Lancashire Holdings Limited (LRE) Earnings Call Transcript & Summary

Hello, and welcome to the Lancashire Holdings Limited Q2 2026 Earnings Call. [Operator Instructions] Today, I am pleased to present Alex Maloney, CEO. Please go ahead with your meeting.

Okay. Thank you, operator. Good morning, everyone, and thank you for everyone who joined our call today. As usual, I will start with the highlights of the 6 months before handing over to Paul and Natalie to provide more details behind the results. Overall, this has been a strong 6-month period for Lancashire, with broadly stable income and an attractive annualized ROE of nearly 20%. This means Lancashire is well-positioned to manage and capitalize on the next phase of the insurance cycle. At Lancashire, underwriting comes first, and we have a focus on disciplined, profitable growth from a diversified portfolio. You can see the results of this approach in a broadly stable gross written premiums compared with a year ago, and an undiscounted combined ratio of 91%. Importantly, we continue to invest in our franchise to diversify our underwriting opportunities. Notably, with planned expansion in U.S. product lines, including inland marine, financial lines and environmental liability. And of course, we remain open to opportunities to further build on our highly successful underwriting team. We have made this targeted investment while keeping costs firmly under control, meaning that profit after tax increased by 30% to $142 million and we delivered an annualized ROE of 19.6%. Now thinking about the current environment, let me give you some high-level thoughts on where we are in the cycle. As we have seen, pricing across many lines started to soften 12 months ago, and in some cases, this trend has accelerated in early 2026 as the industry capacity remains abundant. It is important to stress that conditions are not the same everywhere. For example, the pricing pressure appears most acute in property insurance, but there is currently less pressure on casualty lines. This makes diversification important. At Lancashire, we have a very experienced team who have successfully navigated cycles before. And our underwriters are incentivized to deliver appropriate returns whilst remaining relevant to clients. Although others may be tempted to push for growth at any price, it is in our DNA to manage the cycle in a disciplined way. And of course, we are active buyers of reinsurance. So in this market, we can manage our net exposures through more efficient reinsurance programs. Therefore, with the tailwind of a good 6 months financial performance, prudent reserves and a consistently strong capital position, I am confident that we enter the next phase of this cycle in robust shape, and we will be able to deliver resilient, lower volatility returns for our shareholders. With the usual caveats regarding the U.S. wind season, I'm happy to reiterate that we expect to deliver a high-teens return on equity in the current financial year. I will now hand over to Paul to provide more details from our underwriting results.

Thanks, Alex, and good afternoon, everyone. As Alex has just mentioned, it's been a strong underwriting performance in the first 6 months of the year. The underwriting business we've successfully built over the past number of years was designed to withstand challenges whilst delivering appropriate returns for our stakeholders. Last year, we withstood the impact of the large California wildfires, and this year the challenges have been very different; a softening, more competitive marketplace, plus the outbreak of war in the Middle East. A broad and more diversified portfolio and ability to adjust quickly to market conditions allows us to deliver these robust underwriting results. We have the flexibility to adjust risk appetite within product lines as the market environment changes. This allows us to manage the cycle whilst maintaining relevance to our clients and brokers. We've continued to strengthen our underwriting team with new underwriters and product offerings across multiple distribution channels, further strengthening our franchise value. We'll continue to attract and retain high-caliber underwriters and we'll strengthen whenever we find the right underwriting talent. With these new lines, we are prepared to be patient in their build-out. There will be no unrealistic expectations. The only expectation is that we underwrite any line of business in line with the current market conditions. And as I will explain, not all product lines are moving in the same direction or at the same pace. We have demonstrated repeatedly over the years that we adjust risk appetite and deploy capital as market conditions evolve. This discipline remains central to Lancashire's underwriting culture. We guided to a broadly stable top line, and we remain on track to deliver this. Underlying this, however, there are a number of moving parts. There's no arguing that we're in a softening market with most product lines demonstrating varying degrees of softening. As Alex has mentioned, at the sharper end of the softening are the property lines, with casualty lines far more stable. However, importantly, adequacy does remain across the majority of classes. In certain areas, there is definitely a real need for underwriting discipline, risk selection and the willingness and confidence to walk away from business if adequacy thresholds are not met. That said, there is still plenty of good business with healthy adequacy, but there is now far more need for increased scrutiny as to what that business is. This is the stage of the cycle that underwriters need to earn their money. We have previously signaled we have strategically reduced our inward retro footprint. A decision driven by the intention to manage earnings volatility and natural catastrophe exposure as we move through this phase of the cycle. Offsetting this has been our increased share of Syndicate 2010 following the buyout of names capacity, the continued maturity of Lancashire U.S., plus some elements of growth in certain specialty lines, both insurance and reinsurance. A number of specialty insurance classes we have seen increased demand for cover and significantly higher pricing for war related exposures, resulting in some additional premium opportunities. More generally, while pricing is moderating, we continue to see increased demands and attractive opportunities where expected returns remain commensurate with the risk assumed. We are happy to reiterate our premium guidance of broadly stable, albeit as always with us, the usual caveat will be we are not driven by top line targets, only market conditions and underwriting profitability. As we've previously stated, we look to manage our natural catastrophe footprint as we move through the cycle. Our PMLs for major perils and territories are trending downwards. There 2 two primary drivers of this change; the aforementioned downsizing of our inward retro portfolio and the greater use of efficient reinsurance. As market conditions evolve, we are increasingly focused on maximizing risk adjusted returns. The reduction in PMLs reflects this disciplined portfolio optimization rather than lack of underwriting opportunity. In fact, in our property catastrophe portfolio, we've been able to grow with many of our core clients, but manage this growth with some judicious reinsurance purchasing. In conclusion, we are very happy with the first 6 months of the year. Yes, market conditions are more challenging than they've been for a number of years. And yes, there have been some challenges to navigate, such as the ongoing war in the Middle East. Yet, we have delivered strong underwriting results, stable top line, managed our risk levels and continue to build our bench of underwriting talent and product offering. Lancashire was built for changing market conditions. The first half demonstrates that we continue to generate attractive underwriting returns, actively manage risk and allocate capital where we see the best opportunities for our shareholders. I'll now hand over to Natalie.

