Lancashire Holdings Limited

Hello and welcome to the Lancashire Holdings Limited Q3 2023 earnings call. Throughout the call all participants will be in a listen only mode and afterwards there will be a question and answer session. Please note that this call is being recorded. Today I am pleased to present Alex Maloney, Group CEO, Natalie Kershaw, Group CFO and Paul Gregory, Group CUO. I will now hand over to Alex Maloney.

Thank you, operator.

Good afternoon, everyone. Thank you for joining our call today. I will just give you some brief highlights of the progress that we've made in the quarter. We'll then focus on the underwriting highlights, and then Natalie will cover the financials, and then we will go to Q&A. So during the third quarter, we continued to maintain the excellent momentum across our business, which has been a key thing for us throughout 2023. As we've stated before, our only strategy is to make sure we maintain we manage the underwriting cycle to maximize the opportunity for the benefit of our shareholders. We have now underwritten record amounts of profitable premium versus our capital base and expect to be able to grow our premiums during the rest of 2023 and beyond. The underwriting conditions are the best we have seen in a decade and we have grown our product offerings over recent years as we attract more talented people to our business. We are building a more diversified, resilient business for the future, which means our capital usage is more efficient. We have a conservative view of the capital we require to run our business, but due to the profitability and diversification we are now benefiting from, we find ourselves in a healthy excess capital position. Therefore, I'm pleased to announce our special dividend of 50 cents a share and a $50 million share buyback program in line with our long-term capital return policy. We have sufficient capital to grow into 2024 and fund the underwriting opportunity we see, whilst remaining within our own conservative view of the capital we need to run our business. We see little change to the underwriting opportunity, therefore we believe our growth extends through 2024, where we see a disciplined market with abundant opportunities for Lancashire. Some of that 2024 growth in premiums will come from our newly formed US platform, Well, I'm pleased to report that we've now started to recruit high-quality individuals and expect to be underwriting for the second quarter of 2024. We have enjoyed a profitable 2023, which has not been without lost experience, but our business continues to perform well. Our strategy of diversifying our underwriting portfolio is delivering efficiencies so that we're able to return some of the capital generated this year to our shareholders. on their handover support.

Thanks, Alex. As Alex has already described, the strong forward momentum we've seen in the first half of 2023 continued in the third quarter. The positive rating environment was maintained with the year-to-date RPI holding firm at a very healthy 117%. These favorable conditions have allowed us to continue to profitably grow our growth-richen premiums. Year-to-date premiums have increased by over 23%, as we continue to execute our long-held strategy of growing whilst market conditions are favorable. Earlier in the year, we said we were very comfortable with consensus GWP of around 1.9 billion, and we remain well on track in this regard. In our reinsurance segment, the trends of the first half year have continued. The biggest driver of growth has been casualty, as we continue to build out that portfolio, having only entered the class in early 2021. Recent talk of continued reserve strengthening on older underwriting years should help the market maintain its result through 2024. As you know, we only entered this class in 2021, so we remain very well positioned. Our specialty reinsurance book is also in build-out mode, and we have successfully grown in areas such as marine, energy, and terrorism reinsurance as market conditions have been supportive. On the catastrophe exposure reinsurance lines, we've stuck to our strategy outlined at the start of the year and maintained a broadly similar net cap footprint whilst taking the improvements in level and rate that the hard market has provided. We've also continued to see lots of opportunity in the insurance segment and market conditions have remained favourable during the third quarter. Our property segment in particular has seen a strong combination of new opportunities and healthy rate improvements and there are no obvious signs of reversal. Our marine and energy classes remain in positive rating territory with good levels of growth. We're currently in the midst of aviation renewal season, and this remains the strongest insurance line in terms of pure rate change. Rating conditions across all segments remain in positive territory and have provided ample opportunities for growth. We're extremely satisfied with the shape, rating adequacy, and profitability of our current underwriting portfolio. And as we look towards next year, we're really encouraged by the early signs. Our continued optimism for market conditions in 2024 has been solidified by the consistent messaging from our peers at both Monte Carlo and Baden-Baden. Importantly, the dynamic between supply and demand continues to be well balanced, with inflationary pressures continuing to push demand for our products. Whilst we fully expect market conditions in 2024 to be more measured, we do anticipate there'll be an incremental improvement at a portfolio level. This would be the seventh consecutive year of positive portfolio rate change. We see plenty of areas for continued growth and would fully expect 2024 to be the seventh consecutive year where we can grow our portfolio ahead of rate. We have all the tools necessary, the people, the platforms, and the capital to support this continued growth. As is standard, we'll give further guidance on expectations for 2024 at our Q4 earnings call. I'll now pass over to Natalie.

