Lancashire Holdings Limited ($LRE)

Hello, and welcome to the Lancashire Holdings Limited First Quarter 2026 Earnings Call. [Operator Instructions] Your speakers today will be Alex Maloney, Group CEO; Natalie Kershaw, Group CFO; and Paul Gregory, Group CUO. I will now hand the call over to Alex.

Thank you, operator. Good morning, everyone. We will follow our usual process this morning. I'll keep it brief and give you my thoughts on the quarter. I'll then hand over to Paul for underwriting summaries and then Natalie for the finance part, and then we will then take your questions. I want to start by saying that it's been another excellent quarter for Lancashire, where we affirm our guidance for a high teens ROE for the 2026 year. Amidst elevated geopolitical tensions, our business continues to perform strongly, reflecting our prudent strategy. To remind you, we have set out to continue to grow ahead of rate and deliver more sustainable returns for our investors across the cycle. Our track record of delivery supports this with 3 consecutive years above 20% ROEs and, on average, returning 100% of earnings to shareholders. And that's exactly what we're still doing. Firstly, adjusting for reinstatement premiums of last year, our premiums grew ahead of rate again. As we said at the last conference call, the market is getting more competitive, but is still a profitable one. In that context, our excellent underwriting team worked hard to ensure we retain the business we wanted to retain and grew where appropriate. At the same time, we pulled back where appropriate, reducing our retrocession book again as we flagged at our last conference call. The market has remained competitive, but our proven disciplined management of the underwriting cycle continues to serve us well. Second, whilst there were no big sticker industry loss events in the quarter, the overall claims environment for the industry remains active. Our own loss experience has been benign, but this environment makes it all the more important to navigate this stage of the cycle with care. Turning to investments. Our team navigated a tough market of their own. In light of the heightened uncertainty and volatility, our resilient investment portfolio delivered what is designed to do in the quarter. And finally, our focus remains firmly on delivering sustainable returns across the cycle, supported by active capital management, disciplined underwriting and a conservative investment portfolio and a strong balance sheet, all to support our goals. To that end, our ROE guidance for this year remains in the high teens. I'll now hand over to Paul to take you through some of the details of our underwriting activities.

Thanks, Alex. During the quarter, our market has progressed in line with expectations. We set out these expectations 8 weeks ago. And to summarize, these were as follows: a softening but not soft market with rate reductions at a portfolio level in the high single digits; rate and adequacy remaining healthy in the majority of classes; top line to remain broadly stable; our net cat footprint to be marginally lower year-on-year; and the continued build-out of Lancashire U.S. I'm pleased to report that our performance and expectations remain in line with all of these. As you can see, our portfolio RPI is at 93% for Q1 and excluding the impact of reinstatement premiums, our top line remained stable. Underlying this, we see a variance between the reinsurance and insurance portfolios. Reinsurance premiums are less than Q1 last year. As Alex has mentioned, the primary driver of this was the absence of reinstatement premiums this year, given there were no major catastrophe losses in the quarter, unlike Q1 last year. The only part of the reinsurance portfolio that we've actively reduced was our previously signaled reduction of our inwards retrocession portfolio. As we explained last quarter, this is a decision based purely on prudent cycle management, allowing us to better manage our earnings volatility and net cat footprint as we move through the cycle. Offsetting the dynamics in reinsurance was the growth within our insurance portfolio. This growth primarily comes from 2 areas of the business: the continued and anticipated build-out of the Lancashire U.S. franchise, growth in marine and energy portfolio due to a combination of timing, new business and organic growth with existing clients. Given Q1 performance and current market conditions, we're happy to reiterate our guidance of broadly stable top line for the year. Whilst the market has very much performed in line with our expectations, there has obviously been a large degree of political and economic volatility as a result of the war in the Middle East. As previously explained, a number of our specialty lines of business have exposure to the region and the peril of war. Our position from an exposure point of view is very manageable, and we consider ourselves underweight in the region. Given this underweight position, it does provide the opportunity for us to underwrite new business, which is coming to the market as demand for war coverage increases. As you would expect from us, we are doing this in a measured and thoughtful way in order to manage our exposure, but also maximize any opportunities where we feel the balance of risk and reward is appropriate. And as we look ahead to the remainder of the year, our focus remains on making sensible underwriting decisions to manage the underwriting cycle, whilst at the same time, continuing to invest in the business for the long term. We are actively looking to hire good underwriters to strengthen the Lancashire underwriting franchise. We are proactively hiring in niche areas that will incrementally benefit the bottom line through the cycle, recently adding a new underwriter and product line to our marine team and continuing to build out our bench strength in the maturing Lancashire U.S. platform. We believe that good underwriters that understand the cycle and know when to be bold and when to be patient will add value and further develop the Lancashire franchise over the longer term. I'll now pass over to Natalie.

