Lancashire Holdings (LSE:LRE) Q3 2026 Earnings Call

0:00 Hello and welcome to the Lancashire Holdings Limited Q3 2026 earnings call. Throughout the call, all participants will be in a listen-only mode. And afterwards, there will be a question and answer session. Today, I'm pleased to present Alex Maloney, Group CEO, Paul Gregory, Group CEO, and Natalie Kershaw, Group CFO. Please go ahead with your meeting.

0:26 Thank you, of course. Good morning everyone and thank you for everyone who has joined us today. I'm pleased to report that Lancashire's momentum continued in the third quarter, resulting in a strong underwriting and financial performance for the year to date. As usual, Paul and Natalie will provide more detail, but first I would like to emphasise the key points from today's statement. Given the strong performance year to date, we expect to meet the guidance we have given and deliver a high-teens ROE for the current financial year. Due to our strong operational performance so far in 2026 and our robust balance sheet, we have announced a special dividend of £182 million, equivalent to 75 cents per share. This will be paid to shareholders in early December and continues our long-standing approach of returning surplus capital to shareholders as quickly and as efficiently as possible.

1:25 As we guided at the start of 2026, gross premiums remained stable on an underlying basis and the benefit of business written in prior underwriting years has delivered a modest 1% year-on-year increase in insurance revenue. The loss environment in the quarter was mixed with active man-made losses, including the impact of the ongoing conflict in the Middle East, but a relatively benign catastrophe experience. As usual, we will provide guidance for 2027 when we report the current year's financial results in March. As you know, we are firm believers in the cycle and we will always actively manage our capital to match the underwriting opportunities available.

2:10 and this has been our guiding principle whatever stage of the market cycle we're in. So of course you should expect to see us maintain a relentless focus on deploying capacity only where risk-adjusted returns meet our expectations whilst remaining committed and relevant to our core clients. Although this means we may limit exposures in some parts of our portfolio, we have a number of levers to help us manage this cycle that were not available or not to the same extent in previous periods, for example. A diversified business has many more product lines, each presenting different opportunities and risk and return profiles. So we can be agile and quickly allocate capital where it makes most sense.

2:59 As a larger and more diversified group, we can use reinsurance effectively to manage our net exposures whilst maintaining appropriate gross lines. And of course, a benefit of a softening market is that this tool can be used to make us more efficient. Our balance sheet is well capitalised with prudent loss reserves and a conservative positioned investment portfolio that can make meaningful contributions to Lancashire's financial performance. This ability to be agile and to maintain and to remain disciplined as we manage the cycle underpins our ability to deliver attractive returns to shareholders across the whole cycle. Over the past few years, we've made it a priority to attract and retain the best talent in the market. Lancashire has a high-performing, experienced workforce that is deeply invested in the company's long-term success and understands how to navigate market cycles with discipline and confidence.

4:00 We will continue to add skills, capabilities and product lines to ensure we not only manage this stage of the cycle appropriately, but we are set up for higher levels of growth when the market turns. So as demonstrated by today's trading statement, I believe we are very well positioned as we approach 2027 and the challenges and opportunities it will undoubtedly bring. With that, I will now hand over to PG.

4:27 Thank you, Alex, and good morning, everyone. Turning to slide three. Our year-to-date performance reflects the strength and resilience of the Lancashire underwriting franchise. Gross premiums written of £1.8 billion are stable on an underlying basis in line with guidance at the start of the year and market conditions have also been as anticipated with a portfolio RPI of 93%. Within that, we continue to see differing dynamics across the portfolio with the majority of product lines remaining rate adequate. Insurance premiums have increased by 5%, benefiting from growth in energy and marine lines related to both additional premiums associated with marine war and the continued development of Lancashire US.

5:13 We've continued to add new product lines to Lancashire US, with property facultative reinsurance the most recent addition following environmental liability, financial lines and inland marine earlier this year. We'll enter 2027 with a suite of seven product offerings. In London we've added two product niches to our marine offering following the hiring of two new underwriters which will also be fully up and running in 2027. All of these new product lines will naturally mature in the next few years and we will be patient and build them out in line with market conditions. Re-insurance premiums reduced by six percent primarily reflecting less reinstatement premiums and our deliberate actions to reduce property retrocession exposure as we focus on cycle management and continue to manage catastrophe risk and earnings volatility through the cycle.

