Good day, everyone.
Welcome to Conduit's 2025 interim results presentation.
We appreciate your time today as we discuss our performance for the first half of the year.
Joining me on the call are Neil Eckert.
Eckert, Chief Executive Officer, Elaine Whelan, Chief.
Financial Officer and Nick Pritchard, Interim Chief Underwriting Officer.
Please note our disclaimer language on slide two.
I will now turn the call over.
To our CEO, Neil Eckert.
Thanks Brett. Welcome to our presentation. I'm today joined by Elaine Whelan, our CFO, and Nick Pritchard, our Interim CUO Today's presentation will cover our results for the first half of 2025, our view of the market, and our updated outlook for this year and beyond. I will begin with a summary of our interim results. Nick will then provide a more detailed segment level performance review. Elaine will cover our financial and investment highlights, and I will close with some key takeaways and thoughts on of Conduit. For the first six months of 2025, we delivered growth in gross premiums written across all three of our segments. Property and Casualty experienced strong increase in premium, while the growth in Specialty was more modest relative to recent periods.
We have seen increased competition during Q2, causing us to reduce certain parts of the portfolio in line with our plans. We have started to add more excess of loss business to our portfolio at mid-year renewals. As most of the business has been written for 2025, we will continue on these initiatives throughout next year. Moving to performance, the first half was marked by elevated loss activity including wildfires, severe convective storms, aviation events, and the recent High Court judgment regarding Ukraine war loss. These events contributed significantly to our undiscounted combined ratio of 122.1%. The California wildfires alone now add 31.6% to our combined ratio for the half year. Our investment portfolio continued to deliver with a 3.9% return during the first six months, producing a net investment result of $63.8 million.
Importantly, a large component of our investment return was from the income generated by our growing investment portfolio, which now totals $1.9 billion. Ultimately, we reported a disappointing comprehensive loss of $13.5 million for the first half, largely a result of elevated loss activity. 2025 is a transitional period across multiple Conduit, including portfolio composition both inwards and outwards and personnel. During the second quarter, we undertook a number of strategic actions in response to evolving market conditions and elevated loss activity. These developments have unfortunately led us to revise our expectations for the return on equity for this year. We now anticipate our ROE to be in the mid single digits for 2025. This updated guidance reflects both the actions taken and the loss experienced during the second quarter of 2025, which includes the following.
We have increased our reserves related to Ukraine following the U.K. High Court judgment, which has significantly increased the industry's insured loss from the event. We have also taken a more conservative stance on several aggregate excess of loss contracts given the heightened loss activity in the first half of the year. Our guidance incorporates losses from other aviation-related losses that occurred during the first half of 2025. Further, as previously disclosed, we have made targeted portfolio adjustments, including purchasing additional reinsurance and reducing certain quota share business. Whilst these actions are part of our long-term strategy, they are expected to result in lower premium growth and net revenue in 2025. The most significant driver of our result for the second half of the year will be the Atlantic wind season. We plan on a mean basis, and our guidance assumes an average hurricane season.
Moving forward, we remain focused on our long-term strategy and are committed to improving the company's performance. We continue to invest in our business, both in terms of people and technology, and Conduit is guided by a highly experienced leadership team with decades of proven success in building and managing reinsurance and insurance companies. You would have seen that our most recent hire was William Randolph, who recently joined as our Chief Risk Officer. We are very pleased to have William on board and look forward to the contributions he will make at our risk function. We have also hired a new Head of Exposure Management, and later this year we will welcome a new Head of Claims and a highly experienced specialty underwriter to partner with Mark Bim. These are experienced and well-regarded professionals, and we are pleased with the positive reception from the market.
Collectively, the leadership team is committed to delivering Conduit's long-term vision and strategy. We will exercise discipline, managing risk thoughtfully, and ensure that we are allocating capital where it can generate the best outcomes. With this approach, we believe our cross-cycle mid-teens ROE objective remains achievable whilst recognizing the near-term challenge of the 2025 results. Now turning to our underwriting performance for the first half of the year, we achieved 8.9% growth in gross premiums written, reaching $803.3 million. This growth reflects both targeted new business and increased participations on accounts where we saw strong alignment with our underwriting approach. Our balance between property, casualty, and specialty remains similar to the prior year, and each of our segments have gained scale. We are taking steps to refine our book, reducing exposure to business that no longer meets our return thresholds. This was most apparent in specialty during the second quarter.
Our underwriting decisions will be margin led, and we are willing to walk away from underpriced business overall. Across the portfolio, risk-adjusted rates have reduced by 3% net of inflation through the first half. In our view, rates remain relatively strong in our target classes. Pricing has come off historical highs but remains near 2023 levels. Despite the elevated loss activity during the last few years, industry capacity remains near peak levels, and this excess capital is driving more competition regarding losses. This has been a historic year for catastrophes. The first half of 2025 was one of the most loss-intense periods on record for the industry. Insured catastrophe losses are expected to reach at least $100 billion for the first six months, which is more than double the long-term average and the second highest first half total ever recorded.
