Lancashire Holdings Limited (LRE) Earnings Call Transcript & Summary

Welcome to Lancashire Q3 2025 Earnings Conference Call. The speakers today will be Alex Maloney, Natalie Kershaw and Paul Gregory. I'll now turn the call over to Alex Maloney, Group Chief Executive Officer.

Okay. Thank you, operator. Good morning, everyone. Thank you for joining our call today. We're going to take the usual approach. I will give some highlights on the progress the business has made so far this year. Paul will then focus on the underwriting trends. Natalie will cover the financials, and then we'll go to Q&A. I'm pleased to report that Lancashire continues to demonstrate the strength and resilience of its franchise, delivering robust results in a dynamic market environment. I'd like to highlight 3 key points. Our strategy remains central to our success. We continue to deliver disciplined profitable growth. Gross premiums are up 7.4% year-on-year, reaching $1.8 billion, supported by our diversified portfolio and disciplined underwriting. Even with the sizable industry loss of California wildfires in Q1, our business is in excellent shape with growth delivered by our new U.S. platform and selective growth in our existing lines. You can expect to see more of this throughout 2026. Looking at the market more broadly, the margins remain favorable and most lines of business fundamentally well priced. As we've talked before, after many years of rate increases, we're now seeing a more competitive market. We have yet to see more meaningful new capital enter the market rather being existing players looking to deploy more. It's still more capital in the industry, but it tends to be more disciplined capital. Second, we are actively managing our capital from a position of strength. In addition to our underwriting profitability, investment returns have been strong year-to-date. Our overall result has enabled us to declare a special dividend of $0.75 per share, reflecting our exceptionally strong capital position whilst retaining capacity to continue to expand the franchise. In addition, during Q3, we completed the minority buyout of Syndicate 2010, enhancing our flexibility and future earnings potential. Active capital management -- active management of our capital and risk exposures remain central to our strategy in order to deliver attractive, less volatile returns throughout the cycle. Finally, we look with confidence to '26 and beyond. As I've said before, the quality of the business we have built and the talent we have within the organization together mean that we can continue to deliver on our strategy of delivering more sustainable returns for our shareholders. I'm extremely pleased that at this stage in the cycle, we have a healthy balance sheet to allow us plenty of flexibility to underwrite the opportunities we see. With that, I'll hand over to Paul to talk you through the underwriting trends.

Thanks, Alex. Earlier this year, we set out our expectations for market conditions and our growth prospects in the context of those anticipated conditions. After 7 years of positive rating momentum, we expected 2025 to be the first year of rate softening. Our expectation was that this would be measured softening and that pricing in the vast majority of business lines was to remain very healthy and attractive. With this context, we still expect it to grow our premiums, albeit at a slower rate than in previous years. With the natural organic growth we would see from the build-out of our U.S. operations plus organic growth in established product lines with continued increased demand from clients, we believe that we would -- we could deliver low single-digit growth despite the marginal headwinds of softening rates. To date, the market has behaved in line with expectation as demonstrated with our group RPI of 96%. And we are currently at the upper end of our growth expectations with growth in gross premiums written of 4.8% if you exclude the impact of reinstatement premiums. It has been very pleasing to continue the build-out of the Lancashire franchise in what will be the eighth year of premium and product line growth. As expected, our growth has been aided by the development of Lancashire U.S. The foundation clauses of property D&F and energy liability have continued to mature, and we've recently added our third product line being general casualty. Outside of the U.S., we have measured growth in our reinsurance lines, in particular, specialty reinsurance, which has been a growing class of business for us in recent years. As we look forward to next year, it is likely that 2026 will also see rate softening across a number of product lines. We are strong believers in the insurance cycle, and it is likely that the supply of capital will outstrip increased demand, and therefore, there will be competitive pressure. However, importantly, we still believe that underwriting margins across the majority of business lines will remain healthy and attractive. Much like this year, we have options available to counteract the headwind of softening rate. Firstly, our U.S. operation will continue to mature, both via our newly established products and also, we will continue to add further product lines. Additionally, as Alex has mentioned, we have successfully completed the purchase of the minority buyer of Syndicate 2010. This is simply more of the business we already underwrite and control, but will benefit both our top and bottom line. Lastly, we should never forget that we're a reasonably large buyer of reinsurance. And in a softening market is not always completely negative. We will benefit from a broader, more competitive reinsurance that helps protect our net margin. As a far larger and more diversified business than at the same stage of the cycle last time, we have more reinsurance options and broader, stronger relationships with reinsurers that will allow us more reinsurance flexibility to help navigate the future market cycles. I'll now hand over to Natalie.