6:11 None of this is accidental. We've consistently said we will hire new underwriters that can add value to our overall underwriting proposition whilst continuing to adjust net risk appetite, portfolio composition and capital deployment as market conditions evolve. The benefit of a larger, more diversified portfolio and product offering is it gives us greater flexibility to manage the cycle. Not all products move at the same pace and are at varying levels of adequacy. Therefore, we have more options to reallocate between products, classes and geographies, bringing lower volatility to both top and bottom line. We also have broader reinsurance options available, allowing us to manage the cycle appropriately, maintain relevance with clients through the cycle.

6:58 This flexibility and willingness to be agile and disciplined in the face of changing market conditions is one of Lancashire's key competitive advantages and allows us to continue generating attractive risk-adjusted returns even as the market transitions to softer phase of the cycle. Overall, we are very pleased with the under-item performance year to date and it demonstrates the value of our disciplined cycle management approach. We do anticipate the market to remain competitive in 2027 and that is exactly what we have planned for. Our underwriting business is designed to manage the cyclical nature of the industry and will continue to deliver attractive through cycle returns. I'll now hand over to Natalie to discuss our financial performance in more detail.

7:45 Thanks Paul and good morning everyone. Turning to slide four, I'll briefly cover financial performance, investments and capital. Starting with insurance revenue. Insurance revenue increased by 1% to £1.41 billion, reflecting the continued earning through of business written in prior periods. As Paul has described, there are a number of moving parts within the portfolio, but the business continues to perform well and the benefit of the diversification we've built is coming through. Turning to losses. The third quarter was benign from a natural catastrophe perspective. We did see some man-made loss activity, including from the ongoing conflict in the Middle East, but our exposure remains limited and well within our risk appetite.

8:31 Overall, the loss experience has allowed the underlying profitability of the portfolio to come through in the year to date, and we remain on track to deliver our high team's return on equity for the year. Now looking at investments. The investment portfolio generated an overall return of 0.6% for the first nine months. Investment income remained attractive, but this was offset by unrealised mark-to-market losses in the third quarter, principally as government bond yields increased. Importantly, this does not reflect any deterioration in the quality of the portfolio. Our average credit quality remains AA-, and duration is relatively short at 2.2 years. At the end of September, the portfolio had a book yield of 4.6%, compared with a market yield of 5.3%.

9:19 So while higher yields have created some short-term market volatility, they also allow us to reinvest at more attractive rates and will support investment income going forward. Finally, capital. Our capital position remains very strong. Our approach here hasn't changed. We retain the capital we need to support the business and take advantage of attractive underwriting opportunities. And where we have capital surplus to those requirements, we return it to shareholders. Given our strong performance and capital position, the board has declared a special dividend of 75 cents per share. Even after that distribution, we retain significant financial flexibility to support the existing portfolio and invest in future opportunities.

10:05 So overall, we're pleased with the financial performance for the first nine months. The underwriting business is performing well. Our investment portfolio remains conservatively positioned. and our strong capital position allows us both to invest in the business and return excess capital to shareholders. We remain on track to deliver a high team's return on equity for 2026. And with that, I'll hand back to Alex.

10:31 Thank you. Can we go to Q&A, please? Thank you. If you do wish to ask a question, please press star, then the number one on your telephone keypad. If you wish to withdraw a question, you may do so by pressing star, then the number two to answer. There will be a brief pause while we compile Q&A roster and questions are being registered. We have our first question comes from Shanti Kang of Bank of America. Please go ahead.

11:06 Hey morning, thanks for taking my questions. RPI today seems to be holding up a bit better than I was expecting, so that's good. How much of that do you think is maybe due to the actions that you've taken, shifting the mix or stepping away from specific lines? And then just into 1127, what's your base case for the rate environment there and are there any lines that are holding up a bit better than others?

