Ladies and gentlemen, and welcome to Lancashire First Quarter 2025 earnings call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would now like to turn the conference over to Alex Maloney. Please go ahead.
Good afternoon, everyone, and thank you for joining our call today. As always, I will give some brief highlights on the progress of the business so far. Paul will then focus on the underwriting trends. Natalie will cover the high-level financials, and then we will go to Q&A. There is no question that the broader macro and geopolitical environment is uncertain. The impact of these is relatively modest for Lancashire, but in some instances may create some opportunities. Against the backdrop, I am pleased that we are in great shape to weather this environment and continue delivering against our core strategic objectives. Number one, the insurance market remains favorable, with slight softening from the peak of 2024. As I have said before, we lead with underwriting, and we continue to grow whilst the cycle is supportive of strong returns for our investors, and that is what we did in Q1.
Growing ahead of rate with an underlying premium growth of around 7%. Paul will talk a bit more about this shortly. We continue to actively manage our capital and risk exposures in order to deliver attractive, less volatile returns through the cycle. You saw this with an active Q1 and California wildfires. Even if we assume a severe loss scenario for 2025 from this point on, we would still deliver healthy returns for our investors. We are a people business. We invest in our people, and we promote internal talent when the opportunity arises. To that end, in March 2025, we announced 45 promotions over the previous 12 months, demonstrating the breadth of talent across the business. Also, you will see us continue to build out our U.S. platform, looking to attract and retain the best talent that fits with our culture.
As I've said before, I'm extremely pleased at this stage in the cycle that we have a healthy balance sheet which will allow us plenty of flexibility to underwrite the opportunities we see. The quality of the business we've built and the talent we have in the organization together mean we'll continue to deliver on our strategy of delivering more sustainable returns for our shareholders. I will now hand over to Paul to talk through the underwriting trends.
Thanks, Alex. Good afternoon, everyone. Underwriting conditions in the first quarter have very much been in line with the expectations we described on our year-end call in March. We anticipated 2025 to be the first year since 2017 to see marginal rate softening from an exceptionally strong level. The RPI of 97% in Q1 is reflective of exactly this. Overall, we remain constructive on the underwriting outlook. As is always the case, each product line has its own specific dynamics. Some discrete segments did achieve rate increases in Q1, as did loss-affected business, though we are seeing competitive pressures of varying degrees. Importantly, we are not seeing a major shift in terms and conditions. We fully expect these market conditions to continue through 2025, absent any significant market or macroeconomic events that limit the availability of capital or the willingness to deploy available capital.
Most importantly, rating adequacy remains healthy for the majority of product lines, given that we have been through seven years of positive rate momentum. This is why we are still prepared to grow our underwriting footprint, albeit at a slower rate than seen in recent years. For 2025, we have guided for low single-digit growth for gross written premiums. This takes into account a marginally negative rating environment offset by continued build-out of certain areas of our business, such as our new U.S. platform. In Q1, underlying growth, when excluding the impact of inward reinstatement premiums, is approximately 6.6%. We're very pleased with this growth and have been successful in growing in segments such as specialty reinsurance and, as already mentioned, the further development of Lancashire U.S..
Our plan is to continue to build out product lines of our U.S. platform, which thus far have been focused on excess and surplus property and energy casualty. We have recently hired an underwriter to start underwriting a general casualty insurance portfolio, and this will commence later in the year. We continue to look to add additional product lines to the U.S. platform as long as we can find the right underwriting talent, one that will align with our company and underwriting culture. Given the strong start to the year and current market conditions, we remain very comfortable with our guidance of low single-digit premium growth for the year. I'll now pass over to Natalie.
Thanks, Paul. Hello, everyone. We continue to demonstrate the resilience of our business in what was a challenging quarter for the market as a whole. The growth and diversification of our business means that we are much more able to withstand significant market losses and still make satisfactory returns for our shareholders. The significant premium growth of the last couple of years continues to benefit our own premium and insurance revenue, which increased by 8.7% compared to the first quarter of 2024. For the first quarter of the year, the loss environment was unusually active, with by far the most meaningful loss being the California wildfires. Our exposure to the California wildfires currently remains within the previous guidance given, a range of $145-$165 million. This range is undiscounted and includes the impact of external reinsurance and inwards and outwards reinstatement premiums.
