Earnings Transcript for LRE.L - Q3 Fiscal Year 2024

Operator: Hello, and welcome to the 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.

Alex Maloney: 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 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 organization 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 $0.75 a share and still remaining 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 [Audio Gap] right again at 9%. But as many industry commentators have already pointed out, this year is seeing a heightened loss environment. Whilst Lancashire is not immune to these events, in this context, I'm pleased to say that Lancashire’s exposures are very manageable. Today we have provided a range for all Q3 CAT events and hurricane Milton in Q4 of between of $110 million and $140 million. As such, we expect to deliver on our ROE guidance and coming through 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 to our investors As I've said before, I'm extremely pleased that 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.

Paul Gregory: Thanks, Alex. 2024 will be the seventh consecutive year of compound rate increase on our portfolio. As anticipated, there has been a stabilization 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 rating 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 expectations is that the recent loss activity both highlights the value of the product that we sell, which will always help demand and also prolongs the discipline 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

Natalie Kershaw: Thanks, Paul. Hello everyone. Our yesterday’s financial performance has been excellent. The second half of 2024 has been 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 for the last five years. In spite of the catastrophe losses incurred from hurricanes Milton, Helene. and Debby, plus Storm Boris on the Calgary Hill event, I am pleased to announce a special dividend of $0.75 a share. Following these capital returns, we remain exceptionally well-capitalized to be able to fund all our plan growth in 2025, which we expect to be above rate. Likewise, this year has also seen us grow both rates. Our insurance revenue on an IRS 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 event just mentioned will be in a 100%, 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 today to $72.8 million. No loss was individually material to the Group with the Baltimore Bridge disaster being the most significant. As these are concerned, 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 our RE guidance. As we have benefited from better other income. As you will know that now, this is also a reflection of best underwriting trends as it comes from our Lloyds and our Asian platforms. Our ROE is also supported by slightly better investment returns than initially anticipated. Investment portfolio has returned quite the spent 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 Double A minus on a short duration of 1.9 years. With that, I'll now hand back to Alex to conclude.

Alex Maloney: Thank you, Natalie. So just to conclude we see no change to 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 are in. We’ll now go to Q&A

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Kamran Hossain with JPMorgan please go ahead.

Kamran Hossain : Hi, afternoon. Just want to say kind of well done on a another good year and hopefully that doesn't take us 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, the key three specs I think you saw we welcome, this incident whether this is now kind of a two-part of the proceeds, you kind of largely weighted some here in Q3 and then kind of came back into the bit more in Q4 or whether this is now kind of this is a 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 incident where this comes from is this growing out of teams, or do you believe higher but naturally they will grow their books or where does this come from next year? Because it sounds like it's, you it's the – it sits in the plans and where it comes from? Thank you.

Alex Maloney: So I think I'll start this one Kam. So you know, 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 roots a fair bit of loss activity you’ve seen throughout the year. So, we like to keep let's own capital. We believe that specials appropriate at this point, but it still gives us lots of opportunities we see as we come into 1/1. These are expect to grow in ‘25. Some of that will be at our US operation, which we’ve doing it now, we are 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 US operation and organic growth. But we have plenty of capital to grow. We're still in a really strong position. Plus where you like to be give us options and certain modes, but yeah plenty of opportunities for us.

Kamran Hossain: Thank you, Alex.

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

Anthony Young : Good afternoon, and 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 seems, which is lower than this year's growth. So, are you able to give any color on your - if, if that's a reasonable expectation next year? And then secondly, on the - coming to the losses, are you - could you have a update on your loss experience on casualty reinsurance side? And also any updates on the Ukraine Russia conflict. The aviation loss from that?

Paul Gregory: 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 rates. So we would normally do, we give more concrete guidance, 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 kind of 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 reserves. That remains stable for a long of period of this time now as obviously as we do in major loss, we will continually assess it, but at the moment there has been no change to that. On casualty, that I'll reiterate what I say, on casualty rate we obviously or the industry obviously saw a lot of social inflation and lost cost trend go in the wrong way on the kind of older casual casualty years we obviously only entered during the course of 2021, at which point obviously a lot of those kind of trends it already manifested what this means is obviously we can build that into our pricing and also importantly our reserving And then everything that we've seen thus far, leads us to believe that we still have, 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.

Anthony Young : Thanks for that. If I may just follow up quickly on the aviation with loss reserve. So, has any claims been settled or paid to policy holders or that still remains claims outstanding?

