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Hamilton Insurance (HG) - 2024 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and detailed notes on the company's financial position and performance Unaudited Condensed Consolidated Balance Sheets Table: Unaudited Condensed Consolidated Balance Sheets | Metric | March 31, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | | :--------------------------------- | :--------------------------------- | :--------------------------------- | | Total Assets | 7,349,025 | 6,671,355 | | Total Liabilities | 5,084,793 | 4,623,372 | | Total Shareholders' Equity | 2,209,505 | 2,047,850 | | Investments in Two Sigma Funds | 953,659 | 851,470 | | Cash and cash equivalents | 1,085,038 | 794,509 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Table: Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | Metric | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | | :------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Total Revenues | 658,645 | 322,381 | | Net Premiums Earned | 385,303 | 283,902 | | Net Realized and Unrealized Gains (Losses) on Investments | 255,371 | 35,133 | | Net Income (Loss) | 277,332 | 53,002 | | Diluted Income (Loss) Per Share | 1.38 | 0.49 | Unaudited Condensed Consolidated Statements of Shareholders' Equity Table: Unaudited Condensed Consolidated Statements of Shareholders' Equity | Metric | March 31, 2024 ($ in thousands) | March 31, 2023 ($ in thousands) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Total Shareholders' Equity | 2,209,505 | 1,716,440 | | Net Income (Loss) | 277,332 | 53,002 | | Share Compensation Expense | 7,293 | 2,373 | Unaudited Condensed Consolidated Statements of Cash Flows Table: Unaudited Condensed Consolidated Statements of Cash Flows | Activity | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | | :----------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Net cash provided by (used in) operating activities | 158,200 | 12,086 | | Net cash provided by (used in) investing activities | 194,127 | (132,129) | | Net cash provided by (used in) financing activities | (68,376) | (3,117) | | Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | 279,743 | (122,388) | Notes to the Unaudited Condensed Consolidated Financial Statements Note 1. Organization - Hamilton Insurance Group, Ltd. (Hamilton Group) was incorporated in Bermuda in 2013 and completed an initial public offering (IPO) of its Class B common shares on November 14, 2023, generating net proceeds of $80.6 million30 - The company operates globally through key subsidiaries including Hamilton Re (Bermuda), Hamilton Managing Agency Limited (London), Hamilton Insurance Designated Activity Company (Dublin), Hamilton Managing General Agency Americas LLC (US), and Hamilton Select Insurance Inc. (US E&S carrier)3134353637 - Hamilton Re has a significant investment commitment in Two Sigma Hamilton Fund, LLC (TS Hamilton Fund), an amount up to the lesser of $1.8 billion or 60% of Hamilton Group's net tangible assets38 Note 2. Summary of Significant Accounting Policies - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and Article 10 of Regulation S-X, reflecting all necessary adjustments for fair presentation43 - There have been no material changes to the company's significant accounting policies as described in its Annual Report on Form 10-K for 202342 - Recently issued accounting pronouncements, ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), are not expected to have a material impact on the company's financial position or results4647 Note 3. Investments Table: Investments by Type | Investment Type | Fair Value (Mar 31, 2024, $ in thousands) | Fair Value (Dec 31, 2023, $ in thousands) | | :--------------------------------- | :---------------------------------------- | :---------------------------------------- | | Fixed Maturity Investments | 1,877,130 | 1,831,268 | | Short-Term Investments | 352,068 | 428,878 | | Investments in Two Sigma Funds | 953,659 | 851,470 | - The company's investments in Two Sigma Funds (FTV, STV, ESTV) aim for absolute dollar-denominated returns through multiple hedged and leveraged systematic investment strategies52 - Pledged investments at fair value totaled $237.0 million for Lloyd's capital requirements, $54.1 million for U.S. state regulatory authorities, and $36.7 million for other underwriting obligations as of March 31, 202465 Note 4. Fair Value - Fair value measurements prioritize inputs into a three-level hierarchy: Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)69 - The company's fixed maturity and short-term investments are predominantly classified as Level 2, with fair values determined using observable market inputs such as quoted prices, reported trades, benchmark yields, and credit spreads7073 Note 5. Variable Interest Entities - Two Sigma Hamilton Fund (TS Hamilton Fund) is identified as a Variable Interest Entity (VIE), and Hamilton Group is determined to be its primary beneficiary76 Table: Non-controlling Interest Activity | Non-controlling Interest Activity | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | | :-------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Balance - beginning of period | 133 | 119 | | Withdrawals | (65,564) | (1,509) | | Incentive allocation | 120,137 | 1,509 | - Total net assets managed by TS Hamilton Fund increased to $1.92 billion at March 31, 2024, from $1.73 billion at December 31, 202378 Note 6. Reinsurance Table: Reinsurance Recoverables | Metric | March 31, 2024 ($ in millions) | December 31, 2023 ($ in millions) | | :--------------------------------- | :------------------------------- | :-------------------------------- | | Premiums Receivable (net) | 856.1 | 658.4 | | Paid Losses Recoverable (net) | 169.5 | 145.2 | | Unpaid Losses & LAE Recoverable (net) | 1,200.0 | 1,200.0 | - The company utilizes catastrophe bond reinsurance, with Easton Re providing $200 million in multi-year risk transfer capacity for U.S. named storm and U.S./Canada earthquake risk, effective January 1, 202490 - At March 31, 2024, 74.3% of reinsurance recoverable balances were rated A- or better, and 25.2% were collateralized87 Note 7. Reserve for Losses and Loss Adjustment Expenses Table: Gross Unpaid Losses and Loss Adjustment Expenses | Metric | March 31, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | | :----------------------------------------- | :-------------------------------- | :--------------------------------- | | Gross unpaid losses and loss adjustment expenses | 3,148,782 | 3,030,037 | - Net unfavorable prior year development of $12.1 million for Q1 2024 was primarily driven by attritional losses in specialty and casualty contracts, partially offset by favorable development in property contracts93 - The company recorded reserves of $37.9 million for the Baltimore Bridge collapse, $64.4 million for the Ukraine conflict, and $15.8 million for Covid-19 losses as of March 31, 2024979899 Note 8. Segment Reporting - The company has two reportable business segments: International (London, Dublin, and Hamilton Select operations) and Bermuda (Hamilton Re and Hamilton Re US)101103 Table: Combined Ratio by Segment | Segment | Combined Ratio (Q1 2024) | Combined Ratio (Q1 2023) | | :---------------- | :----------------------- | :----------------------- | | International | 97.2 % | 89.1 % | | Bermuda | 85.5 % | 86.9 % | | Total | 91.5 % | 87.9 % | Table: Gross Premiums Written by Segment | Segment | Gross Premiums Written (Q1 2024, $ in thousands) | Gross Premiums Written (Q1 2023, $ in thousands) | | :---------------- | :----------------------------------------------- | :----------------------------------------------- | | International | 320,841 | 247,114 | | Bermuda | 401,100 | 291,050 | | Total | 721,941 | 538,164 | Note 9. Debt and Credit Facilities - The company has an unsecured $150 million term loan credit arrangement, maturing on June 23, 2025, and was in compliance with all covenants as of March 31, 2024111 Table: Debt and Credit Facility Commitments | Metric | March 31, 2024 ($ in thousands) | | :------------------------------------------------- | :-------------------------------- | | Available letter of credit and revolving loan facilities - commitments | 995,000 | | Available letter of credit and revolving loan facilities - in use | 745,958 | | Security pledged in TS Hamilton Fund | 237,461 | | Security pledged in fixed income portfolio | 251,588 | | Cash pledged | 2,339 | - Interest expense for Q1 2024 was $5.7 million, a modest increase from $5.5 million in Q1 2023, primarily due to the increase in the Secured Overnight Financing Rate (SOFR)121 Note 10. Share Capital Table: Issued & Outstanding Shares by Class | Share Class | Issued & Outstanding (Mar 31, 2024) | Issued & Outstanding (Dec 31, 2023) | | :---------------- | :---------------------------------- | :---------------------------------- | | Class A | 28,644,807 | 28,644,807 | | Class B | 56,813,977 | 56,036,067 | | Class C | 25,544,229 | 25,544,229 | | Total | 111,003,013 | 110,225,103 | - Holders of Class A and Class B common shares generally have one vote per share, subject to voting limitations (9.5% or 14.92% for class votes), while Class C common shares have no voting rights124 Note 11. Earnings Per Share Table: Earnings Per Share | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) attributable to common shareholders | 157,174 | 51,492 | | Basic income (loss) per share | 1.42 | 0.50 | | Diluted income (loss) per share | 1.38 | 0.49 | Note 12. Subsequent Events - On May 8, 2024, the company entered into an agreement to repurchase 9,124,729 Class A common shares at $12.00 per share, totaling $109.5 million, with the transaction expected to close on May 10, 2024128 - Following the repurchase, the company will have 101,878,284 shares issued and outstanding128 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, liquidity, and capital resources, including segment results and key metrics Overview - Hamilton Insurance Group is a global specialty insurance and reinsurance company, leveraging diverse underwriting operations (International and Bermuda segments), proprietary technology, a strong balance sheet, and a unique investment management relationship with Two Sigma131132133 - The company sees significant growth opportunities in both insurance and reinsurance markets, particularly benefiting from a strong rate environment and increased submissions in the E&S market135136 - The investment portfolio includes the Two Sigma Hamilton Fund (TSHF), managed by Two Sigma for low-correlated absolute returns, and an investment-grade fixed income portfolio benefiting from strong interest rates137138 - The Bermuda Government enacted a 15% corporate income tax effective January 1, 2025, but Hamilton Group expects to be exempt from the worldwide minimum tax until January 1, 2030, under certain conditions143 Summary of Critical Accounting Estimates - There have been no material changes to the company's critical accounting estimates, including 'Reserve for Losses and Loss Adjustment Expenses,' 'Premiums Written and Earned,' 'Ceded Reinsurance and Unpaid Losses and Loss Adjustment Expenses Recoverable,' and 'Fair Value of Investments,' as disclosed in the 2023 Form 10-K144 Summary Results of Operations Consolidated Results of Operations Table: Consolidated Results of Operations Summary | Metric | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | YoY Change (%) | | :------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | :------------- | | Gross Premiums Written | 721,941 | 538,164 | 34.1 % | | Net Premiums Earned | 385,303 | 283,902 | 35.7 % | | Net Income (Loss) Attributable to Common Shareholders | 157,174 | 51,492 | 205.2 % | | Combined Ratio | 91.5 % | 87.9 % | 3.6 pts | | Loss and Loss Adjustment Expense Ratio | 60.3 % | 52.3 % | 8.0 pts | | Return on Average Common Shareholders' Equity | 7.4 % | 3.0 % | 4.4 pts | - The attritional loss ratio - current year increased by 8.1 percentage points to 57.2% in Q1 2024, primarily due to $37.9 million in losses from the Francis Scott Key Baltimore Bridge collapse154 - Total net realized and unrealized gains (losses) on investments and net investment income (loss) from TS Hamilton Fund, prior to non-controlling interest, significantly increased to $262.8 million in Q1 2024 from $10.1 million in Q1 2023, driven by macroeconomic trading and single name equities157158161 Segment Information International Segment Table: International Segment Performance | Metric | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | YoY Change (%) | | :--------------------------------- | :------------------------------------------------- | :------------------------------------------------- | :------------- | | Gross Premiums Written | 320,841 | 247,114 | 29.8 % | | Net Premiums Earned | 196,814 | 149,515 | 31.6 % | | Underwriting Income (Loss) | 5,315 | 16,370 | (67.5) % | | Combined Ratio | 97.2 % | 89.1 % | 8.1 pts | | Loss and Loss Adjustment Expense Ratio | 59.0 % | 47.1 % | 11.9 pts | - The increase in the current year attritional loss ratio was primarily driven by $11.8 million of losses arising from the Baltimore Bridge collapse177 - Unfavorable prior year attritional loss development of 2.9% was primarily due to two large losses in specialty insurance, partially offset by smaller reserve releases178 Bermuda Segment Table: Bermuda Segment Performance | Metric | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | YoY Change (%) | | :--------------------------------- | :------------------------------------------------- | :------------------------------------------------- | :------------- | | Gross Premiums Written | 401,100 | 291,050 | 37.8 % | | Net Premiums Earned | 188,489 | 134,387 | 40.3 % | | Underwriting Income (Loss) | 27,207 | 17,693 | 53.8 % | | Combined Ratio | 85.5 % | 86.9 % | (1.4) pts | | Loss and Loss Adjustment Expense Ratio | 61.6 % | 58.2 % | 3.4 pts | - The current year attritional loss ratio increased by 10.3 percentage points to 58.4%, primarily driven by $26.1 million of losses from the Baltimore Bridge collapse189 - Third-party fee income significantly increased to $3.9 million in Q1 2024 from $0.1 million in Q1 2023, driven by performance-based management fees recognized by Ada Capital Management Limited187 Corporate and Other Table: Corporate and Other Financials | Metric | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | | :------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Total