Over 90% of these losses occurred in the U.S., which is where the majority of our property exposure lies. Catastrophe activity was driven by a combination of severe convective storms and the devastating Palisades and Eaton wildfires, which together accounted for over $40 billion of the total. Our undiscounted net loss, net of reinsurance and reinstatement premiums, for the January California wildfires is $118.3 million, which is within our previously disclosed range of between $101 million and $140 million. The majority of this impact was concentrated in our property segment, with some exposure in specialty as well. On top of this, we have experienced development on losses relating to the conflict in Ukraine, as well as several large risk losses such as the Air India aviation crash.
As discussed last quarter, we have made meaningful changes to our reinsurance program since the wildfires and have purchased considerable protection against large secondary perils. Our aim is to reduce volatility going forward from these types of events. Looking ahead to 2026, our intention is to embed secondary peril protection more structurally into our core program, reducing our net exposure to large secondary perils. These changes reflect our intent to reduce volatility and manage gross to net more effectively as a core part of our underwriting strategy. With that, I will hand over to Nick for a deeper dive into our market experience across divisions.
I'll now turn to our performance in each of our business segments along with respect to market conditions and outlook. Over $65.5 million of year to date growth, $41.8 million was driven by our property segment, which grew 9.5% to $483.6 million. This was supported by a continuation of increased demand from U.S. carriers in addition to inflation-linked exposure growth. In line with our Q1 commentary, we observed more limit purchase through midyear in the U.S. as we anticipated. Renewal negotiations were more challenging than in 2024. Risk-adjusted rates net of inflation declined by approximately 5% through June 30. Outcomes vary significantly by region, peril, and layer. This reflects broader market dynamics, including increased capacity and high ILS participation. The ILS market continues to show strong appetite, contributing to increased capacity and competitive pricing on certain layers.
Our growth rate has moderated, and depending on market conditions, this trend could continue as we prioritize risk that satisfies our return hurdles during the year. We continue to increase our line size on high-performing treaties, and we actively reduced exposure to accounts where pricing or structure no longer fits with our risk appetite. We made progress on several new placements in Q2, notably on excess of loss business but also in select quota share deals. These steps support our strategic goal to increase excess of loss business over time. We're actively managing our portfolio to achieve this shift, including adjusting line sizes, targeting new excess of loss opportunities, along with refining and marketing our underwriting strategy to support this evolution. As Neil mentioned, the first half of 2025 was one of the most active catastrophe periods on record, particularly in North America where most of our exposure lies.
The last event was the California wildfires in January, but there were also several large severe convective storms and other smaller events that contributed to results. Our undiscounted combined ratio for the property segment reflects this loss activity and increased to 132.5% for the first half of 2025. Looking ahead, we remain selective in deploying capital as we make careful adjustments to the portfolio. This also includes a revised outwards reinsurance program for the remainder of 2025, which will better protect against large secular perils going forward. I'll now turn to our performance in the casualty segment. Casualty experienced the strongest growth rate among our underwriting segments during the first half of the year with gross premiums written up 14% to $169 million. Growth was concentrated in U.S. general liability classes where we have deepened our partnerships with several key participants in the excess and surplus lines market.
These are mostly existing clients where we have observed strong underwriting behaviors, and we therefore sought to increase our line size on their programs. Equally, as we manage our casualty portfolio for changing conditions, we have reduced exposure to segments where pricing has been more competitive or rate adequacy is deteriorating, such as D&O and financial institutions. For the period to 30th of June, the risk adjusted rate change of casualty was +1% with positive momentum in U.S. general liability offsetting softer trends elsewhere. Senior commissions have moderated slightly, improving net economics as we look forward. Overall, the reinsurance market is showing strong demand to deploy capacity in casualty classes. However, we would characterize the market as generally remaining disciplined given some of the recent experience in industry from back year deterioration. For the first half of the year, our casualty segment undiscounted combined ratio was 103.8%.
Historically, our full year ratio tends to improve relative to the half year result, reflecting the timing of earnings and loss emergence. The 2025 ratio also reflects an increase to our unallocated loss adjustment expense estimate, given the overall casualty claims environment. Prior year reserves remain stable, and in our opinion, our booked ratios include prudent allowances for inflation and uncertainty through our risk adjustment margin, which we expect to unwind over time as claims are paid. Due to the long-term nature of the business, we will continue to be selective in casualty classes and prudent with our reserving. Overall, we believe our portfolio is well positioned and resilient. Our focus remains on long-term partnerships, disciplined underwriting, and selective diversification beyond the U.S. market. Finally, moving on to our specialty segment, we have built an attractive, diversified portfolio of specialty risks.
