Lancashire Holdings Limited (LRE) Q4 FY2025 Earnings Call Transcript & Summary

Hello, and welcome to the Lancashire Holdings Limited Full Year 2025 Results Conference Call. [Operator Instructions] On the call today, we have Alex Maloney, Group CEO; Natalie Kershaw, Group CFO; and Paul Gregory, Group CEO. I will now hand the call over to Alex. Please go ahead with your meeting.

Thank you, operator. Good afternoon, everyone, and thank you for joining our call today. It's our usual approach, and I will give some highlights on the progress of our business. Paul will focus on the underwriting trends. Natalie will cover the financials, and then we will go to Q&A. Lancashire today is a stronger and more balanced franchise. Whilst our DNA remains the same, 2025 was a year that demonstrated the strength and durability of our model, one that blends disciplined underwriting, active cycle management and efficient capital management. Against the year that started with the California wildfires, one of the largest catastrophe losses the business has ever faced, we delivered another set of resilient results. We delivered an undiscounted combined ratio of 93.1%, an investment return of 7% and most importantly, an ROE of nearly 21%, whilst continuing to improve the quality and durability of our earnings. Our underwriting portfolio today is more balanced, more diversified and more capable of generating attractive returns throughout the cycle. This is the third consecutive year of above 20% returns and marks yet another proof point of our strategy. It's a testament to our strategy in action over the last 3 years that we have on average paid out 100% of our earnings whilst growing our business at about 8% on average. Looking at the market backdrop more broadly, we have always believed the market is cyclical. And whilst we are seeing a more competitive market, the portfolio we secured at the 1st of January renewals is still one of the best we have ever had in terms of rate adequacy. The Group RPI is still well ahead of pre-2023 levels, and this is reflective of a market where after a few profitable years, the supply of capital has increased as existing players deploy more retained earnings and this tends to be more disciplined capital. Demand meanwhile, has not kept pace with the increased supply of capital. But I do want to emphasize that margins remain favorable, particularly at the net level, taking into account reinsurance costs. This gives us confidence when looking at our profitability for 2026 and beyond. So looking ahead, this type of market creates new opportunities for Lancashire. The cornerstone for us will be the continued expansion of our U.S. operation. And also, as we have seen in the past, market consolidation typically occurs at this point in the cycle, and this may well give us opportunities to hire talented individuals to join our fantastic underwriting team. The other critical element of our strategy is our active capital management from a position of strength. Since inception, we have returned $3.7 billion to our shareholders. And today, our strong 2025 results have enabled us to declare a special dividend of $0.50 per share, which is an additional $121 million alongside our regular dividends. As you will see from our capital disclosures, we've been able to do this whilst retaining an extremely strong capital position and retaining capacity to continue to support the future development of our franchise. All this means that, as Paul and Natalie will outline, we anticipate delivering an ROE in the high teens for 2026. We will lead with underwriting, construct the best portfolio for this stage in the cycle. We will actively manage our capital and risk exposure to deliver attractive returns throughout the cycle, and we do that with fantastic people seeking to attract and retain the best talent that fits our culture. As I've said before, the quality of the business we have built and the talent we have within our organization together mean we will continue to execute a strategy of delivering more sustainable returns for our shareholders. I'm extremely pleased at this stage of the cycle that we have a healthy balance sheet to allow us plenty of flexibility for the future. And with that, I will now hand over to Paul to talk you through the underwriting trends.