Thanks, Paul. Hello, everyone. Despite the Californian wildfire loss in Q1, I'm pleased to report that Lancashire's franchise continues to deliver robust performance, underpinned by disciplined underwriting and our diversified portfolio. In my remarks, I'll discuss our insurance revenue, investment returns and capital management, including the special dividend. Following on from the premium growth Paul has outlined, I'm pleased to say that our insurance revenue for the first 9 months was $1.4 billion, up 7.8% year-on-year. More of the premium we wrote in recent years is now hitting the P&L as earned revenue, which slightly outpaces the current year's written premium growth, which also includes reinstatement premiums related to the wildfires. I'll touch briefly on the loss environment. As Alex mentioned, the third quarter of life major losses for us, and we had no new significant catastrophe loss events in Q3. Although the environment for risk losses remained active, consistent with trends we saw earlier in the year, the relatively benign quarter is in stark contrast to the first quarter of 2025. The absence of major events in Q3 obviously helps our results and puts us in a good position as we head into year-end. Overall, our underwriting performance so far in 2025 is solid. This underscores the benefit of our diversified portfolio. Following the Q1 losses, the rest of the year has been manageable, allowing our underlying profitability to come through. The higher interest rate environment continues to benefit our investment portfolio. We achieved a total net investment return of 5.6% for the first 9 months of 2025, equating to $170 million of investment income and gains year-to-date. The portfolio benefited from higher coupon income as well as some valuation gains on bonds. We also saw contributions from our private investment funds and about 20 basis points of our return came from foreign exchange gains. The portfolio remains conservatively positioned with an average credit quality of A+ and duration of 2.1 years. Thanks to our performance, our capital position is exceptionally strong. The Board has declared a special dividend of $0.75 to be paid in December, which amounts to roughly $182 million in total payout. The special dividend reflects our excellent operating performance year-to-date and our philosophy of actively managing capital and returning excess to shareholders. We are able to do this while maintaining significant headroom above regulatory and rating requirements with plenty of room to continue to build out the franchise. This commitment to maintaining a strong capital base is demonstrated by our ability to additionally deploy capital by completing the buyout of the remaining third-party capacity in our Lloyds Syndicate during Q3, while still being able to make significant returns to our shareholders. We invested just under $70 million to take our ownership of Syndicate 2010 to 100%. This strategic move enhances our control and flexibility at Lloyds and demonstrates our ability to deploy capital opportunistically without compromising near-term earnings or our ability to pay substantial dividends. In summary, Lancashire is in an excellent position as we head into the final quarter of 2025. We have good momentum and a very balanced portfolio. Year-to-date, we've shown that even with some large losses early on, we can deliver healthy profits and grow the business. Thank you. I'll now hand back to Alex.

Thanks, Natalie. To conclude, I want to leave you with 3 key messages. Firstly, Lancashire's franchise remains strong and resilient, delivering disciplined growth and maintaining healthy margins even as market conditions start to evolve. Secondly, our capital position is extremely robust, allowing us to reward shareholders and invest in future opportunities. And finally, we look to 2026 and beyond with confidence, supported by our talented team, our diversified portfolio and our commitment to delivering sustainable, attractive returns for our investors. And with that, we'll now go to the operator for questions.

[Operator Instructions] Your first question comes from the line of Will Hardcastle with UBS.

The first one, just -- you just -- you touched on the U.S. platform and the opportunity for next year. I guess, is it possible to get sort of a run rate size of where that is today? And if you just annualize that growth, any sort of touch on quantification for that? I know you touched on, it is the maturity of the businesses and the new business lines coming on, but any sort of help there would be useful. And then just touching on the man-made losses in the quarter, it sounds like it's continued from H1. Is it possible to say which lines of business these have arisen in? There was a reinsurer that discussed GL man-made losses as a man-made one, which worried me a little bit, but just touching on that, that would be great.