Thanks, Paul. Hello, everyone. The third quarter was relatively straightforward from a financial perspective. We continue to see the benefit of business growth over the last few years in our earned premium and insurance revenue, which increased by 2.1% compared to the first quarter of 2025. The loss environment was relatively benign with no major losses of note in the quarter. Likewise, the more attritional part of our book, which consumes little capital, performed in line with expectations. During the quarter, we finalized our year-end regulatory returns with a final BSCR ratio of 254%, slightly ahead of our estimate at the year-end results. This reflects normal refinements made during the finalization of what is, by nature, a complex modeling process. Now turning to investments. Market volatility, including high yield and wider credit spreads impacted portfolio valuations during the quarter. However, total investment returns were positive at 0.3% with investment income more than offsetting the unrealized losses. Our private investment funds also delivered strong returns. Since inception, the primary objectives for our investment portfolio have been capital preservation and liquidity, and we continue to position the portfolio to limit downside risk in the event of market shocks. Those objectives remain unchanged and are particularly important in today's volatile markets. Looking ahead, we will maintain a short, high credit quality portfolio with appropriate diversification to optimize risk-adjusted returns. The combination of earnings resilience, strong capital and a conservative investment stance leaves us well positioned for the remainder of 2026. With that, I'll now hand back to Alex to conclude.

Thank you, Natalie. To conclude, I just want to leave you with 3 key points for Lancashire at this stage of the cycle. Disciplined growth continues despite a more competitive market. We continue to deliver a resilient performance amidst an active risk environment. Sustainable returns remain a core focus for us, supported by strong capital management, which is why we are affirming our high teens ROE guidance for this year. With that, I'll hand over to the operator for questions.

[Operator Instructions] Your first question is from Shanti Kang from Bank of America Merrill Lynch.

You guys reiterated the high teens ROE today, which is good, and that was despite the lower top line. I was just wondering if you could help us bridge what structurally supports the ROE as pricing continues to soften. So should we look to you guys looking at the product mix using reinsurance or perhaps investments? How should we think about that into the second half of this year? And then the second question is just on the RPI. So the RPI at 93% suggests a clear softening. I'm just curious to know where you're seeing a bit more pressure today in specific lines within insurance and any sublines in reinsurance as well.

So I think -- Shanti, I think that we're a quarter into the year. From our view, we're very much in line with our expectations. We're very much in line with the guidance that we gave you. So there's no real surprises here. Obviously, when we gave you that guidance, we were trying to predict what the RPI would be this year, trying to predict what the product mix will be this year, and obviously, the benefit of reinsurance that we're now purchasing. So I think, all in all, it is only Q1. I think we're very happy where we are. As you can see from our release, our underwriting portfolio continues to adjust to the market we're in. That's what good underwriters do. Clearly, we're going to manage the cycle. That's what we do at Lancashire. So I think -- we think we're completely in line with where we should be. There's no surprises here. And generally, we've had a good quarter.

And Shanti, I think on the second question on -- was on RPI. I think that, as we said last quarter, our view was across the overall portfolio, the RPI will be in the high single digits. Obviously, underneath that, there are some products that are seeing higher RPIs than that, as in more softening. And then there are others that, to be honest, we are still seeing small rate increases in some small pockets. Generally, casualty is broadly stable. As I said in my script, we're not happy with the guidance that we gave last quarter and everything we've seen thus far doesn't lead us to change any of that. So I think high single digits across the overall portfolio remains valid.

The next question is from Vash Gosalia from Goldman Sachs.

