Transcript
Speaker: I'm Martin King, financials analyst at Edison Investment Research, and I'll be speaking today with Adaraj Matra, who is CFO of Helios Underwriting. Adaraj, thank you for joining us. Could we start by you giving a brief overview of what Helios is?
Speaker: Of course, Martin. Good to see you. ah Helios Underwriting PLC gives shareholders access to Lloyds of London, which is the largest specialist insurance and reinsurance market in the world.
Speaker: And we do this by participating in syndicates at Lloyds. ah Currently, our portfolio has £467 million pounds of underwriting capacity spread across 37 syndicates.
Speaker: We are a lean company but with a very experienced board and management team with a strong network in the Lloyds and London market.
Speaker: This gives us access to the syndicates. ah Additionally, in the last three years we've also built in-house research and analytics capability.
Speaker: Together with our market experience, market knowledge and ah the in-house analytics, we curate our portfolio. A simple way to think about Helios is as an ETF of Deloitte's market,
Speaker: but a selective one. By backing the syndicates we believe are the strongest, we aim for consistent good returns. ah By ah maintaining a diverse portfolio, we reduce the volatility of those returns and lower the capital that we need to hold.
Speaker: And that has allowed us to outperform the Lloyds market on return on capital over the last 10 years. And can we talk about the role of insurance in an investor portfolio? It's ah it's an asset class that is somewhat different to the more traditional equities and bonds, I think.
Speaker: ah Yes, and for those who are not familiar with Lloyd's, ah it has ah it's a market that has strong rating and it's well regulated and has about 100 syndicates.
Speaker: Being part of Lloyd's gives a syndicate access to risks around the world, which means the market has ah exposure to a very large, very diverse pool of risk.
Speaker: And the returns are good too. um Lloyds has delivered ah an average annual return of 11.3% in the last 20 years.
Speaker: um and And the volatility of those returns are lower than ah the equity markets such as MSCI World. ah But there are two other interesting ah things about ah insurance as an asset class as well. so it has really low correlation with real estate and government bonds and some correlation with ah global equities, ah which definitely makes it a very good diversifier for an investor's portfolio.
Speaker: But the other thing worth noting is, um unlike equity markets, insurance benefits from rising interest rates. um So the best way to think about it is ah a pound of capital roughly gives exposure to £2 of premium.
Speaker: And that premium net of expense is invested by the syndicates before claims are paid. So the investor is benefiting not just from the underwriting result, but investment returns as well.
Speaker: And all of those reasons combined makes it a very good asset class for an investor. So it's ah ah the insurance market has had good returns. You've outperformed Lloyd's over the last 10 years. It's uncorrelated. It's a beneficiary of rising interest rates, but it is a cyclical market. Can you talk about the cycle, how you manage it and what that that means for investors?
Speaker: Good question. um In the last eight years, the rates have increased materially, um but they're coming off. As we look into the future, 2027 underwriting year, the rates are softening, but pricing is still adequate. And ah the way we deal at Helios with the underwriting cycle, yeah, you're absolutely right, it's cyclical.
Speaker: It is going to get harder to generate good underwriting results over the kind of next four to five years. however The best way to think about it is ah any syndicate benefits, ah profitability of any syndicate benefits from not just underwriting result, but the investment returns I mentioned earlier. And in the current environment, many of the syndicates are returning strong investment profits.
Speaker: The third aspect is there are many syndicates who have a very conservative reserving philosophy where they hold higher reserves in a hard market, i.e. now, and they release those reserves in a soft market to maintain a consistent result. And we are looking to back some of those syndicates so that the portfolio return is consistent through this I-Corp. You talked about it being a bit like ah an ETF, and I suppose like ah like a fund manager, even in a a more difficult market, they can you've got some you've got this ability to back particular syndicates, particular lines of business, which you think are going to be stronger in that environment. Is that right?
Speaker: That's absolutely right, Martin. And don't forget the investment returns. As um I mentioned earlier, it's quite key to the overall profitability of the portfolio.
Speaker: so So if the cycle is starting to turn down a bit, albeit offset by various other factors, how does that work through for an investor and investment returns?
Speaker: The profit, so Lloyds have a three-year accounting rule. ah Every underwriting year runs for three accounting years before it's closed and the profits are distributed in May the following year. so after 42 months after the underwriting year started. So in May this year, we received the profits from 23 underwriting air, expect to receive the 24 profits in May next year with one quarter to run, and 25 profits in May 2028 with five quarters to run.
Speaker: um and That's how the profits are distributed. 2026 is too early to call. We have the projections, but it is exposed to uncertainties around natural catastrophes and other market claims.
Speaker: Because the cash arrives in lumps, we smooth the expected profit for every underwriting year over 36 months. This feeds into the NAV that we report.
Speaker: And by using this recognition pattern, the NAV grows gradually and the investor can ah ah monitor the progress of our performance over multiple quarters.
Speaker: So the the underwriting earnings are are smoothed in. The 2023 underwriting year, i know, was a very strong year and you say you've just received the cash from that what do you do with the cash uh good question martin um so in we we recently published our interim uh reports in the first half of the year our total nav return uh went on by 17 pence or about six and a half percent uh increase from year-end 25. we paid out a 10p per share dividend in the first half
Speaker: We are looking to return another 11p through a tender offer. And we've been in the last six months buying back shares, ah adding up to about three pence per share. So overall in 2026, we are expecting to return 24 pence ah per share to shareholders ah up from 20 pence last year.
Speaker: And can you talk about the next two or three years, perhaps, how you think that shareholder returns might develop directionally, of course, over over that period? Yes. In the last two to three years, we have reduced our gearing and our expenses.
Speaker: And as we look forward, as I said, with slightly challenging market conditions, we are looking to support syndicates that we expect will maintain consistent returns and that can only be achieved through not just underwriting results, but also reserve release and investment returns.
Speaker: And this should allow us to maintain consistent returns for our portfolio and any profits that are received ah every year will be used to support our strategic initiatives.
Speaker: And also that will result in dynamic capital allocation for shareholders. The thing to consider from an investor's perspective is the point that I made earlier about NAV total return. We are focused on the total return.
Speaker: Depending on the stage of the cycle, that can be growth in our NAV, and in certain times it would be ah capital return to shareholders or a combination of both. So NAV total return is a key ah metric and and a key focus for us.
