International General Insurance Holdings Ltd. Q2 FY2022 Earnings Call

Good day, and welcome to the International General Insurance Holdings Ltd.'s Second Quarter and Half Year 2022 Financial Results Conference Call. All participants are in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Robin Sidders, Head of Investor Relations. Please, go ahead.

Thank you, Robin and good day, everyone. Thank you for joining us on today's call. On the back of our strong start in the first quarter of 2022, IGI continues to perform well with another set of excellent results, recording records for the second quarter and first half of 2022. Our six-month combined ratio of 33.5% and core operating return on average shareholders' equity of 26.8% demonstrate how our strategy and execution capabilities are driving continued high-quality returns and shareholder value as we look at our success over a long-term period. While one or two quarters may stand out compared to others, we are solely focused on our ability to perform well over a sustained period of time. Over the past 10 years, we have achieved an average combined ratio of 80% and a core operating return on average equity of more than 11%. This is an impressive track record of earning stability and cost efficiency. In our 20 years, we have grown significantly on every measure and we are continuing to grow at a steady pace. We are expanding our underwriting portfolio and our footprint into new lines of business and territories. We are offering new options and taking on new underwriting ventures. Waleed will talk more on this, but I would simply note that we are focused on measuring this growth in such a way that we maintain all those qualities that have helped drive our path and current success. We are achieving and implementing the measures across the company to ensure that we have the right infrastructure and the right people to support all these changes. In a moment, I will hand over to Waleed to discuss our results in more detail and our outlook of the market and the specifics of the opportunities ahead of us. The market conditions remain favorable and we continue to see attractive rate increases across a number of business lines and territories, and we see excellent opportunities to expand our portfolio. We have noted in prior quarters that the pace of rate increases is declining, but we are still achieving meaningful increases across most of the lines we operate in, and we are exactly where we need to be to continue benefiting from the momentum for the foreseeable future. Clearly, we are operating in an increasingly challenging environment where elevated inflationary pressures, rising interest rates, and broader economic pressures pose challenges to our business. So while we are very focused on what's going on inside IGI, we are equally focused on our ability to navigate these challenges. Staying successful means having the right people with the right experience and the right level of focus and discipline to manage through any scenario and deliver on the promises we make. This is what we have at IGI, and I'm confident that we will see the results and continue delivering the quality of results that we have been demonstrating. We are very optimistic about our future and our continued commitment to creating value.

Thank you, Wasef, and thanks all for joining us today. I'm going to take a slightly different approach this quarter and focus more on what's going on inside IGI, and also what we're seeing in the market and the opportunities ahead. Just a few comments on the results to begin with. As Wasef said, the results for the second quarter and half-year are very strong. We recorded solid profitable growth in all areas of the business, and we are continuing to make excellent progress in identifying new diversified opportunities. Our six-month combined ratio of 73.5% is particularly strong, building on the 72.2% we recorded in the first quarter of the year. This includes about 12.6 points of favorable developments. While the half-year result is exceptional, as Wasef mentioned, we do look at our performance over a longer-term period rather than specific quarters or years. Another item of note in our results this quarter, as well as in prior quarters, is the balance sheet impact of foreign currency exchange movements, driven by the continued strengthening of the US dollar. For the second quarter and first six months, this impact was a negative $9.2 million and negative $12.7 million respectively. It's important to understand where this is having the most impact for us and what we're doing about it. Where currency impacts one side of our balance sheet, there is typically a corresponding impact elsewhere in our financials. We're continually monitoring currency movements on both sides of our balance sheet to better manage this volatility. As you know, our industry will always experience quarterly volatility in one form or another, and we've said this many times before, it's more indicative to look at the longer term trends. Clearly, there are broader social and financial challenges facing our industry today. With our 20-year history, IGI has been tested many times, and we have a history of adapting as and when we need to, and now is no different. Rising inflation, both social and financial, is impacting our business. We're monitoring this closely and have adjusted our views on pricing appropriately. We tend to take a conservative view with all aspects, given the complexity and inherent uncertainty in our industry. During the second quarter, we also made some adjustments to our asset allocation in our investment portfolio, including increasing our allocation to higher-rated bonds and managing the duration of the bond portfolio, which we brought down from an average of 3.9 years at the end of March to 3.5 years at the end of June. Additionally, we have increased our cash and short-term deposits to take advantage of more attractive returns. I'll say a few words about market conditions, our position in the market, and the outlook for the remainder of 2022 and beyond. We are now more than halfway through the year and all indications are trending in the right direction. Just elaborating on Wasef’s earlier remarks, we continue to see healthy rate movements across our portfolio. Cumulative net increases for the first six months of 2022 registered 11.3% in the long-tail lines and 4.3% in short-tail. The reinsurance portfolio continues to see moderate improvement of about 5%. It is probably fair to say that we are seeing more opportunities in short-tail lines than long-tail lines, as that landscape is becoming more competitive with new capacity in the markets we operate in, particularly in the UK. There has been no significant change in claims activity, but we are taking a cautious approach here. In our short-tail portfolio, we've increased line sizes in energy, engineering, and property where rates remain healthy and we are seeing good opportunities. We continue to see some very interesting opportunities in political violence, where there have recently been significant dislocations. The same goes for contingency business, which we began writing last year post-pandemic. In terms of geographic commentary, the US and Europe are both growth markets for us, and we expect to see further expansion in those regions during the remainder of the year and in 2023. In the US, as you're all aware, we are primarily writing energy and property business. We've more than doubled gross premiums through the first half. Similarly, in Europe, where our focus has primarily been on long-tail opportunities, especially Directors and Officers liability and Professional Indemnity, we've written close to $24 million of premium for the first half and expect steady growth going forward. We opened our European subsidiary in Malta last year in July to access this business directly in Europe. We recently announced that we have signed a letter of intent to acquire Energy Insurance Oslo, a Norwegian-based Managing General Agent. We have had an exclusive underwriting agency agreement with them since 2009, writing a portfolio mostly consisting of upstream energy and construction business. We expect this acquisition to be completed during the third quarter. This presents us with two opportunities: first, to expand the existing business that we’ve been underwriting for many years, and second, to leverage our relationships for further growth opportunities, not just in Norway but throughout the Scandinavian markets. This is an excellent example of the value of true partnerships and how IGI is benefiting from strong relationships with our partners. This relationship with EIO has been particularly beneficial to IGI for many years. The principles of EIO have built IGI's brand in Norway, especially in the energy sector, where we have a strong reputation and broad name recognition, and where their efforts have produced solid results for IGI and built a foundation we can now expand upon. We have also recently begun the process of establishing a stronger presence in Bermuda, where we moved our domicile in 2019 but have maintained a subsidiary underwriting entity for many years. With the new office in Hamilton, we expect to expand our reinsurance treaty business in the near term, and we'll provide more details on this later in the year. So it's fair to say we have a lot going on. What you are not seeing is all the work being done to manage our growth, maintain our momentum, manage our risk appetite, and ensure that we continue our track record of strong results. We speak about this regularly across our management teams. We've launched several initiatives and made a number of new hires in recent months across the company, not just in underwriting, but also in investment, IT, and operations. This all integrates effectively with our overall development. Our continued success heavily depends on the people and talent we can attract and retain at IGI. Our specialty insurance business requires experienced technical expertise, disciplined and strong leadership. We have that at IGI, and we are always working hard to ensure we maintain and improve it. We have good talent and a strong performance-based culture. We have proven our ability to manage growth, volatility, and the cyclicality of this business, and our track record demonstrates this. One last point before we open the call for questions: We began utilizing the new share repurchase authorization we announced in May. As of earlier this week, we had repurchased more than 335,000 common shares at an average price per share of $7.51, well below our June 30 stated book value of $8.64. We will continue to repurchase until we announce otherwise. Lastly, I would highlight the dividend announcements we made earlier this morning, reflecting the new dividend policy announced in May. Our commitment is to generate value for our shareholders through excellence in underwriting, growing our book value per share, and leveraging other capital initiatives. I will pause here, and we'll turn it over for questions now. Operator, we are ready to take the first question, please.

