Conduit Re praised for first year tactics setting up strong second year growth

Upstart property, casualty and specialty reinsurer  Conduit Re proved its mettle during its cat-laden first year of operations, beating peers with a fractional underwriting loss and holding the course towards targets laid out at IPO just over one year ago, equity analysts said in chorus following publication of FY 2021 earnings.

Conduit's decision to pile into quota share exposures helped smooth earnings where rivals succumbed to volatility and set the company up to deliver stronger top and bottom-line growth moving forward, analysts claimed.

“The group's underwriting loss of just $7m compares favourably with other start-ups, largely due to management's decision to write more Quota Share contracts, the strength of the underwriting and the prudent purchasing of retrocession,” analysts at the Jeffries brokerage wrote in a note to clients.

The shift to a higher reliance on quota-share not only reduced nat cat exposure during what analysts call the fourth most costly year on record, it masked some of the profitability in the first year book: quota share takes higher acquisition costs and delays revenue recognition vis-à-vis XOL contracts, analysts noted.

A combined ratio at 119.4% “has more to do with revenue recognition than claims activity” and looks downright “modest” against the average combined ratio of 140% for Lloyd’s start-ups, Jeffries said.

Conduit piled into quota share, against the outlook from its initial strategy. Conduit ended 2021 with a quota share to XOL split of 64-36, well off from the company’s year-two plan of 48-52, the Q4 earnings report indicated.

Conduit’s position during a hardening market in 2022 further bolsters analyst ‘Buy’ recommendations.

The 2022 outlook “remains positive” given management views to pending rate expectations, analysts at the Berenberg investment house add. Rate hardening should prove beneficial, particularly for the June and July renewal dates as retrocession capacity continues to look blocked.

With January renewals already ahead of management expectations and despite naturally slowing growth through the upcoming renewals, Berenberg is forecasting heady 48% growth in total ultimate premium bound growth in FY2022.

Conduit’s decision to enhance the message with fresh guidance on profitability drew accolades and investors could appreciate the new transparency, analysts claimed.

“Given more clarity on the combined ratio and better visibility into the premium development, we think the uncertainty regarding future earnings is now lower,” Berenberg analysts wrote.

“Enhanced disclosures” and new outlook could constitute the “most important news,” far eclipsing a nominally red bottom line, Jeffries added.

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