Thanks, Alex. As Alex has just described, we enter 2026 in a position of strength, helped by another strong year of underwriting performance. We have a very strong capital base that will support the continued maturity of the Lancashire underwriting franchise. Our diversified and balanced portfolio provides earnings resilience and multiple options to successfully navigate the underwriting cycle. Looking at 2025, it was a year of strong underwriting performance. A combined ratio of 93.1% is a robust performance in light of loss activity and continued reserve prudence. This delivers an insurance service result of $381 million, which is marginally more than last year despite increased catastrophe and large losses and a high combined ratio. This is the benefit of a more diverse and capital-efficient portfolio where significant dollars of underwriting profit are helping to deliver an ROE of nearly 21%. That is now over $1.14 billion of insurance service result produced over the past 3 years, helping to deliver an ROE above 20% in each of those years. In terms of growth, 2025 was our eighth consecutive year of premium growth in excess of rate with 5.1% growth year-on-year, continuing to develop our franchise in what was still a healthy and supportive rate environment. Moving to our portfolio makeup and underwriting conditions for '25. We remain equally split between insurance and reinsurance and grew both during '25. Whilst the rating environment softened for the first time since 2017, we remain close to peak rating and the vast majority of products had healthy rate adequacy, and we were happy to grow in a disciplined way. Our expectation and guidance for last year was for low single-digit growth, and we delivered in line with this. Looking ahead to 2026, we are clearly in a more competitive market that is softening, but importantly, not soft. What I mean by this is that rates for most classes are under pressure, but the majority of product lines have good margin that will continue to deliver healthy underwriting returns. We're at the stage of the market where you can continue to produce these healthy underwriting returns if you make sensible underwriting decisions to navigate the cycle, and we have proven that we can navigate market cycles. At this time, given the work over the past 8 years to diversify and build increased resilience, we have far more options available to us than before. To summarize the recent 1/1 renewal season, we're very pleased with our performance where we managed the more competitive environment well and secured an outcome in line with our expectations. This sets us up very well to execute on our plans for the remainder of the year. As always, we appreciated the ongoing support we received from our clients and brokers and look forward to building on these valued relationships. Alongside this, we were very pleased with the outcomes of our own reinsurance renewals at the 1st of January. As we've said, the one benefit of the softening market is the products we buy to protect our earnings and balance sheet are also more efficient. We can manage our reinsurance spend, which helps mitigate some of the margin pressure on the inwards book. As importantly, we have better tailored the structure of our reinsurance to box in our exposures, which better manages our earnings volatility. As an example, the aggregate catastrophe products that we described last year renewed at 1/1 with a lower attachment point and more limit. This provides more certainty of underwriting result in an active catastrophe loss year. Looking at anticipated market conditions for the remainder of the year and what this means for our '26 portfolio, we would expect to see the following. At a portfolio level, we'd expect to see rate reduction in the high single digits. As always, there will be a variance between product lines and a benefit of a diversified portfolio is that not everything moves at the same pace. The casualty classes will be relatively stable with property and specialty insurance and reinsurance classes generally seeing rate reductions of varying degrees. To reemphasize and repeat what Alex and I have both said, rates remain in a good place for the majority of classes. With this in mind and our proven track record of cycle management, we would anticipate our top line to remain broadly stable during 2026. Our net cat footprint will likely be marginally lower than last year. Whilst we have assumed more cat risk with an increased share of Syndicate 2010, we have continued to shrink our inward retro portfolio in light of market conditions as well as seeing the benefit of a more efficient reinsurance program. Our U.S. operation will continue to mature with existing and new product lines further developing the Lancashire franchise and portfolio diversification. The strategic investment to purchase the names allocation of Syndicate 2010 helps mitigate top line pressure by retaining more profitable business. So in summary, we enter 2026 in a very strong position. We have a strong capital base, a fantastic underwriting portfolio across a number of platforms, supported by a talented and committed team of underwriters. From this, we are well positioned to continue to deliver robust underwriting returns. I'll now pass over to Natalie.