A couple of questions. The first two are sort of numbers questions. It looked like the tax rate in the quarter was actually negative. Was there some sort of a benefit or kind of a one-time item or something in there that might have benefited that result?

I'll divert that question to Pervez. Pervez, do you want to address the tax rate?

The tax rate is applicable to our UK operation only. Our Bermuda operation does not pay any tax. The general tax rate for the UK is around 30%. I can get specific details later after checking with our UK operation. The reason it is negative is that we have a deferred tax asset for our Malta operation. So, this has turned negative because we recorded a loss in the first half, which resulted in us creating a deferred tax asset.

The second question I had related to some of the reserve releases in the quarter. It looked like those were primarily on the long-tail lines. Could you maybe talk about which lines were impacted and maybe which accident years?

The reserve releases from prior years are predominantly on the long-tail lines. We take a more cautious view, especially with long-tail business. I don't have specifics in front of me, but they are from the older accident years. Obviously, we keep the newer years reserved and do not adjust them until we feel more comfortable.

The other question I had, you commented about expanding the scope of the operations in the Bermuda subsidiary, and you mentioned reinsurance treaty business. Would that be mainly property-oriented or would it be casualty, or maybe both?

In the near term, it will likely be focused on property. It's going to be a small operation to begin with, and we'll provide more details later in the year. But as time goes by, the operation will likely grow based on the opportunities we identify.

And then the last question I had, you had commented at the beginning of your remarks on some of the rate increases. The rate increase in the short-tail lines of 4.3% is probably a little bit lower than what I've seen reported from some other similar companies. I was just wondering if you could elaborate on that a little bit more, we've seen other companies reporting mid and high single digits on some of those lines.

It all depends on the composition of the portfolio territorially, as well. Our property book, for example, is very diversified, and a small element of that is in the US. I would assume the others who have reported would be more weighted toward the US, whereas the US makes up about 10% or less of our overall portfolio. We are seeing different underlying market conditions globally. If you look at our US property portfolio, for example, we average rate increases of about just under 20%. Overall, as an average within the short-tail segment, that comes in at about 4%. So it depends on the weighting of your book, and we're seeing different conditions in various parts of the world.

That's definitely very helpful. Obviously, you're achieving good combined ratios on the rates you are receiving. I'll stop there and let some others have a chance. Thank you for all the answers.

It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you all for joining us today. We appreciate your continued support and we'll continue building on our successes so that we can continue to generate value for you in the future. If you have any additional questions, please contact Robin, and she will be happy to assist. Have a good day.

Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.