We will look to expand this over time with the addition of underwriting resources and as market conditions warrant. Gross premiums written in Specialty rose 2% to $150.7 million during the first half of 2025, with growth constrained by softening rates and our selective underwriting approach. The moderation in year-to-date premium growth to 2% for the half year from 25% in Q1 is largely attributable to a combination of timing-related effects and more market competition in the second quarter. While Q1 benefited from strong new business momentum and favorable prior year comparisons, during Q2 we came off a few treaties where pricing or terms and conditions did not meet our standards. We also reduced our offered line on certain programs, while some accounts experienced slower than expected exposure growth or structural changes that reduced.
Our clean and capture risk.
Adjusted rates net of inflation declined by approximately 4% through June 30 with pressure across most classes including marine and energy. However, wordings and terms and conditions have largely held. Specialty classes have been exposed to some significant risk losses including the Baltimore Bridge and several aviation events. We have been disappointed that pricing in these classes has not responded to some significant claims for the industry. The undiscounted combined ratio for the first half of the year was 105%. This result considers impacts of our aviation and war related exposures, including developments linked to Ukraine. A small portion of our California wildfire exposure also sits within the specialty book. Regarding Ukraine, the situation remains complex. We are monitoring legal developments and working closely with partners to assess outcomes. Looking ahead, we have reinforced relationships with proven partners and are seeing increased traction in multiline and excess of loss opportunities.
Submission flow has increased and we are maintaining discipline on event limits and loss ratio caps. While top line growth is modest, we're prioritizing quality of underwriting. I'll now hand over to Elaine for the interim financial results.
Gross premiums written in $803.3 million are up 8.9% on the prior year. That compares to the 15% increase that we discussed in our first quarter trading update. As mentioned then, we expected that growth rate to moderate somewhat with the half year given timing around our renewing book plus some premium adjustments. Our growth of nearly 9% is in line with those expectations. That growth will moderate a bit more over the rest of the year, but we still expect to have a healthy level of growth for the full year. Our proportion of quota share business currently remains reasonably consistent year-on-year, again reflecting where we've seen the best value.
Although, as you've heard, we're just beginning to tilt a little to some excess of loss deals where we're seeing some more deals meet our return hurdles, and as we seek to rebalance our book a little, we have reinsurance revenue of $433.3 million versus $382 million at the prior half year, a 13.4% increase year-on-year. Our reinsurance revenue is essentially gross premiums earned, less a ceding commission and a smaller adjustment for non-distinct investment components. It therefore tracks the same pattern as our gross premiums earned, just a lower number after the ceding commission deduction. Generally, ceding commissions have ticked up a bit, so we're seeing a higher deduction for those, which of course impacts our reinsurance revenue.
Ceded reinsurance expenses, which are essentially our ceded premiums earned excluding reinstatement premiums, were $53.4 million for the first six months 2025 compared with $43.8 million for the prior year. Our IRIS cover has increased year-on-year as the inwards book has grown, in addition to price increases at the January 1st renewals plus some additional cover purchased around Secretary Barrels following the California wildfire loss in January. On losses, the first six months 2025 was another highly active period of natural catastrophe events and risk losses for the industry, including the California wildfires, severe convective storms in the United States, and several aviation losses amongst others. The California wildfires were the most significant event, and our undiscounted net loss, net of reinsurance and reinstatement premiums, is $118.3 million, which is within our previously disclosed range of between $100 million and $140 million.
The California wildfires contributed 31.6% to our undiscounted net loss ratio. Absent this event, our undiscounted net loss ratio would have been 78% which is more in line with the prior year undiscounted loss ratio of 73%. Other smaller impacts came from taking a more conservative stance on a number of aggregateexcess of loss contracts given the elevated loss activity in the first half of the year and also strengthening our Ukraine reserves a little given the outcome of the U.K. High Court ruling. While some of our students may appeal the ruling, we felt it prudent to bolster reserves now given the updated information available. A reminder that our reinsurance service expenses includes both loss and loss related amount but also reinsures operating expenses and an allocation of some other operating expenses in our interim financial statements segment disclosure.
We've provided a breakout of that number into the loss and expense components so that you can see those separately and also to help with calculating our net loss ratio. Our undiscounted net loss ratio for the half year was 109.6% versus 73% for the prior period. Our discounted loss ratio was 95.8% for the half year this year and 62.4% for the half year last year. Our combined ratio for the half year was 122.1% on an undiscounted basis and 108.3% on a discounted basis compared to 85.7% and 75.1% respectively for the prior year. Our comprehensive loss for the half year was $13.5 million or an ROE of - 1.3% compared to comprehensive income of $98.1 million and an ROE of 9.9% for the prior period.
