for the six months ended 30 June 2022 was 67.8% compared with 70.0% for the same period in 2021. Our ultimate loss estimates, net of reinsurance and reinstatement premiums, for the previously reported 2021 loss events remained relatively stable.

Investments

In line with our stated strategy, we continue to maintain our conservative approach to managing our invested assets with a strong emphasis on preserving capital and liquidity. Our strategy remains maintaining a short duration, highly creditworthy portfolio, with due consideration of the duration of our liabilities.

The Group recorded a loss of 4.7% on the investment portfolio for the six months ended 30 June 2022 (30 June 2021 - 0.1% gain) due primarily to rising treasury yields.

Net investment income, excluding realised and unrealised losses, was $6.4 million for the six months ended 30 June 2022 (30 June 2021 - $1.3 million). Total investment return, including net investment income, net realised gains and losses, and net change in unrealised gains and losses, was a loss of $50.0 million (30 June 2021 - $0.8 million gain).

The percentage split of the managed portfolio is as follows:

	30 June 2022	30 June 2021	31 Dec 2021
Fixed maturity securities	91.7%	88.8%	95.3%
Cash and cash equivalents	8.3%	11.2%	4.7%

Key investment portfolio statistics for our fixed maturities and managed cash were:

	30 June 2022	30 June 2021	31 Dec 2021
Duration	2.4 years	2.4 years	2.4 years
Credit Quality	AA	AA	AA-
Book yield	1.4%	0.8%	0.9%
Market yield	3.5%	0.8%	1.2%

ESG considerations are incorporated into our individual portfolio investment guidelines. We are in favour of ESG investments generally.

Other operating expenses and equity-based incentives

Other operating expenses were $16.7 million for the six months ended 30 June 2022 (30 June 2021 - $13.5 million), while our equity-based incentives expense was $0.7 million (30 June 2021 - $0.2 million).

Other operating expenses contributed 8.0% to the Group's combined ratio, lower than the same period of 2021 which contributed 28.3%. The prior year ratio was a reflection of our start up nature with earnings yet to mature but employment costs and technology platform development costs incurred upfront.

Capital and dividends

Total capital and tangible capital available to the Group was $0.89 billion at 30 June 2022 (30 June 2021 - $1.04 billion; 31 December 2021 - $0.98 billion).

Tangible net assets per share at 30 June 2022 were $5.39 (30 June 2021 - $6.29; 31 December 2021 - $5.93).

In December 2021, the Group commenced on-market purchases of CHL's shares under a share purchase programme announced on 29 December 2021, where shares may be repurchased pursuant to authority obtained at CHL's most recent annual general meeting. Shares repurchased to 30 June 2022 amounted to $3.2 million and will be held in treasury to meet future obligations under CHL's variable incentive schemes.

On 26 July 2022 the Group's Board of Directors declared an interim dividend of $0.18 (approximately 15 pence) per common share, resulting in an aggregate payment of $29.6 million. The dividend will be paid in pounds sterling on 9 September 2022 to shareholders of record on 19 August 2022 (the "Record Date") using the pound sterling / US dollar spot exchange rate at 12 noon BST on the Record Date.

Publication of unaudited condensed interim consolidated financial statements

The Group's unaudited condensed interim consolidated financial statements as at and for the six months ended 30 June 2022 have been published on the Conduit Re website.

Conference Call & Presentation

Conduit Holdings management will host a live analyst and investor call, including a question and answer session, on Wednesday, 27 July 2022 at 12.00 Noon UK time / 8.00 am Bermuda time.

The video conference will be available via MS Teams.

To join on your computer or mobile app copy and paste the following link into your browser:

https://tinyurl.com/mry9wf47

Or join by entering a meeting ID

Meeting ID: 369 822 100 701

Passcode: V4nvSJ

Or call in (audio only)

[phone],,416346374# United Kingdom, London

[phone],,416346374# Bermuda (Toll-free)

Phone Conference ID: 416 346 374#

An archive of the conference call will be available together with the presentation slides through the Investors section of CHL's website at www.conduitreinsurance.com from approximately 4:00 p.m. BST on 27 July 2022.

