Conduit Holdings Limited (CRE) Earnings Call Transcript

Good day, everyone, and welcome to Conduit's Q3 2026 Trading Update Call. Thank you for joining us today. On the call are Neil Eckert, Chief Executive Officer; Stephen Postlewhite, Chief Underwriting Officer; and Alex Bateman, Chief Accounting Officer. Please note our disclaimer language on Slide 2. I will now turn the call over to our CEO, Neil Eckert.

Thanks, Brett, and welcome, everyone. As usual, with our trading updates, today's presentation focuses on our top line underwriting experience through the first 9 months of the year and our view of market conditions. I will start with the business highlights and an overview of our underwriting activity. Steve will then discuss our distribution and client engagement strategy, followed by performance and market conditions across our 3 segments. I will then cover the financial investment highlights before closing remarks and time for questions. I'm pleased with the execution of our strategy during the year as we have continued to manage the portfolio for softening market conditions and remain on track to hit our targets as we rebalance towards excess of loss business. Gross premiums written were nearly $1 billion for the first 9 months, down 3.8% compared with the same period last year, while reinsurance revenue increased 1.6% to $673.2 million. With risk-adjusted pricing down 6% across our portfolio, we will continue to deploy our capacity in classes where pricing remains stable or where we see strong margin opportunities. We have grown the share of excess of loss business in the portfolio, particularly within our Property segment. Based on the strong progress we have achieved, we expect excess of loss to represent approximately 40% of our Property segment premiums in 2026. This is consistent with our plans. Casualty pricing remains relatively stable, and we have continued to expand with preferred clients. Our rate growth in casualty has slowed as the year has progressed, following increased writings in the second half of 2025 and the first half of 2026. And we expect casualty growth to remain positive for the year. The first 9 months have been marked by relatively benign insured natural catastrophe losses compared to historical levels, including Atlantic hurricane season. However, we have continued to see an elevated frequency of losses impacting certain classes in the specialty market and more volatile investment markets due to rising interest rates. The change in treasury yields resulted in unrealized losses within our investment portfolio and our investment performance for the year is slightly negative despite continued growth in investment income. Our total managed investments and cash were GBP 2.3 billion at the end of September, approximately GBP 280 million or 14% higher than a year earlier. As a reminder, we generally hold our investments to maturity, and we expect to recover unrealized losses in our high-quality portfolio over time. During the third quarter, we paid our interim dividend, returning $28 million to shareholders. In the current environment, active capital management remains a priority for the Board and we intend to distribute excess capital to shareholders, in line with Conduit's capital management strategy. We have continued to attract talent to the organization and strengthen our personnel with new hires across several key functions. During the quarter, we welcomed Anthony Mongiello as Chief Operating Officer; Aaron Coates as Head of Property; and Mark Mitchell as Head of U.S. Property's. Lastly, we have completed our leadership succession planning and have announced that Christian Dunleavy, will be appointed CEO effective 1 of March 2027, and that Mark Pickering will be joining as CFO effective 30th of November this year. Christian and Mark are both highly regarded in the industry, and these appointments position Conduit with a strong leadership team to build on our progress and take the business forward. Turning to underwriting. Market softening is likely to persist as another relatively benign catastrophe year will support strong industry results and drive further growth in capital. Across our portfolio, risk-adjusted rates declined 6% during the first 9 months of 2026, net of inflation. It is important to note that despite the recent softening, rates remain approximately 11% above 2021 levels. Conditions vary across the market, frequency of losses and ongoing geopolitical instability could support pricing stabilization or increases in select specialty classes even as broader competition remains strong. Our underwriting strategy remains focused on protecting net margins and limiting volatility. The reduction in gross premiums reflects lower writings in Property & Specialty, partially offset by growth in casualty. We have continued to target excess of loss business, particularly in property, while reducing participation in business with more marginal expected returns. Despite the increase in excess of loss, we have also meaningfully reduced our model PMLs as we have strengthened our retro program during 2026. Maintaining a robust recession program remains a focus to managing underwriting volatility through the cycle. With that, I will hand over to Steve to discuss our client engagement strategy and performance across the 3 segments.