On the investment side, yields have decreased a fair bit this year and the portfolio is generally yielding more now, maintaining a current book yield around 4.2%. Overall for the half year we returned 3.9% versus 1.5% in the prior year where we saw yields move the other way. We remain relatively short duration and our focus is on maintaining a high quality, highly liquid portfolio. Duration is currently 2.8 years which is the same as our net reserves. Average credit quality is double A and you can see the usual pie chart here with our asset allocation and other than cash, cash equivalents, or short term investments reducing a bit which is largely timing, no real changes in prior quarters in that order. Strategy, the business continues to grow and we remain highly cash generative.
Our invested assets also continue to grow as our portfolios become higher yielding over time. We produce more income as our investment leverage increases over time that contributes more to our ROE. I'll now hand back to Neil for closing comments.
Thank you, Elaine. Before we close, I would like to reflect on this transitional phase for Conduit and our strategy. Conduit has made significant achievements since the IPO, and our efforts to better position the business for the future are progressing. As the market changes, our strategy must evolve. As a startup company, we achieve scale with our quota share focus, which enables us to capitalize on the hard market conditions and grow into our capital base. Through the startup phase, we have developed strong client and broker relationships to assess risk. As we move forward, we are looking to achieve balance between quota share and excess of loss business, which is consistent with the business plan we originally designed at the IPO.
We believe this adjustment, which will take time to achieve, will affect our business in a few ways: reduce our exposure to attritional losses, which is more difficult to control when rates are softening; improve diversification within our portfolio; allow us to better control our net exposures through retro coverage, retro being our outward reinsurance protection. We recognize our transition will involve additional investment in people and resources. We have started to make progress with recent hires who are bringing fresh perspective and expertise to the company and are supported by our longstanding executives who are providing strategic consistency and operational stability. Our goal is to create a stronger, more resilient Conduit that generates more consistent returns. Our path forward requires building on strong leadership, underwriting expertise, and a collaborative culture.
Returning to this year's performance, we are disappointed to report the first half loss of $13.5 million, primarily driven by industry-wide losses relating to the California wildfires. Market conditions have become more competitive, however, business generally remains adequately priced. We will continue to deploy capacity where we see sufficient margin, and our underwriting teams are starting to manage the cycle in classes where there is more intense pressure on rates, terms, and conditions. Our strategy is bottom-line driven, with growth during 2025 enabled by renewal, support from our clients, and selective expansion with preferred partners. Conduit's balance sheet remains strong with over $1 billion of shareholders' equity. Our capital strategy remains focused on supporting underwriting whilst returning value to shareholders over time. Our conservative investment portfolio has reached $1.9 billion and is now generating meaningful investment income to support our returns.
We are committed to long-term value creation, and we believe necessary strategic actions are underway. That concludes today's presentation. Thank you for your time. We will now turn it over to Q& A.
Into the call.
Would like to ask a question.
Please press star followed by one on your telephone keypad. We will pause for a brief moment to wait for the questions to come in. Your first question comes from the line of Michael Huttner of Berenberg. Your line is now open.
Thank you very much.
Good morning.
I see questions. The first one, the transitional phase. Did you say how long it will last? That would be my first question and maybe touch on, you know, this additional investment is a potential amount we can think about. The second one is on the, I noticed on Ukraine and maybe I misheard, you know, the conflict flame. Does that mean that there could be potentially more loss coming from that? Maybe you could give us a feel for that. The final point is you talked a lot about the retro cover that you've purchased and how it protects earnings. I just wanted, can you give us a feel for either the benefit of this retro cover or the cost of it? It's difficult to form a kind of idea of how meaningful it is.
Okay, so the first question was the transitional phase. We are. Our current portfolio quota share to XOL split is. Quota share is probably in the mid-70%. The IPO plan stated a 50/50 split. We wish to move towards that. I previously said that it's about evolution, not revolution. We will not move there in one go. It will be a gradual adjustment to the portfolio. I mean we're not going to sort of sit on our hands. It will be done in a meaningful fashion, but it will take more than 12 months after that premium split. That's why it's described as a transition phase. Your next question was about people. When we said continue to invest, it's not like a capital investment or we're buying people. It's just new recruits and hires. So, you know, we are, where appropriate and where the skill sets.
We've announced the hiring of a new underwriter specialty to support Mark Bierman. We've announced a new CRO. That's what we meant by investment. It is not a material sum and we would still expect our expense ratio to be below the 5% line that we've always aspired to. On the retro, Michael, the principal purchases were made in the announcement that was before the announcement that was made in Q1, so that cost would have been contained within previous announced figures. Any further purchases of reinsurance for this year were within the original budget. There is not material additional cost making part of this set of results from previous disclosures. Ukraine, you also asked about the benefit of that reinsurance, the principal benefit. We have historically disclosed losses that are sort of greater than $25 million- $30 million roughly.