Will, it's Paul here. I'll take that first question regarding the U.S. Look, I think similar to what we said at the start of this year, you've got 2 kind of aspects of growth in the U.S. It's the lines that we established 18 months ago now that will continue to mature. And if you think back to when we grew out Syndicate 3010, you usually wait at least kind of 3 to 4 years before you've got a fully mature book. So on those lines, they kind of made good progress. We've made really good progress on those this year. They're very established and will continue to grow. We very much anticipate that to be the case next year. I think as I said in my script, we've added one more product line this year. Our intention is to add further product lines. That will obviously always be on the same basis. Our product lines, we need the right people with the right business plans, but there's numbers of conversations going on all the time on that. So we will fully expect that platform to continue to build out. Much like it has been this year, next year will be one of the engines for growth for us. Obviously, we don't split out the U.S. specifically in terms of premiums, but we called it out this year as an area that would aid our premium growth, and that has been one of the areas that's done that.

So on your question about losses, I think there was an interesting report that Aon published, I think, this week talking about the heightened risk environment. So I think what's important is, as the market starts to soften, underwriters don't forget that we are in a heightened risk environment. I think there's been some well-publicized downstream energy losses that you've seen in the last quarter. Obviously, there's some more activity in the airline space. So losses are still happening. Events are still there. So I think that's the message that we have given to our underwriters. We still need to be disciplined, but there are losses in the quartile, but there's nothing material for us clearly, but there's definitely some activity.

Your next question comes from the line of Shanti Kang with Bank of America.

So I was just curious what your expectation is for the upcoming renewal periods. What's going to be the area of focus for you guys and what pockets you're going to deploy your capital into? And then I saw that the RPI for this quarter was flat versus H1. And I was just curious if you found that, is that surprising at all to you? Or is there any reason why that was actually flat when we're seeing continued conversation about market softening? Obviously, it's a benefit, but just curious there. And then the last question is just on your retro protection. I think you guys are still due to renew that ahead of 2026. How are you thinking about that for the upcoming year? Will you look to increase in areas or decrease at all?

Shanti, it's Paul here. I'll take the RPI one first. I wouldn't read too much into Q3. It's not necessarily a significant quarter for premiums, but I think it's fair to say the conditions that we saw in Q3 were very similar to what we saw in Q2. But as I said, it's not a significant quarter in terms of major renewals and we're tracking on an RPI perspective exactly in line with what we said at the start of the year, which was we did expect a marginal softening. So I think 96% RPI kind of would be marginal softening. In terms of the upcoming renewals, I think, as I said in my script, we do think there will be some softening of rates as we move into 2026. As Alex alluded to, there is more competitive pressure because there is more supply of capital. There is still increased demand coming through, though, and we expect softening to be measured, but there are still really healthy margins in the vast majority of lines of business. So there are still areas in which we feel we can grow. I think as I just answered in the last question, one obvious area is the U.S. platform. That's an area we continue to grow the existing lines and also add additional lines kind of outside of that. And as we've seen this year, we still, on the specialty reinsurance side, that's something we started to grow out a couple of years ago. That continues to mature. I'd expect that to also be an area of focus next year where we're going to have continued opportunity to grow. And even on some of the property reinsurance lines, there are still clients out there looking to buy more limit, and underlying rates are still healthy. If we have core clients that want more limit, we will have the opportunity to grow with them at what are still very healthy margins. That probably covers your first question. And then your last question, I believe, is on own retro. Yes, we renewed the vast majority of our non-marine reinsurance coverage, retro coverage, at the 1st of January. We are currently in the kind of buildup to that. Just like every other part of the market, we expect there's been more competition, which if the buyer is favorable. So we will look at that and we'll look to trade with our core partners through that. I think until we get nearer to the nuts and bolts of renewal trying to call out exactly what we're going to do now is probably a little premature, but we do expect to have kind of a broader, more competitive price reinsurance as we move into 2026.

The next question comes from the line of Vash Gosalia with Goldman Sachs.

Two questions from my side. The first one on just your top line growth. So obviously, your guidance is low single digit. But feels like you're growing closer to mid-single digits. So just trying to think around that as to what should we expect for 2026, one. But also, could you then help us understand how much of this top line growth is just FX benefit because I don't think that's been broken out. So it would be great to know that. The second question is just on the capital side. So obviously, you are in a strong capital position. But as I understand, there are some BMA model changes, which are yet to come. So just trying to think around this aspect a bit more quantitatively as to what should we be looking at which really reflects the strength of your capital? I mean any color or guidance on this would be really helpful.