11:32 Thanks. Hi Shanti, I'll take those questions. I think on the RPI today, to be honest, I think it's performing exactly as we expected it to. At the start of this year, our guidance on our kind of view on what rating would do through the course of the year was kind of high single digit rate reductions. And then as you can see, you know, that's exactly where we're tracking. you can get you know depending on the course you can get slightly different changes depending on business mix but the business mix that we've had for the year is pretty much in line with our anticipation and I think that's why the RPI is tracking exactly with what we gave guidance to at the start of the year I think on your second question as as we move into 27 and as I said in my script we're definitely anticipating a continuation of softening So we're going to be in a more competitive marketplace.

12:33 I think as I also made reference to the majority of product reliance remain in a good position from a rate adequacy perspective. Undoubtedly, there are some parts of the market that are moving faster than others. I mean, if you look at the casualty-based lines, they're far more stable than some of, say, the proxy insurance lines, which I think is very well documented that there's some quite High competitive pressures in things like property, DNF, open market business. Our job is very much to try and balance our portfolio in the best possible way. There are parts of the market that are competitive, but that doesn't mean within that there are not pockets of good opportunity and accounts that have good rate adequacy.

13:22 It's just in these environments, you have to be a bit more discerning with your underwriting in terms of the accounts that you actually underwrite. So we expect generally for there to be more softening. As Alex said in his script, as we get to March, we'll give you some more guidance as to where we think that will be across the portfolio in terms of the rating environment. 1.1 is the best kind of data point we will have, which is why we wait till after 1.1 to give you some guidance.

13:56 That makes sense. Thanks. Next question comes from Cameron Hossein from JP Morgan.

14:08 Hi, good morning. First question is on the US expansion. Just interested in kind of if you give a bit more colour on how far along you are in the US expansion versus kind of where you want to get to. Just trying to work out how much of a tailwind it will be for kind of 27 and beyond. and the second question is just on the special dividend. Just wanted to confirm that the approach will probably be similar to last year that you announced a similar special dividend at the third quarter, evaluated the opportunities at 1-1 and then returned a little bit more capital with the four-year results. I just wanted to make sure the thought process going into 2027 looks kind of roughly similar to that.

14:57 Thank you.

15:00 Hi, Cam. I'll take the question on the US expansion and kind of where we are. I think that whenever we enter a new product line, we expect it to take at least three years to get up to maturity. So if you think about it, we started with two product lines. I would say they're close to maturity based upon the current market conditions we're in, obviously. We then enter general casualty. It's about a year and a half now since we started that. So that's still building out. And then the more recent lines that we've added through the course of this year, really, they're only going to start. Some of them have started underwriting now, but 2027 is really going to be their first full year. So you will expect that U.S.

15:49 operation to continue to grow and mature. you know as I often say it will very much be aligned with the market opportunity and we'll very much be patient in the market environment that we're in but what it's doing is creating a very solid base for us for when the market inevitably turns in any of those product lines. So ultimately, yes, that will continue to be an area that will grow within our portfolio, but it will be very much aligned to the market opportunity.

16:19 I think as well, Cam, when we give our guidance for 27, we'll just give you a lot more colour on the US operation and what we're trying to achieve. As Paul said, the reason we haven't really given much detail at this point is because we're still in build-out mode.

16:36 Hi, Cam. I'll take the second question on the special dividend. Yes, essentially, you're exactly right. We look at capital at Q3 post-win season and see what we're comfortable with returning at that point. But we always want to retain some flexibility going into year-round the renewals and the outwards purchasing. And then we'll look again at capital at the next board meeting in the first quarter of next year. So exactly right, that the process is similar to previous

17:06 years. Thanks very much, Natalie. Next question comes from Alice Palumba from Goldman Sachs. Please go ahead.

17:19 Good morning, thank you for taking my question. My question is on growth. So you mentioned in the release that you continue to hire talent, but this appears to be a departure from your earlier philosophy of shrinking when the market pricing weakens. Could you please help us understand how should we think about growth over the coming few years and the costs associated with these hires should the market soften beyond current expectations? Thank you.

17:45 Hi Alice, I think where we can hire great talent, which obviously is as important as retaining great talent in our business, we're just going to do that and we've had a really good year of momentum where we continue to hire great people and actually even some of the recent M&A is an opportunity for Lancashire, it just displaces people. So where we can find great people and and great products that diversify our book. And as you know, we've grown our diversification massively in this cycle. We're going to continue to do that. I think what won't ever change at Lancashire is how we manage the cycle. So we are obsessed with the cycle and we believe we have the skills and the talent to manage this stage of the cycle. But we do fully intend to continue to add people where we can and product where we can. So that, you know, you shouldn't expect as the market softens, Lancashire to retreat as much as we did last time.

