Hamilton Insurance Group, Ltd.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global specialty insurance and reinsurance company, distinguished by its focus on complex risks, technology-driven underwriting, and a broad, yet targeted, global reach.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Hamilton Insurance Group, Ltd. (HG) is a global specialty insurance and reinsurance company founded in 2013. It operates across multiple segments: Global Specialty, Reinsurance, and Hamilton Re, with a focus on specialty and casualty insurance, as well as reinsurance. HG underwrites a diverse range of risks, often complex and high-severity, targeting both primary and reinsurance markets. The company differentiates itself through its proprietary technology platform and data analytics, aiming for improved underwriting outcomes and enhanced efficiency.

  • Revenue Distribution: Hamilton derives its revenue from premiums earned across its insurance and reinsurance operations.

    • Global Specialty segment serves commercial clients, focusing on specialty and casualty insurance solutions.

      • Key lines of business include financial lines (such as professional liability and cyber insurance), accident and health, specialty casualty, and specialty commercial insurance.
      • International operations are predominately in the UK and Europe, while the US makes up the other parts.

    • Reinsurance covers property, casualty, and specialty reinsurance contracts.

      • This segment focuses on providing reinsurance solutions to insurance companies.
      • It includes operations in Bermuda, the U.S., and Europe.

    • Hamilton Re is the company’s reinsurance operations, offering both proportional and nonproportional reinsurance products.

      • It targets more complex and larger risk-sharing opportunities.
      • The Bermuda-based operations have a global reach.

  • Industry Trends: The insurance industry is being shaped by increasing regulatory requirements, technology disruptions, and globalization.

    • The shift towards digital platforms has been accelerated by the COVID-19 pandemic and that has changed distribution channels in insurance.
    • Emerging risks such as cyber and climate change require insurers to adapt and provide relevant coverage.
    • Data analytics and advanced technology are increasingly important for underwriting and pricing accuracy and for claims processing.

  • Competitive Landscape: The insurance industry is highly competitive, characterized by numerous global and regional players.

    • Hamilton competes with large, well-established insurers and reinsurers, as well as smaller specialty firms.
    • Competitive dynamics involve balancing premium pricing, risk selection, and customer service.
    • The emphasis on technology and data analytics is making competition even more intense.

  • What Makes Hamilton Different: HG differentiates itself by focusing on:

    • Technology and Data: Leveraging proprietary data platforms and analytics for underwriting decisions.
    • Specialty Focus: Concentrating on higher-margin and complex insurance risks.
    • Global Presence: Operating in key markets with a diversified and international reach.
    • Experienced Management Team: With a focus on long-term shareholder value creation and capital allocation.

Financial Analysis: Hamilton’s financials demonstrate a combination of growth and ongoing profitability, although specific metrics fluctuate.

  • Premiums Written/Earned: The company reported gross premiums written of $612.9 million and gross premiums earned of $675.2 million, a small increase from the year prior, but is still above its peak in 2018. Net premiums written was 107 million and net premiums earned was 205 million.
  • Net Income and Loss: HG shows a net income of 23.7 million, a huge turnaround from previous years. Loss and loss adjustment expenses remain above 70% of earned premiums, which is a point to consider when looking at the profitability of the company, especially with the increase in claims that are present in current reports. This is a trend that is occurring in the industry as a whole, in the recent times.
  • Underwriting Performance: For the nine months ended September 30, 2024 and 2023, the underwriting income has improved from a loss of 16 million to a positive of 113 million and a combined ratio of 93.5%. For the quarter 3 of 2024, their underwriting expenses were high compared to 2023’s quarter 3. This is mainly due to an increase in claims from natural disasters, but an area to keep a watch out for.
  • Investment Income: Net investment income in the recent months has decreased. Overall investment losses have decreased too, but overall there is still a loss of 24.4 million from the portfolio in the last 9 months. Net realized and unrealized gains are heavily fluctuating, and investors should be aware of this. This sector is a smaller percentage of the total revenue but should not be overlooked in long term financial health of the company.
  • Balance Sheet: HG reports substantial total assets of $7.086 Billion with total liabilities of $4.575 Billion. The company has enough assets to cover its liabilities. Cash and investment numbers are fluctuating, but that is a common trend across the industry. For companies like these, their liabilities should always be lower and easily coverable by their assets. Their shareholders’ equity is 2.4 billion which could be used to buffer large losses and to fund growth. The overall financial health of the company as a whole is good. However, their solvency is something to consider, and watch as a trend.
    • Invested capital is $3,125 million as of Sep 2023.