-END-

Media contacts

Haggie Partners - David Haggie, Caroline Klein

[phone]

[e-mail]

Investor relations and other enquiries:

[e-mail]

About Conduit Re

Conduit Re is a pure play global reinsurance business based in Bermuda. Conduit Reinsurance Limited is licensed by the Bermuda Monetary Authority as a Class 4 insurer. A.M. Best has assigned a Financial Strength Rating of A- (Excellent) and a Long-Term Issuer Credit Rating of a- (Excellent) to Conduit Reinsurance Limited. The outlook assigned to these ratings is stable.

Conduit Holdings Limited is the ultimate parent of Conduit Re and is listed on the London Stock Exchange (ticker : CRE).

Learn more about Conduit Re:

Website: https://conduitreinsurance.com/

LinkedIn: https://www.linkedin.com/company/conduit-re

Twitter: https://twitter.com/Conduit_Re

Additional Performance Measures (APMs)

The Group presents certain APMs to evaluate, monitor and manage the business and to aid readers' understanding of the Group financials and methodologies used. These are common measures used across the (re)insurance industry and allow the reader of the Group's financial reports to compare those with other companies in the (re)insurance industry. The APMs should be viewed as complementary to, rather than a substitute for, the figures prepared in accordance with IFRS. The Group's Audit Committee has evaluated the use of these APMs and reviewed their overall presentation to ensure that they were not given undue prominence. This information has not been audited.

Management believes the APMs included in the consolidated financial statements are important for understanding the Group's overall results of operations and may be helpful to investors and other interested parties who may benefit from having a consistent basis for comparison with other companies within the (re)insurance industry. However, these measures may not be comparable to similarly labelled measures used by companies inside or outside the (re)insurance industry. In addition, the information contained herein should not be viewed as superior to, or a substitute for, the measures determined in accordance with the accounting principles used by the Group for its audited consolidated financial statements or in accordance with IFRS.

Below are explanations, and associated calculations, of the APMs presented by the Group:

APM	Explanation	Calculation
Net loss ratio	Ratio of net losses and loss adjustment expenses expressed as a percentage of net premiums earned in a period.	Net losses and loss adjustment expenses / Net premiums earned
Net acquisition expense ratio	Ratio of net acquisition expenses charged by insurance brokers and other insurance intermediaries to the Group expressed as a percentage of net premiums earned in a period.	Net acquisition expenses / Net premiums earned
Other operating expense ratio	Ratio of other operating expenses expressed as a percentage of net premiums earned in a period.	Other operating expenses / Net premiums earned
Combined ratio	The sum of the net loss ratio, net acquisition expense ratio and other operating expense ratio. A combined ratio below 100% generally indicates profitable underwriting, whereas a combined ratio over 100% generally indicates unprofitable underwriting, each prior to the consideration of total net investment return.	Net loss ratio + Net acquisition expense ratio + Other operating expense ratio
Accident year loss ratio	Ratio of the net accident year ultimate liability revalued at the current balance sheet date expressed as a percentage of net premiums earned in a period.	Accident year net losses and loss adjustment expenses / Net premiums earned
Underwriting year loss ratio	Ratio of net losses and loss adjustment expenses of an underwriting year (or calendar year) expressed as a percentage of net premiums earned in a period.	Underwriting year net losses and loss adjustment expenses / Net premiums earned
Total net investment return	The Group's principal investment objective is to preserve capital and provide adequate liquidity to support the payment of losses and other liabilities. In light of this, the Group looks to generate an appropriate total net investment return. The Group bases its total net investment return on the sum of non-operating cash and cash equivalents and fixed maturity securities. Total net investment return is calculated daily and expressed as a percentage.	Net investment income + Net unrealised gains (losses) on investments + Net realised gains (losses) on investments / Non-operating cash and cash equivalents + Fixed maturity securities, at beginning of period
Return on equity	ROE enables the Group to compare itself against other peer companies in the immediate industry, it is also a key measure internally, and is integral in the performance-related pay determinations. ROE is calculated as the profit for the period divided by the adjusted opening total shareholders' equity.	Profit (loss) after tax for the period / Total shareholders' equity, at beginning of period
Total shareholder return	TSR allows the Group to compare itself against other public peer companies. TSR is calculated as the percentage change in common share price over a period, after adjustment for common share dividends.	Closing common share price - Opening common share price + Common share dividends during the period / Opening common share price
Dividend yield	Calculated by dividing the annual dividends per common share by the common share price on the last day of the given year and expressed as a percentage.	Annual dividends per common share / Closing common share price
Underwriting profit / loss	Profit or loss directly related to the underwriting activities of the Group.	Net premiums earned - net losses and loss adjustment expenses - net acquisition costs

Important Information

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "goals", "objective", "rewards", "expectations", "projects", "anticipates", "expects", "achieve", "intends", "tends", "on track", "well placed", "estimated", "projected", "may", "will", "aims", "could" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. Forward-looking statements include statements relating to the following: (i) future capital expenditures, expenses, revenues, pricing rate changes, terms and conditions, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, claims development, losses and future prospects; investment returns, gains and losses; and (ii) business and management strategies and the expansion and growth of CHL's operations.