Thanks, Paul. Hello, everyone. I am pleased that our strong performance in the first half of the year continued into the third quarter, further demonstrating the benefits of our growth and diversification strategy. The strong operating performance and healthy capital position means that we have been able to announce a special dividend and share buyback scheme. returning approximately our half year earnings. Following these capital returns, we remain exceptionally well capitalised and are able to fund all our planned growth in 2024 from internally generated capital. We have at least as much capital flexibility going into 2024 as we had at the start of this year. Our insurance revenue on an IFRS 17 basis for the year to date increased by 22% compared to the same period in 2022. which is in line with the increase in gross premiums written that Paul has just talked through. Although the market loss environment was reasonably active for the first nine months of 2023, we have not incurred any individually material catastrophe or large losses to date, and the North American wind season has been relatively quiet so far. Our 2023 guidance remains unchanged. We will update for 2024 guidance at the year-end earnings call in March. The investment portfolio has returned 2.8% as we continue to see the benefit of higher rates on investment income. Our book yield is now 3.9% and the market yield 5.8%. The investment portfolio remains relatively conservative with an overall credit rating of AA-. We do not intend any material changes to our investment strategy in the medium term and will keep the overall portfolio duration short. With that, I'll now hand back to Alex to conclude.

Okay, thanks, Natalie. So just to summarize our views, our business continues to grow with the underwriting opportunity. We continue to better utilize the capital we have and diversify our underwriting portfolio. Our investment portfolio is the largest in our history. Our investment returns are the strongest we have seen in a decade. And we continue to attract talented individuals to our business. We will now hand over to the operator for questions. Thank you.

Thank you. If you would like to ask a question, please press star 1 1 on your telephone keypad and wait for your name to be announced. There will be a brief pause whilst questions are being registered. Our first question today comes from the line of Cameron Hussain from JP Morgan. Your line is open. Please ask your question.

Alex, Paul, Natalie, thanks for taking my questions. The first one I have is on the capital return. So it's kind of good news to be returning capital shareholders. I think it's been taken well today. If I think about the return that you've announced today, it's a broadly similar number to your half-year earnings. By the sounds of it, Q3 has gone relatively well. Q4 so far doesn't feel like it's been too costly. Now, I don't want to get too greedy, but Do you think if the rest of the year remains pretty quiet or pretty benign or loss experience isn't too heavy, that there'll be more to do on capital later in the year? I know that's probably very early to think about that, but that's my first question. And the second question is just on the outlook. Seven years of growth in a row is obviously good news. Do you think we're nearer to the top of the market than the bottom? And how does that split between reinsurance and, I guess, the specialty? I'm just interested in your view on that.

Thank you. Okay, thanks a lot. I think on the first point, as you know, we have had a good year. We started this year in a strong capital position and clearly we've had a good year and generated more capital. So I think it makes sense to pay the dividend we are today. But obviously, we're now starting to think ahead to 1.1 and buying reinsurance and all those things. So we'll get through 1.1 We'll decide what reinsurance we want to purchase, decide what business we want to write. Obviously, there's still great opportunities there. Paul will give you his view of the opportunity, but it's still strong. And then if we get to next year and we're in an excess capital position or whatever position we're in, we'll be constantly looking at capital. But I think now is the time to focus on 1.1 and the opportunities for 24. And look, we're still very much in growth mode. So we want to grow as much as we can. And having that flexibility is just great. It's exactly where I want us to be.