Thanks, Paul, and good afternoon, everyone. We've delivered a strong and resilient first half with $142 million of profit, resulting in a 19.6% annualized return on equity, a clear demonstration of the earnings power of the business, even in a relatively active loss environment. I'll highlight 3 key points from the half. First, our underwriting performance remains robust. Despite global instability and a number of risk losses, we have delivered a 91% undiscounted combined ratio, reflecting both the quality of the portfolio and our continued focus on disciplined underwriting and overall profitability. Second, our earnings profile is increasingly resilient. The scale and diversification of the business allows us to absorb volatility in a loss environment while still producing attractive returns for our shareholders. And thirdly, we remain very well positioned from a capital perspective. Our balance sheet continues to provide flexibility to support the business while maintaining our focus on return on capital and disciplined capital management. Turning to our financial performance. Insurance revenue for the first half is flat compared to 2025. As we highlighted previously, we continue to benefit from the earning through of a significant premium growth delivered in prior years. The current year also reflects a more stable level of written premium. The allocation of reinsurance premium is $28 million higher than 2025. Outwards reinsurance spend has increased as we have taken the opportunity to expand quota share protection, supporting both capital efficiency and earnings stability. Our undiscounted combined ratio for the period is 91%. This reflects continued strong underlying performance across the portfolio, including the impacts of current accident year losses, particularly relating to the war in the Middle East, which we have absorbed within our expected large risk budget. Prior year reserve releases are lower than the first half of 2025. This is primarily driven by some deterioration on the Baltimore Bridge loss, which has reduced the level of releases recognized in the period. We also recognize $15.2 million of other income this period, primarily relating to consortia fees. Around half of this is one-off in nature. Our operating expense ratio is marginally higher than 2025 at 9.2% compared to 8.8%. We now take 100% of the Syndicate 2010 expenses due to the names buyout and continue to invest in the business, increasing head count and associated costs. Operating expenses are running in line with expectations, and I can confirm that the previous guidance that the quantum of operating expenses will be comparable to 2025 remains appropriate. Overall, the underlying performance of the business remains strong and consistent with our expectations for the portfolio. The next slide has further detail on the claims environment and our reserving. The loss environment in the first half has remained active. We have seen a number of large risk losses and activity linked to the Middle East conflict impacting the current accident year. Large and cat risk losses totaled $60 million. Importantly, all losses recorded are within our risk appetite. And the diversification of the portfolio continues to allow us to absorb these events without materially impacting overall profitability. On reserving, our confidence level of 85% is in line with recent periods. This represents a net discounted risk adjustment of $287 million or 14.6% of total net insurance contract liabilities. There have been no changes in reserving assumptions in the period. Our stated preference to maintain the confidence level between 80% and 90% underpins our ongoing ability to release loss reserves from prior years. Prior year favorable development totaled $22 million in the first half. This reflected favorable development on older catastrophe losses and releases of 2025 IBNR, partially offset by adverse development on the Baltimore Bridge claim. We have now fully reserved the claim and have no remaining exposure beyond the established reserve. Excluding Baltimore Bridge, reserve releases would have been more consistent with our long-term experience. Bear in mind that the $109 million of reserve releases recognized in the first half of 2025 reflected an unusually high level of favorable developments on prior year catastrophe events. The net discounting benefit was $46 million in 2026 compared to $19 million in 2025. We benefited from an increase in rates in the period across all our major currencies. And now turning to investments. Investment income of $78 million was at a similar level to 2025. Total investment returns for the first half are lower than in 2025, reflecting a less favorable market backdrop compared to the prior year, which has resulted in just under $30 million of unrealized investment losses. The portfolio continues to perform in line with its core objectives of capital preservation and liquidity, and remains conservatively positioned with a focus on high credit quality and short duration. On capital, our capital position remains strong. We continue to maintain significant headroom above regulatory and rating agency requirements, providing resilience to potential volatility and flexibility to support future underwriting opportunities and capital management decisions. I am happy to announce our usual interim dividend of $0.075 a share, an aggregate payment of around $18 million. Overall, this is a strong first half performance. We have delivered a solid underwriting result, resilient earnings despite an active loss environment, and continued capital strength. This reinforces our confidence in the underlying performance of the business and our ability to deliver attractive returns through the cycle. With that, I'll hand back to the operator to take questions.