Thanks, Paul. The investment we have made in the business since 2018 is now delivering sustained high-quality returns, underscoring the strength and durability of our diversified model. Even after absorbing the largest single loss event in the calendar year in our history, the resilience of our model allowed us to deliver another excellent year of underwriting and investment performance. We remain focused on return on capital and disciplined shareholder returns. Diluted book value per share increased by 20.9%, marking our third consecutive year of delivering over 20% return. Our strong balance sheet and consistent capital generation enabled us to return nearly $300 million to shareholders, reinforcing our commitment to disciplined value-accretive capital management. We are announcing a further $0.50 special dividend today in addition to our regular $0.15 final dividend. In my remarks, I will cover our overall financial performance, the claims environment and how the resilience we have built into our balance sheet positions us for the next phase of the cycle. A summary of our results for the year is laid out on Slide 12. Our profit after tax of $293.4 million is slightly lower than our 2024 profit after tax of $321.3 million. With a consistent insurance service result and stronger investment returns, the decrease is due to higher operating expenses and the impact of discounting. Insurance revenue grew by 5.4% ahead of underlying written premium growth, excluding RIPs of 3.3% as we continue to earn through the substantial premium expansion of recent years. The allocation of reinsurance premium at $423.5 million is marginally lower in dollar terms than 2024 and falling to 22.8% of insurance revenue from 24.9% last year. The increased scale and diversification of our portfolio has enabled continuous improvement in the efficiency of our reinsurance purchasing. Our undiscounted combined ratio was 93.1% or 83.7% on a discounted basis. Despite a nearly 4-point increase in the discounted ratio, we delivered an insurance service result comparable to 2024, reflecting our disciplined focus on overall profitability and return on capital. Our underlying undiscounted loss ratio, excluding catastrophe and large losses and reserve releases was broadly in line with last year. Turning to our investments. The portfolio generated an excellent 7% return, driven by disciplined positioning. The return largely comprised investment income from high yields plus valuation gains from falling treasury rates and modest tightening in credit spreads. Private credit funds and other risk assets also contributed positively and the weakening U.S. dollar added around 50 basis points of return related to our non-U.S. dollar portfolios. Our overall operating expenses increased by $44 million, adding around 3% to the combined ratio. This reflects targeted investment in talent and infrastructure to support future growth. We also incurred approximately $13 million of one-off charges relating to impairments and consultancy fees. The net discounting benefit was $33 million in 2025 compared to $66 million in 2024. We benefited from an increase in net initial discount due to the growth in the group's reserves, offset by an adverse impact from the reduction in discount rates through 2025. On tax, as a reminder, unlike most of our peers in the industry, we are not required to pay the 15% corporate income tax until 2030 due to our limited geographical spread. This provides a clear competitive advantage, allowing a greater proportion of operating profit to flow directly to the bottom line. And now moving on to the claims environment on Slide 13. Overall, loss activity in 2025 remained elevated but within our modeled expectations. After a very active first half, loss activity in the second half of the year was quieter but not benign. Total undiscounted net catastrophe weather and large loss claims were $277 million compared to $215 million in 2024. This included $163 million from the California wildfires and $92 million from large risk losses across several lines of business, nonindividually material. Prior year development was again very favorable at $123 million, reflecting our consistent prudence in reserving and the high quality of our underlying book. In addition to IBNR releases, 2025 benefited from the positive development of prior year catastrophe events, notably Hurricanes Milton and Helene from 2024 and a number of other older events. During the last quarter of 2025, we took the prudent decision to refine our assumptions on ultimate net losses related to the Ukraine conflict to cater for any future geopolitical uncertainty and extended legal proceedings. This increased the net reserves related to the Ukraine conflict by $33 million, maintaining a robust and conservative reserve position. On to the balance sheet. A key theme of 2025 was the continued strength and resilience of our balance sheet. This supports our ability to navigate the next phase of the underwriting cycle while continuing to deliver sustainable returns to shareholders. Starting with capital on Slide 15. Our capital management strategy remains unchanged. We deploy capital to maximize underwriting opportunities through the cycle and return excess capital efficiently to shareholders. Our solvency ratio of 240% underscores the exceptional strength of our capital base, which gives us significant flexibility to deploy capital into attractive opportunities whilst continuing to return excess capital to shareholders. During the year, we returned significant capital through special dividends and also used some of our headroom to buy out the remaining names on Syndicate 2010 and continue to build out Lancashire U.S. Total capital returned through ordinary and special dividends in 2025 was $1.23 per share or $296.5 million, with a further $0.50 special dividend announced today. The table on Slide 15 shows the impact of a modeled 1 in 100 Gulf Wind event of $337 million on our solvency ratio. This is one of our key model tail scenarios and demonstrates the resilience and depth of our capital base even under a severe stress. And now moving on to reserves on Slide 16. We have always had a prudent approach to reserving and set catastrophe loss reserves on a ground-up client-by-client basis. We have never had a year of overall adverse reserve development since our inception. Our confidence level of 85% is in line with recent periods. This represents a net discounted risk adjustment of $285 million. Effectively, this is the amount of additional margin that we are holding over the actuarial best estimate liabilities. As previously noted, we expect the disclosed reserving confidence level to remain within the 80th to 90th percentile band unless there is a change in our reserving risk appetite. We expect the disclosed percentile to move around within this range from period to period, depending on portfolio mix and uncertainty. And now if we turn to investments on Slide 17. Our investment philosophy remains focused on capital preservation and liquidity. Our investment stance remains deliberately conservative, positioning us to deliver consistent high-quality returns whilst preserving capital and liquidity in what we expect to be another volatile year. We will maintain a short duration, high-quality portfolio with selective diversification to balance risk-adjusted returns. Growth in our underwriting business, particularly casualty, has increased the size of our invested asset base, resulting in higher returns in dollar terms from our portfolio. Even if yields soften from current levels, the larger asset base will continue to provide a solid, consistent earnings stream over the coming years. And I'll now hand back to Alex to conclude.

