Lancashire Holdings Limited (LRE) Earnings Call Transcript

Hello, and welcome to the Lancashire Holdings Limited Q3 2026 Earnings Call. [Operator Instructions] Today, I am pleased to present Alex Maloney, Group CEO; Paul Gregory, Group CEO; and Natalie Kershaw, Group CFO. Please go ahead with your meeting.

Thank you, operator. Good morning, everyone, and thank you for everyone who has joined us today. I'm pleased to report Lancashire's momentum continued in the third quarter, resulted in a strong underwriting and financial performance for the year-to-date. As usual, Paul and Natalie will provide more detail. But first, I would like to emphasize the key points from today's statement. Given the strong performance year-to-date, we expect to meet the guidance we have given and deliver a high teens RoE for the current financial year. Due to our strong operational performance so far in 2026 and our robust balance sheet, we have announced a special dividend of $182 million, equivalent to $0.75 per share. This will be paid to shareholders in early December and continues our long-standing approach of returning surplus capital to shareholders as quickly and as efficiently as possible. As we guided at the start of 2026, gross premiums remained stable on an underlying basis and the benefit of business written in prior underwriting years have delivered a modest 1% year-on-year increase in Insurance revenue. The loss environment in the quarter was mixed with active man-made losses, including the impact of the ongoing conflict in the Middle East, with a relatively benign catastrophe experience. As usual, we will provide guidance for 2027 when we report the current year's financial results in March. As you know, we are firm believers in the cycle, and we always actively manage our capital to match the underwriting opportunities available. And this has been our guiding principle at every stage of the market cycle we're in. So of course, you should expect to see us maintain a relentless focus on deploying capacity, only where risk-adjusted returns meet our expectations, whilst remaining committed and relevant to our core clients. Although this means we may limit exposures in some parts of our portfolio, we have a number of levers to help us manage this cycle that were not available or not to the same extent in previous periods. For example, our diversified business has many more product lines, each presenting different opportunities and risk and return profiles, so we can be agile and quickly allocate capital where it makes most sense. As a larger and more diversified group, we can use Reinsurance effectively to manage our net exposures whilst maintaining appropriate gross lines and of course, a benefit of a softening market is that this tool can be used to make us more efficient. Our balance sheet is well capitalized with prudent loss reserves and a conservatively positioned investment portfolio that can make meaningful contribution to Lancashire's financial performance. This ability to be agile and to maintain and to remain disciplined as we manage the cycle underpins our ability to deliver attractive returns to shareholders across the whole cycle. Over the past few years, we've made a priority to attract and retain the best talent to market. Lancashire has a high-performing experienced workforce that is deeply invested in the company's long-term success and understands how to navigate market cycles with discipline and confidence. We will continue to add skills, capabilities and product lines to ensure we not only manage this stage of the cycle appropriately, but we are set up for high levels of growth when the market turns. So as demonstrated by today's trading statement, I believe we are very well positioned as we approach 2027 and the challenges and opportunities it will undoubtedly bring. With that, I will now hand over to P.G.

Thank you, Alex, and good morning, everyone. Turning to Slide 3. Our year-to-date performance reflects the strength and resilience of the Lancashire underwriting franchise. Gross premiums written of $1.8 billion are stable on an underlying basis, in line with guidance at the start of the year, and market conditions have also been as anticipated with a portfolio RPI of 93%. Within that, we continue to see different dynamics across the portfolio with the majority of product lines remaining rate adequate. Insurance premiums have increased by 5%, benefiting from growth in Energy and Marine lines related to both additional premiums associated with Marine War and the continued development of Lancashire U.S. We've continued to add new product lines to Lancashire U.S. with Property Facultative Reinsurance, the most recent addition, following environmental liability, financial lines and Inland Marine earlier this year. We'll enter 2027 with a suite of 7 product offerings. In London, we've added two product niches to our Marine offering following the hiring of two new underwriters, which will also be fully up and running in 2027. All of these new product lines will naturally mature in the next few years, and we will be patient and build them out in line with market conditions. Reinsurance premiums reduced by 6%, primarily reflecting less reinstatement premiums and our deliberate actions to reduce proxy retrocession exposure as we focus on cycle management, and continue to manage catastrophe risk and earnings volatility through the cycle. None of this is accidental. We have consistently said we will hire new underwriters that can add value to overall underwriting proposition whilst continuing to adjust net risk appetite, portfolio composition and capital deployment as market conditions evolve. The benefit of a larger, more diversified portfolio and product offering, is it gives us greater flexibility to manage the cycle. Not all products move at the same pace and are at varying levels of adequacy. Therefore, we have more options to reallocate between products, classes and geographies, bringing lower volatility to both top and bottom line. We also have broader reinsurance options available, allowing us to manage the cycle appropriately, maintain relevance with clients through the cycle. This flexibility and willingness to be agile and disciplined in the face of changing market conditions is one of Lancashire's key competitive advantages and allows us to continue generating attractive risk-adjusted returns even as the market transitions to softer phase of the cycle. Overall, we are very pleased with the underwriting performance year-to-date, and it demonstrates the value of our disciplined cycle management approach. We do anticipate the market to remain competitive in 2027, and that is exactly what we have planned for. Our Underwriting business is designed to manage the cyclical nature of the industry, and we'll continue to deliver attractive through cycle returns. I'll now hand over to Natalie to discuss our financial performance in more detail.