I have 2 -- potentially 3. One is, again, just following up on the RPI question. So here, could you just help us understand how should we think of the 7 points reduction or whatever the reduction of high single digit in rates, how does that translate into combined ratio for potentially next year? It would be interesting to just understand what levers do you have in the middle so that it does not translate for a 1:1. Second question was maybe a little bit of clarity on something you've mentioned in the past about your casualty reserves. So obviously, you've said you would consider releasing some after 5 years of underwriting the business. But are you able to give us a sense of how much reserves or basically the dollar amount of reserves you are holding for the casualty line so that we can get a sense of what's to be released? And third question, potentially a bit more qualitative, how far are we from a soft cycle? I appreciate you're seeing the cycle softening. But in your view, what does the soft cycle look like?

I'll take the first question. Yes, the things you need to consider when it comes to the levers are, obviously, you see the RPI and what's happening generally to rates. The bit that's more difficult for you to see is -- and we've said this before, the one benefit of a softening market is we're obviously a buyer of reinsurance. That obviously helps manage our combined ratios because the cost of that reinsurance generally reduced it. But probably more importantly is the breadth of products that we can buy, which helps us manage our earnings volatility and ultimately, our combined ratio. So that's the main lever that you need to consider. Obviously, as we move through the year and have a better visibility on the market in '27, we can give you some more commentary around that. But that's the main thing for you to consider.

Vash, it's Natalie. I'll take your second question on casualty reserving. Obviously, as I think you'll be aware, we don't give the dollar amount of reserves by portfolio mix. Obviously, we do give you the amount of our risk margin, which we disclosed at the year-end, which is effectively the total amount of prudence that we have in the reserves. We did start writing casualty around 5 years ago now, but that was the first year. So we have a very small amount of excess reserves from that first year. And we're not necessarily considering releasing anything at the moment. So I think if you're thinking about what to model for us, I wouldn't be assuming any casualty releases in the near term. So hopefully, that's helpful.

Vash, your question about a soft market, we are obsessed with the underwriting cycle. We're firm believers that that's just the way this industry works. I think you can just -- I suppose an easy way to think about it is, with the guidance that we've given for the year, we very much do not think that means we're in a soft market. Clearly, the market is more competitive, but we still think there's some really good opportunities in the product lines that we write. So I definitely don't think -- I don't think anyone actually in the industry would say we're currently in a soft market. But clearly, it's a softening market.

Your next question is from Kamran Hossain from JPMorgan.

First question for me is just on the claims experience. You said kind of benign for yourself in the quarter. I think on one of the conference calls earlier this week, the CEO of a large company said that political violence claims could be a lot more than kind of the amount of premium in the market. Are you just kind of not in the market? Or is it just better risk selection? Just intrigued kind of why some of that hasn't maybe shown up for yourselves. The second question is on the reduction in inwards retro -- property retro. What's -- is there much of a combined ratio impact from that? Because I would assume it's pretty low combined ratio, therefore, it might have an impact. But just intrigued, I understand kind of ROE is the primary metric, as it should be. And the third question on kind of business growth or kind of how the business is going to develop over the remainder of the year. I know you've got the kind of the stable headline number for the year as guidance. Clearly, reinsurance in Q1 was impacted by the reinstatements, but you won't have that in Q2. I assume there's less impact from retro. Is there anything to suggest that insurance won't be quite as healthy in the remainder of the year as it was in Q1?

Okay. I'll start on point one, and Paul will be a bit more specific about Lancashire. So yes, look, we have seen a comment about the Middle East. We would agree with that. So we do think that the losses that we think are going to come through the system exceed the premium for the PV market. So you would expect that to come through the course of this year, and that will probably affect some of the specialty reinsurance placements. The majority of those are done at the 1st of January. So yes, we definitely agree with that. And you would expect in any class of business where you've got claims exceeding premiums, there should be some upwards movements in that class of business. And obviously, the continued situation in the Middle East, the prolonged situation, we believe [Audio Gap] people are going to have to re-underwrite those exposures on a more sensible basis. So yes, we do agree with that comment. We think it will come through the system this year, and we do believe the claims exceed the premiums. Paul will just give you a bit more detail on [indiscernible].

