Lancashire Holdings Limited

Hello and welcome to the Lancashire full year 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 this call is being recorded. Today I'm pleased to present Alex Maloney, CEO. Please begin your meeting.

Good morning everyone and thank you for joining our call today. I'll just give you some brief highlights on the progress that we've made through the fourth quarter. and some of the highlights we've made throughout 2023. Paul will then focus on our underwriting progress, and that will cover our financials, and then we'll go to Q&A. We have delivered strong profits for the year, strong capital returns for our investors, and maintain strong capital flexibility to fund the investments in our business. Lancashire continues to grow in line with our long-term strategy to grow when the underwriting opportunities are strong. We continue to grow our premiums in excess of the strong rate change we have seen throughout 2023, demonstrating real momentum at the right time in the underwriting cycle. We have, in fact, grown our premiums in excess of the positive rate change we have seen in the last five years. If you believe in the underwriting cycle as we do, you have to demonstrate real momentum in strong underwriting markets. Our 2023 results of nearly a 25% return on equity is clearly a strong result for Lancashire. Risk adjusted, probably the best in our history. We have benefited from the steep increase in rating across our underwriting portfolio where we saw real dislocation in our reinsurance segments and continued hardening in our insurance segment. We've also benefited from the strengthening of retention levels in our cut exposed lines. We saw real benefit in a year that produced another year of insured losses which exceeded $100 billion. And insurance lines have also benefited from the tightening terms and conditions driven by recent world events. All these factors have led us to build a better risk-adjusted underwriting portfolio to help us navigate the heightened level of risk we witness in the world today. Our investment portfolio has grown in tandem with our business. Our current portfolio is the largest we have managed at a time when yields have significantly improved. Due to the short duration of our portfolio, we've been able to benefit from the reinvestment rates, which quickly add a further income stream to our business. During 2023, we benefited from more yield from our underwriting portfolio and more yield in our investment portfolio. This just means our capital usage is materially more efficient and we're just generating more dollars as a business. Our capital management strategy remains the same. We constantly assess our capital needs versus the opportunities we see during the next 12 months. Our plan is to continue to grow our business throughout 2024, where we see exciting opportunities, particularly with the opening of our new E&S business in the US. Due to the excellent underwriting result we have, coupled with a much higher investment returns, we find ourselves in an excess capital position which enables us to announce a further special dividend of 50 cents today. We still have excess capital to grow our underwriting and capital flexibility for any unforeseen underwriting opportunities. Lancashire is a more diverse, larger, more resilient and less volatile business than it has been the case in the past. We believe it's appropriate to raise our ordinary dividends for our shareholders to benefit from the hard work we have done to build the business we are today. Our ordinary dividends would increase by 50%. So we have delivered what we said we would do. Our long-term strategy of demonstrating real growth at the right time in the underwriting cycle is benefiting our business. We see lots of opportunity to continue to grow in the buoyant underwriting markets we operate in. We maintain a strong capital flexibility for an uncertain risk environment, coupled with great people to continue our momentum throughout 2024. I'll now pass over to Paul.