[Operator Instructions] Your first question comes from Shanti Kang with Bank of America.

The first one was just on the premium top line. I think that was down 3% year-on-year, and I understand the book actions that you mentioned. Into the second half of this year, where are you expecting to pick up a bit more volume to kind of makeup that broadly stable top-line guide that you have? And then the second question was really on casualty. You mentioned better pricing conditions in casualty. But last week, some of the large U.S. names had a pretty cautious stance on casualty and particularly on general liability reserves. In some places that was strengthened even on earlier years. I know that you booked the reserves at 100% combined ratio and you entered the market relatively recently. But how can we get comfortable with that booking at that level even given the loss cost trends arising? That would be helpful.

Shanti, it's Paul here. I'll take those questions. On the premium point, I'd just obviously remind you that ex reinstatement premiums, which were obviously quite significant in the first half last year with California wildfires, the actual underlying is minus 1%, which I would certainly categorize as broadly stable. And as I said in my script, we're happy with that guidance. Again, and I'll always do this, I'll always reiterate we're not being driven by top line here. That's our expectation, but we'll adapt to market conditions. But we're happy with the broadly stable on an underlying basis. On casualty, again, just to slightly clarify the comments. We're not saying we're seeing improvement in casualty. What we're saying is it's the more stable when it comes to rate change year-on-year. Certainly, more so than you're seeing in some of the property lines that are seeing some more significant softening. So our comment is around rate direction. But what I would say, and again, you mentioned this quite rightly, obviously, we've reserved our casualty portfolio very prudently since we've entered that class. I can't obviously talk about other peers, but I'm pretty sure not many have been reserving at that level of loss ratio. What I can reiterate, as we've said previously, we're very comfortable with the reserve position we're taking, and we still believe over time that the underlying business that we've written, there is margin there, which we will realize over time. Look, the casualty market is a very broad church. And there's a lot of different classes of casualty within our casualty reinsurance portfolio. And whilst our premium has remained relatively stable over the last few years, there's a lot of changes underlying that, and that's very much in line with market conditions on the underlying book. So undoubtedly, in some areas of the casualty market, there is more challenge from a pricing perspective and price and adequacy perspective. And then there's some other areas where we still feel that there's good margin, and we're just trying to adjust our book accordingly.

That makes sense. Could I just quickly follow up on the first question? I was just curious, maybe into the second half of the year, just where you think there's more volume or rate pickup, just on the premium side, maybe directionally where you're looking to deploy capital. Look, the second half of the year, I'm definitely not saying we're going to see rate pickup in the second half of the year. We're definitely in a phase of the market where there's softening. Our view is that we can remain broadly stable from a top-line perspective in the second half of the year. The second half of the year is more kind of specialty insurance dominated. A lot of the reinsurance classes, particularly on the property side, have already been underwritten. And looking at the market as we see here now, yes, there will be rating pressure in some of those lines, but we think we can still maintain broadly stable top line.

