Lancashire Holdings Limited

Hello and welcome to Lancashire third quarter 2024 trading update conference call. The speakers today will be Alex Maloney, Group CEO, Natalie Kershaw, Group CFO, and Paul Gregory, Group Chief Underwriting Officer. I'll now turn over the call to Alex. Please go ahead.

Good afternoon, everyone. Thank you for joining our call today. As always, I'll just give some brief highlights of the progress we've made so far this year. and the priorities we have for our business, Paul will then focus on the underwriting trends, Natalie will cover the financials, and then we'll go to Q&A. It's been a strong nine months for Lancashire. The quality of the business we have built and the talent we have within our organisation together mean that we continue to deliver on our strategy of delivering more sustainable returns for our shareholders. With stronger earnings, we're able to announce another special dividend of 75 cents a share and still remain extremely well capitalized to fund the growth opportunities we see into 2025. The trading conditions in underwriting remain favorable, and as such, we have grown ahead of rate again at 9%. But as many industry commentators have already pointed out, This year, it's seen a heightened loss environment. Whilst Lancashire is not immune to these events, in this context, I'm pleased to say that Lancashire exposures are very manageable. Today, we have provided a range for all Q3 CAT events and Hurricane Milton in Q4. of between $110 and $140 million. As such, we expect to deliver on our ROE guidance and coming towards the top end of the undiscounted combined ratio range. As I look to the rest of the year and into 2025, our core objective remains the same. We continue to see attractive opportunities to deliver superior returns for our investors. As I have said before, I'm extremely pleased at this stage in the underwriting cycle that we have a healthy balance sheet to allow us plenty of flexibility to underwrite the opportunities we see. We continue to deliver on what we said we would do. And with that, I'll hand over to Paul.

Thanks, Alex. 2024 will be the seventh consecutive year of compound rate increase on our portfolio. As anticipated, there has been a stabilisation of rates over the year. This strong base level of rating has allowed us to continue to grow ahead of rate and build out our portfolio. Our strategy of growing in a hardening rate environment to reduce volatility with a more robust portfolio is clearly being demonstrated this year. In an active loss year, we remain very profitable. Market conditions in almost all lines of business continue to have a very solid rating fundamentals going into 2025. Our expectation is that the recent loss activity both highlights the value of the products that we sell, which will always help demand, and also prolongs the disciplined and pragmatic underwriting approach we've seen from the market this year. Looking at insurance and reinsurance separately, we would expect the following market dynamics. We would anticipate marginally greater competitive pressures in the insurance lines, given they started their upward rating trajectory earlier than the reinsurance lines. But let's just emphasise the strong position they are currently in and that the rate adequacy is very good and we fully expect healthy margins to continue. We expect continued discipline in the reinsurance lines. Casualty remains in focus, given continued prior year development and loss trends. Both specialty and property reinsurance have had their share of large loss experience this year, which again will help with maintaining discipline. Our expectation is the market will remain in a position of strong rate inadequacy, and we see opportunities for continued growth. Our extremely healthy balance sheet provides the foundation to support this profitable growth. We're incredibly pleased with our start in the US, and this will continue to be an engine for growth over the next few years. Outside of the US, we see numerous opportunities across our product lines to continue to profitably grow and further strengthen the portfolio. I'll now pass over to Natalie.