Thanks, Neil, and good morning, everyone. Before turning to the individual segments, I would like to briefly explain how our distribution and client engagement strategy supports our underwriting objectives. We have appetite and underwriting expertise to service clients across property, casualty and specialty classes. Our single office structure allows us to be nimble and for our underwriting team to collaborate to service our clients and brokers. Our aim is to create a more selective and partnership-led model to deepen our relationships with preferred clients and intermediaries. This approach is intended to build on existing relationships and improve our access to attractive high-margin opportunities while also supporting better portfolio diversification. Ultimately, our objectives are to improve the quality and resilience of the portfolio through the cycle, minimize execution risk and support long-term profitability. Turning to property. Gross premiums written were GBP 532.9 million for the first 9 months down approximately 10% compared to the same period last year. This reduction reflects the continued execution of our portfolio rebalancing. During the year, we have grown in higher margin excess of loss business while reducing quota share business where returns are more marginal. We expect our property excess of loss gross premiums to increase by approximately GBP 50 million during 2026. As Neil mentioned, we remain on track for excess of loss to represent approximately 40% of the property portfolio for the year, with further progress planned for 2027. Risk-adjusted rates declined 10% across our property portfolio during the first 9 months. The property market remains competitive with increased participation from both traditional and alternative capital. We expect the suffering to persist through the January renewals. There has been a modest increase in demand for additional limit, reflecting growth in exposures and model changes. Against this backdrop, we will continue to focus on business that best supports our acquired margin and diversification objectives. Turning to casualty. In our view, casualty continues to represent an attractive segment of the market, and we are happy with the growth in the portfolio over the last 2 years. We continue to focus on areas of the casualty market with more sustained pricing momentum. During the first 9 months, gross premiums written increased 8.9% to GBP 309.1 million. The rate of growth in casualty has slowed as increased writings in late 2025 and early 2026, drove stronger growth in the first half of the year. We have been successful in expanding our shares with preferred partners which will also add diversification by class and geography to the portfolio. Pricing in the market remains relatively stable with risk-adjusted rates down approximately 1% during the first 9 months, demonstrating the relative resilience of the casualty market. Conditions vary across classes and geographies that overall remain broadly consistent with our expectations. The general third-party liability class continues to see strongest original rate increases and has driven much of our growth in casualty. We have observed a moderate increase in competition while continuing to secure select new placements alongside our renewal portfolio. Our approach remains selective, deploying capacity where the client relationship pricing and portfolio characteristics align with our objectives. Turning to specialty. Market conditions generally remain competitive, but we are closely watching for any response to recent claims activity. There have been several very large losses impacting marine, aviation, some war-related classes, and we could see pricing begin to respond to the elevated claims activity. For the first 9 months, gross premiums written were GBP 157.9 million, down 3% compared with the prior year period. We have scaled back areas of our portfolio that do not meet our margin or return objectives, while also finding select cases for growth. Aviation has experienced more stable conditions and primary rate increases, and we have expanded our participation in this class. While overall market conditions have softened, the specialty segment remains highly diverse. Risk-adjusted rates were down 7% during the first 9 months. The diverse supply and characteristics of these classes continue to attract capacity in an otherwise softening market. Overall, our approach remains disciplined. We will continue to prioritize generating margin over growth and focus on opportunities where expected returns remain attractive. I will now hand back to Neil to cover the financial investment highlights and closing remarks.

