Hamilton Insurance Group, Ltd. (NYSE:HG) Q1 2024 Earnings Call Transcript

Hamilton Insurance Group, Ltd. (NYSE:HG) Q1 2024 Earnings Call Transcript May 12, 2024

Hamilton Insurance Group, Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Hamilton Insurance Group Earnings Conference Call. As a reminder, this call is being webcast and will also be available for replay with links on the Hamilton Investor Relations website. I’d now like to turn the call over to John Levenson, Group Treasurer and Head of Investor Relations. Please go ahead.

John Levenson: Thank you, Operator, and welcome all to the Hamilton Insurance Group First Quarter 2024 Earnings Conference Call. The Hamilton executives leading today’s call are Pina Albo, Group Chief Executive Officer, and Craig Howie, Group Chief Financial Officer. We are also joined by other members of the Hamilton Management Team. Before we begin, please note that Hamilton financial disclosures, including our earnings release, include important disclosures regarding forward-looking statements. Management comments regarding potential future developments are subject to the risks and uncertainties as noted in these disclosures. Management may also refer to certain non-GAAP financial measures. These items are reconciled on our earnings release and financial supplement. With that, I turn the call over to Pina Albo, Hamilton CEO.

Pina Albo : Thank you, John, and hello everyone. Welcome to the First Quarter 2024 Conference Call for Hamilton Insurance Group Limited. Following our strong year end results in 2023, Hamilton kicked off 2024 with another great quarter, making these six quarters in a row of underwriting profitability. We had a combined ratio of 91.5%, net income of $157 million, an annualized ROE of 29.5%, book value growth of 7% from year end 2023, an AM Best ratings upgrade to A for our operating subsidiaries, Hamilton Re and Hamilton Insurance Designated Activity Company, and an agreed targeted share buyback. Let me start with our strong underwriting result, a result which was achieved against the backdrop of an active loss quarter for the industry, including natural catastrophes and what is being described as potentially one of the largest losses ever to hit the marine market, the collapse of the Francis Scott Key Baltimore Bridge in Baltimore.

I will come back to this point later, but for now, suffice it to say that we booked a conservative provision for this loss. We are exceptionally proud of the growth the team has accomplished in this favorable market environment across property, casualty, and specialty classes, and we look ahead, we are excited about the additional opportunities we expect to see with the benefit of our AM Best rating upgrade to A. Both of our segments and all three of our underwriting platforms, Hamilton Re, Hamilton Global Specialty, and Hamilton Select contributed to a notable increase in our top line this quarter. Our Bermuda segment, which houses Hamilton Re and Hamilton Re US, and its predominantly reinsurance business, grew top line by 38% for the quarter, with property as the largest contributor.

We leaned into this market, growing existing lines, and securing new business with existing clients, as well as retaining more risk on our balance sheet. As I mentioned on our last call, we have been complementing cat excess of loss capacity with a new property quota share offering and the take-up has been impressive. Casualty reinsurance was our second largest growth area. This follows on from the success we had on this class in 2023 as we continue to take advantage of this location in the market. We were able to increase our underweight casualty participation with targeted clients as underlying rates and commission terms improved. Our rating upgrade will be particularly beneficial for this class at this opportune time. We also wrote new specialty business at 1-1 in lines such as marine and energy and aviation.

This is business which we believe is well priced and well-structured following events in these lines over the last couple of years. Our International segment, which houses our Hamilton Global Specialty and Hamilton Select underwriting platforms and is predominantly specialty insurance business, grew 30% quarter-on-quarter. Hamilton Global Specialty, the largest contributor to International, grew significantly with specialty reinsurance posting the largest increase. Casualty insurance was a close second, with growth in professional indemnity offsetting some declines in cyber where the rate environment demands careful underwriting. With respect to professional lines, it is important to note that public company D&O, which, like cyber, is under rate pressure, is an area where we have limited exposure.