Hi, Cameron. Yeah, just on the outlook and where we are, as a broader point, obviously, we're really happy with the rating environment that we've seen this year and for many classes in the year preceding that. So, look, at a portfolio level, it's in a really good spot from a rating perspective. More encouragingly... we don't see that moving backwards in 2024 and in some instances continuing to move forwards. I think there's still that good balance between demand and supply at work. There'll always be some classes within what we write that I would argue are maybe nearer the bottom than the top, but it's the small minority and certainly a relatively small amount of premium when you look at it in terms of the overall impact to our portfolio. So we're really happy um with with how this year has progressed from a rating and obviously turn the conditions and level point of view particularly on the on the cat reinsurance lines and we're also equally encouraged that you know we we we don't see that stepping backwards in the foreseeable all right alex paul thanks very much thank you our next question comes from the line of andrew ritchie from autonomous your line is open please ask your question

Yeah, thanks for the special dividend. Unlike Cameron, I'm not going to ask for more. I had a couple of questions. One is, could you just remind me, sorry, I need reminding on this again, but it's topical, exactly the risk appetite, what your appetite is in casualty reinsurance. Clearly you've grown it well. I appreciate you don't have any legacy. Just remind us what your appetite and parameters are because obviously it's in focus given the lot of debate again on casualty. And maybe in relation to that class, is the opportunity even greater there maybe in 24 because it does look like there's a further pullback in broader capacity in that class. So a bit of color around that again would be my first question. Second question, I'm not questioning what to read into the aviation commentary. You said that RPI is very high. Obviously, renewals have, I guess, happened now or are in the process of happening. I thought there was uncertainty in pricing in that class because there's still uncertainty on where Russia claims land, etc. So maybe just give us a bit of color on aviation conditions. And the final question is, you talked, Alex, about you've recruited some talented individuals already. I think you're referring to U.S. onshore entity. What classes are those in initially? Is it property or maybe just give us some color?

I think what is interesting at the moment is our understanding, although we weren't writing casualty in those years, is that the sub-market years, which are probably 14 to 18 or 14 to 19, I think those claims are emerging now. And clearly you've seen from some of the barriers, reserves are having to go up. So those years do look bad. And I think it sort of demonstrates how long the tail is on that book. But I think those badges are getting bad. And I do agree with you. If you look at some of the commentary from some of the big guys, I wouldn't be surprised if some of that cash in the market does harden into 24. And that could be a good opportunity for us. But as I said, we don't have that back book. We're in that nice position. And if that market hardens further, that's great for us. But there is a lot of commentary from a lot of big carriers about the need to get more rates. I think that's quite interesting. I think on our book, we've always been very public that although we do now write casualty, the percentage of casualty that we're prepared to write versus our overall underwriting portfolio is substantially less than the average. So, you know, lots of P&C carriers have, let's say, 40% of their portfolio will be casualty. I think we're probably... We've got to max out half of that amount, whatever the opportunity is. So we like the book, we like where we came in, but we're just not going to have the same weight into casualty as most of our peer group in any market. That's a hard spot for us.

So just to remind us what your appetite is, we won't do commercial auto, we won't do Fortune 500. Is there any other sort of red lines?