Net Realized and Unrealized Gains (Losses) on Investments and Net Investment Income (Loss) - TSHF | 262,821 | 10,064 | | Corporate Expenses | 11,502 | 6,664 | | Net Foreign Exchange Gains (Losses) | (2,125) | (2,046) | - TS Hamilton Fund produced returns, net of investment management fees and performance incentive allocations, of 8.3% in Q1 2024, significantly up from 0.5% in Q1 2023197 - Corporate expenses increased by $4.8 million, primarily due to $3.7 million of Value Appreciation Pool (VAP) expense, increased headcount, variable performance-based compensation, and professional fees associated with operating as a public company205 Key Operating and Financial Metrics Table: Book Value per Common Share | Metric | March 31, 2024 | December 31, 2023 | Change (%) | | :--------------------------------- | :------------- | :---------------- | :--------- | | Book Value per Common Share | $19.90 | $18.58 | 7.1 % | | Tangible Book Value per Common Share | $19.07 | $17.75 | 7.4 % | Table: Return on Average Common Shareholders' Equity | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Return on Average Common Shareholders' Equity | 7.4 % | 3.0 % | Non-GAAP Measures - The company presents non-GAAP financial measures, including underwriting income (loss), third-party fee income, and other underwriting expenses, to provide a clearer understanding of core operational performance219 Table: Non-GAAP Financial Metrics | Non-GAAP Metric | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | | :--------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Underwriting Income (Loss) | 32,522 | 34,063 | | Third Party Fee Income | 7,478 | 3,004 | | Other Underwriting Expenses | 43,353 | 39,142 | Financial Condition, Liquidity and Capital Resources Financial Condition - The company maintains two segregated investment portfolios: a fixed maturities and short-term investments trading portfolio focused on capital preservation and liquidity, and an investment in Two Sigma Hamilton Fund (TS Hamilton Fund) for non-market correlated absolute returns231232233 Table: Total Cash & Investments | Metric | March 31, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total Cash & Investments | 4,363,460 | 4,012,476 | | Fixed Maturity Investments | 1,877,130 | 1,831,268 | | Short-Term Investments | 352,068 | 428,878 | | Investments in Two Sigma Funds | 953,659 | 851,470 | Liquidity and Capital Resources Liquidity - Management believes that significant cash flows from operations and a high-quality liquid investment portfolio provide sufficient liquidity for the foreseeable future247 Table: Cash and Cash Equivalents | Metric | March 31, 2024 ($ in millions) | December 31, 2023 ($ in millions) | | :--------------------------------- | :------------------------------- | :-------------------------------- | | Unrestricted Cash and Cash Equivalents | 1,100.0 | 794.5 | | Restricted Cash and Cash Equivalents | 95.6 | 106.4 | Holding Company - Hamilton Insurance Group, Ltd. relies on dividends and distributions from its subsidiaries, receiving $20.0 million in Q1 2024 (vs. $Nil in Q1 2023)249 - The estimated dividend distribution capacity of its subsidiaries was $471.6 million at December 31, 2023, providing sufficient liquidity for the holding company249 Operating Subsidiaries - Operating subsidiaries derive cash from net premiums and investment income, which typically fund operating expenses and dividend payments250 - Each of the company's insurance subsidiaries and branches exceeded the minimum solvency, capital, and surplus requirements in their applicable jurisdictions at December 31, 2023252 Consolidated Cash Flows Table: Consolidated Cash Flow Activities | Activity | Three Months Ended March 31, 2024 ($ in thousands) | Three Months Ended March 31, 2023 ($ in thousands) | | :----------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Operating activities | 158,200 | 12,086 | | Investing activities | 194,127 | (132,129) | | Financing activities | (68,376) | (3,117) | - Net cash provided by operating activities significantly increased due to timing differences in premium collection, reinsurance recoverables, and loss payments254 - Net cash provided by investing activities shifted from a net outflow to a net inflow, primarily driven by the timing of investing activities and turnover in fixed maturities and short-term investments255 Capital Resources - The company's total capital increased by 7.9% to $2.2 billion at March 31, 2024, from $2.0 billion at December 31, 2023, primarily driven by net income attributable to common shareholders260 - Management monitors capital adequacy to meet rating agency and regulatory requirements and maintains flexibility to raise or return capital through share repurchases or dividends259 Debt - The company has an