Paul Gregory: Yeah, no, so I think from and this you heard saying and I’ll talk from an industry perspective. I think it the same from various press reports. There have been a number of number of settlements, obviously, just remind you when this, all started off here, it was very much. But there would be settlements and all parties would come together to find a reasonable resolution. That means there is obviously a lot of ongoing legal activity in this area and I anticipate that will continue – as anticipate it will be a continuation settlement.

Anthony Young : Thank you.

Operator: Your next question comes from the line of Andreas van Embden with Peel Hunt. Please go ahead.

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

Paul Gregory: Hi, Andreas. I'll take that. No obviously, and I’ll come onto the property piece, obviously, at the moment, the US platform is both property and then 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 very well-known and it’s at a very healthy point and has provided us a great opportunity to build out at a good point in the cycle. It's in terms of the shape of that property insurance portfolio is definitely more small to mid-market than you'd see in our kind of London ratings in that sector. The whole kind of rationale for opening in the US and accessing that market 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, there 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 write in there. And importantly the pricing that we're getting and the terms and conditions that we're getting and we believe that, healthy margin within that.

Andreas van Embden : Thanks, Paul. If I may follow up that that doesn't mean that that US to this portfolio of the property book as you build it up becomes more sensitive to sort of US secondary perils?

Alex Maloney: No, not necessarily and obviously always it will depend upon how we protect it.

Paul Gregory: Yeah, I don't think there's any differences 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 what it has to-date as we find more products, 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, a business that doesn’t have to leave the US border to get cover is what we are targeting.

Andreas van Embden : Right. Thank you very much.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Nick Johnson with Deutsche. Please go ahead.

Nick Johnson: Thank you. Good afternoon, everybody. Thanks for taking my questions. 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 back at in 2022 your initial estimate was 161 90. I think. And, I think from recent communications, it’s now 125. Is that level of sort of reduction is that indicative of the normal level of prudence, you have in initial CAT estimates. I’m 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.

Alex Maloney: So on your first question, Nick, I think look, no one I haven’t described 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 in more so years of as we got rate change that market is in a super good place. I think most people would have agree with that and we are now writing 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 told to our underwriters whether that's a bottom of the cycle, or it’s up to the cycle everything is about adequacy isn’t it? We think Mr. [Indiscernible] comments, but I am not sure in the lines that we write, we see anyone do 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 tamper any excessive negative rate change. I think that will slow down any talk about rate reductions and obviously, more CAT act to 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 tamper any negative rate change and as I said, I don’t believe anyone. There's not one we see being reckless among.

Nick Johnson: Understood. Thanks very much.

Paul Gregory: And on the loss ranges, Nick I think I'd start with saying that, we followed the same reserving approach and methodology that we always do on - in any losses. And that is 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 would caveat that every loss is different - at least 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 still we are saving information at the moment. So to make any kind of bold statement, in terms of where it could end up I am obviously not in a position to do that. But I would reiterate our methodology, particularly on CAT reserving has been pretty sound. We follow the same process, we normally do. So, hopefully, directionally, we will see that, but, it is very early.

Natalie Kershaw : Yeah. Hey, Nick, it's Natalie. Just on your initial E&S, I think it was 165, 175. So the reduction you mentioned is obviously not quite as dramatic as you said it.

Nick Johnson: Okay. Sorry, I might have picked wrong numbers some way. But thanks very much. Yeah, understood. Thank you.

Operator: Thank you. [Operator Instructions] And your next question comes from the line of Abid Hussain with Panmure Liberum. please go ahead.

Abid Hussain: Hi, everyone. Thanks for taking my questions. Just one question from me please on margins. Just trying to squarely to mind how were you able to reiterate your margin and ROE guidance despite the insured losses in Q3 and Q4, which seem to be, - in total it seems to be double-digit of your net insurance revenues. And so it feels like you've got a lot of flex on your book - on your reserves or is it just a simply as I would think this is that simply that the pricing is highly adequate, and it allows for the increased frequency of – we are seeing now?

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

Abid Hussain: Okay. Good. And then what is the condition of - is the top end of the guidance on the combined ratio, please.

Natalie Kershaw : Well, we didn't get a specific numerical range for that, but I think you can probably work out what the top end of mid-8o is given a lot of information.

Abid Hussain: Yeah. Okay.

Operator: And I am showing no further questions at this time. I would like to turn the conference back to Alex, Maloney for closing remarks.

Alex Maloney: Thank you very much for dialing in and thank you for your questions.