Thanks, Natalie. To summarize, the past 3 years have been a clear demonstration of our strategy in action. We have paid out 100% of our earnings whilst growing our business by 8% on average. And today, Lancashire is a stronger and more balanced franchise. We also generate more dollars of profit per dollar of capital than we ever have done in our history. And the portfolio we secured at the 1st of January is still one of the best we've ever had in terms of rate adequacy, and we expect to deliver a higher teens ROE during 2026. We are perfectly positioned for the next phase of the cycle. With that, operator, we will now go to Q&A, please.

Your first question is from Kamran Hossain from JPMorgan.

Two questions from me. The first one is on, I guess, this week, kind of war has been the top headline really. Just really wanted to get a feeling of kind of what you're feeling relaxed about. So we've heard lots in the press, and I think even Trump was talking about insurance exclusions. So what you're feeling relaxed about and whether there's anything out there that you think could become an area of risk? And the second question is just how should we interpret kind of the capital return this year? Obviously, kind of it was well above expectations, which I think is a very good sign, strong balance sheet, excellent year again despite the tough start. Should we assume that in this stage of the cycle, you do pay out a little bit more than kind of what you're making? Just wondering how we should think about that going forward.

Kam, let me just sort of set the scene on the Middle East, and then Paul can give you a bit more details about our portfolio. I think when these events happen, I think particularly from my point of view, I'd just like to say that in a business such as Lancashire, we do have a clear line of sight on these events. And due to the way that we underwrite and the business we have, we can get to our numbers very quickly. And when we think about underwriting and when you think about how we manage our business, these events are just a clear observation of we don't write lots of delegated facilities. We don't write lots of blind follow broker facilities. And when you have these events, that allows you to get to your underwriting exposures quickly. And that also means if there are opportunities, underwriting opportunities that come out of some of these events, we can assess where we want to position our portfolio. So I just want to sort of basically thank our underwriters for the way they've constructed their portfolios in the region, and that allows us to be pretty nimble in these kind of situations.