Thank you, Alex. As Alex has just explained, we're extremely pleased with the 2023 underwriting result. We have delivered a combined ratio of 82.6% and a net insurance services result of $382 million. This is in a year of natural catastrophe losses of over 100 billion and continued global political unrest. We are incredibly proud of the underwriting team and all those in the business that support us in delivering this result. We continue to deliver our strategic objective of growing while the market is favourable to develop a more robust, less volatile and highly profitable underwriting portfolio. The market was certainly very healthy in 23. which helped us achieve our goals of continuing to grow ahead of rate, broadly maintaining our net cash footprint whilst improving portfolio shape and margin, continuing to build out our franchise in newer product lines such as casualty, construction and specialty reinsurance, as well as profitably growing in areas of opportunity such as property insurance. With regard to top line growth, we slightly exceeded the expectations we set out at the This was down to the portfolio RPI of 115% and increased demand across a number of our product lines. Most pleasing is the shape and balance of our overall portfolio, which is testament to some of the strategic investments and decisions made over the past six years. I'll now talk briefly about the market dynamics in a few of our product lines before moving on to outlook for this year. I'll first pick out the reinsurance segment and then a couple of classes within our insurance segment. In reinsurance, the property reinsurance market, there was a true hard market with a reduced supply and increased demand. Rating was buoyant and as importantly, structural changes were made as the product reverted to protecting balance sheets as opposed to just protecting earnings. The value of this structural change and the increased levels of attachment have been proven this year with a large number of small to mid-sized catastrophe losses having far less impact than would have been the case in previous years. For casualty reinsurance, there continues to be a lot of headlines around prior year deterioration. It's always worth reiterating that this is a class we entered during 2021 and the problem years in the headlines precede our entries. If anything, the continued pain of reserves deterioration has strengthened our ability to build a portfolio that will be accretive to bottom line over the longer term. As we've said many times before, and as we do for any new class of business, we begin by reserving very prudently. We believe this is even more appropriate for longer term lines such as casualty. We are prepared to allow this to drag our short term profitability in order to build a business where the underlying profitability will be accretive over time and allow us to manage the cycle. Our specialty reinsurance portfolio has been another area of growth. There were very strong rating conditions in our more established product lines such as retro and aviation reinsurance. In these classes, risk-adjusted rate change was as much due to policy structure terms and conditions as it was rate. So whilst you may not see all of rate flow through in premium, the underlying quality of the portfolio is significantly better. The build-out of our marine energy and terrorism reinsurance offering continued successfully in favourable market conditions. Moving to our insurance lines, I'll focus on a couple of key points. Every insurance class we write had positive rate change in 2023. For most classes, this was the sixth year of upward rating trajectory with these classes now sitting at very healthy levels of adequacy. In aviation, we saw the whole spectrum of market dynamics. In some of our niches that provide war and terrorism type coverage, there was healthy rate momentum and good opportunities to grow. In other niches, rating remained positive, albeit less pronounced, but importantly, remained at really robust levels producing excellent profitability. In contrast, I've talked before about our ambitions in areas such as major airline all should market conditions improve. Unfortunately, this did not happen and the market seemed to defy logic. But overall, we grow our more profitable Asian niches year on year, were able to leverage across our broader portfolio effectively and importantly, maintained our discipline in those other areas. One of the standout product lines in the year was property. This is both property direct and facultative insurance and our property construction portfolio. Rating conditions were strong and ahead of our original expectations. Alongside this, demand was also supportive and we took advantage of these conditions to grow our footprint with property forming a core component of 23 premium growth and profitability. I'll now move on to 24 outlook. We started the year positively. It's fair to say the trading conditions at the 1st of January were far more stable than 12 months prior. but importantly, market discipline has been maintained. We successfully purchased our outward reinsurance protections at 1.1 and given the more stable market conditions, we have a more efficient reinsurance structure than we had last year. In terms of reinsurance spend, we anticipate spending marginally more dollars given the anticipated premium growth on the inwards book, but the percentage of inwards premium spend will reduce. This very much follows the trend of the last few years. Much like 1.1, our outlook for rating across 2024 is one of broad stability, with healthy levels of profitability. Each product line will have its own dynamics, but all things remaining equal, we do not anticipate any significant hardening, or more importantly, any significant softening. The key point for us is that the vast majority of classes, the underlying rating levels remain strong, with pricing adequacy in a very robust position and this is why we will continue to grow. Current consensus has our 2024 premium growth at approximately 10% ahead of 2023 and that level of growth feels pretty sensible based upon anticipated market conditions. We will continue to grow above rate but some drivers of growth in recent years, such as casualty, are closer to maturity in terms of overall size. so we will see less growth here than we've seen in recent years. However, in lines such as property insurance and specialty reinsurance, we still see very attractive opportunities to grow materially and we of course have our US office starting underwriting during the course of 2024. As ever, we'll be driven by the market opportunity and we will underwrite accordingly. We remain very, very well capitalized to continue to invest in the business and build the Lanxure franchise. I'll now pass over to Natalie.