18:52 But one thing that we will 100% do, we will reduce our risk levels, mainly through reinsurance as the market softens. So that the net outcome will be the same, but we just may look different in this soft market. Your next question comes from Joseph Fiennes from Autonomous, please go ahead.

19:25 Hi there, thanks for taking my questions. The first one I had was looking to get a bit more colour and a growth in the insurance book and was wondering if you could kind of Give an indication of how much of this was attributed to the new US business compared to maybe some of the other areas that you called out. So that's the first question. And on the second, I was wondering if you could give an indication of the level of reserves that have been put aside for losses related to the Middle East and also an idea of how this has progressed since Q2. Thanks again.

20:06 Hi, Joseph. I'll take the first question. On the insurance lines, there's really been two areas where we have seen growth in premiums year to date. One is certainly the continued maturity of the US operation, which you allude to, and we called that out earlier this year when we were giving guidance around, you know, you would likely see growth there as those new lines continue to reach maturity and then the second area again which I alluded to in my script is there has been additional premiums come through in relation to marine war given the ongoing conflict so we've seen some benefit there. Elsewhere things are relatively stable obviously there's a few moving parts here and there but they're the two drivers of what we've seen on the insurance portfolio year to date.

21:03 Hi Jo, I'll take the second question on the Middle East reserves. As you'll have seen from the release, any losses that we do have from the Middle East are certainly not material enough to disclose. As I said, our exposure remains relatively limited. We are underweight the Middle East. So although we do have some losses, they are definitely not material and aren't having a material impact on our reserves at the moment.

21:33 Understood. Thanks. If I might just quickly follow up on sort of the response to the first question. Is it sort of fair to assume that the sort of the drivers have been sort of roughly equal in terms of the insurance book, the increased growth between the US business and the sort of marine wars, it's sort of roughly even?

21:59 Sorry, Joseph, we don't provide that split, so unfortunately I'm not going to be able to answer your question on that one. Apologies.

22:06 Okay. Thanks again for answering questions. Your next question comes from Will Hardcastle from UBS. Please go ahead.

22:22 Oh, hi there. Thanks for the opportunity. First of all, just to follow up on the marine, just I'm trying to understand, are these sort of, you know, just taking the opportunity because the industry pricing has changed, or are they sort of temporary one-off covers, sort of very specific conflict related, that if the conflict eases, they would go away next year? Just trying to think about the sustainability of those. The second one is a much more bigger picture question. Look, it seems cycle trends are very much at play and pure follow capacity providers will likely be most vulnerable at this stage of the cycle. I guess what are some of the things that Lancashire can differentiate themselves relative to these players ensuring maybe that terms, pricing, access to risk can hold up better than the market?

23:10 Hi Will, I'll take the first question, Alex will take the second one. So on the marine, yes, it's very much the kind of The increase that we've seen is very much conflict related given the price in terms and conditions have spiked quite dramatically as you would expect because the risk has increased quite significantly as well. Obviously we started from a position being relatively underweight so we're able to underwrite more of that business particularly given how we've seen the pricing change. Obviously, if the conflict were to end, then those opportunities won't be as prevalent. So I'm not going to start trying to anticipate when the conflict may or may not end, but they are very much conflict related, those premiums that we're seeing.

24:02 So we're on your second point. I think it's a really good question because there's been lots of changes in our industry in recent years and people have very different strategies. I think our one is, you know, we want to be an underwriter that has, you know, sort of the best underwriters with great relationships with clients. So we want to be in that sort of alpha camp. We don't write the follow broker facilities. and that's not really something we're interested in. Obviously some people think that's a great opportunity. That's not really what we're trying to achieve here. Equally, I think, you know, I think Paul made the comment earlier, you know, you're at the stage of the market that's now softening.

