Hamilton Insurance Group, Ltd. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Hamilton is a Bermuda-based global specialty insurance and reinsurance group with International and Bermuda segments. It underwrites property, casualty and specialty business through Lloyd’s, Ireland, Bermuda and U.S. platforms. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Gross premiums written | $474.1 million | $400.8 million | $1.52 billion | $1.31 billion |
| Net premiums earned | $337.0 million | $294.9 million | $952.4 million | $831.5 million |
| Underwriting income | $24.9 million | $(66.1) million | $93.8 million | $(70.3) million |
| Net income attributable to common shareholders | $43.6 million | $(136.1) million | $131.9 million | $(39.0) million |
| Diluted earnings per share | $0.41 | $(1.32) | $1.26 | $(0.38) |
| Combined ratio | 92.6% | 122.5% | 90.2% | 108.5% |
| Return on average common equity | 2.5% | (7.6)% | 7.6% | (2.2)% |
Q3 total revenues were $396.3 million, including $55.4 million of investment gains and net investment income, compared with a $72.6 million investment loss in Q3 2022. Nine-month total revenues were $1.08 billion, versus $980.4 million in the prior-year period.
The Q3 loss and loss adjustment expense ratio improved to 56.8% from 87.5%, while the acquisition cost ratio increased to 23.3% from 22.3%. Nine-month loss and loss adjustment expenses were $519.6 million, compared with $597.0 million in 2022. Current-year attritional losses increased as a percentage of earned premiums, but catastrophe losses declined substantially.
Balance sheet, cash flow, debt and liquidity
- Total assets were $6.50 billion at September 30, 2023, compared with $5.82 billion at December 31, 2022. Shareholders’ equity was $1.80 billion, versus $1.66 billion.
- Book value per common share was $17.35 and tangible book value per common share was $16.49, up 7.5% and 7.8%, respectively, from December 31, 2022.
- Total investments were $2.96 billion, including $1.63 billion of fixed maturities, $349.0 million of short-term investments and $980.0 million invested in Two Sigma funds. The fixed maturity and short-term portfolio was 100% investment grade, with an average yield to maturity of 5.4% and expected duration of 3.3 years.
- Cash and cash equivalents were $804.5 million, with restricted cash of $99.0 million. Total cash and restricted cash declined from $1.21 billion at December 31, 2022 to $903.5 million.
- Operating cash flow was $247.7 million, compared with $189.0 million in the prior-year period. Investing activities used $530.9 million, primarily reflecting contributions to Two Sigma funds and purchases of fixed maturity investments. Total cash and restricted cash decreased by $303.7 million.
- The company had a $150.0 million unsecured term loan, net carrying value of $149.8 million, maturing June 23, 2025. It was in compliance with all debt covenants.
- Letter of credit and revolving facilities totaled $924.5 million of commitments, of which $635.0 million was in use at September 30, 2023. Management stated that operating cash flows and liquid investments should provide sufficient liquidity absent a series of additional large catastrophe losses.
Material changes versus the prior comparable period
- Gross premiums written increased 18.3% in Q3 and 16.2% for the first nine months, driven by increased participation, rate increases and growth in casualty reinsurance and specialty classes.
- International Q3 underwriting income improved to $4.1 million from a $1.4 million loss, while Bermuda underwriting income improved to $20.8 million from a $64.7 million loss.
- The combined ratio improved by 29.9 percentage points in Q3 and 18.3 percentage points for the nine months, primarily because of substantially lower catastrophe losses and improved prior-year development.
- Q3 catastrophe losses were $7.2 million, compared with $81.6 million in Q3 2022. Nine-month catastrophe losses were $30.4 million, compared with $173.4 million.
- Two Sigma Hamilton Fund generated a 3.1% Q3 return and a 5.3% nine-month return, compared with a 1.2% Q3 loss and a 9.4% nine-month return in the prior-year periods. However, nine-month Two Sigma-related investment income before non-controlling interests declined to $100.4 million from $225.9 million.
- Corporate expenses increased to $18.7 million in Q3 and $31.8 million for the nine months, primarily because of Value Appreciation Pool expense. Total VAP expense was $15.6 million through September 30, 2023, including a $4.2 million retained-earnings adjustment.
- Interest expense increased to $5.3 million in Q3 and $16.0 million for the nine months, primarily because of higher SOFR-based borrowing costs.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or premium guidance. Management describes market conditions as favorable, citing a hardening insurance and reinsurance market, increased demand for excess and surplus coverage, reduced reinsurance capacity, rising rates and opportunities to deploy capital. Management intends to pursue disciplined growth while maintaining underwriting profitability and capital adequacy.
Important risks include catastrophe frequency and severity, climate change, inflation and social inflation, reserve inadequacy, incorrect underwriting models or pricing, cyclical market conditions, foreign currency exposure, rating downgrades, regulatory restrictions on subsidiary dividends, reliance on letter of credit facilities, and the potential need for additional capital.
The Two Sigma relationship is a material investment risk. Hamilton does not control the fund’s asset allocation or performance, has a commitment extending through December 31, 2025, and is exposed to conflicts of interest, leverage, investment volatility and restrictions on liquidity. The company’s fixed maturity portfolio also had approximately $99.3 million of gross unrealized losses at September 30, 2023.
Net reserves related to the Ukraine conflict were $66.2 million at September 30, 2023, down from $79.3 million at December 31, 2022. COVID-19 reserves were $13.9 million, down from $39.0 million. Management cautions that ultimate losses may differ materially from current estimates. The loss portfolio transfer also remains subject to reserve development and reinsurance counterparty risk.
Subsequent to quarter-end, Hamilton completed its NYSE initial public offering on November 14, 2023, raising approximately $80.7 million of net proceeds. The IPO triggered the VAP underpin, with a valuation of $5.16 per unit, and terminated specified shareholder liquidity rights. The filing also reports additional Class B share issuance and warrant exercises after September 30.
Important facts for investors to verify
- Whether premium growth and the 90.2% nine-month combined ratio are sustainable as catastrophe activity, attritional losses and market pricing evolve.
- The sensitivity of earnings and book value to Two Sigma fund performance, liquidity terms, incentive allocations and the company’s minimum investment commitment.
- The adequacy of gross loss reserves of $2.95 billion and net unpaid loss reserves of $1.79 billion, including Ukraine, COVID-19, casualty and property exposures.
- The availability and renewal terms of letter of credit facilities, including the increased $230 million Funds at Lloyd’s facility and the $635.0 million already in use.
- The effect of the IPO, share conversions, warrant exercises and VAP obligations on future diluted share count, compensation expense and per-share book value.
- The effect of higher interest rates, foreign exchange movements and unrealized losses in the investment portfolio on future reported earnings and capital.