Yes. So look, just to follow on with what Alex has said there, Kamran, I think the comment to make is obviously, as it stands today, we're -- and you can tell from Alex's comments, we're very comfortable with any potential exposure we may have in the region. As you would also expect me to say, obviously, it's a very fluid situation and things sort of changing on an almost hourly basis. I suppose just to give a bit of color, if it's helpful, the specialty insurer and reinsurer, as we said, we obviously do have potential exposure in the region, albeit very comfortable. And to think of the lines of business that just on a more macro basis that you need to be thinking about is any of those products that have more like peril coverage. So that would be your marine classes, aviation, energy and obviously, the political violence type classes. But as Alex said, we know what our numbers are. We're very comfortable with our numbers. And yes, we're perfectly comfortable.

Kam, it's Natalie. I'll take -- thanks for the capital question. As you know, we had a consistent capital management approach since our inception, where we're continually looking at the underwriting requirements on capital and then we make decisions on what returns should be, which we tend to make fairly quickly and efficiently. As PG said, we've got slightly lower cat exposure going into this year than we had in previous years. So you can draw your own conclusions from that. But yes, overall strategy has not changed on capital.

Your next question is from Joseph Theuns from Autonomous.

I have 2 questions. The first is on your risk adjustment actually. Whilst it sort of increased on an absolute basis, the level decreased on a relative basis compared to your best estimate liabilities. Pairing that with the decline in the risk confidence interval, is there anything that we should take away from that? The second question I had was actually on the sort of reserve releases. It's -- again, it's just looking at the trend in reserve releases has been sort of trending down the last couple of years. Is that something that we can expect to continue? And just sort of, kind of to go inside of this, kind of what level of reserves that you have are related to casualty because as we know, that is sort of only expected to start running off in sort of the next couple of years' time.

Joe, I think I'll take both your questions and Denise might be able to jump in on the investment return. Was your -- your first question more specifically about the risk adjustment on the reserves and the confidence level. I think the confidence level, the change between 86% last year and 85% this year is really not meaningful from an actuarial perspective. And as long as we're between 80% and 90%, which is our stated range, then we're happy with that. And then Denise can comment on the investment returns.

Sorry, I didn't fully grasp your question, Joseph. Can you repeat the first question related to investments?

Sorry, it wasn't on the investment. It was on the risk adjustment, so your reserve levels. So just commenting that the absolute sort of number has increased, but the relative number sort of the reserves -- risk adjustment relative to the sort of best estimate liability, the BEL, has decreased now 2 years in a row alongside the risk adjustment confidence level. Is that something that we can expect to continue going forward? It's nothing to do with the investment return.

Yes. No, sorry. Joe, I wouldn't expect that necessarily to continue going forward. As I said, as long as we're between 80% and 90%, but then we're happy with that. It's not a trend or anything you should be concerned about. I think it's a similar question on your reserve releases. Obviously, our reserve releases this year are higher than they were last year. As we've said, quite a lot through our history because we have a lot of large claims, it can move around from year-to-year. And you don't really get a stable reserve release like you may do in a more retail-focused business. So our reserve releases can change year-on-year and tend to be a little bit volatile, but there's no underlying trend that you should be worried about.

And just sorry, a very short follow-up. Can you sort of give an indication of sort of what level of reserves are tied to the casualty book, just going back to the first question.

Yes. Sorry, we don't split out that information.

Your next question is from Abid Hussain from Panmure Liberum.

I've got 2 questions. The first one is on the balance sheet. I'm just trying to get a sense of in this part of the cycle, so softening part of the cycle, not soft, as you said, how much capital would you typically want to hold through this part and then into sort of the later part of the cycle? Just trying to get a sense of the sort of the 240% where that might go to because clearly, you don't need all of that capital. And then the second question is on the outlook. I'm just trying to get a sense of how you see the ROE evolving over '26 and perhaps into '27. And I think you've said high teens for this year for 2026. And I guess the building blocks for that would be the investment return. You've got some decent investment leverage and you can probably bank. I would imagine sort of half of the ROE is coming from the investment return and you can sort of bank that at the beginning of the year. You've got some PYD. And then I guess, the current year margins, that's where if there's any sort of additional color on that, and that's the bit that I suppose is getting squeezed, that's what you're alluding to. And I just want to get a sense of those current year margins that seem to be quite decent. But what sort of pace at which those get squeezed because I don't think there's a cliff edge in terms of pricing and margins getting squeezed in the current year. So any sort of color around that would be very helpful.