Property D&F, which largely consists of U.S. property E&S insurance business, and where we are still enjoying respectable rate increases, also contributed to our growth this quarter. As a reminder, House and Global Specialty houses our Lloyd’s underwriting operation. It is our largest platform by premium, and it is home to nearly half of our global staff. It is focused predominantly on specialty insurance and specialty reinsurance. Lloyd’s released its 2023 market results a few weeks ago reporting some of the best underwriting results in over a decade. Based on those results, Hamilton’s syndicate 4,000 remains in the enviable position of being amongst the syndicates with the highest profitability and lowest volatility over a 10-year period.

We have a great business at Lloyd’s and we continue to build on its track record of success. Hamilton Select is also part of our International segment. While we do not disclose specific results for this business, I am happy to report that Hamilton Select continued its strong growth trajectory achieving record submission flow while improving its combined ratio. We are very pleased with the company’s momentum and the reception it has received from our broking partners since we launched the platform in 2021. A credit to the strong team we have in place. A reminder Hamilton Select only writes casualty business, small to mid-size, hard to place accounts. The market environment is an important factor in our recent growth so I thought I would spend a few moments on this topic.

With another active Nat Cat quarter for the industry, a collapsed bridge, ongoing geopolitical tensions and concerns raised about the state of casualty reserves in the market, it is no surprise that the overall rate environment remains attractive across the vast majority of Hamilton’s business. While there is moderation in certain lines, this is from cumulative year-over-year rate increases and in other areas like casualty or certain specialty lines, conditions are improving because of the market dynamics I mentioned earlier. This is allowing us to step in or step up on business that complements our portfolio with better metrics. With respect to property cat reinsurance, while we have seen some additional appetite at the top end of programs, it is important to note that discipline remains in the market when it comes to attachment points and terms and conditions.

Sticking to reinsurance, a few comments on the recent and upcoming renewals. The 4-1 renewals were predictable on the property side. 4-1 is a Japan-heavy property cat renewal period where no additional limits were purchased. There was increased capacity at the top end of programs, which resulted in modest downward pressure on rate. The pricing was still attractive, and again, the structures benefited from the market discipline. For casualty and specialty business that renewed this quarter, we have the opportunity to increase line sizes with select clients at attractive terms because of market dislocation. As we head into 6-1 and 7-1 renewals, which are largely property driven, we expect increased demand by key clients, and we also expect underwriting discipline to prevail.

We are fortunate to have made good decisions over the past five years, staying close to clients and brokers, being clear about appetite, leaning in and out consistent with market conditions, and expanding our product offering along the way. We, therefore find ourselves in the opportune position of being able to grow at the right time and in the right lines. Following on double-digit growth that we achieved in 2023, all three of our underwriting platforms continue to see a healthy flow of business. Based on the positive feedback we have already received about our rating upgrade from clients and brokers, we expect this flow to accelerate, particularly for reinsurance business. Consistent with our culture, we will continue to grow our footprint in a disciplined manner, deploying capital where we see the best returns and in the context of maintaining a balanced portfolio.

Turning to net income, Hamilton again had meaningful contributions from both sides of the balance sheet, with strong underwriting income of $33 million and outstanding investment income of $148 million driven by the Two Sigma Hamilton Fund. As mentioned earlier, our results include a $38 million provision for the Baltimore bridge collapse, a reserve provision that we consider to be conservative. While there are considerable uncertainties surrounding this loss, as mentioned earlier, many industry sources are forecasting it to become one of the most expensive marine losses in history, with published industry loss estimates ranging from $1 billion to $3 billion. Consistent with our conservative approach to setting reserves, and in an effort to select our ultimate loss early on, just as we did with the Ukraine event, we decided to take our medicine upfront and post a reserve at the high end of the market estimated ranges.

While Craig will provide additional details shortly, for now, you should know that our exposure to this event, even at this prudent level, is completely in line with our expectations. As , we are a specialty focused insurance and reinsurance business, and we expect a loss of this magnitude to have a positive effect on the rating environment and provide opportunities going forward. Turning briefly to capital, the lockups for all pre-IPO investors expired two days ago on May 7th, with yesterday, May 8th, being the first trading day post expiry. In anticipation of this event, our board of directors authorized a targeted repurchase in the amount of $109.5 million to allow an investor who has been with us for over 10 years to fully exit the position.