Thanks, Paul, and good morning, everyone. Turning to Slide 4, I'll briefly cover financial performance, investments and capital. Starting with Insurance revenue. Insurance revenue increased by 1% to $1.41 billion. reflecting the continued earnings through of business written in prior periods. As Paul has described, there are a number of moving parts within the portfolio, but the business continues to perform well and the benefit of the diversification we've built is coming through. Turning to losses. Third quarter was benign from a natural catastrophe perspective. We did see some man-made loss activity, including from the ongoing conflict in the Middle East, but our exposure remains limited and well within our risk appetite. Overall, the loss experience has allowed the underlying profitability of the portfolio to come through in the year-to-date, and we remain on track to deliver our high teens return on equity for the year. Now looking at Investments. The Investment portfolio generated an overall return of 0.6% for the first 9 months. Investment income remained attractive but this was offset by unrealized mark-to-market losses in the third quarter, principally as government bond yields increased. Importantly, this does not reflect any deterioration in the quality of the portfolio. Our average credit quality remains AA-, and duration is relatively short at 2.2 years. At the end of September, the portfolio had a book yield of 4.6% compared with a market yield of 5.3%. So while higher yields have created some short-term mark-to-market volatility, they also allow us to reinvest at more attractive rates and will support investment income going forward. Finally, capital. Our capital position remains very strong. Our approach here hasn't changed. We retain the capital we need to support the business and take advantage of attractive underwriting opportunities. And while we have capital surplus to those requirements, we return it to shareholders. Given our strong performance and capital position, the Board has declared a special dividend of $0.75 per share. Even after that distribution, we retained significant financial flexibility to support the existing portfolio and invest in future opportunities. So overall, we're pleased with the financial performance for the first 9 months. The Underwriting business is performing well. Our Investment portfolio remains conservatively positioned, and our strong capital position allows us both to invest in the business and return excess capital to shareholders. We remain on track to deliver a high teens return on equity for 2026. And with that, I'll hand back to Alex.

Thank you, Operator. Can we go to Q&A, please.

[Operator Instructions] We have our first question comes from Shanti Kang of Bank of America.

RPI today seems to being up a bit better than I was expecting. So that's good. How much of that do you think is maybe due to the actions that you've taken shifting the mix or stepping away from specific lines? And then just into 1/1/27, what's your base case for the rate environment there? And are there any lines that are holding up a bit better than others?

Shanti, I'll take those questions. I think on the RPI today, -- to be honest, I think it's performing exactly as we expected it to -- at the start of this year, our guidance on our kind of view on what rating would do through the course of the year was kind of high single-digit rate reductions. And then as you can see, that's exactly where we are tracking. You can get -- depending on the quarter, you can get slightly different changes depending on business mix. But the business mix that we've had through the year is pretty much in line with our anticipation, and I think that's why the RPI is tracking exactly with what we gave guidance to at the start of the year. I think on your second question is as we move into '27 and as I said in my script, we definitely anticipating a continuation of softening. So we're going to be in a more competitive marketplace. I think as I also made reference to the majority of product reliance remain in a good position from a rate adequacy perspective. Undoubtedly, there are some parts of the market that are moving faster than others. I mean if you look at the casualty-based lines, they're far more stable than some of, say, the Property Insurance lines, which I think is very well documented that there's some quite high competitive pressures in things like Property, D&F, Open Market business. Look, our job is very much to try and balance our portfolio in the best possible way. There are parts of the market that are competitive, but that doesn't mean within that there are not pockets of good opportunity and accounts that have good rate adequacy. It's just in these environments, you have to be a bit more discerning with your underwriting in terms of the losses that -- in terms of the accounts that you actually underwrite. So look, we expect generally for there to be more softening. As Alex said in his script, as we get to March, we'll give you some more guidance as to where we think that will be across the portfolio in terms of the rating environment. 1/1 is the best kind of data point we will have, which is why we wait until after 1/1 to give you some guidance.

Next question comes from Kamran Hossain from JPMorgan.