Thanks, Paul. Hello, everyone. Our year-to-date financial performance has been excellent. The second half of 2024 has seen higher than average catastrophe losses. This gives us the opportunity to demonstrate how well positioned we are now as a business. following the successful growth and diversification strategy of the last five years. In spite of the catastrophe losses incurred from Hurricanes Milton, Helene and Debbie, plus Storm Boris and the Calgary hail event, I am pleased to announce a special dividend of 75 cents per share. Following these capital returns, we remain exceptionally well capitalised to be able to fund all our planned growth in 2025, which we expect to be above rate. Likewise, This year has also seen us grow above rate. Our insurance revenue on an IFRS 17 basis for the nine months increased by 16.8% compared to the same period in 2023. This is larger than the increase in premiums written as we continue to see benefits coming through from the growth in premiums written in recent years. The total net losses for the catastrophe events just mentioned will be in $110 to $140 million range. We also incurred a few large risk losses in the third quarter, taking our total undiscounted large risk losses for the year to date to $72.8 million. No loss was individually material to the group, with the Baltimore Bridge disaster being the most significant. As we've often said, there is nothing unusual in these, and we expect to see risk losses throughout the year. Taking the above average market loss environment into account, we are likely to come in at the top end of the previous combined ratio guidance at the end of the year. We are also likely to be at the top end of ROE guidance, as we have benefited from better other income. As you will no doubt know, this is also a reflection of better underwriting trends, as it comes from our Lloyds and LCM platforms. Our ROE is also supported by slightly better investment returns than initially anticipated. The investment portfolio has returned 5%, as we continue to see the benefit of higher rates on investment income. The investment portfolio remains relatively conservative, with an overall credit rating of AA-, and a short duration of 1.9 years. With that, I'll now hand back to Alex to conclude.

Thank you, Natalie. So just to conclude, we see no change for our underwriting strategy. We believe the opportunity remains strong. We have plenty of capital to navigate the opportunities that we see for the rest of the year and for 25, but we continue to grow, and it's just an important time to make sure that we maximize the market we're in. We'll now go to Q&A.

Thank you. If you do wish to ask an audio question, please press star 1 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing star 2 to cancel. Once again, please press the star one to register for a question. We'll pause for just a moment while we compile our Q&A session. And our first question comes from the line of Kamran Hussain with JP Morgan. Please go ahead.

Hi. Afternoon. I just want to say kind of well done on this. another good year and hopefully that doesn't take the last two months but it looks like it's going quite well so far just wanted to think about capital allocation and the outlook for 2025 I think you know the Q3 special I think is very welcome just interested in whether this is going to be kind of a two-part approach like you kind of had last year where you did something at Q3 and then kind of came back and did a bit more at Q4 or whether this is now kind of you know this is the 2024 kind of capital return and just any thoughts around that The second one is just on the growth opportunities. From your comments, it sounds like you have very concrete plans to grow, which I think is good news. But just interested in where this comes from. Is this growing out of teams, so people you've hired that naturally will grow their books? Or where does this come from next year? Because it sounds like it's there, it's in the plans, and just interested in where it comes from. Thank you.

We've previously said we started the year in a very strong capital position, clearly had a strong half year and Q3 again has been a strong earnings period for Lancashire, albeit with a fair bit of loss activity you've seen throughout the year. We like to keep flexible on capital. We believe that the special is appropriate at this point, but it still gives us lots of opportunities. We see as we come into 1.1, we also expect to grow in 25. Some of that will be out of our US operation, which we're building out. We're looking to add more product lines there in the next six months. And I think some of the other growth is just organic from teams that we have. that we have built over the last five years. So it's a combination of U.S. operation and organic growth, but we have plenty of capital to grow. We're still in a really strong position. That's where we like to be. It gives us options, uncertain world, but yeah, plenty of opportunity for us.

Thank you, Alex.

And your next question comes from the line of Anthony Yang with Goldman Sachs. Please go ahead.

Good afternoon. Thank you for taking my questions. Maybe I think I just follow up on the growth opportunities firstly. So looking, I mean, I appreciate your comments on the outlook in insurance and reinsurance. Looking at consensus, it seems it's a 6% year-on-year growth into 2025. which is lower than this year's growth. So are you able to give any color if that's a reasonable expectation next year? And then secondly, coming to the losses, could you have an update on your loss experience on casualty reinsurance side and also any updates on the on the Ukraine-Russia conflict, the aviation laws from that. Thank you.