As a reminder, we could achieve a mid-teens ROE, even assuming similar loss activity as 2024 for the rest of the year. As already noted, 2024 was a higher-than-average loss year, so we are in an exceptionally strong position. In a more normal loss year, we would expect to do better than this. Our investments performed well for the first quarter of 2024, with returns of 1.9%, driven by investment income plus valuation gains from falling treasury rates. Our private investment funds also posted strong returns for the quarter. Since inception, the primary objectives for our investment portfolio have been capital preservation and liquidity, and we position our portfolio to limit downside risk in the event of market shocks. Those objectives remain unchanged and are more important than ever in today's volatile markets.
Given current expectations of market volatility in 2025, we will continue to maintain a short, high-credit quality portfolio, with some portfolio diversification to balance the overall risk-adjusted return. Our capital position is in line with expectations at our year-end results, with the BSCR ratio as of 31st December 2024 standing at 271%. With that, I'll now hand back to Alex to conclude.
Thank you, Natalie. Just to conclude, we continue to be happy to grow our underwriting at this point in the underwriting cycle. We see no change to the shape of our underwriting portfolio throughout 2025, and we have the capital flexibility to look for opportunities should they arise for the rest of the year. With that, we'll hand over to the operator for questions, please.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Vash Gosalia from Goldman Sachs. Your line is open.
Thank you for the opportunity. I have two questions. The first one on premium growth. There is somewhat of a clarification. You maintain your low single-digit growth target, but you also mentioned you are happy to grow underwriting with a 7% growth in first quarter. I am just trying to sort of piece the two together as to what do I expect in the remaining nine months. That is the first one. The second one on investments. Now your book yield is equal to your market yield. I am just sort of thinking if, let's say, interest rates are to fall further, how should I think of investment income? I mean, do you have any sort of levers you can pull, let's say, from a tactical asset allocation point of view to keep your investment income stable, or would that also come down with interest rates? Thank you.
Hi. I'll take the first question on premium growth. As I said in my script, given the strong start to the year, we're very comfortable with the guidance that we've given for low single-digit growth through the year. While we still feel that rating is at good levels, which we clearly do, we're prepared to grow. Obviously, we've had a strong start to the year on an underlying basis. As I've said many times before, we can have time indifferences in quarters with business renewing at different times. If we're still happy with the rates, then, as I've said, we're happy to grow. We'll never be driven by a particular target. We'll underwrite the business in line with the renewal terms and the market conditions. It has been a very pleasing start to the year. We've grown in exactly the areas we said we would.
We knew the U.S. would continue to build out. We said last quarter that we'd look to grow our specialty reinsurance portfolio. That's happened as well. Look, we're very happy with the start we've had to the year. We're happy with where the rating environment is, and it's tracking with where we expected it to be. There are different renewal trends as we move through the year. I think we're happy with the guidance we gave last quarter.
Hi, it's Denise here. Basically, the market yield will fall quicker than the book yield going forward if rates do fall. I think our overall position is that we don't want to question the uncertainty right now. We don't know that rates are going to fall. We don't know what the Fed is going to do. We will maintain our conservative portfolio and kind of go with that and keep liquidity strong so that we don't have to change our portfolio allocation.
That's very clear. Thank you.
Thank you. Your next question is from Will Hardcastle from UBS. Your line is now open.
Afternoon, everyone. First one is just hoping for you to touch on where tariff implications could impact the business most. Anything that's happened so far, I know we're early into it, whether it's pricing or even operationally, to try to counter it and any potential lines of business where it could actually create opportunities. The second one is you've talked very well and clearly about where we've been year to date on pricing. I guess it'd be nice to think about supply-demand dynamic heading into mid-year renewals as well and how do these stack up versus your expectations, you think, at the beginning of that year. Thank you.
Hi, Will. I'll probably take both of these. On the tariffs, I'll start with the obvious point that I don't think any of us know where we'll eventually end up. What I can definitely talk about is the things we're thinking about in terms of potential impacts from tariffs. From an underwriting perspective, obviously, the first thing you think about is it would likely be inflationary, and you'd see inflationary pressures come through. A number of things we need to consider there is things like changing value of assets insured, which can potentially increase the cost of claims going forward. I think the industry and ourselves dealt with inflationary pressures very well in recent years and have hopefully demonstrated very well that we are good at dealing with inflationary pressures from both a pricing perspective and a reserving perspective.
I said this a number of years ago when we got the inflation questions. A lot of our lines of business, we are very used to dealing with inflationary and deflationary pressures. It's very much business as usual. If you look at something like the energy account, it's hugely impacted by oil price swings, which happen quite quickly and dramatically. I think we're reasonably well set to deal with that. Also, remember, most of our contracts are annual. They renew during the course of the year. As inflation changes, you get to revalue those exposures coming into you. There is also an upside. As values go up, it increases demand, which increases the limits purchased by our clients. We saw that happen last time. Obviously, as you know, any kind of increase in demand is helpful in terms of the price and environment.