Your next question comes from Will Hardcastle with UBS. Your line is now open.

As you mentioned, the PMLs have reduced significantly. How do we think about that in terms of capital requirement reduction? Is there a rule of thumb type calculation you can help us on about that impact? And within that, how much of the added protection has been acquired in traditional reinsurance markets versus alternative? And a second question. It looks to me that if I take the Gulf of Mexico hurricane exposure, think about where that is as a percentage of your tangible capital relative to history. We're probably about a cross-cycle level at the moment. I guess just wanted to sort of relay that with yourselves and wonder if that aligns with your view. And therefore, if this market continues to soften in this environment, do we think there's a reasonable amount more that we can reduce this number by? Thank you.

Will, it's Natalie. Thanks for the questions. I'll take the first part of your PML question, and then Paul is going to jump in on the second part. So yes, the PMLs have significantly reduced at the 30th of June compared to the 31st of December, which were the previously published PMLs. I think one thing for you guys to note, though, is that the rating agency on the regulatory capital models that we do at the beginning of the year are based on the 1st of January PMLs, and they would include a lot of the reductions that you've seen now published at 30th of June because it includes the 1st of January reinsurance purchases and 1st of January renewals. And so it's almost that the published PMLs at 30th of June are slightly lagging what we have submitted for the rating agencies and the regulators at beginning of this year. So hopefully that makes sense. I can pass over to PG for the second part.

Just quickly on that point. Can I just check, is that the rating agencies, but what about the BSCR, your calculation that you provided at the full year? That's already incorporated that. Is that what you mean?

Yes, that's already incorporated. A significant part of that. The models are more forward-looking. If you think about it that makes sense from a capital perspective.

Will, on the traditional versus non-traditional reinsurance, the vast majority of our reinsurance purchasing remains traditional reinsurance. We do have elements of non-traditional with partners that we've traded with for a number of years through cycle, but I can confirm that the majority is traditional. And then more about your question on direction of PMLs. We've obviously seen a reasonable jump down in the last 6 months. I think -- I mean, I'd need to go back and check in terms of where we sit historically, but I don't think you're 1 million away. Looking forward, I think that it will depend on what happens in the market. There's a long way to go between now and the 1st of January. But as you'd expect from us, we'll continue to manage the cycle. And as we said before, the one benefit of a softening market is the availability and efficiency of reinsurance. And as you can see, we've started to use that lever. That's not saying we will necessarily see the same jump down in PMLs, but directionally, if the market continues along this path, then we will definitely be looking to manage our catastrophe exposure. One quick caveat on that is obviously, to be fair to you, the only numbers you really see to look at our catastrophe exposure is these PMLs. But we obviously manage our business at all parts of the return period, and you don't necessarily get to see that. So these are good directionally from a number point of view, but they don't always show you the whole story.

Your next question comes from Vash Gosalia with Goldman Sachs. Your line is now open.

I have 2, please. One on your combined ratio. And I appreciate from the outside, it's a little bit difficult for us to really understand what's going on, but would love to get some color from you as to how much of the combined ratio movement in this half has been due to the reserve strengthening that you've done for the Baltimore Bridge. And how much of it is just an effect of rate softening? That's the first one. The second one, just following some of the comments you made to the first question, and something that I noticed in your release about you using reserves to manage the business cycle. Could you just give us a little bit more color on this particular comment? As in, how should we think of reserve releases? I appreciate in the past you have said the 5-year mark, but we're getting quite close to it with the cycle softening. Could you just give us some quantitative indication on how much is there? When could we expect it?

Vash, it's Natalie. I'll take the first question on the combined ratio. I think are you comparing this to the guidance and asking why we're coming slightly higher than guidance? If that's the case, I suspect that is to do with a deterioration on the Baltimore Bridge claim, which has impacted our prior year releases for this half, and they're probably therefore slightly lower than people were expecting. The underlying performance of the business is exactly in line with what we'd expect, and there's nothing worrying going on there. So we're perfectly happy with the underlying combined ratio. That's completely in line with expectations. And then on the casualty...

Sorry, just on the -- are you able to give us a little bit of color on how much was reserved for Baltimore? Is that something you're not willing to share at this stage?

Yes. We're not sharing that information because it's not a material enough number to disclose at this point.

On the casualty reserve point, Vash, I think, yes. What we've said since we entered casualty was the earliest we would look at our casualty reserving would be 5 years. We entered the class kind of halfway through 2021. I'd obviously say even if we did it at the 5-year point, which would be the earliest point we would look at it would be for a very small part of the overall premium given we only really underwrite for half of that year. So we're not at the point yet. We're obviously getting closer. There's a little way to go yet.