First question is on the U.S. expansion. Just interested in kind of -- if you can give a bit more color on how far along you are in the U.S. expansion versus kind of where you want to get to? Just trying to work out how much of a tailwind it will be for kind of '27 and beyond? And the second question is just on the special dividend. Just wanted to confirm that the approach will probably be similar to last year that you announced a similar special dividend at the third quarter. Evaluate the opportunities at 1/1 and then return a little bit more capital with the full year results. So I just wanted to make sure the thought process going into 2027 looks kind of roughly similar to that.

Kam, I'll take the question on the U.S. expansion and kind of where we are. I think, look, whenever we enter a new product line, we expect it to take at least 3 years to get up to maturity. So if you think about it, we started with two product lines, I would say they're close to maturity based upon the current market conditions we're in, obviously. We then entered general casualty. It's about 1.5 years now since we started that. So that's still building out. And then the more recent lines that we've added through the course of this year, really, they're only going to start -- some of them have started underwriting now, but 2027 is really going to be the first full year. So you will expect that U.S. operation to continue to grow and mature. As I often say, it will very much be aligned with the market opportunity. And we'll very much be patient in the market environment that we're in, but what it's doing is creating a very solid base for us for when the market inevitably turns in any of those product lines. So ultimately, yes, that will continue to be an area that will grow within our portfolio, but it will be very much aligned to the market opportunity.

I think as well, Kam, when we give our guidance for '27, we'll just give you a little more color on the U.S. operation and what we're trying to achieve. As Paul said, the reason we haven't really given much detail at this point, we still want to build that moat.

Kam, I'll take the second question on the special dividend. Yes, essentially, you're exactly right. We look at capital at Q3 post [indiscernible] season and see what we're comfortable with returning at that point, but we always want to retain some flexibility going into year-end, the renewals and the outlook purchasing. And then we'll look again at capital at the next Board meeting in the first quarter of next year. So exactly right, that the process is similar to previous years.

Next question comes from Alice Palumba from Goldman Sachs.

My question is on growth. So you mentioned in the release that you continue to hire talent, but this appears to be a departure from your earlier philosophy of shrinking when the market pricing weakens. Could you just help us understand how should we think about growth over the coming few years and the costs associated with these hires, should the market soften beyond current expectations?

Alice, I think where we can hire great talent, which obviously is important is retaining great talent in our business. We're just going to do that. And we've had a really good year of momentum where we continue to hire great people. And actually, even some of the recent M&A is an opportunity for Lancashire, it just displaces people. So where we can find great people, and grow products that diversify our book. And as you know, we've grown our diversification massively in this cycle. We're going to continue to do that. I think what won't ever change at Lancashire is how we manage the cycle. So we are obsessed with the cycle, and we believe we have the skills and the talent to manage this stage of the cycle. But we do fully intend to continue to add people where we can and product that we can. So that you shouldn't expect as the market softens, Lancashire to retreat as much as we did last time, but one thing that we will 100% do, we will reduce our risk levels mainly through Reinsurance as the market softens. So the net outcome will be the same, but we just may look different in this submarket.

Your next question comes from Joseph Theuns from Autonomous.

The first one I had was looking to get a bit more color on the growth in the Insurance book. And I was wondering if you could kind of give an indication of sort of how much of the -- of this was attributed to the new U.S. business compared to maybe some of the other areas that you called out? So that's the first question. And on the second, I was kind of wondering if you could give sort of a level of -- an indication of the level of reserves have been put aside for losses related to the Middle East and also kind of an idea of how this has progressed since Q2.

Joseph, I'll take the first question. On the Insurance line, there's really been two areas where we have seen growth in premiums year-to-date. One is certainly the continued maturity of the U.S. operation, which you alluded to, and we called that out earlier this year when we were giving guidance around you would likely see growth there as those new lines continue to reach maturity. And then the second area, again, which I alluded to in my script is there has been additional premiums coming through in relation to marine-war, given the ongoing conflict. So we're seeing some benefit there. Elsewhere, things are relatively stable. Obviously, there's a few moving parts here and there, but they're the two drivers of what we've seen on the Insurance portfolio year-to-date.

Joe, I'll take the second question on the Middle East reserves. As you have seen from the release, any losses that we do have from the Middle East are not -- certainly not material enough to disclose. As I said, our exposure remains relatively limited. We are underweight in the Middle East. So although we do have some losses, they are definitely not material and aren't having a material impact on our reserves at the moment.

Understood. If I might just sort of quickly follow up on sort of the response to the first question. The -- is it sort of fair to assume that the sort of driver of the business sort of roughly equal sorry, in terms of the Insurance book the increased growth between the U.S. business and the sort of marine war, is it sort of roughly even?

Sorry, Joseph, we don't provide that split. So unfortunately, I'm not going to about to answer your question on that one, apologies.

Your next question comes from Will Hardcastle from UBS.