  • Capitalization: The company has a manageable amount of debt and has a financial strategy focused on organic growth, and maintaining a sound and stable capital structure.

    *The company’s capital ratio is healthy with an improving outlook. It has also had successful raises from issuing stocks and other securities over the recent years. The company has a history of raising more equity capital, but their leverage is manageable.

Moat Rating: Based on my analysis, I give Hamilton a moat rating of 2 out of 5.

  • Justification: Hamilton’s reliance on its core expertise and tech are strong, but not enough to make a lasting impression on the insurance market, therefore, its moat isn’t as high as a company such as Visa, which has a network effect. Hamilton tries to differentiate itself using its technology platform, but it’s unclear whether this has an impact strong enough to achieve a stable moat. HG also focuses on specialty insurance lines, which are higher margin, but it is a more competitive market segment. Although it has improved its pricing and underwriting methods over time, to give it a bigger moat, these will need to be improved upon further. Finally, it is difficult to find a company that has a truly wide moat in the insurance sector, so, while they have a moat, it is more on the lower end of the spectrum.

Risks to the Moat and Business Resilience: Several risks could potentially erode Hamilton’s moat and impact its business resilience:

  • Competition: The competitive landscape is intense, putting pressure on pricing and margins. If competitors are able to better implement their tech or data analytics, their advantage would be diminished greatly.
  • Regulatory Changes: Increased government regulation could raise compliance costs and limit underwriting flexibility, which could hinder their growth.
  • Catastrophic Events: Exposure to high-severity or tail-risk events in its specialty and casualty insurance business could lead to substantial losses. Their reliance on the reinsurance market in part shows that.
  • Technological Obsolescence: If the company fails to continue to invest and upgrade their tech platforms, their advantage can be quickly diminished by competitors that implement more advanced tech.
  • Macroeconomic Conditions: Economic downturns may reduce premium collections and increase claims, affecting earnings and valuation. A major recession is expected in the near term and could have a significant impact on the insurance sector.
  • Geopolitical Risk: Operating globally exposes the company to a variety of political, social, and economic risks. These geopolitical factors can make future performances a risk.
  • Management/Control Changes: While they are currently focusing on profitable lines of businesses, if they lose focus and again start overemphasizing growth (like in previous years), it could hurt their financials in the future.

Recent Concerns and Controversies: Hamilton has faced several challenges recently:

  • Underwriting losses and expenses due to the severe weather conditions globally. Although they have improved their combined ratio recently, they need to better predict future losses in this aspect.
  • The recent stock offering and convertible debt offerings are something investors are wary about. Management has said they have issued these for growth, but still many investors think they could be hurting their shareholders’ returns by issuing more shares.

Understandability: I would rate Hamilton’s understandability at a 3 out of 5.

  • Justification: While the general concept of insurance is straightforward, Hamilton operates in complex and specialized niches of insurance. It’s a reasonably hard business to assess the future potential of the company and also to determine how the management team is performing over the long term. The company’s various segments and financial reporting can be complex for a non-specialist. The financial statements also are complex and take time to get a full grasp on. For investors who aren’t used to insurance companies, this could be very confusing to get a grasp on.

Balance Sheet Health: I would rate Hamilton’s balance sheet health at 4 out of 5.

  • Justification: Despite the various losses, the balance sheet has good numbers for the current state of business. The company has also been consistently improving the equity ratio over time and also has substantial cash to protect it from most downturns. The debt/equity ratio is also at a manageable level. However, investors should note that a large portion of the total capitalization is attributable to “goodwill and intangibles”, which carries some risk. The company has to be watched to see if those assets produce as the company predicts.

I hope this helps. If you need any more information, feel free to ask.