Lancashire Holdings Limited

Hello and welcome to Lancashire four-year 1024 earnings 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 the call over to Alex. Please go ahead.

Good morning, everyone, and thank you for joining our call today. We're going to do things a little bit differently today. I'd like to take a moment, first of all, to reiterate our strategy. I'll then follow on with some brief highlights from 2024 and the priorities for our business for 2025. Paul will then focus on the underwriting trends. Natalie will cover the financials. And then we will go to Q&A. We adopt our strategy to where we are in the cycle, but our DNA remains the same. We leave with underwriting, looking to maximize growth opportunities at this stage of the cycle. And we actively manage our capital and risk exposures to deliver attractive returns through cycle. We do that with fantastic people where we look to attract and retain the best talent that fits within our culture. Some of you may remember me saying five or so years ago that we will look to grow materially as the cycle started to improve, that we will use our capital more efficiently, and we will diversify our underwriting portfolio to reduce volatility. If I now turn to 2024, you can see this is exactly what we have done. In another year of high industry insured losses, both natural catastrophe and large risk losses, we've delivered a fantastic ROE of 23.4%. We grew our premiums by another 11% in 2024. To put this into context, since the end of 2017, which was the softest point in the underwriting cycle, we have now more than trebled our premiums and added over 20 different sub-products to our underwriting portfolio. We've delivered a strong underwriting result. The benefits of the successful execution of our strategy is evident in our combined ratio of 80% on a discounted basis or 89.1% on an undiscounted basis. This includes over $200 million of weather and large risk losses, but the broader business we now have is better able to absorb large loss events. And although underwriting always comes first for us, as a broader business, we're also benefiting from a larger investment portfolio. This gives us a bigger stock of profits that ultimately help the bottom line. And we've delivered all of this without dramatically increasing our capital base. In fact, we were able to return the vast majority of our 2024 profits in regular and special dividends. and we have returned $294 million and still remain with a very healthy, strong balance sheet. 2024 is exactly what we set out to do as the market started to improve in 2018. As I look into 2025, the plan is to do more of the same. The external environment remains uncertain. So far this year, we've seen a lot of geopolitical change and a number of highly publicised large events, particularly in the aviation space, and of course we have seen the devastating impact of the wildfires in Los Angeles. Lancashire's strategy remains unchanged. The products we sell are designed to respond to the uncertain environment, and as already announced, we expect the LA wildfires to result in a net loss in the range of $145 to $165 million. As Paul and Natalie outlined, we anticipate delivering an ROE in the mid-teens for 2025, assuming a similar level of catastrophe and large losses as we saw in 2024, in addition to the wildfire loss. When we give you guidance, we typically have our assumptions in there for large losses and catastrophes. For 2025, we've added the impact of the wildfires on top of these assumptions. This would make 2025 probably the costliest year on record in terms of insured losses. This is obviously a severe scenario we're painting and not a normalised one. The attractive return profile we would be able to deliver in this scenario again exemplifies our strategy in action. As I've said before, I'm extremely pleased at this stage in the cycle. that we have a healthy balance sheet which allows us plenty of flexibility to underwrite the opportunities we see. We will continue to deliver what we said we would do. I will now hand over to Paul to talk you through the underwriting trends.