Forward-looking statements may and often do differ materially from actual results. Forward-looking statements reflect CHL's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to CHL's business, results of operations, financial position, liquidity, prospects, growth and strategies. These risks, uncertainties and assumptions include, but are not limited to: the possibility of greater frequency or severity of claims and loss activity than CHL's underwriting, reserving or investment practices have anticipated; the reliability of catastrophe pricing, accumulation and estimated loss models; the actual development of losses and expenses impacting estimates for claims which arose as a result of recent loss activity such as the conflict in Ukraine, Hurricane Ida, and the European storms and floods in 2021; the impact of complex causation and coverage issues associated with attribution of losses to wind or flood damage or the conflict in Ukraine; unusual loss frequency or losses that are not modelled; the effectiveness of CHL's risk management and loss limitation methods, including to manage volatility; the development of CHL's technology platforms; a decline in Conduit Re's ratings with A.M. Best or other rating agencies; the impact that CHL's future operating results, capital position and ratings may have on the execution of CHL's business plan, capital management initiatives or dividends; CHL's ability to implement successfully its business plan and strategy during 'soft' as well as 'hard' markets; the premium rates which are available at the time of renewals within Conduit Re's targeted business lines; increased competition on the basis of pricing, capacity or coverage terms and the related demand and supply dynamics as contracts come up for renewal; the successful recruitment, retention and motivation of CHL's key management and the potential loss of key personnel; the credit environment for issuers of fixed maturity investments in CHL's portfolio, including those with ESG ratings; the impact of swings in market interest rates, currency exchange rates and securities prices; changes by central banks regarding the level of interest rates and the timing and extent of any such changes; the impact of inflation or deflation in relevant economies in which CHL operates; CHL becoming subject to income taxes in the United States or in the United Kingdom; and changes in insurance or tax laws or regulations in jurisdictions where CHL conducts business

Forward-looking statements speak only as of the date they are made. No representation or warranty is made that any forward-looking statement will come to pass. These forward-looking statements speak only as at the date of this announcement. CHL disclaims any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect actual results or any change in the assumptions, conditions or circumstances on which any such statements are based unless required to do so by law or regulation.

The Conduit Re indicative renewal price index measure is an internal methodology that management intends to use to track trends in premium rates of a portfolio of reinsurance contracts. The change measure reflects management's assessment of relative changes in price, terms, conditions and limits. The calculation involves a degree of judgement in relation to comparability of contracts and the assessment noted above, particularly in Conduit Re's initial years of underwriting. To enhance the methodology, management may revise the methodology and assumptions underlying the change measure, so the trends in premium rates reflected in the change measure may not be comparable over time. Consideration is only given to renewals of a comparable nature so it does not reflect every contract in the portfolio of Conduit Re's contracts. The future profitability of the portfolio of contracts within the change measure is dependent upon many factors besides the trends in premium rates, including policy terms, conditions and wording.

Condensed interim consolidated statement of comprehensive loss (unaudited)

	Six months ended 30 June 2022	Six months ended 30 June 2021	Year ended 31 Dec 2021
	$m	$m	$m
Gross premiums written	359.0	210.3	378.8
Ceded reinsurance premiums	(45.6)	(21.8)	(32.6)
Net premiums written	313.4	188.5	346.2
Change in unearned premiums	(125.6)	(153.2)	(152.8)
Change in unearned premiums on premiums ceded	22.2	12.4	0.8
Net premiums earned	210.0	47.7	194.2
Net investment income	6.4	1.3	5.5
Net realised losses on investments	(2.1)	(0.4)	(1.0)
Net unrealised losses on investments	(54.3)	(0.1)	(7.6)
Net foreign exchange gains (losses)	0.2	-	(0.5)
Total net revenue	160.2	48.5	190.6
Insurance losses and loss adjustment expenses	157.9	33.4	191.0
Insurance losses and loss adjustment expenses recoverable	(15.6)	-	(48.9)
Net insurance losses	142.3	33.4	142.1
Insurance acquisition expenses	61.5	13.8	59.1
Equity-based incentives	0.7	0.2	0.3
Other operating expenses	16.7	13.5	30.6
Total expenses	221.2	60.9	232.1
Results of operating activities	(61.0)	(12.4)	(41.5)
Financing costs	(0.4)	-	(0.5)
Total comprehensive loss for the period	(61.4)	(12.4)	(42.0)
Loss per share
Basic and diluted	$(0.37)	$(0.08)	$(0.25)