24:47 That's no surprise to us. You know, we are obsessed with the cycle. So, you know, there's no surprises here. But I think what it does tell you is if you're going to write some of these trackers, if you want to call it that, Paul Gregory, Jelena Bjelanovic, We just wouldn't be comfortable writing a tracker of these kind of classes as the market gets more difficult. So we just think you've got to be more active when the market is softening. You definitely want to pick your trades.

25:39 You've got to pick your way through the accounts. I don't see how you do that on a passive basis. So it's not for us. We know what we want to do. It's why we talk about talent so much. It's why we're obsessed with trying to get and retain the best people. But yeah, other people have different strategies, but the follow, tracker, passive strategy is not for us. Thank you. Your next question comes from Abid Hussein from Panmure Librum. Please go ahead.

26:18 Oh, hi. Morning, everyone. I've got two questions. The first one is on casualty. I know it's only a quarter of a year since we last spoke, but is there anything worth calling out on the build-up of that book? and then the second one is on the US build-out. Are you seeing any opportunities to accelerate the build-out, for example M&A or team lifts in the US? Thank you.

26:46 So on casualty, nothing materially different to what we spoke about last quarter. Our portfolio this year has been relatively stable, which is very much in line with expectations. As we always say, the casualty market is a very broad church and there are lots of moving parts underneath it. We obviously write predominantly a casualty reinsurance portfolio and we'll obviously try and manoeuvre that portfolio in line with where we think the better rated parts of the market are and one of the key objectives on the casualty reinsurance book is making sure that we try to pick the right underlying clients and those that have historically proved that they manage the cycle appropriately and they have the best mechanisms in place to manage claims and that's how we believe we will manage the casualty cycle appropriately but we're very comfortable with the portfolio we have built and as I say it's been pretty consistent this year.

27:58 So I think your question about the US, you know, if I just take you back to the way we think about everything at Lancashire is when we entered the US, it was all about, you know, we would travel as fast as we could, but only if we can find the right people. So, you know, we don't set ourselves hard goals on premiums or products or timing. It has to be when we can get the appropriate people. But then other times, a bit like buses, you know, three come along at once and, you know, we added three more product lines. You know, in the last sort of three to four months. So I think we're always, you know, our growth in that market is always going to be driven by the people we can find and the talent we can hire. Again, like all of our product lines, you know, there's products in our US operation, you know, again, property insurance, where we haven't written as much premium as we expected, and other lines that have done better.

28:53 M&A for us in general, same applies to the US. I can never say it's going to be impossible. We'd never do it, but I still think it's unlikely. And again, you have to be super disciplined about any M&A. What are we actually buying? Does it accelerate? Of course, we'd like to accelerate a US operation. If we could find the perfect company to purchase, we would. But most things that are presented to us don't hit the hurdles that we have internally. So again, not impossible, but probably highly unlikely. Understood. Thank you. Next question comes from the line of Ben Cohen from RBC Capital Markets.

29:38 Please go ahead.

29:40 Oh, hi there. Thanks very much for taking my questions. I had two, please. The first was on the higher investment yield Thank you. Thank you. Thank you. Does sort of unrealized investment losses here have any impact or is there anything else we should think about from a yield point of view when we're thinking about the sort of size of capital returns that you might do through the rest of the year?

30:34 Thank you.

30:36 Hi, Ben. It's Denise O'Donoghue. Yeah, definitely a higher investment yield changes your outlook in terms of if you're getting paid to go a little bit out the curve, which I think We need to see a little bit more stability because I think, you know, rates have already moved back down slightly from the September 30th, which we've made back some of our losses, our mark-to-market losses. But yeah, it definitely is an opportunity depending on, you know, there's a lot going on with inflation and Middle East, etc. But we definitely see an opportunity to extend duration a little bit, which ties into your question about casualty, which we try to match those cash flows.

31:16 Yeah.

31:17 It makes sense to go a little bit longer.

31:19 And just to be clear on the casualty underwriting, Ben, we underwrite casualty on the basis that we believe that there's underwriting margin in it. We don't factor into account what could potentially happen on the other side of the balance sheet. Underwriting focuses very much on margin within underwriting.