Craig will provide more details on the numbers and implications of these actions. As always, our strong results for the quarter do not happen in a vacuum. They are a product of our outstanding global team, a team that was integral to our profitable growth trajectory for achieving our REITs and rating upgrade to A, and a team that will continue to manage the cycle while supporting our clients and brokers and being good stewards of capital. Craig, now over to you.

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Craig Howie : Thank you, Pina, and hello, everyone. Hamilton had an excellent start to the year, reporting strong investment returns, solid underwriting income, and record gross premiums written. For the first quarter of 2024, as Pina mentioned, Hamilton reported net income of $157 million, equal to $1.38 per diluted share, producing an annualized return on average equity of 29.5%. This compares to net income of $51 million, or $0.49 per share, and an annualized return on average equity of 12.2% in the first quarter of 2023. With those numbers as highlights, let me provide additional details around our underwriting and investment income components for the quarter, starting with underwriting results. Hamilton continues to grow in an impressive double-digit rate for the first quarter of 2024, gross premiums written increased to $722 million compared to $538 million this time last year, an increase of 34%.

This was a record revenue result for the group. Each of our three operating platforms, Hamilton Global Specialty, Hamilton Select, and Hamilton Re leaned into this favorable market to hit this record premium level. Please note this was achieved without the benefit of our recent AM Best rating upgrade to A, which will increase our business opportunities even further going forward. Underwriting income for the group was $33 million in the first quarter compared to underwriting income of $34 million in the first quarter last year. The group combined ratio was 91.5% compared to 87.9% in the first quarter of 2023. The increase was driven by a higher attrition loss ratio partially offset by a lower expense ratio. The current attritional loss ratio increased 8.1 points to compared to 49.1% in the prior period.

The increase was primarily driven by the Baltimore Bridge collapse, which contributed 9.8 points or $38 million to the current attritional loss ratio. Given our growing diversified book of business, and as you can see from our combined ratio of 91.5%, this event was clearly manageable and also within our risk tolerances. As Pina noted earlier, given the potential magnitude of the bridge event and consistent with our reserving philosophy, we chose to be conservative here, setting an ultimate loss estimate that corresponds with the higher end of the published range of industry estimates. As mentioned earlier, there are a number of uncertainties surrounding this loss. So for example, if the industry loss were closer to the middle of the range, our loss estimate would be approximately half of what we reported.

Again, this is consistent with our expectations for a loss of this nature. Don’t forget we are a specialty focused business and we expect a loss of this magnitude to have a positive effect on the rating environment going forward. We also had two large losses within our specialty class that impacted our quarter. The largest loss stems from satellites launched in 2022 and 2023, which drove unfavorable attritional prior period development of 3.1 points in the quarter, compared to 0.6 points of unfavorable development in the first quarter last year. While categorized as prior period development, the recognition of the satellite losses in this quarter was due to the timing of the damage becoming clear and being reported to insurers. As a general comment about our reserving approach, we tend to set reserves conservatively and early, and to be less inclined to react to favorable claims development until we feel confident in trends and patterns.

This quarter, we saw several lines showing benign claims activity, but generally chose to hold our reserve position rather than reacting in the quarter. There were no current year catastrophe losses in the first quarter, compared to $5.3 million or 1.8 points in the first quarter last year. The loss ratio was offset by 4.4 points of improvement in the expense ratio of 31.2% compared to 35.6% in the prior quarter. The decrease was driven by the growth in our premium base, the reversal of prior year bonus accruals, and performance-based fee income from our ILS platform, which offsets expenses. Next, let’s look at the results by segment. Let’s start with the International segment, which includes our specialty insurance businesses Hamilton Global Specialty and Hamilton Select.

International had an underwriting gain of $5 million and a combined ratio of 97.2% for the first quarter, compared to an underwriting gain of $16 million and a combined ratio of 89.1% in the first quarter last year. The increase in the combined ratio was primarily driven by our conservative loss estimate for the Baltimore Bridge collapse, which added 6.0 points to the attritional loss ratio. I will now turn to the Bermuda segment, which houses Hamilton Re and Hamilton Re US and which predominantly writes reinsurance business. Bermuda had an underwriting gain of $27 million and a combined ratio of 85.5% for the first quarter, compared to an underwriting gain of $18 million and an 86.9% combined ratio in the first quarter last year. The decrease in combined ratio was primarily related to having no catastrophe losses in 2024.