The vast majority of our book, Andrew, is quota share reinsurance of large carriers. So we do get a broad spread of the general liability portfolio out there. So we're not overly exposed to any particular part of the casualty market, which is obviously incredibly broad. And that plays into our strategy, which was to enter the casualty market, as Alex said, at kind of, you know, the best pricing we've seen for a number of years for all the reasons we know about and we wanted the best spread possible. And the way to do that was to write a predominantly quota share, reinsurance quota share portfolio. Okay. I'll take aviation first. Is that all right? On aviation, Andrew, yeah, get your question and you're right. There is still lots of uncertainty in that market. My commentary was that in terms of pure rate change on our insurance lines, it is at the top end of what we're seeing. For the insurance lines that we write, just as a reminder, obviously, we operate in quite small niches of that market, and the rate change we've seen there has been reasonably significant, and we're pretty happy with what we've seen there. Obviously, we would always want more. But we're happy with how that's performed. There are some parts of the market that we historically haven't had a large market share in. And in all honesty, we did think that the opportunity there would grow and we would be able to step into that. But that opportunity, which is normally the kind of major airline hull and liability market, we haven't really seen that happen. So we have kept our powder dry because we don't think the rating opportunity is there to significantly broaden our shoulders. So it's a kind of mixed bag. On the other part of aviation, aviation reinsurance, which we also underwrite, that really has seen some strong rate increases. I think that's been well publicized across the market due to a number of reasons, not just uncertainty over Russia, but historical claims that have also stepped out quite significantly. So for our portfolio, we're happy with the rate change we've seen. It has been reasonably significant. However, there remain parts of the market that we're not really boarding in because we don't feel the market's quite there. Obviously, we're hopeful that that would happen, and if it does, we've already got the team in place to step into it. So hopefully that explains aviation. And on the US, we've hired kind of our head underwriters for two lines of business. I think on the last call, we'd already announced that we'd hired our head of energy casualty, and subsequent to that, We have hired a head of property, B&F. They're the kind of two classes that we're focusing on early for our entry during Q2 next year. So we're obviously very happy with that. And obviously there's a lot of other hires behind the scenes that are not just underwriters that we've also made really good progress on.

Okay. Thank you very much. Thanks. Thank you. Our next question comes from the line of Trefonas Spirou from Berenberg. Your line is open.

Please ask your question.

The special dividend buyback. So I have two questions. One is on growth for next year. It looks like you'd be deploying maybe $150 million of capital you'd be generating in the second half. I guess, how should we think about in which areas would be deployed it would it be should we expect another sort of step up in your um sort of peak losses um and and step up into proper maximum losses um and exposure in a textbook because it is quite a lot of capital you're looking to deploy um so it's first question and then the second one is on the reinsurance premiums it looks like they're up 19% year-on-year it's actually tracking a little bit below the RPI 25% so I was wondering what are the dynamics there in terms of the rate and sort of headline premium increase thank you hi I'll take the first one I think yes we have certainly got the capital to continue to

to grow next year obviously we've got our US proposition and as I've just mentioned on a previous answer one of the lines of business that we'll be going into is property insurance undoubtedly with that will come some natural catastrophe exposure and therefore there will be some capital you know requirement to fund that growth but as a general overlying point Obviously, the rest of the portfolio is growing as well. So you shouldn't expect to see a significantly change the balance that we have between cat exposure and non-cat exposure in 2024. And sorry, we lost you a bit on your second question, if you could repeat that.

So it's just on the top line growth, 19.2% for reinsurance premiums, nine months. um that's against one two three so 25 increase in rpi so tracking a little bit below um i was wondering if you have any any comments on the dynamic between the rate and actual premium uh volume coming through yeah of course that i think as we've said um before obviously when we track risk adjusted rate change not all of that is reflected in in premium and probably the best example of that could be some of the catastrophe reinsurance lines

We've talked a lot this year about you're not just seeing change in pure rate and therefore premium, you're also seeing increases in level of attachment, so the level at which you come in with the market, and ourselves obviously seeing the benefit of that with the impact of the various cat losses this year having less of an impact on the reinsurance market. That's because of that change in level. So that is a risk-adjusted change. If you increase level, you don't recognise all of that through premium. So on our catastrophe book, as an example, and that's the driver of this thing you're seeing in the premium versus rate change in the reinsurance segment that's been driven by the cap reinsurance lines where we're taking some of that rate through level as opposed to pure premiums.

That's very clear. Maybe just one point on the first question. Can you maybe remind us on the split between CAT and non-CAT business this year and maybe obviously the same next year? So any comment on the split?

Oh, hi, Tressa. This is Helena. We don't give that level of detail in terms of pure premiums. I think it's probably useful to look at our PML that we've published. That gives you a good idea of sort of how we're thinking about the CAT book. But we wouldn't be giving you premiums specifically. We haven't done that for a number of years now.

Perfect. Thank you.

We're helpful. Thank you. Our next question comes from the line of Will Hardcastle from UBS. Your line is open. Please ask your question.