Hi, Anthony. I'll take those questions. With regard to growth next year, as Alex just alluded to, on the answer to the last question, yes, we do anticipate to grow in 2025. And we, again, would anticipate to grow ahead of rate. As we would normally do, we give more concrete guidance at our full-year numbers early next year, and we will do so again. I think it's fair to say that the percentage of growth year-on-year is likely to be less than we've seen this year, but we'll give more of a point number when we talk next quarter. In terms of the losses, Russia, Ukraine first, I can confirm. no changes to that reserve. That's remained stable for a long period of time now. Obviously, as we do with any major loss, we'll continually assess it. But at the moment, there's been no change to that. On casualty, I'll reiterate what I say. On casualty, we obviously, or the industry, obviously saw a lot of social inflation and lost cost trend going the wrong way on the kind of older casualty years. We obviously only entered during the course of 2021, at which point obviously a lot of those kind of trends had already manifested. What this means is obviously we can build that into our pricing and also importantly our reserving. And everything that we've seen thus far leads us to believe that we still have you know, healthy margin in that portfolio over time. But as you know, on top of that, we hold prudence in our reserving, which we're not looking to change at this point, and I don't think you would expect us to. But obviously, we would anticipate benefiting from this margin over a longer period of time as this book develops.

Thanks for that. If I may just follow up quickly on the aviation loss reserve. So has any claims been settled or paid to policyholders or that still remain claims outstanding?

Yeah, no. So I think as you've just seen, and I'll talk from an industry perspective, I think as you've seen from various press reports, there have been a number of settlements, Obviously, just to remind you, when this all started, our view was very much that there would be settlements and all parties would come together to find a reasonable resolution. That's happening. There is obviously a lot of ongoing legal activity in this area, and I anticipate that will continue, and I also anticipate there will be a continuation of the settlement.

Thank you.

Your next question comes from the line of Andreas van Erden with Bill Hunt. Please go ahead.

Andreas Van Erden Yes, thank you. Good afternoon. I have a question around the shape of the U.S. E&S book you're building at Lancashire U.S., that insurance portfolio. You're writing a lot of new property insurance premium. I just want to check, you know, how is the shape of that book developing? Is this mainly big ticket sort of ENS or are you looking more SME slash mid-market? Can you maybe discuss the split between CAT versus non-CAT as you build out that book? Is this sort of a diversifying book against your CAT writings in Bermuda and your big ticket business in London? Or is this just more of the same, just you're more local in terms of your distribution? Thanks.

Hi, Andreas. I'll take that. Obviously, and I'll come on to the property piece, but obviously at the moment, the US platform is both property and an energy liability class. Beyond that, we're looking to build out other classes of business. And I think if you just look at the US, what we're aiming to achieve over the kind of medium to longer term is just a version of the broader group. in terms of balance. Obviously, there's an immediate opportunity in the property sector. I think the kind of rating environment and rating adequacy in that area is very well known and is a very healthy point and has provided us a great opportunity to build that out at a good point in the cycle. In terms of the shape of that property insurance portfolio, It's definitely more small to mid-market than you'd see in our London writings in that sector. The whole rationale for opening in the US and accessing that market is it is different to what we see in London. We don't really want to compete with ourselves. Any property business, in my opinion, or the vast majority of property business, in my opinion, has catastrophe risk associated with it. There are, of course, elements that are risk only, but there is definitely catastrophe risk within the portfolio that we are writing. But with any line of business that we underwrite that includes catastrophe, we manage it across the group and it fits within our cat appetite as a group. So we're very happy with the business that we're writing there. And importantly, the pricing that we're getting and the terms and conditions that we're getting, and we believe there's healthy margin within that.

Thanks, Paul. If I may follow up, does this mean that that US portfolio, the property book, as you build it out, becomes more sensitive to US secondary perils?

Not necessarily, and obviously always will depend upon how we protect it.

Yeah, I don't think it's any different to any other thing we do. As Paul said, I mean, all the US exposure is part of our cat appetite that the US office over time will have more diversification than it has today as we find more product, more underwriting teams. So as I said, I don't think it's anything different to what we do in London or even in Australia and other places where we write cat business. But as Paul said, smaller tickets, you know, business that doesn't have to leave the U.S. border to get cover is what we're targeting.

All right. Thank you very much.

Thank you. And once again, if you would like to ask an audio question, please press the star 1 on your telephone keypad. Your next question comes from the line of Nick Johnson with Deutsche. Please go ahead.