There's no hard and fast rule on that, but that's the basic level. What I said previously is that we now have substantial vertical limits on an excess of loss basis that cap our losses on secondary perils to within that disclosable level. We never give details of individual reinsurance contracts for commercial reasons, but it is safe to assume that within what I described as the disclosable range, those reinsurance contracts kick in on each and every basis. Effectively, on a per event basis there's a big limit, but there's an excess point that paths in below the disclosable level. We also did previously announce the purchase of additional aggregate cover which protects us from the crisis.
Michael, just pick up on those points as well. If you go to our interim financial statements in the segment note, split out the CDV insurance expenses, which is basically on an earned basis, that will let you be able to compare where we are this year versus last year. You can kind of power that through for the rest of the year.
Go to the statements and then effectively look at the ceded premiums. Is that what you're saying?
Yeah, in the notes. There's a segment note in the notes to production statement, and the green collide items that you see in the income statement in a little bit more detail, so you can see the CDV insurance expenses there.
Yeah, brilliant.
Fantastic.
You also asked a question about Ukraine, which the Ukraine loss has gone up a lot in the original loss terms. The latest PCSS budget is between $8 billion- $10 billion and it was previously much reduced from that. I do think it'll be a feature of this results season for certain companies. The reason it's complex is the judge found that it was an aviation war claim and that claim is still being appealed. Until the outcome of that case is finally resolved, there could be some more risk loss for some and insurers aren't even appealing that. It is not a cut and dried case, but we do not have deterioration that's up to a disclosable level. Any deterioration that we've taken we have. It might be prudently reserved. It's not material.
The reserves that we have on Ukraine and the aviation loss would be contained within our H1 class combined ratio, which we do disclose. That will give you the ability to see that it's not a large or material figure. Ukraine is complex. The way it's treated in reinsurance is also complex because it's a question of the event definition as to whether it becomes more than one event. I think we've taken a prudent position and there are moving parts, but we are not, we reserved on the basis we don't expect. Obviously, when you set a reserve you don't expect further deterioration. Absolutely.
Very good, very helpful. Thank you.
Question comes from the line of. Your line is still open.
Oh, hello. Hi there. I've got a few questions if I may. The first one is on Greg. What number are you looking to focus on in terms of the growth? Are you looking to adjust the gross premium number or the net number down or both? It sounds like you're looking to manage deeper net insurance revenues more effectively through Vetro. That's the first question. The second one is just coming back on to the balance of the business. You're looking to shift more towards the excess loss lines. I'm just wondering what's the motivation behind that? Is it as simple as the margins? Are they better there? Any more color on what's driving that motivation towards excess loss? The third question is on exits. I think you mentioned that you are looking to pull back from certain products online. Any more color on that?
The final question is just on your share buyback. Are you still intending to buy back your shares, particularly given where the stock is trading today? Thank you.
Right, so the first question was on growth in ti. We did record a level of growth in the first half, 9% increase. We would expect that probe to moderate. Yes, it will be a reduced level of growth for this year, which is in. I'll ask Elaine to comment further on that in a minute. We don't give guidance for 2026 in terms of going and driving towards excess of loss. Excess of loss is priced at a higher margin than quota share, so there is an attraction to driving towards the original business plan, which was written on a 50/50 basis. It's also easier to manage attrition within that portfolio because excess of loss by its definition is more catastrophe orientated. Quota shares, if market rates soften, the margin is less. We are managing that process.
We will reduce our exposure to quota share for those reasons and increase towards excess of loss, which is higher margin. You asked on exit. We haven't specifically exited a class in total. We will review each line of business based on its merits, and we are happy with the shape of the portfolio from a class perspective other than our wish to drive towards more excess of loss and less quota share a bit. Can you remind me the last? Oh, it was on share buyback. Yeah, the share buybacks.
Yeah.
We announced we have pulled permissions to make share buybacks until March next year. I mean yes, I am totally aware of where the share price is as we sit here, and we have exercised our ability to purchase some shares. We have been prudent; every single time we purchase our stock, it goes down the wire on the RNS so you guys can see what we purchased. I don't want to comment on forward purchase because by definition I'll be giving out inside information.
Just to add to that, you know we are in kind of season. That's obviously part of our consideration there as well. You know we'll reassess that as we move through that peak risk period. I guess Neil asked me to comment a little bit more on the growth side. I think both sides of that equation are important and I think Nick kind of remarks that the growth in.
Our.
Moderate a little bit as we move towards the end of the year, and that's a fairly typical pattern for us anyway given where we write our book. I think going forward there's the mix of the book where we're looking to achieve, but also managing to have a more efficient and effective hybrid program there as well. There's two sides to it.