Condensed interim consolidated balance sheet (unaudited)

	As at 30 June 2022	As at 30 June 2021	As at 31 Dec 2021
	$m	$m	$m
Assets
Cash and cash equivalents	92.0	130.9	67.5
Accrued interest receivable	4.0	3.2	3.7
Investments	952.7	939.9	1,008.4
Inwards premiums receivable	288.7	143.6	155.0
Reinsurance assets
- Unearned premiums on premiums ceded	23.0	12.4	0.8
- Reinsurance recoverable	64.5	-	48.9
- Other reinsurance receivables	0.3	-	0.3
Other assets	2.6	5.4	1.6
Right-of-use assets	2.4	-	2.9
Deferred acquisition expenses	73.1	40.2	44.6
Intangible assets	1.2	0.5	1.1
Total assets	1,504.5	1,276.1	1,334.8
Liabilities
Reinsurance contracts
- Losses and loss adjustment expenses	290.1	33.4	171.6
- Unearned premiums	278.4	153.2	152.8
- Other reinsurance payables	5.0	-	-
Amounts payable to reinsurers	34.4	15.6	7.3
Other payables	6.2	33.3	19.0
Lease liabilities	2.6	-	2.9
Total liabilities	616.7	235.5	353.6
Shareholders' equity
Share capital	1.7	1.7	1.7
Own shares	(3.2)	-	(0.2)
Other reserves	1,056.7	1,055.9	1,056.0
Dividends	(29.7)	-	(29.7)
Retained loss	(137.7)	(17.0)	(46.6)
Total shareholders' equity	887.8	1,040.6	981.2
Total liabilities and shareholders' equity	1,504.5	1,276.1	1,334.8

Condensed interim statement of consolidated cash flows (unaudited)

	Six months ended 30 June 2022	Six months ended 30 June 2021	Year ended 31 Dec 2021
	$m	$m	$m
Cash flows from (used in) operating activities
Comprehensive loss	(61.4)	(12.4)	(42.0)
Depreciation	0.7	-	0.1
Interest expense on lease liabilities	0.1	-	0.1
Net investment income	(7.0)	(1.3)	(6.2)
Net realised losses on investments	2.1	0.4	1.0
Net unrealised losses on investments	54.3	0.1	7.6
Net foreign exchange (gains) losses	(0.2)	(0.2)	0.3
Equity-based incentives	0.7	0.2	0.3
Change in operational assets and liabilities
- Reinsurance assets and liabilities	77.0	6.1	82.0
- Other assets and liabilities	(5.5)	0.1	5.5
Net cash flows from (used in) operating activities	60.8	(7.0)	48.7
Cash flows used in investing activities
Purchase of investments	(155.6)	(1,008.4)	(1,570.4)
Proceeds on sale and maturity of investments	143.5	90.5	558.9
Interest received	9.5	2.0	7.5
Purchase of intangible assets	(0.1)	(0.3)	(0.9)
Purchase of property, plant and equipment	-	-	(0.5)
Net cash flows used in investing activities	(2.7)	(916.2)	(1,005.4)
Cash flows used in financing activities
Lease liabilities paid	(0.3)	-	(0.1)
Dividends paid	(29.7)	-	(29.7)
Purchase of own shares	(3.0)	-	(0.2)
Net cash flows used in financing activities	(33.0)	-	(30.0)
Net increase (decrease) in cash and cash equivalents	25.1	(923.2)	(986.7)
Cash and cash equivalents at the beginning of the year	67.5	1,054.0	1,054.0
Effect of exchange rate fluctuations on cash and cash equivalents	(0.6)	0.1	0.2
Cash and cash equivalents at the end of the period	92.0	130.9	67.5

 

END

 

 

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