Your next question comes from Kamran Hossain with JPMorgan.

So in terms of the 1 in 100 PMLs, there is -- you've clearly brought these down. On an annual basis, is there anything that we should think about in terms of the annual budget? I know you don't have a formal annual budget, but should we assume that cat losses on an annual basis having reduced to retrocession, et cetera, should be lower relative to premium? And the second question is on the comments Alex made in the statement around kind of what you've got to help yourself out in the soft cycle. You mentioned strong capital base, I think we all understand that. But you also called out robust reserves. I guess looking forward, if the cycle -- not if, I guess as the cycle continues to soften, would you expect reserve releases to maybe pick up a little bit, particularly if the -- as a percent of revenue, particularly if the top line does decline a little bit?

Kamran, we missed the first part of your question. I'll answer the second question, and then if you can rephrase the first part of your first question.

Sure.

I think, look, if you think about where we are in the cycle, what I'm trying to say is we are huge believers in the cycle in our world, you and can see the cycle turning and all the data is there. All we're saying is that we are a bigger business today than we've ever been. One thing that hasn't changed is we've always had very conservative reserves. So we've never had a year where we haven't had positive reserve releases. You can see that in our history. And so therefore, we haven't changed our reserving practice. We believe there's margin in the casualty book. So we think over time there will be reserve releases which will help our earnings through the more skinnier years. And we just think that's a really conservative way to run our book. And if you go back to all the questions about casualty or the comments from some of the U.S. carriers about casualty, again, that just backs up our view of why we reserve our casualty book the way we do, because we just don't want to have those years that some others have had. So we have been planning for the market to soften ever since the market hardened in '18, as crazy as that sounds. And as we go into the softer part of the cycle, which clearly we now are seeing across most classes of business, we just think conservative reserves will help our earnings through the next stage of the cycle. And everything we're trying to achieve is to have a better cross-cycle return for our shareholders, and that's one of the things we can use to achieve that.

Let me try again on the first part of the question. so in terms of -- you brought down the 1 in 100 PMLs. So clearly kind of reducing kind of the retrocession business that you're writing. On an annual basis, I know you don't have an annual cat budget that you disclose to the market. But on an annual basis, would it be right to assume that your cat loss as a percentage of revenue should be lower because of the changes you've made? So I know it's very theoretical, but that was the first question.

No, I think that's -- I'll take this, Kamran. I think if you think about -- you're going in the right direction if you think about the moving parts. So you're right, we've reduced our inwards retro portfolio. As you've seen, we've increased our use of reinsurance, and that certainly applies to the catastrophe lines of business. You can see that's manifesting itself through the PMLs, but also not just those numbers. Our footprint will be on a net basis shrinking as we move into the next part of the cycle. Obviously, our earnings are not what they were in the last 3 years. But as Alex has said, we're very much in the phase of we're actively managing the cycle. Yes, there are still some really good returns to be had. But we need to carefully manage as we move through this phase of the cycle, and those actions that we've taken are just aligned to that.

So another thing, I think that we're definitely more diversified than we've ever been. You saw that last year. So by definition, our earnings are not as volatile compared to they were in the past around cat risk. We are buying better reinsurance. And as Paul said, we are at the stage of the cycle where we're actively managing our underwriting, we're actively managing our capital. And as we've said many times, efficient reinsurance and better products is the way we do that, and we'll continue to do that if the market continues to soften.

The next question comes from [ Joseph Theuns ] with Autonomous.

The first is just kind of looking through a slide deck on the appendix, Slide 17. I suppose I'm a little surprised to see the property reinsurance premiums kind of holding stable, and sort of casualty maybe shrinking slightly. Just considering some of the comments that you've made today about sort of where rates are on pricing and things. Can you kind of give us a little bit of flavor as to where you're growing in this sort of property segment in reinsurance? And perhaps also sort of tie to that why casualty has sort of shrunk, considering it's got some of the better rates on offer in the book? And the second question is around the loss ratio in the reinsurance book. Just given the benign net cat environment, sort of surprised the loss ratio isn't a bit better. Sorry if that's a bit cheeky. But just given that it's sort of higher than some of the previous years we've had, with also benign net cat experience, is this kind of the soft cycle effect kicking in or are there any losses that you can call out that sort of really maybe that we maybe didn't factor in or weren't aware of?