Hi, Graham. Thanks for letting me take the questions. First of all, the comment that you say that you have at least as much capital flexibility going into 2024 as 2023, that looks like you've therefore been able to go premium in 20%. It's sort of around 350 mark year on year, whilst only needing to retain 150 men of earnings or so. I guess it's a crude run rate there for cost of funding. It goes for 24 about right as well, so sort of 50% of premium. I know that'll be moving past, but I didn't know whether there was a big capital synergy benefit perhaps in 23. Second one, over what time period are you going to undertake the buyback? And just perhaps some thinking about the size of split, especially buyback and liquidity. That would be helpful, thanks.

Okay, hi Will. I'll take the second question first. When we were looking at the buyback versus dividend with the board over the past few days, obviously it'd be preferable at the current share price to do more share buybacks, but given the liquidity of the stock, it's just not feasible and we didn't want to put an unrealistic number out there. So that's why we've done this fit the way we have and focused more on special dividends. We'll keep the share buyback going as long as we need to. And then the first question we didn't quite catch, can you repeat that?

Yeah, it was more looking at that you've been able to grow premium, let's say, this year for about 350 million, perhaps, I mean, come year end, and you're only retaining maybe 150 million of earnings this year. So it looks like, crudely, the cost of that funding to premium is about 50% for capital intensity. Seems a bit low, but is there a one-time capital benefit this year, or is that a decent run rate for 24?

I don't think you can... Sorry, Will, it's Jelena again. I don't think you can look at it that way, because I don't think it's necessarily about $1 of premium versus a specific amount of capital exactly around it. It'll depend on the shape of the book of business that we underwrite for 2024, It obviously will get certain diversification benefits. And most importantly, as you know, we've been investing in the business over the past five years to have a diversified growth coming through, which means that you do get the capital efficiency. But it's very hard to do it as a sort of, you know, $1 premium equals $0.30 or $0.50 or $0.70. It's very hard to give you a rule of thumb.

Okay. Cheers.

Thank you. Our next question comes from the line of Abid Hussain from Panmure Gordon. Your line is open. Please ask your question.

Hi, all. Two questions from me, please. Firstly, on the market cycle, just wondering at a high level, how does this year's hard market compare to the previous hard markets that you've seen? I know you guys have sort of been through a couple of different cycles. just just broadly speaking how does it compare in terms of returns and the growth opportunities that you see ahead of you that's the first question and then the second one is on the capital distribution uh you're obviously clearly signaling uh it's been a great year uh with the special dividend and the buyback as well um but just just on on the flip side why why not retain that capital and and deploy that into the into more exposures high exposures

at these prices at these terms that you're securing thank you sure okay so look i think on the first question you know it every every cycle is different but it's every cycle happens for the same reason so i think yes we are we are in a good place uh as an industry and this year feels good for a number of classes i think uh certain classes like the cat lines and Prophecy Cat and Retro and the harder end of the cat book is definitely an old-fashioned hard market. But there's other classes within our specialty book that are okay but not brilliant. So I think it is different to some of the cycles we've seen in the past. Sometimes you've seen loss events such as Hurricane Katrina if you've got a long time where you really shock the market and people's people's risk levels are wrong and capital is destroyed quite quickly and you get a very steep hard market for sort of two years and then you start going back to more sensible times. I think what is unusual about this part or this hard market is, as Paul said in his commentary, we've seen positive rate change for seven years now and personally I've never seen that, but let's be honest, the industry hasn't really made any real money for five years. I think it's a hard market driven out of the need for profitability. I think the impact of interest rates and where investors can get risk-free returns is clearly going to push our market. And I think that's the part that gives us the confidence to say that this market is here to stay for the foreseeable future because I think all carriers are just going to have to generate a much better return over risk-free for their investors. And so that's why we see the market discipline. That's why we're confident we can grow into next year. I think on the point about where we grow, you know, I'll let Paul take that question. But before he sort of gives you the answer there, I think that one thing we've done in the last five years is completely changed the shape of our business and the diversification we have. And as Yelena said, you know, lots of the earnings that we've put on our a relatively capital light. So, you know, Lancashire is a different business to what it was five years ago, definitely a bit of a different business to what it was 10 years ago, and obviously that's strategically important to us. So, you know, there's certain things that are just non-negotiable from now on.