Kind of more broadly, if you think about potential recessionary impacts, the industry generally is quite recession-proof. Most of the products we sell are reasonably compulsory in terms of purchases. I mean, you could potentially see some demand impact somewhere, but that's probably offset by those inflationary pressures I spoke about. Without being too flippant, it's definitely something we think about. It's not something we're overly concerned about, and we feel we have everything in place to deal with it. Obviously, tariffs themselves as a service provider do not impact us directly as a business. On the supply-demand side and thinking about the rest of the year, I think we are seeing the property lines. We are still seeing increased demand come through. Take Florida as an example, which is an upcoming renewal later in Q2. Almost all clients are buying more limit.
In terms of supply, nothing has really changed since we last spoke. There is definitely more willingness to deploy. Most of that additional supply is coming from existing carriers who have had two years of good profitability. There are a few small new capacity providers in the market, but it's marginal compared to existing carriers willing to deploy more. As I've said before, that generally leads to a more kind of measured and disciplined approach within the underwriting environment. As I said in my opening script, look, most lines are seeing some form of marginal rate softening. When we spoke six, seven weeks ago, that's exactly what we talked about. Nothing has changed dramatically since then. There are a couple of small pockets that you are still seeing small rate increases, generally things like energy and marine liability.
Obviously, you have loss-impacted business renewing through the year that will get rate increases. It is fair to say we are at the very early stages of a market that is coming off slightly from a rating point of view, but we are coming from a very good level. Terms and conditions are remaining firm, which is important. I think that the rating environment is healthy.
That's great. Thank you.
Thank you. Your next question is from Kamran Hussain from JP Morgan. Your line is now open.
Hi. Afternoon. Two questions for me. The first one is just on the LA wildfires. One of your peers this morning mentioned potential for subrogation. I'm just really interested in kind of your views on whether that might make your number a little bit lighter in the coming quarters or not, and whether you've got any color or clarity in kind of Eaton versus Palisades, etc. The second one is just on the mid-year renewals and coming back to the kind of the points you were just talking through. It is one for Paul. You're talking about loss-affected business. When we think about the mid-year renewals, should we see a much better outcome than maybe which we expect a much better outcome than maybe we saw at one-one?
Also as well on the mid-year renewals, given how little clarity there seems to be on tariffs and where they're going and whether they come in or not, etc., in many areas, what do you think the appetite is for U.S. clients to accept higher inflation being baked into the price they're going to have to pay or not? Just really interested in views and how that's trading up to that. Thank you.
Okay. I'll take those, Kamran. I'll deal with the second question first. I don't see the market dynamics changing drastically Q2 versus Q1. There is some loss-impacted business, as you say, in Q2, but there was also loss-impacted business in Q1. I wouldn't expect to see fundamental shifts in RPIs. It will be more to do with the lines of business renewing in Q2 versus Q1. In terms of kind of inflationary impacts, etc., I don't think it affects rates per se, but clients are obviously obligated to provide us with updated values. The rate on that value will react in the way the market dictates. If underlying values go up, they have to provide that data, and therefore premium flows off of that.
On LA wildfires, yes, as we've seen in the past, there is potential for subrogation to flow through, and underlying clients could potentially see the benefit of that in the future. Obviously, that will bring their losses down, which in instances can then bring the reinsured loss down and the retro loss down, etc. It just works its way through the system. In our number, we haven't included any benefit of potential subrogation in the future. It's an unknown. There are obviously lots of unknowns in any large cat loss that work both ways. We've just followed our normal strategy and process in terms of our wildfire reserve, which I think you'd always expect us to do. Generally, historically, our catastrophe initial reserves have been incredibly robust. Never guarantee that's always going to be the case, but we've followed exactly the same process. At this stage, we have not included any benefits of potential subrogation that may happen in the future.
Right. Thank you, Paul.
Thank you. Ladies and gentlemen, once again, should you wish to ask a question, you may press star one. Your next question is from Darius Satkauskas from KBW. Your line is now open.
Hi. Thank you for taking my questions. A few, please. Are you close to beginning to release from the conservative casualty picks made in the past? Was the development in line with your expectations? That is the first question. What makes you comfortable that the timing is right to enter general U.S. casualty when others are pulling back because of social inflation still? Just to confirm, when you said if 2025 was a normal year, which 2024 was not, we should expect an ROE above mid-years. Is that what you tried to say? Thank you.