Your next question comes from the line of Andreas van Embden of Peel Hunt. Your line is now open.
Yes, thank you very much. Just a few quick questions. Again, referring back to that transition you're making towards the quota share program, could you maybe describe some examples of where you're already cutting back on that quota share program? You mentioned property as being an area where you're sort of looking to actively re-underwrite, but you didn't mention anything on casualty and specialty. I just wanted to try and find out whether you're cutting back on quota share on individual clients' classes across the board and whether you're cutting back because of being uncomfortable with terms or conditions rather than rates. The second question is as you move to excess of loss type contract. I appreciate that it is a higher margin business, but it also increases your risk appetite. I'm just wondering what this means from a capital point of view.
Would you need to hold more capital against the premiums you write as you move to writing more excess of loss, and then finally on premiums, as you downsize your quota share book and move into excess of loss, are you managing the premium pie, as it were, the whole premium volume you're writing in 2025? Can you replace dollar for dollar a quota share contract with a loss contract that keeps premium stable, or is there going to be any pressure on premium volume as you move towards the 50/50 transitions? Thank you.
On the quota share examples, we would look. There are some types of quota share that we will be more skeptical of, one or two in the property segment, but it's basically down to the quality of the underlying portfolio. That's the first assessment in writing that risk, and then it's down to the margin that is available based on those factors, but also the factors of the level of acquisition costs within that treaty. If in our perception there is exposure that does not justify on the model, then the price margin, we have reduced on some property quota. We've also reduced our line on one large casualty treaty, and we have a reduced line within the specialty account. It's not that we will target a particular segment. It is about the quality and the margin within that portfolio.
I do take your points on excess of loss being more capital intensive, it's catastrophic. You do reduce your exposure to attritional losses, and we can tailor our reinsurance program accordingly. We have always had good capital protection, and we are able to accommodate more excess of loss business without putting capital stress in the business. We have a strong balance sheet. In terms of the premium pie, your observation that if you do, you know, can you replace dollar for dollar XL for quota share, quota share comes in larger lumps premium. We would have to do more work and attract portfolios of excess of loss business. Dollar for dollar, no. It's then a question if we have an increased appetite for excess of loss, can we get on the business we want to get on?
We are in the middle of a planning process for 2026, and I need to complete that. Your question on dollar for dollar replacement on a per risk basis, obviously not. We would look to, if, and I have said earlier in the call that we're not just coming off quota share business wholesale. There is some nice business in there that we would want to give continuity and support to our students. It's evolution, not revolution. I do think we can replace, as we trim our quota share book, we can replace it with excess of loss business.
I'll just chip in a little if I can. Hi, Andreas. The quota share, although there's some larger TCs, does take time to write and earn, with this transition timing around that in terms of dollar matching as well.
All right, understood. Thank you very much.
Next question comes from the line of Ben Cohen of RBC Capital Markets.
Your line is now open. Good morning. Hello there. I hope you're all well. I just had two questions. I wanted to go back on something I think Elaine said, which was about some of the loss in the quarter reflecting, I think, treatment of aggregate XOL contracts that you had. I just wonder if you could give some more color there. Does that suggest that you yourself are writing aggregate business and that you're concerned because of, I guess, the storms in the U.S. that these contracts are more likely to kind of move against you and so you've recognized that. The second question was just to come back on the casualty combined ratio in the first half.
I appreciate, I think you're setting your reserves at a conservative level, but could you just say more about why you're prepared to write business above A, above 100% combined rate though, particularly as you know, it doesn't, doesn't seem now that there's that much sort of forward momentum in that rate anymore. Thank you.
Hi Ben, welcome back. You're spot on on the aggregate XOL contracts. We do write a few of those, and we have recognized that the higher period of activity in the first half around, you know, conjecture, storms, and some of the other things we've mentioned as well. Yeah, we have taken appropriate measures on those contracts. On the casualty combined ratio, there is a little bit of timing element in there. It was kind of higher through half year last year and then came down towards the end of last year, and we expect that trend to continue. It's just kind of a bit of a fallout in terms of how we think about risk adjustments and through the reserving process there.
Thanks. Could I ask just a follow up on this?
Go ahead, Ben.
No, I was just going to ask a follow up on the aggregate excess of loss. Does that mean that there's a risk that these treaties, if there are sort of more mid sized events, that actually you would have more losses there, and then can they come to a point where this additional aggregate cover that you yourself have purchased in the first quarter, that sort of claws some of that back, or would that be below the level that you've then purchased the coverage for? If you follow.
There's a degree of a timing exercise with when we purchase the additional cover. Sorry, ask your question again or down.