Yeah, just following on from that a little bit, I mean, for us still, the kind of key driver of capital for us when it comes to underwriting will be our catastrophe exposure, and that we still have a a good size catastrophe footprint. In terms of shape, return, it's probably the best it's been for a long time. And we've spent this year improving the shape of that portfolio and the market's given us the opportunity to do that. But in terms of the overall balance of the book, following on from what Alex said about all the investments we've made outside of those catastrophe lines to bring us a far more robust portfolio, We don't want to undo all of that work, but we go back to the point we already still have quite a meaningful catastrophe footprint. Now, we clearly, as Natalie said, our capital return is pretty much in line with our half-year earnings, so we are retaining capital to grow, and there will be opportunities to do that, but we can do that without unbalancing the work that we've done over the past few years.

Okay, thank you.

Thank you. Our next question comes from the line of Nick Johnson from Numis. Your line is open. Please ask your question.

Hi, everybody. Just got a question on catastrophe and large losses in Q3. Trying to get a reference point on this. You say nothing material individually, but in aggregate, just wondering whether the Q3 Cat and large losses were higher or lower than the 9.7% run rate from H1 on an undiscounted basis. And secondly, on the same subject, just wondering if the 15% guidance is still relevant given the higher attachment points and rate increases that the market has now moved to. Thanks.

Just on the last point on the guidance, we've never actually said 15% guidance. We've said historically that's been the percentage, so just bear that in mind as well. We'll come back to 2024 guidance at the next earnings call. We didn't have any individual material losses in Q3 and in aggregate, not material either.

Right. Okay, so you can't say whether the run rate in Q3 is above or below the half year.

Nick, sorry, it's Jelena. We're not going to give you the full P&L. Sorry.

All right. Okay. I tried. Thanks very much.

Thank you. A reminder that if you would like to ask a question, please press star 1 1 on your telephone keypad and wait for your name to be announced. Our next question comes from the line of Faizan Lakhani. from HSBC. Your line is open. Please ask your question.

Thank you very much for taking my questions. Well, firstly, congratulations on the strong capital generation in H1 and return of the special and buyback. In terms of understanding, how do we tie back capital generation versus net income? Is that a fair reflection or under vermini solvency Does it come through a bit quicker? And what would the implications be for next year's capital generation on that front? The second question is, have you seen any changes to your property cat charge from the S&P model regulatory change? And what would the implications of that be for your PMLs?

Thank you. So capital generation for us is really 100% income. And it doesn't come through any quicker on a Bermuda basis to any other basis. And on the property cap charge, we're not expecting any detrimental impacts on the new model for S&P. It'll probably be beneficial for us with the allowance of DAC as an allowable asset. So we have no concerns about S&P. And if you are invested in it, we have got a session on capital then. So we'll be able to go through some of these things in a bit more detail.

Okay, perfect. Thank you very much.

Thank you. Our next question comes from the line of Frank Kaywood from FCMA. Your line is open. Please ask your question.

Alex, Paul, and Natalie, all a great year and navigating all the traps and potholes and et cetera for the last few years. Just want to congratulate you, especially on the timing of entering casualty. I was a little skeptical of that when you did it, knowing the long tail there. But as you described, you were already into very substantial rate increases with the competitors being constrained in how much they could ride by all their reserve strengthening things. So in retrospect, this was a outstanding time. And so once again, timing, congratulations again. uh on your other thing uh i just really uh appreciate your kind of standing fast in what you've been doing uh during the uh the lean years and uh it's uh really taken the company to a very good position for a higher level in years to come so once again thank you very much as a long-term shareholder that's great frank we really appreciate your comments and great to hear from you thank you thank you for your support i appreciate your support thanks Okay.

Thank you. We have no further questions at this time.

I will now hand back to our speakers.

Okay, thanks. Thanks, our producer, and thanks, everyone, for your questions today, and hopefully we'll see a number of you at Investor Day on Tuesday. Thank you.

Thank you. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.