So why don't we start on the guidance? So look, we don't give multiyear guidance. But I think if you look at the guidance that we've just given you, it's still a really good ROE for '26, and it's not dissimilar to what we guided you to in '25. I think the thing that we can be quite confident about is when we look at our future years business plans, and obviously, these things are always difficult predicting markets on a multiyear. But what gives us great comfort is the business we've built in the last 6, 7, 8 years just demonstrates to us that our returns will be more sustainable going through the cycle. As you know, we've always been obsessed with the cycle. We always believe the cycle will be here. We don't believe there'll be anything [indiscernible] anything different and if you remember, everything we've done pretty much since '18 was to build a better business for when the market becomes more competitive, which where we are today. So look, we're very happy with the business we have. We definitely think there's still opportunities, as we mentioned earlier, some of those may come out of M&A and things that are happening in the market. And historically, that's been good for us. But all the numbers that we look at and our business plans tell us that we have a more sustainable...

Abid, on the first question on capital and similar to how I answered the original question from Kam, there's no change to our capital management strategy. We do match capital to the underwriting opportunities. I think as we've explained in the past, we also keep headroom. So when the market does change and it will change again positively, we need to be sure that we've got sufficient capital then to quickly take advantage of opportunities that present themselves. So just because the market is softening, it doesn't mean we're going to run capital headroom down significantly because we want to have capital available for opportunities when they come up, which they always do.

Your next question is from Ben Cohen from RBC Capital Markets.

I had 2 questions, please. Firstly, could you maybe just unpack a little bit the high single digit. I think it was rate decline that you're looking that you expect this year, maybe by line where you sort of see the greatest opportunities, where there are the greatest headwinds? And my second question was just on the amount of reinsurance or the cost of reinsurance that you expect to incur this year. You referenced kind of cheaper reinsurance. Should we read that to mean that you're actually going to be seeing a lower kind of dollar impact in terms of that? Or are you kind of buying more? Are you looking to sort of reduce any of the risk limits further?

Ben, it's PG. I'll take both of those. I will start with your second question. It's a very good question. Yes, we would expect our RI spend in dollar terms to be broadly stable compared to 2025. So you're right, we're definitely seeing the benefit of a softening reinsurance market, and that comes through in less premium spend. And as I mentioned in my script, there was also the opportunity to tailor better structured reinsurance products to help manage our earnings volatility. So we've taken some of that saving and used it there to construct a more all-encompassing reinsurance protection for the business to help us maintain sustainable earnings cycle. So very simply, very similar spend year-on-year. If you look at the color across the lines of business, as you rightly said, I think broadly over the portfolio, we'd expect to see the RPI kind of off high single digits. Underlying that, there are obviously different movements in rate across the classes. As I said in my script, if you look at, say, the casualty classes, they're broadly stable, with that be kind of casualty reinsurance or some of the casualty lines associated with the kind of marine and energy products that we also underwrite and then you're seeing varying degrees of competition across the other product lines. I think it's -- there's been a lot of commentary around competitive pressure in areas like property insurance. I think that's fair and property reinsurance as well as some of the specialty insurance and reinsurance lines. So we are seeing some competitive pressure. But as Alex said, and I said in my script, we're still at a reasonably good point from a rating point of view. So you've got healthy underwriting returns still being delivered from them. We're still definitely closer to the peak than we are at the trough, which is the reason that we're able to give the kind of ROE guidance we're giving today.