The Bermuda attrition loss ratio increased 10.3 points to 58.4%, compared to 48.1% in the prior period. This increase was primarily related to our loss estimate for the Baltimore Bridge collapse, which added 13.8 points to the attrition loss ratio. Now, turning to investment income. Total net investment income for the first quarter was $148 million, compared to investment income of $36 million in the first quarter of 2023. The fixed income portfolio, short-term investments in cash produced a gain of $5 million for the quarter, compared to a gain of $27 million in the first quarter of 2023. This includes the realized and unrealized gains and losses that Hamilton reports through net income as part of our trading investment portfolio. The fixed income portfolio had a return of 0.1% or $2 million, and a new money yield of 4.9% on investments purchased this quarter.

The duration of the portfolio was 3.3 years at March 31, 2024. The average yield to maturity on this portfolio was 4.9% compared to 4.5% at yearend 2023. The average credit quality of the portfolio remained strong at AA3. The Two Sigma Hamilton Fund produced a gain of $143 million and a net return of 8.3% for the first quarter. The latest estimate we have for the Two Sigma Hamilton Fund year-to-date performance is 9.0% through April 30, 2024. The Two Sigma Hamilton Fund made up about 44% of our total investments, including cash investments, at March 31. Next, I’m going to provide more details on the targeted repurchase of stock that Pina mentioned earlier. They have agreed a targeted share repurchase in the amount of $109.5 million from funds affiliated with Blackstone Alternative Solutions LLC.

This transaction allows them to fully exit an investment that was made over 10 years ago. The purchase price agreed in the directed share repurchase was $12 per common share, clearly an accretive transaction for Hamilton shareholders. This repurchase exhibits our belief in the value of our shares, given six quarters of strong underwriting results, our ability to lean into the favorable market environment and the benefits we expect of our recent AM Best rating upgrade. The targeted repurchase will be funded by our current excess capital with the source of funds being withdrawal from the Two Sigma Hamilton Funds. We regularly measure our level of capital against current and projected utilization, and at this point, opportunistically repurchasing shares at 60% of book value is a compelling use of our excess capital.

Our book value per share was $19.90 at March 31, 2024, up 7% compared to year end 2023. Hamilton will have about 102 million shares outstanding following the repurchase transaction. I would like to conclude my remarks with some comments on our strong balance sheet. Total assets were $7.3 billion at March 31, 2024, up 10% from $6.7 billion at year end 2023. Total investments in cash were $4.2 billion at March 31, an increase of 6% from $4 billion at year end 2023. Shareholders’ equity was $2.2 billion at the end of the first quarter, which was 8% increase from year end 2023. One concluding point on our balance sheet strength, AM Best mentioned our very strong balance sheet, our conservative reserving, and over five years of net favorable reserve development as reasons for our recent rate upgrade.

Thank you. And with that, we’ll open up the call for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Elyse Greenspan.

Elyse Greenspan: Hi, thanks. Good morning. Maybe starting on the growth side of things. I think both of you guys in your prepared remarks just touched on the potential implications of the S&P upgrade and it sounds like you were really kind of flagging casualty reinsurance as some potential opportunities. Could you just give us a sense of just magnitude of additional premiums and how you’re thinking of these opportunities in terms of timeline potentially coming on to the platform?

Pina Albo: Sure, Elyse. I’ll take that, and thanks for the question. We are incredibly pleased with the growth that we achieved this quarter following last year’s double-digit growth. Just at the outset we saw growth across all three platforms and also across property casualty and specialty. In Q1, property led the way followed by specialty and casualty was third. You specifically asked about the rating upgrade and how we perceive that. I don’t want to put a number on that at this stage but what I can say is that we see great opportunity for us that have particularly at Hamilton Re on the reinsurance size and our ability to keep growing by leveraging the smaller line sizes that we have with clients that we’ve been building relationships with over several years.