Yeah, it was just whether you'd potentially have additional coverage from the new reinsurance that you bought for this, you know, for this kind of aggregate XOL contracts that are being, that I suppose are being pinged now from all that. You're more worried about sort of aggregating into you providing cover, whether there's any additional protection that you bought there or is that. Am I just looking at the wrong things and we should just think about it. Okay. You know, if there's another $15 billion SQS in the U.S. then you'll be protected and a $20 million, $30 million loss would come down to the $10 million loss and you wouldn't hear about it.
I guess I'll probably slip with my initial reaction in terms of timing. We did have some cover in place. We've got some more. If any kicks in, then we'll get the benefit of that cover. I think that's what you're looking for.
Yeah, yeah.
An SCS loss of the size that you mentioned on an event basis is capped out by the, by the, each and every covers that we have. What I would observe is we have tried to give granular detail on the constituent parts that go into the result for H1, but no individual particular event, whether it's within the aggregate, whether it's Ukraine, whether it's the individual aviation plane, make up a majority part of that result. It's not significant. We have just taken what we regard as a prudent reserving stance.
Okay, thank you very much.
Your next question comes from the line of Joseph Theuns of Autonomous. Your line is now open.
Hello, can you hear me?
Yeah.
Hi.
Great. I've got two questions. The first, I saw that you reiterated a cross cycle ROE target of mid teens. Given that we've passed the peak and are entering the soft market, what's the near term ROE target? Is it realistic that it might be below this cross cycle target? The second question I have is just going back to the combined ratio target of the low 80s given all of the changes that you're making primarily in property, but a little bit broader across the book. Does this still hold? Is that the target or has that changed? Thank you for asking them.
Okay, if we do give a cross cycle ROE target, then one would suspect that during the soft part of a market cycle, the mid teens would be harder to achieve and companies should be getting to more than mid teens in the hard part, which we did observe across the market in 2023. At peak of cycle, there will be volatility within that cross cycle aspiration. Yes, I get where you're coming from. We've given guidance for this year, we haven't given guidance for next year. We're in the middle of the planning process and that's what we aspire to as a company and we will write a plan accordingly. Within that cross cycle guidance, there will be parts of the cycle where that is much more difficult to achieve. Hopefully that answers that part of your question.
I do think in the near term while the market is softening, we're not in a proper stock market either. I think, you know, I'd factor that into your expectations around our ability to produce returns for next year on the combined ratio. You know, we're not in a position where we think that anything has changed in terms of anything we said previously. We've obviously had some issues around our wildfire losses this year. In terms of the underlying book, it's adjusting around our excess of loss balance and making our reinsurance program hoping to work a little bit harder. None of that really changes where we expect to be from that perspective. That kind of ties in with the cross hyper guidance as well.
Okay, thanks for that.
Question comes from the line of Ivan Bokhmat of Barclays. Your line is now open.
Hi, good afternoon. Thank you very much. I have a few questions. Please. The first one, I mean I've noticed that if I look at the property and casualty rate changes, there seems to be some improvement of momentum Q1 to first half, albeit some acceleration in specialty. I was just wondering if you could maybe comment on why we're seeing such dynamics. Is it because of mix? Is it because of some other impact, and perhaps if you could provide some of the outlook of what you think will happen to those rates and the rest of the year and maybe into 2026. My second question is, I mean could you help us understand the change in the attritional loss ratio or combined ratio year-on-year? Obviously, first half of 2024 did not see anywhere near as much CAT losses.
Given the changes in the reinsurance you have purchased, how should we think about that attritional ratio and where should the NATCAT ratio be throughout the cycle? Maybe the final question, I think it's actually related to the prior year developments and the reserve confidence. You flagged that you've added the Ukraine reserves. That overall PYD I think was positive over the first half. Maybe you could comment a little bit on where that came from and also how you view your reserve confidence. Thank you.
Okay, Elaine, could we take that in reverse form? Do you want to start on the reserves?
Sure. You know those numbers and that is an offset. The rest of it is really just the runoff of kind of prior years in terms of what's been reported versus what we expected, how we're adjusting our risk margin there. There isn't anything specific that I would call out in those numbers there on the traditional loss ratio. I think it's going to go back to the comments that we made just a moment ago around the combined ratio. I don't think we're necessarily changing significantly the expectations around the underlying portfolio. I think what we're talking about with adjusting business mix and buying more effectively insurance program is our ability to achieve those. I don't think it's necessarily say there's any significant change in how we think about those underlying ratios.
Yeah. You asked about rate progression in P&C, the underlying pricing. There were rate reductions and I think to a small extent some of these classes are dependent on class specific experience. There is an overarching trend which is that there is a lot of capacity in the market now and placements as rates come off. We have seen rates come off from peak and we now think they're at 2023 levels. From a macro industry perspective there are people that are increasing their premiums. I'm sure this reporting season people will announce increased premiums and the availability of additional capacity on a pure supply and demand basis is affecting things. Property, we have seen rate reduction and I wouldn't expect that trend to change. I would expect a continuation of those conditions because you've got a high level supply and demand issue.