Yes, I can. I think as I said in my script, we're generally underweight in the region, and that definitely applies to the kind of political violence product line and that it's an ongoing event can change. We do have exposure. But as I said, it's definitely underweight. So maybe that explains our experience thus far. So we -- again, as I said in the opening remarks, there is currently opportunity. And I think being in a position where we're underweight allows us to selectively look at those opportunities, obviously, in a very measured way. But there is definitely increased demand coming to the market and clearly, a very different price point to what we've seen before the war. So we will be cautiously selective, but we are open for business, and we will underwrite those risks and have underwritten more risk since the war began. Moving on to your second question on inwards retrocession. To be honest, I think you've answered it for yourself. Our focus always is on ROE. We grew that retro portfolio when market conditions were really strong. They're not as strong as they were. And for us, it's a very capital-consumptive line of business. You're right, it does tend to run kind of depending on the [ loss year ], obviously, but would generally be at the lower end of combined ratios. But for us, that's not the focus. The reason for reducing -- and we did reduce last year, you'll recall, and we've been quite open about the fact we would reduce again at this 1:1 is primarily around how capital-consumptive it is, but also the earnings volatility that it can bring because it's a product that's very difficult to reinsure. So they're all the reasons. Yes, it runs at a lower combined ratio, but it's very capital-intensive. So for us, it seems, at this part of the cycle, the most sensible thing to do. You're also right that the vast majority of that premium impact is in Q1 because the majority -- the vast majority of the retro portfolio is written at the 1st of January. There is a little bit in Q2, but the vast majority of that impact has been felt. And then I think the third question was on overall growth for the rest of the year. As I've just said there, you've seen the impact -- the vast majority of impact from retro come through the reinsurance lines. Obviously, you've seen the -- when we talk about growth, we don't really think about reinstatement premiums because we're talking about underlying growth. But yes, you've seen the impact of that in Q1. Very pleased with kind of insurance growth in Q1. Some of that's coming from areas we flagged 8 weeks ago, which is the continued maturity of Lancashire U.S. We continue that -- we would expect that to continue through the course of the year. And then for marine and energy, it was also a very good Q1. Some of that is timing, favorable timing with products -- sorry, policies renewing into Q1. But it's also in energy, the kind of energy liability line that, one, we are growing in Lancashire U.S., but two, is still seeing a relatively good rating environment, and we have the opportunity to increase with some core clients through Q1. Everything said, as you've heard us say, we're sticking to our kind of stable top line guidance for the balance of the year.

Your next question is from Joseph Theuns from Autonomous.

First question I had was just a follow-up actually to one of your answers previously about the cost and availability of reinsurance. Does that mean you're reducing the level of retained business that we can expect this year? And then the second question is just in terms of casualty book. As casualty -- the casualty class remains one of the areas that is still best in terms of rate adequacy, are you still looking to grow this line of business? Or are you happy with kind of the size of where the portfolio is today?

Okay. Thanks, Joe. So on your first question around reinsurance, if you look at us through the cycle, -- we -- as a proportion of like our inwards premiums in softer markets, we tend to spend a bigger percentage on reinsurance and in harder markets, that percentage comes down. We're probably at the stage now where if you look at it from that metric perspective, it's going to be broadly stable versus last year, but perhaps marginally higher because we are kind of, as Alex said, in a softening part of the cycle. So I think directionally, that's how you need to think about it. On casualty, I think we said this before, but we're pretty happy with the size of our casualty book in terms of how it sits overall in the group's portfolio. Look, there are always opportunities for us to grow with core clients. And if they're there, we're happy to do it. There will obviously be other times when maybe deals don't make sense. But I think if you want to think about it, I wouldn't see any fundamental changes to the size of our casualty book during the course of this year.

[Operator Instructions] Your next question is from Will Hardcastle from UBS.