Vash, I'll take the first question, and apologies because I'm boring on this, but I always remind everyone, when we give guidance at the start of the year and what we expect. But we're never driven by a top line target. We're always driven by opportunity, and that's something we drive into our underwriters all the time. Look, it's plaguing, we are tracking currently tracking ahead of, we said, low single digit, you're correct, if you strip out reinstatement premiums, we're closer to mid-single digit, but it's not an exact science. I'm obviously very happy that there's been opportunity to grow marginally ahead of where we guided. I think FX, to be honest, is relatively immaterial. So I don't think there's anything there to be concerned about predominantly U.S. dollar premiums.

Vash, it's Natalie. I'll take the capital question. I think as you can see from the special dividend and the purchase of the Syndicate capacity in the same period, we're exceptionally well capitalized. It's something that we focus on all the time where we've always been looking at capital flexibly. Anything that we can't deploy in the short term, we're very active in returning that to our shareholders. But we do like to retain some capital just to give us flexibility for opportunities arise such as the purchase of the Syndicate. The BMA model changes are particularly concerning to us. The BMA, the FCR model is more constraining on capital, it's actually a rating agency capital that's more constrained for us. We have been bringing in the BMA man-made risk charges in over the last couple of years, and I think there's 1 year to go in our capital disclosures at the half year. I think you could see the impact of that in the investor presentation. And we will be giving a bit more flavor on how we think about capital in our forthcoming Investor Day in December, so you'll get a bit more detail then as well. But the main message is that we remain exceptionally well capitalized.

Got it. I'll just wait for the December 2nd.

The next question comes from the line of Kamran Hossain with JPMorgan.

A couple of questions for me. The first one is just on the capital kind of distribution special dividends. How should we think about it? Should we think about historically in the past, you've done Q3 you've done special and then on occasion, you've topped up at Q4? Or should we think of it as you've done the Q3 special dividends you've invested I think very sensibly in Syndicate 2010. So that's kind of the capital you generated this year roughly gone? Or should we expect maybe a further evaluation of this in Q4? And the second question is just on the return on equity guidance. From all your comments, even taking into account the man-made loss environment, it sounds like Q3 was pretty good, but there's no change to the return on equity guidance. I'm probably reading way too much into that, but I just wanted to confirm that.

Kam, on the special, we looked at the special the same way that we always see. We look at what capital is generated during the year, what we can afford to pay back as well as retaining some flexibility for the year-end, what reinsurance we purchase, what business we worry out 1/1. This year won't be any different to that. We'll think about the Q4 any potential special in the same way that we've always done. As I alluded to, I think, as you know, we've always been exceptionally well capitalized, and we've always retained a little bit of buffer in there for things such as Syndicate buyout. So I think you almost need to think of the two things kind of separately, the specials, we'll continue to think about it in the same way as usual, and the Syndicate buyout was more or less using some of our capital hedging that we've built up over the last few years.

And then, Kam, on the guidance, we gave our updated guidance at half year, obviously, when we gave you some numbers and some context of that, that we're very happy where we are. We're very comfortable with the updated guidance where we are today. We've had a decent Q3, but as we've said, there are risk losses around. So I think at this point, we're happy where we are. We can demonstrate that we can return the capital. We're very well positioned for 1/1. So we're not updating that guidance today.

Kam, sorry, it's Jelena, just to add to that. What we gave you at the half year stage is very much a framework that helps to kind of think about the ROE. So we gave you on the basis of the same loss environment, as you saw in the second half of last year what the likely outcome would be. Obviously, it's never going to be exactly the same because losses always thought slightly differently, but it's given you hopefully a good framework of how to think about the likely outcome for this year.

The next question comes from the line of Joseph Theuns with Autonomous.

Just sort of thinking about your comments there Jelena about the ROE guidance. Again, sorry to lay around about this. But I think generally, the nat cat environment in H2 so far has been more benign than it was last year. So if this continues, is it fair to expect sort of an ROE upgrade kind of closer to what we saw in 2024, which was sort of the 20% mark? That's sort of the first question. Second question is just, have you had any concerns or change in strategy for your U.S. E&S buildout amid pricing pressure that we've seen in recent quarters from some of the sort of U.S. commercial players there?

Joe, it's Jelena. I think on the ROE point, I mean, there's still 2 months of the year to go with. So you've got to, I think, a very nice framework as we have -- as we sort of say repeatedly, everybody's bonus in the business is dependent on an ROE. We all get remunerated in exactly the same way as our shareholders. So from that perspective, we're sort of fully tied into delivering a output of return as we can. Obviously, there's still 2 months of the year left to go.