Hi, Darius. I'll take the first two of those. What we said when we entered our casualty reinsurance portfolio in kind of end of Q1, beginning of Q2 2021, was the earliest we would kind of take a look at our reserving approach, which, as you know, has been incredibly prudent thus far, would be a minimum of five years. The earliest possible time we would start to look at that would be at some point in 2026. Obviously, that would only be for that 2021 year, which was a partial year. Obviously, our view would be to remain as prudent as possible for as long as we can. As I think we said on the last quarter's call, we remain very happy with the portfolio that we've underwritten. We remain confident that there's good margin within that portfolio.
Hopefully, we will reap the benefits of that in the future. We are not currently at the point where we have done any large reserve study on that portfolio. On the general liability in the U.S., first of all, it was always our plan to enter that class in the US once we could find the underwriter that we wanted and that would fit our kind of underwriting culture and company culture. That is obviously really important. I think maybe one of the reasons we are happy to go into it is the fact that others are pulling back. If you look at all the lines of business we went into back through the years 2018, 2019, 2020, we got asked exactly the same question around why we are going into power, why we are going into construction, etc.
The reason we are is because others are pulling out, which helps the pricing dynamics. We believe the pricing dynamics are good and strong, which allows us to grow a portfolio in a market where rates are in a good place. To be clear, we'll have the same reserving approach on our casualty insurance book as we have done on our reinsurance book because we think that's appropriate. We fundamentally believe there's margin there to be had through cycle, which is the reason we've gone into it.
Hi, Darius. It's Natalie. I'll take your third question on the ROE guidance. Just to clarify, what we said was if we had the same quantum of losses in the rest of this year as we had in 2024, then the result would be a mid-teens ROE. Obviously, 2024 was a heightened loss year. If you had a more normal loss year, we would expect a result higher than mid-teens ROE. Is that helpful?
Yes. Thank you. Just to be clear, on general U.S. casualty, are we talking about sort of slow and sort of tiny entry like you've done with the other casualty business, or are we talking something a bit more substantial?
No. It will be a reasonably modest and cautious build-out. Our appetite for casualty will remain. We've said it's unlikely we'll write a pure casualty portfolio that's greater than 20% of our group's premiums. That remains, whether that's reinsurance or insurance. It will take time to build out. It won't be overly material in the first couple of years, and it will be modest compared to our casualty reinsurance portfolio.
Thank you. Your next question is from Andreas van Embden and from Peel Hunt. Your line is now open.
Thank you. Good afternoon. I've just got two questions on your property catastrophe portfolio. The first one is just on the outlook for the renewals in the U.S. for the business incepting in June-July, then running all the way through to June-July next year. When you model out the IRRs on that ahead of the renewals, are you running returns which you would expect to be similar to those you wrote in 2024, or do you expect those returns to be slightly better or slightly worse than the same renewal period in 2024? I just had a question around the exposure you have to the nationwide accounts. Now that the Los Angeles wildfires have sort of settled down a little bit, I just wondered whether you would be renewing your exposure to these nationwide accounts. Are there going to be any changes in terms of line size to some of them, or will you be exiting a number of accounts at all, or is it just business as usual? Thank you.
Hi, Andreas. On your first question, I'm happy to talk about what our expectations are for this year's renewals and returns. I think trying to guess what would happen for one-one next year, obviously, there's going to be a lot dependent upon what happens through wind season, etc. That would be far more of a guess. If you look at this year, I think, as we mentioned, and as you can see through the numbers, there is some marginal rate pressure coming through, albeit from a strong base. Terms and conditions, as I've said, remain solid and stable, which is really encouraging. That would suggest slightly lower returns. At the same time, we have benefited, of course, from being able to buy a retrocession program that was cheaper for us because the retro market was softer than what we saw in property cat.
It is broadly similar returns. The book, kind of coming on to your second question, the book is not changing materially. Our appetite is broadly similar. There will obviously be certain accounts, and we do this every single year, as you would expect us to, and it will be dependent upon renewal terms, etc. There will be clients, whether they are nationwide or others, where you sometimes adjust your exposure, but it will be at the margins. We are not anticipating any significant shift of appetite in any particular territory or for any particular type of client. Our core clients, we try to stay as consistent as possible, and that will be the intention again through the kind of next two to three months of renewals on that portfolio.
Okay. Great. Thank you very much.
Thank you. Your next question is from Abid Hussain from Panmure Liberum . Your line is now open.