Thanks, Steve. As you have heard, we are approaching the market cautiously as conditions soften. We wrote approximately GBP 1 billion of gross premiums during the first 9 months of 2026, down 3.8% compared to the prior year period. As Steve has outlined, this reflects reduction in property and specialty partially offset by growth in casualty. Reinsurance revenue of GBP 673.2 million for the first 9 months was up 1.6% and compared to the prior year. The growth in reinsurance revenue reflects the earnings pattern of prior written premium growth and the impact of writing more excess of loss business during the period. . Insured natural catastrophe activity has been relatively benign during the first 9 months of the year. Atlantic hurricane season was calm, with very few named storms and hurricanes compared to longer-term averages. However, we have continued to see an elevated frequency of loss impacting certain classes of the specialty market. Importantly, our loss estimates relative to previous reported events, including the Baltimore bridge and the Middle East remains stable. Turning to investments. Total managed investments and cash were $2.3 billion at the end of the quarter, approximately $280 million or 14% higher than a year earlier. That growth was achieved despite unrealized losses associated with the significant increase in treasury yields during 2026, and we have continued to be cash generative. Market yields increased over the course of the third quarter, particularly in September, which gave us the opportunity to invest cash flow at high yields. The book yield on our portfolio has increased modestly to 4.3% at September 30. The combination of a larger investment portfolio and higher reinvestment rates continues to support growth in net investment income. Our portfolio remains high quality with an average AA rating and our 2.9-year duration tracks our liability profile. Let me conclude with a few observations. Managing the cycle and strengthening our business remains our central focus. In the softening market, we are protecting our margins and controlling volatility by executing our portfolio rebalancing plans and maintaining a robust retrocessional program. We've been willing to come off business that no longer meets our return expectations while growing selectively in classes where pricing remains more stable. Our distribution and client engagement strategy aims to deepen our relationship with preferred partners to gain access to higher-margin business and improve our portfolio diversification across the cycle. We expect market conditions will broadly remain competitive in 2027, and we plan to continue to execute our fundamental underwriting strategy to manage the cycle. On the investment side, our strategy is unchanged, and we are benefiting from higher yielding opportunities in the market. We are investing cash flow above the current book yield on the portfolio, which will support our investment returns. Investment income is contributing meaningfully to our ROE. And with higher yields being added to the portfolio, we expect this dynamic to continue. Capital management remains a priority as we navigate softening market conditions. Our current share buyback program has approximately $46 million remaining, which is active until May 2027. We've been cautious returning additional capital during the Atlantic hurricane season, but during the third quarter, we paid an interim dividend of $0.18 per share, resulting in an accurate payment of $28 million. The Board intends to continue to distribute excess capital to shareholders, in line with Conduit capital management strategy. On the people side, we have continued to strengthen our team, adding talent and resources across the organization. Our leadership succession plans are on track, and Christian and Mark will be excellent executives to take Conduit into the next phase of its evolution and development. We have made significant progress this year, strengthening Conduit's portfolio, operations and talent. We remain confident in our strategy and approach in the current environment to focus on capital discipline and cycle management, which we believe will generate value for shareholders through the softening phase of the cycle. Thank you, and we can now open the call for questions.

[Operator Instructions] Our first question comes from the line of Michael Huttner with Berenberg.

I have 3. One is as you probably can't answer, it's not possible strategy. But what do you think the market is missing? So the stock is down and the results look very healthy, pricing looks solid given the market conditions. So just, I guess, in general overview, the second -- another very fair question. So we had premiums down 4%. And I know because you target margin, not volume, but can you give a feel for where do you think we might land at the end of this year that just a feel for it. And the last one, Steve, you very kindly explained the model -- partnership model. How far are we down this road at the moment?

Right. Let me start off on what is the market missing? I think possibly the market is focused on top line, which -- that's great. We're focused on NTA growth, and we're focused on margin, and we're focused on managing ourselves during the cycle. And if there's a disconnect there that's fine. We are very committed to a strategy of doing what we think will build medium- to long-term value for the company. . On the premiums, Michael, you or -- correction or observation. We don't give guidance as to earnings forward premiums. It's down 4% now. And one would expect sort of not too much. I mean, the year is largely written, okay? By July the year is sort of set in stone. So there is a sort of trend, but I'm not going to give a number for the year-end. And the partnership, Steve, over to you.

Yes. So I mean we set out our approach on preferred partners, Michael. I mean the model is well embedded, one thing we have here is the entire underwriting team live and work on 1 floor of a building in Bermuda. And so I can pretty much reach out and touch all of the heads of each of the underwriting areas. So for us to be collaborative across client is something that's relatively easy for us to do compared to others who are much more disparate and so it's now a well-embedded model, I would say.

Our next question comes from the line of Bengamin Cohen with RBC Capital Markets.

I just had 2 questions. The first thing I wanted to -- I just want to come back on the opening remark that you made, which was that you remain on track to hit your targets. Does that mean that the business that's being written currently is on track to hit the sort of mid-teens ROE that you've spoken about historically? Or maybe you could just give a bit more context in terms of how you see targets on a medium-term view? And the second question I had, and I appreciate what you were saying about how much of the year has already been written. Was there any sort of seasonality or sort of multiyear effect that was impacting at Q3? And can you just remind us kind of what actually is left to be written in the fourth quarter of the year?

Sort of we have been clear that the aspiration is for cross cycle mid-teen ROE. One of the effects of this year is interest rate volatility and unrealized mark-to-market losses under normal investment conditions and I'm being really careful not to give any guidance or forecast. This year would be satisfactory, you'd be aware of analysts' forecast. . In terms of target, what we said was that the rebalancing of the excess of loss account was on target and would reach 40%. We have a conviction that there's high margin in excess of loss than the quota share book. We have been prudent on what we've done on the QS side. As I said previously, the year is largely written. So it's just more of the same towards year-end. But hopefully, I've covered your questions.