unsecured $150 million term loan credit arrangement, which matures on June 23, 2025, and was in compliance with all financial covenants at March 31, 2024261 Table: Outstanding Loan Balance | Metric | March 31, 2024 ($ in thousands) | December 31, 2023 ($ in thousands) | | :------------------------ | :-------------------------------- | :--------------------------------- | | Outstanding Loan Balance | 150,000 | 150,000 | Common Shares - The company's authorized and issued share capital includes Class A, Class B, and Class C common shares263 - Class A and Class B common shares generally have voting rights, subject to certain limitations (9.5% or 14.92% for class votes), while Class C common shares have no voting rights263 Credit Facilities - The company utilizes several letter of credit facilities and a revolving loan facility, with total commitments of $995 million, to provide collateral for reinsureds and support capital requirements at Lloyd's272 - These facilities are secured by pledged interests in the TS Hamilton Fund ($237.5 million), the fixed income portfolio ($251.6 million), and cash ($2.3 million) as of March 31, 2024272 Financial Strength Ratings - A.M. Best upgraded the Financial Strength Rating of Hamilton Re and HIDAC to 'A' (Excellent) from 'A-' (Excellent) on April 30, 2024, with a stable outlook275 - Kroll Bond Rating Agency affirmed its 'A' insurance financial strength rating for Hamilton Re and 'BBB+' issuer rating for Hamilton Insurance Group, Ltd. on July 25, 2023, with a positive outlook276 Reserve for Losses and Loss Adjustment Expenses - The company establishes loss reserves using actuarial models, historical industry experience, and loss development patterns, believing its recorded reserves are management's best estimate of ultimate liabilities277 - The company utilizes reinsurance to reduce potential losses from claim events, recording amounts recoverable under reinsurance contracts as assets280 Recent Accounting Pronouncements - No recently issued accounting pronouncements are expected to have a material impact on the company's results of operations, financial condition, or liquidity281 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risks, including interest rate, credit, equity, and foreign currency, remain unchanged from the 2023 Form 10-K - The company's principal market risks include interest rate risk, credit spread risk, equity price risk, and foreign currency risk282 - There were no material changes to these market risks as disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023282 Item 4. Controls and Procedures Disclosure controls were effective, and no material changes in internal control over financial reporting occurred Evaluation of Disclosure Controls and Procedures - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2024, providing reasonable assurance for timely and accurate reporting283 Changes in Internal Control Over Financial Reporting - No changes in internal control over financial reporting were identified during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting284 Part II. Other Information Item 1. Legal Proceedings No material changes to legal proceedings have occurred since the 2023 Form 10-K filing - No material changes to legal proceedings from the Form 10-K for the year ended December 31, 2023285 Item 1A. Risk Factors No material changes to risk factors have occurred since the 2023 Form 10-K filing - No material changes to risk factors from the Form 10-K for the year ended December 31, 2023286 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 613,734 common shares in Q1 2024, mainly for employee tax obligations and warrant exercises Table: Common Shares Purchased | Period | Total Shares Purchased | | :------------------ | :--------------------- | | January 1 - 31, 2024 | 368,907 | | March 1 - 31, 2024 | 244,827 | | Total | 613,734 | - Shares were purchased from employees for withholding tax obligations on restricted stock awards and in respect of the purchase price for warrants exercised288 - No shares were purchased under a publicly announced repurchase program during the first quarter of 2024288 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None290 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable291 Item 5. Other Information No other information is reported under this item - None292 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements and certifications - Exhibits include a Share Purchase Agreement (10.1), CEO and CFO Certifications (31.1, 31.2, 32.1, 32.2), and Interactive Data Files (101, 104)294 Signatures The report is officially signed by the Group Chief Financial Officer and Group Chief Accounting Officer - The report was signed by Craig Howie, Group Chief Financial Officer, and Brian Deegan, Group Chief Accounting Officer, on May 9, 2024297