Your next question is from Shanti Kang from Bank of America.

The first one was just on the Ukraine load. I was slightly late to the call, so I'm not sure if you talked about this. But in the past, you talked a little bit about loading, I think, $66 million from direct and indirect losses in relation to the Russia-Ukraine high court case. And then I think that unquantified unit load that you guys added in Q1 for this year was also eligible for that. So I'm just trying to maybe quantify how the top-up today or if today is a top-up really fits against the kind of tail risk and how you're feeling about that now? And then the second question was just on the large loss experience in the second half of this year. That took us a bit by surprise. I think it's quite hard for us to model sometimes. And I was just wondering what those large losses might have been. I think you said they were immaterial by single risk item, but obviously, on an aggregate basis, that had an impact. Is there something or somewhere that you're a bit more overweight where we should be thinking about? If you have any color on that, that would be great.

Shanti, on Russia, Ukraine, it's very simple, to be honest. Look, we've taken the opportunity to revise our assumptions on this event basically to add resilience to our overall reserve position. At the end of every year, we take the opportunity to review all our major losses, whether they be risk or cat. And in this year, you've still seen favorable reserve releases of $123 million as well as further strengthening of our overall net reserve margin. And to be honest, you only have to look at our 20-year track record of reserving to understand our prudent approach and how this has benefited our shareholders over the longer term. So simply, we're just following the same process we always follow, which -- and you've seen there's a relatively small change in that number.

Shanti, it's Natalie. Just to add, you mentioned ENIDs. They've really got absolutely nothing to do with Ukraine. It's a completely separate process. So the ENIDs would be part of the actuarial process. We're looking at Ukraine reserves, it will be part of our year-end reserving review where we go through all our old and current large and cat claims and make sure we're happy with the reserving on those. And then on your large loss experience question, our large losses were completely within our expectations of what we would expect. We're not overweight in any area. And as I said in the script, and I think in the press release, none of these were individually material, but there have been events across marine, energy and aviation classes that you may have seen in the press. So we would be exposed to some of those in line with our expectations.

Your next question is from Joseph Theuns from Autonomous.

Just trying to get a better understanding of the outlook on your expenses. You mentioned that you have a consistent quantum. I just wanted to double check whether that's sort of an absolute basis or a relative basis. And just kind of understand sort of why that would be the case after you invested $44 million this year in employee costs. Is that sort of -- I'm just trying to understand why this would now be a consistent level from this -- at this higher level.

Joe, on expenses, we did have $13 million of one-off costs this year, which we wouldn't expect to be repeated. And then also included this year because of the good performance of the business is quite a high amount of variable employee costs in there, which you wouldn't necessarily expect to be repeated as well. And then going forward, we're also eligible for the Bermuda tax credit on employment expenses, which will actually should be a little bit higher next year than it was this year. So all those things taken together is why we're happy with the current quantum of expenses.

I mean, based on what you said, the expenses should -- are expected to come down and not stay consistent or level. So where would we expect to see a high level of expenses maybe in 2026 then?

Well, it's also taking into account, as we've said, we're continuing to build out the U.S. So we would expect to increase expenses in the U.S., which may be offset by a small decrease in expenses in the rest of the business.

Your next question is from Daniel from MS.

This is Daniel from Morgan Stanley. Two quick questions, one on capital and one on casualty. On the capital front, and I'm sorry if I'm beating a dead horse, the 170% kind of minimum threshold you have, I'm just trying to work out how to think about this and try to think about sort of comfortable threshold for you on the BSCR ratio. Is the right way to look at this to take the 170% and sort of add the sort of 1 in 100 windstorm stress scenario, so an extra 40 points from there and then look at sort of a 210% sort of percentage number as sort of a comfortable level for your BSCR ratio? And then on the casualty side, I'm just wondering what your current thoughts are on social inflation and how you're positioned there. One of your peers added some reserves on that front. So just wondering how you're thinking about it.