Will Hardcastle, UBS. First one is just thinking about that insurance segment premium growth year-on-year. Is it possible to try and sort of just get, in rough broad terms, how much of that is new teams and how much is perhaps the opportunistic war-related energy or marine? Or is it other energy marine business that's grown? I'm trying to sort of get a feel for that underlying book growth, if that ever makes sense, for Lancashire. And then just thinking about that, it sounds like one of the cuts on the reinsurance book or reductions was on that inwards retro, clearly as capital-consumptive. And I know there's a hell of a lot of the year still to come and you're not there trying to tell us what pricing will do post the cat season. But I guess, just thinking about the incremental news flow we've had quarter-on-quarter, and that reduction in inwards retro, is it a fair point just to suggest that there's a higher chance of a higher payout ratio year-on-year in that sense, if that makes sense?

Okay. Will, I'll take the first question. I think the growth in insurance, first of all, to clarify, the growth that we've seen in marine and energy in Q1, that isn't related to any great extent to additional premiums coming from the war. We -- as I've said, we are open for business and happy to underwrite more risk. So we could potentially see the benefit of that as we move through the course of the year, absolutely. The other areas are effectively younger teams maturing, and that's generally in our Lancashire U.S. platform where those teams are still building to maturity, and that's where we're seeing growth. That doesn't mean there's not areas of growth elsewhere. We are still seeing clients on the insurance side, bringing kind of more demand to market, but nothing specific that I would call out. Also, as I said in my script, we're still hiring. We are looking to add new underwriters to our business. We've recently hired a new underwriter in marine in London for a niche. They won't arrive until later in the year. So the impact is not really going to be seen this year. But we are still very focused on that, and we believe, in the current M&A environment, there will be opportunities for us to add more talented underwriters to the group.

Will, it's Natalie. Thanks for the capital question. [indiscernible] question before, you've almost answered your own question. As you know, we try and remain disciplined and flexible with capital as the year develops, and we look at various capital deployment options as the year goes on. One of the things, obviously, we keep an eye on is the cat season, as you mentioned. So it would be our usual timing when considering any capital returns will be towards the end of the year, dependent on what happens during the course of the year.

Your next question is from Darius Satkauskas from KBW.

The first question is just on the BSCR. So your estimate at the time of the full year result was 240%, I believe, and I think today it's 254%. So it's 14 points difference. It's not tiny. Could you disclose what's driving this in terms of -- is it the numerator, is it denominator, because of change in growth assumptions, or just a combination of many moving parts? And another question is just on the reinsurance. Did I understand you correctly that you are thinking of slightly increasing the total reinsurance dollar spend? So not only you're banking the reinsurance -- sort of cheaper reinsurance prices; you're buying more of it to sort of offset what's happening in your primary divisions. Is that correct?

Darius, it's Natalie. I'll take the question on the BSCR. I think it's probably helpful if I explain the process around that. So the BSCR is a year-end 2025 metric. And what happens is those regulatory solvency returns are not due to the regulator until the end of May. So while we're going through the year-end process at the beginning of the year, we're really focusing more on things like the annual report, et cetera, et cetera, and these regulatory returns tend to come after that. It's quite a complex -- involve modeling process from an actuarial perspective. We try to give a reasonable estimate in March, but then you've obviously got another 6 weeks of work happening after that. And in this case, it's really around the technical provisions that are used in the BSCR. So what happens is you basically remove IFRS 17 loss reserves and you're replacing them with technical provisions to come up with a true economic balance sheet. Now those technical provisions can move around a little bit during the process. So on your question about what was driving it, the technical provisions actually impact the numerator and the denominator because they impact the charges you get, the capital charges, they also impact the denominator by increasing the amount of capital that's available. So it's not really reflective of anything that's going on in the business this year. It's more reflective of the process and the modeling assumptions around that. So hopefully, that makes a little bit of sense.

On your second question, Darius, I think as I just answered on a previous question, I think dollar-wise, it's going to be broadly similar year-on-year. But at the margin, if it's gone one way, it might go slightly up. But that's completely in line with how we manage the cycle and how you would have seen us buy reinsurance through cycle in the past, but not anything material for 2026 for you to think about.

Your next question is from Abid Hussain from Panmure Liberum.

I think I've just got one question left. It's just around the link between the pricing and ROE. I'm just wondering if you're able to provide some sort of guidance on, say, a 5 percentage point move on rates and then how that feeds through to ROE. I know that's incredibly difficult thing to do, but just some sense, sort of given the various levers that you do have on whether it's retro, asset leverage, reserve releases, current year margins. There's clearly things that you are doing and can do to achieve decent ROEs. And there's clearly not a one-to-one translation between pricing and ROE. So I'm just trying to get a sense of how you think about that.

