20.02.2025
Californian Wildfires, Hurricanes Helene and Milton, Baltimore Bridge – all have in the last year or so been disaster scenes for a major subsidiary of Conduit Holdings (LON:CRE).
So why should we even bother looking at this company and consider it as worthy of investment?
Simply because catastrophes drive business within the insurance industry.
The Business
Conduit Holdings is a Bermuda-based holding company, which through its subsidiary, Conduit Reinsurance, provides reinsurance products and services to its clients worldwide.
The £661m-capitalised company’s underwriting business is comprised of three segments: Property, Casualty, and Specialty.
The Property segment covers natural catastrophe and non-catastrophe risks on ‘an excess of loss’ and ‘proportional contract’ basis.
The natural catastrophe risk is written across both the United States and internationally on an ‘excess of loss’ and ‘capped quota share’ basis.
The Specialty segment has a diverse portfolio of business, including aviation, energy, engineering and construction, environmental, marine, renewables, political violence and terrorism, and whole account.
The company underwrites a balanced portfolio of casualty classes of business, comprised of both excess of loss and proportional contracts, on a worldwide basis.
Reinsurance
Like a bookmaker laying off his risks in any one race, reinsurance is basically insurance for insurance companies, being a way for a primary insurer to protect against unforeseen or extraordinary losses.
Reinsurance serves to limit liability on specific risks, to increase individual insurers' capacity, to share liability when losses overwhelm the primary insurer's resources,
and to help insurers stabilise their business in the face of the wide swings in profit and loss margins inherent in the insurance business.
In a reinsurance contract one insurance company charges a premium to indemnify another insurance company against all or part of the loss it may sustain under its policies, those contracts may cover a specific risk or a broad class of business.
Reinsurance is a global business its international nature reflects a further spreading of risk and access to broader capital markets to help cover losses.
The 2024 Final Results
Yesterday the group reported its Final Results for the year to end-December 2024, showing a 24.8% increase in gross premiums written to $1.16bn ($0.93bn).
The comprehensive income of $125.6m resulted in a 12.7% return on equity in a high catastrophe year.
It stated that deliberate and targeted growth was achieved across all three segments as the business continued to see attractive underwriting opportunities in its target classes.
The group noted that it was continuing to see the benefits of asset accumulation on the balance sheet: with net investment income of $65.0m (+57.4% on 2023).
Tangible net assets per share were $6.70 ($6.25).
Management Comment
Executive Chairman Neil Eckert stated that:
"On our IPO four years ago we set out with a target of delivering mid-teens ROEs and gross premiums written of $0.9 billion in year four.
Our premium in 2024 was $1.16 billion which is 30% above our IPO target, in addition we achieved a 12.7% ROE in a high industry loss year following on from a 22.0% ROE in 2023.
We can be proud of what this business has achieved and, with a strong capital base and a robust, efficient platform that is still in its growth phase, I am very excited for the future."
The Equity
There are some 165.24m shares in issue.
The larger holders include FIL Investment Advisors (10.00%), Aviva Investors Global Services (9.95%), Artemis Investment Management (6.14%), Janus Henderson Investors (5.01%), Conduit Employee Benefit Trust (5.00%), Aberforth Partners (4.50%), Odey Asset Management (4.03%), Harwood Capital (3.03%), JO Hambro Capital Management (2.83%), Ruffer (2.60%), FIL Investments International (2.50%), Chelverton Asset Management (1.82%) and Unicorn Asset Management (1.25%).
Broker’s View
At Panmure Liberum, its analyst Abid Hussain rates the group’s shares as a Buy, with a 630p Target Price.
For the current year to end-December his estimates are for Premiums of $1,277m ($1,162m), with pre-tax profits of $149.4m ($125.6m), generating earnings of 0.95c (0.80c) and paying out a maintained dividend of 0.36c per share.
For the 2026 year he looks for $1.350m premiums, some $219.6m profits, $1.40 earnings but still paying the maintained 0.36c per share dividend.
More ambitiously he foresees the 2027-year reporting $1,427m in premiums, $242.0m in profits, $1.54 earnings per share and a 0.36c dividend.
Hussain concludes that:
“Conduit Re is a pure-play reinsurer with readily available capital that it is deploying into favourable conditions for an attractive return on equity.
Unlike some peers, the returns do not need to be diverted to shore up legacy balance sheet issues, meaning these are available to deploy for growth and capital distributions.
We continue to expect favourable reinsurance market conditions over FY25E and beyond.”
My View
Catastrophes are big business for the insurance industry – and boy have they been very evident in the last few years.
But mitigating against losses caused by such mega-events is what drives higher premium incomes over time.
The way that reinsurance works, it is all total arithmetic, assessing costs and protections against disasters hitting personal, corporate, civil and even insurance company claims.
The group declares that its balance sheet remains very strong, giving it capacity for further growth.
Looking at the broker’s estimates, the shares of Conduit Holdings stand out to me as being incredibly lowly rated, they are currently trading at 400p, which offers substantial upside to the price,
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