Okay. Daniel, yes, on your capital question, as I've said, we do vary our capital needs actually really rapidly depending on underwriting opportunities. So there isn't actually a target, say BSCR percentage that we're working to. And that would change over the year and then over the midterm as well. You're right in thinking of the 170% really as a floor, and that would be a floor after a large cat event. So I think the way you're thinking about it is logical that we don't actually have a target that we're working towards, if that makes sense.

Yes.

Daniel, I'll take the second one on casualty. Yes, obviously, social inflation is something we look very carefully at when underwriting our casualty portfolio. But I think I'll just take you back to the starting point of our reserving approach, which I think we've been reasonably clear on since we entered that class. We've not been booking any margin since we've entered the casualty portfolio. We obviously believe there is underlying margin there that we will see over time. But obviously, starting from a position whereby we've taken that reserving approach means that we're not having to make any actions at this point. And to reiterate, we still believe the pricing of that portfolio, there is margin, and we will see that over time, but we believe it's prudent, particularly in that class of business to take the approach we have done.

Your next question is from Abid Hussain from Panmure Liberum.

It was just -- I just wanted to follow up on one of the things that you just mentioned on the pricing cycle and your experience, I guess, having worked through a few of them. And I think you said that we are closer to the top of the cycle than the bottom of the cycle. I'm just wondering in your experience, how long do the good times last past the peak? And I'm not trying to be flippant. I'm just trying to get a sense of sort of -- it feels like the ROE still should be decent for a number of years. And it just feels like the trade commentary gets overly negative quickly. Is that sort of a fair characterization?

Yes. Yes. So look, I definitely think when people now in a soft market, I mean that massively [indiscernible]. And I think you can, whether it's like demonstrate and how far you fall from peak, which is very little. So I think the evidence is there that you are close to the peak -- I think trying to predict cycles and markets is very difficult. So clearly, we are obsessed with the cycle. We'll always be obsessed for the cycle. And I think what it means is that the next few years, I think most people can look at their returns, and I think they're sensible and adequate for that their shareholders provide. But obviously, it's all down to loss experience, isn't it? So if you go back in history, there were years in the last soft market that were very skinny, but not much happened. So the returns were fine. So people lulled into a full sense of security in some markets. So our view is the cycle will be no different this time around. Our market is still run by humans, but we have built a much better business when times were really good to and built -- to allow us to have more sustainable returns even through the more -- we are firm believers that the cycle will be the cycle and history for some people will repeat itself.

Vash Gosalia from Goldman Sachs.

I just have one or maybe two quick questions. One is on the capital and following from something that Daniel was asking. So I remember from the Capital Markets Day that you were mentioning how S&P rating model tends to be a constraint. And I believe today in today's release, you spoke about being upgraded from A- to A. Can we take that as an indication of you having surplus capital and actually continuing to sort of give back returns or give back dividends higher than the 100% payout ratio? I mean is that something we should be taking into consideration? And maybe just a second quick one and something that Natalie already alluded to. So you've had some changes in the Bermudian tax regime in the near term. But then can you help us really understand what should be the rough sort of tax liability we should be thinking of within our models for the next 5 years?

Thanks for the questions. I'll take those. I'll start with the tax question. So as I said in my script, we're not -- we don't have any liability to the corporate income tax in Bermuda, which is 15% until 2030. So if you're modeling our results, then you don't need to think about tax until you get to 2030. And then I guess it would be sensible to be modeling 15% tax at that point, which will be consistent with the rest of the market. With the S&P upgrade, obviously, we were very pleased to get that. We think it's a really good validation of our business strategy and what we've been building over the past few years, but it really won't impact how we think about overall capital or capital returns. So I'll just refer you to my previous answers on that question.

[Operator Instructions] There are no further questions at this time. Please proceed with the closing remarks.

Okay. Thank you for all your questions today, but we'll close the call now. Thank you.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.