31:41 Hi Ben, it's Natalie. On your question on returnable capital, obviously the unrealised losses do impact our capital position because they do hit shareholders' equity. Obviously, in a sense, they're not a real loss and we expect that to unwind over time, which then will give us more capital available to return should the unrealised losses unwind, which we expect they will do over time. So hopefully that helps with your second question.

32:13 Yes, thank you. Could I just follow up just, I mean, I guess where I was getting to with the first question was as well, was in terms of the underwriting portfolio, does that, and I'm aware that you're trying obviously to underwrite for an underwriting profit everywhere, but does that shift the relative attractiveness, if you like, of different lines and where is that in your thinking at the moment planning into next year?

32:38 So I don't think it changes our view. I think the broader question for the industry is we're really attracting investment returns going forward. Does that allow the underwriting climate to get weaker over time? And the real answer is no one knows. But as I said, for us, you know, we just don't really think that way. You know, we think very separately on underwriting and very separately on investment returns. Great. That's clear. Thank you. Your next question comes from Daniel Wilson Armoria from Morgan Stanley. Please go ahead.

33:16 Hi, morning guys. Thank you for taking my questions. I guess first question would be on how you're thinking about the mix between pricing and TNCs from here. I think clearly the consensus is that the environment gets incrementally weaker next year, but the question for me is Do you think the pricing or the terms and conditions are more vulnerable here? Do you think the pricing is kind of at its limit and TNCs could be the next kind of topic of negotiation? Or do you think the TNCs will hold quite firm into next year? It would be good to get your perspective on that. In addition, just wondering if you could remind us how flexible you are on adjusting your reinsurance or retro buying Next year, if you'll continue to buy more retro if the opportunity presents itself or you're happy with your current protections.

34:12 Yeah, those two for now would be great.

34:14 So I think, let me just give you a flavor on question two. I think, you know, across the board, you know, we are going to manage our underwriting portfolio. So as earnings decrease, as the market softens for everyone, you know we will look to to buy different forms of reinsurance and as our business is more diversified and broader like there's a small opportunity and we've actually bought more reinsurance already for 26 uh particularly on our cat portfolio so yes you are going to see us buying probably more reinsurance if the market continues to soften which is what we expect and obviously you know with the portfolio we have that gives us lots of different options also Lancashire is a very different business to what it was the last time the market softened so again the products that we buy products that we already buy actually are different to what we bought in the past so in the past we pretty much bought particularly on the non-marine cat side we just bought retro and already we buy multiple products to protect our cat portfolio so yes you will see us buying more reinsurance as the market softens, our seeded spend will probably change over time, as you would expect.

35:34 But as I said, everything is about managing the cycle. Everything is about making sure that you know how to navigate soft markets. And we just believe that at this stage of the cycle, or this stage, the cycle for everyone in the next few years, you're going to be at to work out who can manage the cycle and who can't manage the cycle and then fundamentally as much as the market always softens there's always an opportunity and even now everything we're doing today is to get us ready for the for the next turn in the cycle if you think about what we've done last time we managed to cycle down in a very different way that we don't have to this time but fundamentally we came through the soft cycle and and we were ready to go for the hard market and we've more than trebled our book so already we're thinking about the next opportunity and what we're going to do when that arises.

36:32 And Daniel on your first question I think yes you're right but this year I think across most product lines if there's been a focus in terms of what clients are looking for it's certainly been more on the pricing side than it has on the terms and conditions side. As we've said we expect more competitive Thank you very much. We will also have more options.

37:23 I think there's one other point, Daniel. Let's just be very clear about our view where we are. I do not think this is a soft market. I'm not saying it won't be a soft market at some point because there always is. But if you look at the aggregate rate you've had in most product lines versus the rate reduction you've given for the last two years, we're pretty comfortable where we are. As I said, I'm never going to say it won't turn into a soft market. I'm not. I still think we're in the softening phase. And your question about terms and conditions and pricing, you know, you're at the phase where the brokers are asking for everything, but they're trying to find where the market's at. So it's the underwriting community to make sure, you know, they don't give the brokers everything they want at this stage of the cycle.

38:11 Very clear. Thank you. There are no further questions at this time. I'll turn the call back over to Alex.

38:22 Okay, thank you everyone for your questions today, but we will close the call there. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines. Please wait.

38:44 The conference will begin shortly.