Thank you. Afternoon, everybody. Thanks for taking my questions. A couple of questions. Firstly, on property, there's been some recent industry commentary that London market players are becoming very competitive. And Lancashire has always been a good judge in the past of whether the market is being rational or reckless. Just wondering, where do you think we are now on that spectrum in terms of property? Second question is on the catastrophe loss estimates. So if you're looking back at Ian in 2022, your initial estimate was 160 to 190, I think. And I think from recent communications, it's now at 125. Is that level of reduction, is that indicative of the normal level of prudence you have in initial CAT estimates? Just thinking how much prudence you've got in the Helene and Milton estimates that might come through in prior year developments in later years. Thanks.

So on your first question, Nick, I think that no one, I wouldn't describe anyone's behavior in the industry as reckless at this point of the cycle. I think there's a realization that particularly for property insurance that's seen multiple years of aggregate rate change, that market's in a super good place. I think most people would agree with that. And we are now right in the largest portfolio of property insurance I think we ever have in our history. So it's inevitable that you've seen more competition this year than you have in prior years, but as we always talk to our underwriters, whether that's at the bottom of the cycle or the top of the cycle, everything is about adequacy, isn't it? So we thank Mr Greenberg for his comments, but I'm not sure in the lines that we write we see anyone doing anything really silly. now, but clearly for good business, good underwriters know that this is probably the top of the market. I think what's happened with cat losses this year, I think that will temper any excessive negative rate change. I think that will slow down any talk of rate reductions and obviously more cat activity this year does remind everyone that there's a reason why this market have premiums at the levels they are today because we need to be sustainable so I think any losses that you've seen recently temper any negative rate change and as I said I don't believe anyone there's no one we see being reckless at the moment Understood, thanks very much

On the loss ranges, Nick, I think I'd start with saying that we've followed the same reserving approach and methodology that we always do on any loss and that has historically proved to be a reasonably prudent methodology. I think a couple of things in terms of trying to work out where it's going to ultimately end up is I'd caveat that every loss is different and behaves differently, so it's hard to use one loss and say the next loss will act in exactly the same way. I'd also caution that, particularly for Milton, that wasn't actually that long ago and we're still receiving information at the moment. So to make any kind of bold statement in terms of where it could end up, I'm obviously not in a position to do that, but I would reiterate You know, our methodology, particularly on cat reserving, has been pretty sound. We've followed the same process we normally do. So hopefully, directionally, we'll see that. But, you know, it's very early.

Yeah. Hey, Nick, it's Natalie. Just on your initial ear loss, I think it was 165 to 175. So the reduction you mentioned is obviously not quite as dramatic as you said it is.

Okay. Sorry, I might have picked up the wrong numbers from somewhere. But thanks very much. Yeah, understood. Thank you.

Thank you. Once again, please press the star line to ask a question. And your next question comes from the line of Abid Hussain with Palm Neuron Liverum. Please go ahead.

Hi, everyone. Thanks for taking my question. Just one question from me, please, on margins. Just trying to square this in my mind, how were you able to reiterate your margin and ROE guidance despite the insured losses in Q3 and Q4, which seemed to be in total seemed to be double digit of your net insurance revenues. So it feels like you've got a lot of flex on your book, on your reserves. Or is it just simply, am I overthinking this, is it just simply that the pricing is highly adequate and it allows for the increased frequency of events that we're seeing now?

Hi Abid, it's Natalie here. So just taking the combined ratio guidance first, we guided to a mid-80s and said that was in an average loss year. What we're saying now is we think this year is going to end up being slightly higher than average loss year, so we're now guiding to the top end of the mid-80s combined ratio. And then on the ROE guidance, as I mentioned in my script, we're benefiting from a few other areas there, one of which is we're getting better other income from our Lloyds platform. And we're also benefiting from some positive reserving changes on the LCM platform. They're both kind of underwriting related but not coming through the combined ratio And then we've got slightly better investment returns as well than we were initially anticipating. So, you know, all in all, it's been a great year and it's been a really good demonstration of our strategy to diversify the business.

Okay, got it. Can you just remind me what is the top end of the guidance on the combined ratio, please?

Well, we didn't give a specific numerical range for that, but I think you can... probably work out what the top end of mid-80s is, given the loss information that we've also given.

Yeah, OK. And I'm showing no further questions at this time. I would like to turn the conference back to Alex Maloney for closing remarks.

Thank you very much for dialing in, and thank you for your questions.