Also by offering new products. This AM Best upgrade to A is going to open up a number of new classes of business for us and also allow us again to take those smaller line sizes that we have on casualty but also on some of the other classes to leverage those up but at the same time we are always going to be selective about the clients that we support and continue our culture of strong underwriting discipline. Does that answer your question?

Elyse Greenspan: Yes, that’s helpful and then my follow-up was just on some of the repurchase commentary, right. So I think you guys said, right, Craig, buying back at these levels is an attractive use of capital. So how do we think about potential open market repurchases and then also perhaps if there’s other shareholders, right, that might come forward and also want to monetize their stake. I’m just trying to understand, right, how you guys are going to use the fact that you have excess capital, you’re willing to buy back stock and kind of could you just help me bring it all together?

Craig Howie : Elyse, this is Craig. At the moment, the board authorized just this targeted share repurchase at the moment. So this was, again, a good opportunity for us to have a large investment exited in full from an initial shareholder that we had in the organization. We took that opportunity to be able to buy these shares back at a discount. This will be accretive to all Hamilton shareholders as it reduces our outstanding shares. It will improve our book value per share, our earnings per share, and our ROE. And you’ll see that in our financials going forward next quarter, starting next quarter.

Pina Albo: The only thing I would add, Elyse, is we’re trying to use any of the capital or excess capital that we have really to continue to grow into what’s a very favorable market environment. Of course, we will also continue to look at how we will be proper stewards of capital. And if we were to determine that we wish to purchase because we thought our shares are not valued, that is something that we would return to at a later date.

Operator: Our next question comes from the line of Tommy McJoynt.

Thomas McJoynt: Hey, good morning, guys. Thanks for taking my questions. I wanted to ask about the expense ratio. It certainly saw some nice improvement year-over-year. Wanted to get a sense if there was any sort of implications of the higher loss ratio that fed into the lower expense ratio, perhaps via profit ceding commissions or anything of that sort. Just want to get a sense of kind of what we can think about for the expense ratio going forward.

Craig Howie : Tommy, that’s a good question. So actually, no direct implication on the expense ratio. We saw some items that I had mentioned earlier in my script that were consequently happened during this quarter. For example, bonuses that were not paid, they were accrued at the end of last year, not paid in the first quarter of this year. So those reversals come through in the first quarter. We also saw some performance-based fee income that came in from our ILS platform that comes in, and we utilized that to offset expenses in the quarter. We don’t really plan for that performance-based income, fee income because it’s on a contingent basis. What we do plan for is the fee income on that IOS platform that’s based on assets under management. We have about $1 million of fee income that comes in each year.

Thomas McJoynt: Okay, got it, that’s helpful. And then switching over, the retention ratios, kind of the net to gross at both the International and Bermuda segments increased decently year-over-year. What do you anticipate for that net to gross ratio on written premium to be for each segment in 2024, if not on an absolute basis, perhaps just relative to last year at least?

Craig Howie : Yes, so what I would say to you is we expect to retain more of that business. As you know, we took in primary proceeds from the IPO. Last year, one way to utilize that was to grow our premium base. The other way to do that was to retain more of that business. So we do expect to retain more business this year than we have in the past. But at this point, I don’t want to put out a forecast other than that.

Operator: Our next question comes from the line of Matt Carletti.

Matthew Carletti: Yes. Thanks. Good morning. I just had a question on the accident year loss ratios. If we kind of attritional, if we take the bridge loss out, yes, they’re vary in line with Q1 last year, which was the low point of last year, and a few points below kind of where the year settled. How should we think about that? Is that — are there other moving pieces in there? Was it a late large loss quarter otherwise, or is that a pretty clean number or way to think about it as we think forward through this year?

Craig Howie : So what I would say to you, Matt, is certainly as we pick our normal loss picks for the year, we expect a certain level of losses in those picks. There are — this bridge loss certainly is a headline event, and as we see that loss come in as a separate loss, we certainly have to take a look and adjust that headline loss in those other loss selections. So as part of that loss, it gets absorbed into our attritional loss ratio. Otherwise, we’d be double counting the loss. What I would say to you from an overall basis, I would encourage you to look at the full year loss ratios. For example, at the end of 2023, that would be a normalized basis for our attritional loss ratio.

Operator: Our next question comes from the line of Bob Huang.