Oh, hello. Hi. Thanks for taking my question. I've just got a follow-up question on the pricing. I'm just trying to gauge where you're seeing the most and least amount of rate softening. I appreciate the comments that you just made on the terms and conditions remaining stable. It feels like, given your comments, that the reinsurance rates are now softer than the insurance rates. If that's true, does that then mean your net premium growth will be faster than the gross number? Thank you.
I'll take the first part of that question. On pricing, the areas where from a pure year-on-year rate movement perspective, anything with kind of a casualty exposure is kind of at the better end of year-on-year rate change. I think as I answered one of the earlier questions, things like energy, marine liability, you are still seeing kind of mid-single-digit rate increases. In the other areas of the book, the 1st of January, probably just purely on year-on-year rate change, which obviously does not speak to rate adequacy. We probably saw the most competitive part of the portfolio was the inwards retro book. As I said on the last call, we did actually reduce our exposure there. Everything else, to be honest, whether insurance and reinsurance, is relatively similar.
You are seeing marginal rate increase, as you can see from the overall RPI in Q1 on most other lines of business. Terms and conditions are remaining stable, which is really good. Attachment points have been held, which remains good. I would not say there is a massive difference between insurance and reinsurance. There are far more renewals on insurance in Q2 on a weighted basis. We will see as we progress through Q2. There are some classes within the insurance sector that are seeing a bit more competition. Property insurance is a good example of that, albeit the rating adequacy for that line is incredibly strong.
Abid, was the second part of your question, is the net premiums written going to grow slightly faster because they're getting the benefit of our outwards reinsurance? Yeah.
Yeah.
I think if you had exactly the same portfolios, then that logic applies because, as Paul has said, we have been able to negotiate some good pricing on our outwards reinsurance. It's not to say that we'd buy exactly the same reinsurance that we bought last year or bought earlier this year going forward. Your logic is correct, yes.
Yeah. Super. Thank you.
Thank you. Your next question is from Daniel Wilson Omordia from Morgan Stanley. Your line is now open.
Hi. Morning, guys. Thank you for taking my questions. Two quick ones. The growth today on the top line came largely from the reinsurance side, even if you exclude the reinstatement premiums. I'm wondering if that's the same trend we're going to be expecting for the rest of the year. The second question would be on the insurance side. You mentioned that you're reducing in aviation classes. Could you go a bit more into that and talk about how you're feeling about that line going forward?
Okay. Yeah. Sure. I mean, Q1 is traditionally bigger for reinsurance anyway. There is more premium weight in there. Historically, it is likely that reinsurance will grow more than insurance this year. I think that is fair. On the aviation piece, I would not take too much notice of what happens in Q1. It is a very light quarter for aviation. The vast majority of the business is underwritten in Q3 and Q4. We have seen a number of contracts in Q1 have moved or been extended into later in the year, which accounts for a fair amount of the difference that we comment on in Q1. I would not see Aviation changing Q1 as indicative of our appetite for Aviation. We will see what the market conditions are like later in the year when we get into the kind of real renewal season.
Obviously, there's been quite a bit of loss activity in the aviation sector, but I think it's too early at this point to call where the market will end up later in the year. Ultimately, it will only be driven by demand and supply. We have seen a number of carriers reduce their aviation kind of underwriting, which can only be helpful. Just remember, we only write certain niches of the aviation portfolio. We are happy with the pricing adequacy that we have on our portfolio. If the other areas we do not underwrite change from a rating perspective, i.e., get better, then our team is fully ready to underwrite that business as and when the pricing adequacy is there. For the portfolio we underwrite, we have no significant change in appetite. Come the end of the year, all things remaining equal, our Aviation Underwriting will be broadly similar to last year.
Thank you.
Thank you once again, ladies and gentlemen. Please press star one should you wish to ask a question. Your next question is from Vash Gosalia from Goldman Sachs. Your line is now open.
Oh, thank you for the second opportunity. Just a quick one on FX. Could you please remind us of the sensitivities within the business to FX?
Hi, Vash. It's Natalie. We hedge our FX across the business. We look at a group level, and we hedge our investment portfolio with the insurance and reinsurance exposures. You never see much volatility in FX in our business.
Sorry. Just to sort of confirm, you're saying there is no material sensitivity even within P&L underwriting, just given that you write global lines?
No. Yeah. If you looked at our FX line historically through our income statement, you would see that it tends to be relatively small because we're very well hedged.
Got it.
I think you mean on the operating expenses front? Or do you mean on underwriting or operating expenses?
I'm quite general, and the question's quite general. In all places, basically.
Thank you. There are no further questions at this time. I will now hand the call back to Alex Maloney for the closing comments.
Thank you for your questions today, and thanks for dialing in.
Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect your lines.