Abid, it's Natalie. Thanks for the question. I'll take that one on how we come up with the ROE guidance. Obviously, the guidance factors in a lot of different scenarios that could happen in all areas of the business, all areas of the balance sheet. And our priority when we give the guidance is to give something we're confident in delivering across a range of scenarios that would include changes in RPI, changes in investment returns, changes in cat and large losses and loss assumptions, et cetera. So we are -- as we've said, we're reaffirming guidance, and we're quite confident to reaffirm that at the moment.

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

So I was just thinking, after the renewal period in the first quarter of this year, is there anything that sort of surprised you about the conditions that you've gone through to make you think differently going into midyear renewals? Is your sort of baseline -- I know you've got the RPI dropping high single digits year-on-year. Is your baseline view in that, that softening will still be orderly rather than a dislocation, for example? I don't know if you've got any thoughts on that.

I think thus far, and even if you look at the [ 1/4 ] renewals, everything is very much playing out as we anticipated. I think as we said earlier, there are some lines that are more competitive than others, definitely. But kind of, at a portfolio level, we're happy with the guidance that we've given. There's nothing thus far that has led us to change that. We are in a softening market. That is clear. But my anticipation is that as we move through the rest of the year, it will remain very similar to what we're seeing now. So look, no surprises thus far. We were anticipating a softening market. In some lines, we were anticipating some quite -- more competitive pressure than in others, and that's happening. But as I say, no massive surprises thus far.

Yes. I think in certain product lines and the PV question was an obvious one earlier. And clearly, we believe losses exceed premium in that class. You could probably say the same about the downstream energy sector. There's been a fair bit of loss activity there. Aviation continues to be difficult. So there are -- there's underwriting needed in certain classes of business. But I think the general trend, we are in the softening phase. We don't [Audio Gap] change to that or any acceleration or deceleration into wind season. And then obviously, we'll see what the wind season brings.

Your next question is from Will Hardcastle from UBS.

Just one industry loss estimate that has been increasing appears to be the Baltimore bridge loss. If you could just give us an update, whether it be what industry loss you're assuming, I'm sure it's bottom up. But -- and if that's developed since your initial loss pick, that would be helpful.

Will, I'll take this one. Look, we -- as you know, we try not to talk about specific claims too much, but I appreciate it is a major event and in the press. I mean I think you know how we reserve, and you're right, we do it bottom up, and we try to be as prudent as we possibly can. We definitely don't, on any loss, take just the initial loss pick we may be given or presented with. We come up with our own view of where we think the ultimate loss may land. Obviously, we review these assumptions if we get updated information, et cetera, and you've seen us do that on other losses, and that could either be positive or negative and we revise accordingly. Obviously, in the aggregate, our track record is pretty good. But I think that what you can take from today's reiteration of ROE guidance for the year is that if there would be any change here, it's not going to be material enough to impact that guidance.

Your next question is from Joseph Theuns from Autonomous.

Apologies if you sort of touched on this already, but can you just give any more sort of rationale behind the reason behind merging the 2 Lloyd's syndicates? I'm just wondering if there's any sort of capital benefits to doing this.

So look, I think we mentioned this before. We were fortunate enough to buy out the names that we had on Syndicate 2010 last year. That was a good deal for Lancashire, but it was also a good fit for the names that we had. And by merging the syndicates, we definitely get some synergies in cost. So there's lots of things we won't have to do twice. So I think that's a benefit, but that will also be good timing for us. The '27 year, again, that will help us save some expenses in '27, not materially. And I think on the capital side, we will be more capital-efficient at Lloyd's and just running one syndicate just simplifies our business. One thing we're trying to do all the time is simplify our business, trying to be as cost-efficient as we can, which all aids us managing the cycle. So yes, we should be able to get that done in '27 and have one simple syndicate in Lloyd's.

There are no further questions at this time. I will now hand the call back over to Alex Maloney for the closing remarks.

Okay. Thank you for all your questions today. We'll close the call there.

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