Our next question comes from the lot of Ivan Bokhmat with Barclays.

I've got 3 questions, please. Maybe the first 1 is, as we think about the higher claims and specialty that you have flagged, I mean your slides do suggest that there is no large individual events that impact you this year. But if we had to put the increased claims frequency in specialty or second half with the benign nat cat and how do these compare? Are we still at net benefit situation? My second question, I think it's related to the some of the premium adjustments that I think your statements have mentioned. Could you outline how material this is? I presume this is on your quota share contracts what your seasons have told you and then you true up now. Is it something that will carry on into 2027? And my final question is regarding the start of the new CFO and perhaps the timing of the annual reserve reviews across your business. Can you share anything about the how the process works? Are you done with that process already for this year? Or is it something that you still anticipate going through over the next few months?

Right. So the higher claims in specialty, what I can reference is the Baltimore bridge during this year has gone from GBP 1.3 billion to about GBP 2.7 billion, and we would be reserving or carrying that much higher. That has not impacted us because we have reinsurance in place. Ukraine is a loss of settling in the market. There have been some significant aviation and some significant specialty energy claims that has been war losses in the Gulf. Once again, nothing individually or in the aggregate that Merit reporting. There's been PBT probably an estimate of GBP 4 billion on PBT, GBP 4 billion plus. . Once again, sort of nothing that we would currently reference individually or in the aggregate, but that leads us to suspect that, that market, especially the Baltimore Bridge, it's the largest marine liability claim in history. These losses in my view will be having an effect in the market. So hence, the comments we've made. The premium adjustments, when rates are softening then you will -- when you write a share piece of business, you have an income forecast, and that income forecast will be affected. We do on looking forward, the job of the underwriter is just to estimate the rates are softening and factor that into estimates and income. So I believe that we can manage those adjustments on a forward basis. As it relates to the annual reserve process, probably one of the key reserving meetings is as we move towards year-end because obviously, Q3, we don't print a result. Q4 is our finals. So the reserve meetings are up and coming for Q4. We have a significant risk adjustment, which we announced at the half year at $140 million. So that's about $0.90 a share, we've always been fairly cautious on the way that we treat our casualty book. So I would make a virtue of the strength of our balance sheet. And I would also add that on a constant basis, there is a third-party review process, our independent actuary is Willis Towers Watson, and they have a view, and then there's the management view, which I've just said is GBP 140 million in excess of actuary or best estimate. So hopefully, I've covered those points.

Our next question comes from the line of Abid Hussain with Panmure Liberum.

I've got a couple of questions. The first 1 is on margins. I was just wondering if you could talk to how the margins might be tracking through the quarter. I know you don't sort of typically give that color, but just an indication of -- are you more negative or more positive than you went into the quarter? I think it would just be helpful today just to give us a sense of directionally at least? And then the second question is on the excess of loss growth, could you talk to the difference in the premium base on excess of loss versus quota share? And whether you think that's part of the disconnect that the market is working through this morning.

Right. So in terms of margin tracking, so on the book, Abid, is largely written for the year. The 1/1 is a big season, 1/4 is Japan, 5, 6, 7 is the U.S. cash in more spread, but in effect, the -- on the excess of loss account, you will get a multiple of expected loss probability. Very often -- in fact, virtually all cases where in excess of loss contract is written, it's written to a margin. And it is that EL multiple that there is at the bottom of the program, it might be slightly lower. At the top of the program, it's slightly higher. But we have visibility and we track that year-on-year. We have never posted quarterly updates on margin within the account, but we know that and it's part of our business planning process. And the same with quota share. You write to 1/1, it is priced, you are tracking it, but we do not give quarterly updates. On the premium base, versus quota share, I'm not 100% certain, I mean, what we've said is that the property book will be at 40% of the excess of loss as a percentage of the overall property book. And we have given a breakdown of excess of loss QS and QS on XL, which I'm hoping is one of the achievements over the last 18 months is to successfully rebalance. And that is still a work in progress. At the time we did it, and I think it was met with some cynicism. We said we'd rebalance and we would work over time towards at 50-50, and we are on track for that. So hopefully, that covers those points.

Our next question comes from the line of Joseph Theuns from Autonomous.