There will be class specific claims and loss activity that affect areas. There has been loss experience in Florida from Helen and Milton which have affected pockets of risk. Overall, the market sort of has come off and we've been clear on that.
Next question comes from the line of Michael Huttner of Berenberg.
Good day. Thank you. It was really light, light stuff, natural catastrophe kind of loss pattern. You mentioned how we can season and stuff, and I just wanted this give us a feel for what I know I'm kind of asking for forward looking, but any help would be good. I think you mentioned several times diversification at the moment, not much because you know the pattern of loss has affected you more as more U.S., and then XOL giving you the opportunity for diversification. Maybe you could explain, see the benefit of that. Thank you.
Right. The first thing you asked about was the up and coming Atlantic wind season. What we were not doing was trying to create any type of predictive skill set. What we did say is that we use a mean basis in terms of results. We originally gave guidance post the L.A. event and therefore, in updating, there is volatility. There could be a benign hurricane season. So far, the hurricane season has started fairly quietly. It's, you know, we are in the Atlantic wind season, which is why we said and caveated the guidance in that regard. I think that's positioned. There is no attempt to predict an outcome. We've stated that we would use a mean hurricane basis and that will be taking the mean equivalence of the preceding few years. In terms of diversification, we do have a concentration of risk within North America.
Within that market itself, we are diversified, and America is a very large place. By writing excess of loss with more exposure into European and international markets, we will increase diversification and we will begin writing excess of loss. Where an earlier question was talking about the margin, there is less exposure to attrition and more margin in the underlying, so long as you can attract diversification within the excess of loss account. We are in the middle of a planning process. That would be one of the targets, to improve the diversification we get through a spread of access and possibility.
Very helpful, thank you.
Next question comes from the line of Joseph Theuns of Autonomous. Your line is now open.
Hi there.
Thanks for taking my follow up questions. The first is just in terms of this transition, can you give any indication of how long you anticipate it might take? I know you mentioned more than 12 months. Even on a two or three renewal window season that seems like quite a dramatic shift. My second question is on the underwriting hires. Are there more planned on top of the one you mentioned in specialty? In terms of this current high investment in specialty and any other future hires, is it for new lines and geographies or is it just expanding what you already currently underwrite? Thanks again for the follow ups.
Yeah, there are sort of two questions there, which is obviously slightly forward looking in terms of highs. We have been strengthening various areas across the group and we actually have a new Head of Claims starting very soon. We also would be strengthening in areas such as pricing actuaries and things that increase bandwidth and enable us to write more business. Yes, we will continue to hire. I don't want to make forward looking statements in terms of specific allusions, but we will hire where appropriate within the classes that we currently write. There are no current plans to open new lines of business away from property, casualty, and specialty. We will continue to look to strengthen both from a service and resource perspective within those lines. If the right underwriters are there, that would be good too.
We have made hires in risk, we made hires in claims, and we will be looking just to strengthen in general. You asked about the duration of the transition and I did say that it was evolution, not revolution. I also said we would not be looking to suddenly be sitting down here in 12 months' time saying it is 50/50. That is not what we can say. We are in the middle of a planning process for 2026 and we will drive towards that figure. I cannot predict the exact time frame on that drive. We have that strategy, which is to increase the amount of excess of loss and reduce on a selective basis. We will continue to write what we regard as good segments with attractive reinsurance policies that we want to write, including on quota share. The drive is to adjust the portfolio over time.
You said will it take two or three renewal seasons to achieve the ultimate goal. It could, but as I sit here I can't turn around and give an exact program. We are in the middle of the 2026 business planning process now.
Okay, so what I'm hearing is that you won't be actively cutting quota share. It's more kind of a trimming where the profitability isn't adequate, and then you know, kind of growing more actively in sort of the XOL handbook over sort of.
Yeah.
Longer.
Yeah.
What you're doing is drawing a distinction between the word cutting and trimming. What I've said is that we will push towards the 50/50. We will manage both the increase in XOL and the reduction in QS in what we think is the best way possible. That may mean that there are some bits of business that do not meet our margin criteria. If the definition of cut is to decline that renewal, then that's a cut. We are looking to, you know, I have said it's evolution, not revolution. We are looking to drive towards a goal as opposed to define explicit action.
Okay, thanks for that additional color.
For no further questions on the conference line, I will now hand over to.
Neil for closing remarks.
Thank you, everybody. I mean, pledging remarks, the announcement's been made. You know, we have revised earnings. It's been a tough quarter for us. We look forward to seeing individual investors and catching up with all of you individually, especially Q3. Many thanks. Cheers.