Shares in reinsurance specialist Conduit Holdings LON:CRE have done extremely well for investors since August. The stock has delivered over 42% in the last 12 months. It has rallied from a substantial decline last year and still has to reach the highs it was enjoying in 2021.
Conduit Re is a Bermuda-based pure play reinsurance business. It is a relatively young business, having only been launched in 2020. The reinsurance sector has long been an important part of the overall insurance market, as it helps insurers to diversify their risks by moving them onto the books of reinsurers. This helps insurers cover more risks in confidence that liabilities can be met.
Conduit Holdings, together with its subsidiaries, engages in the reinsurance business in the United States, Europe, and internationally. It underwrites property, casualty, and specialty reinsurance products comprising director’s liability and officer’s liability, financial institutions liability, general liability, medical malpractice, professional liability, transactional liability, aviation, energy, marine, political violence and terrorism, whole account, and ceded reinsurance products.
There still seems to be a lot of good news not fully priced into the stock. Conduit Holdings reported a big boost in net revenue for the fully year ending December 2022. Liabilities and equity stand out as the most significant drivers of Conduit’s balance sheet and the management team seem to have done an excellent job of balancing these. The company is measuring well on these key metrics against insurance sector peers.
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Why was Conduit Holdings stock punished so heavily last year?
Investors will be wondering why the stock sold off so heavily last year. This was due to an anticipated hit of USD 61m which came from a USD 24m loss in relation to the war in Ukraine including from aviation claims. There was also a net unrealised loss on investments of USD 54m reflecting a mark to market adjustment driven by expectations of rising interest rates. However, management also flagged last summer the opportunity for enhanced investment income going forward in a higher interest rate environment.
Conduit looks very well positioned for growth with a strong, unencumbered balance sheet with limited exposure to issues such as claims inflation on reserves. The reinsurance sector remains significantly capacity constrained which is driving strong demand for Conduit’s unencumbered capacity and its strong balance sheet.
“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,” said Neil Eckert, Executive Chairman of Conduit Holdings. “Conduit’s business model was constructed precisely for these circumstances. The continued hardening of the market provides Conduit with a substantial opportunity for profitable growth to build out the business.”
In its last trading statement Conduit Holdings said it had seen a 55% increase in estimated ultimate gross premiums for the nine months ending 30 September 2022, versus the same period the previous year. Also notable is the strong, legacy free balance sheet, which means it is well-placed to write additional business into a highly attractive market. The company is now seeing a strengthening renewal experience, has a high quality book of business, and an embedded pipeline of premium income.