Thanks Alex. As Alex has just described, 2024 was an excellent year for Lancashire and the underwriting portfolio has contributed significantly to the group's overall result. What we have demonstrated are the benefits of growth and diversification strategy of recent years. The goal was to build a profitable underwriting portfolio that could withstand large losses and still produce adequate returns whilst using our capital more efficiently. In the following slides, I'll explain in more detail how 2024 is an excellent example of our progression. and how the underwriting strategy we have put in place will serve us well in 2025. I'll start quickly by covering some key metrics from 2024. We continue to grow ahead of rate in line with our stated objective to do so whilst underwriting margins are strong. For the seventh consecutive year, the rate environment was positive. As expected, we did see a plateauing of rates as demand and supply rebalanced. but the year ended marginally positive with an RPI of 101%. We had guided to approximately 10% growth in gross premiums written and delivered slightly ahead of this guidance with 11.3% growth. There were many areas we were able to grow in 2024. One of the most exciting developments was our newly minted US platform. It was an exceptional effort by all those involved across the business be up and running to underwrite business from Q2. This certainly aided our year-on-year growth and will continue to be a platform for profitable growth in the coming years. As I mentioned in my opening comments, 2024 helps demonstrate the more robust underwriting business we have built. It was far from a benign loss year. Natural catastrophe losses were approximately $145 billion, and there were a number of large risk losses, in classes such as marine, energy, and aviation. As a risk-taking business, we will assume our share of losses in large industry events. However, our exposure to such events no longer creates the same degree of volatility and underwriting result that it once did. As you can see from the slide, despite 2024 being far more active from a loss perspective than 23, our insurance service result is basically the same. Our combined ratio may be higher, but our use of capital is far more efficient. In large industry events, we can still have large dollar losses, but our larger, more diversified portfolio means that we are far more likely to still produce attractive returns, even in active loss years. So what does this mean for 2025? We expect to see the following in terms of market dynamics. We do anticipate 2025 to be the first year since 2017 to see marginal rate softening. I would remind everyone of the progress that has been made in the past seven years and that in most classes rate adequacy remains in a very good place. The rating trajectory is purely a function of the demand and supply dynamic. Whilst we do see increased demand still coming through in most lines of business, at the margin there is more supply offsetting this demand. Increased supply is predominantly from existing carriers redeploying strong earnings of recent years, which does tend to lead to a more disciplined market. Helping the overall dynamic is the fact that demand remains healthy and we live in a world of heightened uncertainty and risk. Whether it be continued geopolitical and economic uncertainty, large loss of bets impacting our industry, or continued pressure on prior year reserves, it all helps maintain focus. and is the reason we anticipate rate softening to be very manageable. So what does this mean for 2025 gross written premiums? Given that rate adequacy in most lines remains healthy, we still anticipate growing ahead of rate. However, year-on-year growth will be less than in previous years. As a guide, we would anticipate growth to be in the low single digits. Areas growth for us will be from the continued build out of our specialty reinsurance lines such as Marine Energy, Terrorism and Aviation, plus the development of the Lancashire US platform as existing products build out and new product lines are added. As always, our growth will be based on the market opportunity and we will happily pivot as necessary and not be driven by premium targets. At the 1st of January, renewal market conditions met our expectations. In terms of the loss environment, the first quarter has been highly active for the industry from a loss perspective. Alex has already spoken about the tragic and devastating wildfires seen in California in January, which is the significant loss event in Q1. In terms of the impact this will have on rating for the remainder of the year, our current thoughts are as follows. For property catastrophe reinsurance, we would expect there to be less rate softening than we originally anticipated. we would expect to see a flattening of rate in the US and more measured rate softening in other territories. There are, of course, a number of territories still to renew through the year that are loss impacted, and these will see year-on-year rate increase. So overall, the rating environment will now be more favourable than originally expected. Outside of property catastrophe reinsurance, we do not anticipate any significant change from our original rating outlook. other than, of course, if directly impacted by wildfires. What the California wildfires do do is act as a reminder that our industry is always subject to large loss events. It's also a reminder of the value of our products. Usually large loss events of this nature are catalysts for future demand, and any increased demand for the product will only help further stabilise the rating environment. When announcing our wildfire loss estimate, we made reference to an aggregate reinsurance protection that we have in place. Slide 8 is here to demonstrate the basics of this product. The objective of this protection is to help manage volatility of the group's returns in years of large catastrophe losses. The reinsurance structure provides coverage for our property insurance classes and our property catastrophe treaty reinsurance. Other classes are not covered by this product. At the 1st of January, we renewed this structure and extended the product to fully include all natural catastrophe perils. The product has a per-event deductible. After the per-event deductible is taken into account, the additional loss amounts erode the aggregate deductible. As you can see from the schematic, based upon the current loss estimate range, the California wildfire loss has eroded a good portion of the annual aggregate deductible. Once the annual aggregate deductible is eroded and after the application of a per-event deductible, additional loss amounts would be covered by the annual aggregate limit. Noting that no one loss or sequence of losses are ever the same, and for illustration purposes only, if we had an exact repeat of our 24 natural catastrophe loss events in addition to the Q1 wildfire loss, we would anticipate recoveries from the aggregate cover. we would also not be exhausting the full limit available. Whilst we can never predict every loss scenario, the value of this product is that despite a large catastrophe loss in Q1, we have a high degree of confidence that the business can still produce really attractive returns, even in a year when catastrophe losses could potentially be at historical highs. I'll now pass over to Natalie.