Lancashire Holdings reports record first-half results for 2024 By Investing.com

Lancashire Holdings Limited (LRE.L), a global provider of specialty insurance and reinsurance products, has announced its strongest first-half results ever for the year 2024. The company achieved a return on equity of 14% and reported an 8% premium growth, with a combined ratio of 73%.

These results were driven by solid performances in both underwriting and investment sectors. Lancashire also reaffirmed its full-year guidance, anticipating a mid-80% combined ratio and a return on equity of around 20%.

Key Takeaways

• Lancashire Holdings Limited’s first-half results for 2024 are the best in its history.
• The company reported a 14% return on equity and an 8% growth in premiums.
• The combined ratio stood at 73%, indicating strong underwriting profitability.
• There were no significant catastrophe losses, and the impact of the Baltimore Bridge disaster was within expectations.
• The investment portfolio yielded a 2.3% return, contributing $75.2 million.
• Full-year guidance remains unchanged, with a mid-80% combined ratio and around 20% return on equity expected.

Company Outlook

• Lancashire plans to capitalize on favorable market conditions for further growth.
• Expansion in the U.S. and new product lines are areas of focus.
• The company expects a higher combined ratio in the second half of the year due to the hurricane season.

Bearish Highlights

• Large risk losses were manageable at $45.5 million, including the Baltimore Bridge incident.
• The company anticipates a higher combined ratio in the latter half of the year, influenced by the hurricane season.

Bullish Highlights

• The U.S. E&S platform has had a strong start with plans for continued growth.
• The company has been successful in hiring for the new platform and remains on track with its growth expectations.
• Nat cat exposure remains stable despite some fluctuations.

Misses

• No specific premium levels were discussed for the new E&S platform during the call.

Q&A highlights

• There were no questions from participants at the end of the earnings call.

Lancashire Holdings Limited’s positive performance is marked by its ability to manage risks effectively, as shown by the manageable large risk losses, including the Baltimore Bridge disaster. The company’s reserving practices and investment portfolio have also contributed to the strong results. The firm remains well-capitalized with a BSCR ratio of just over 300%, indicating a robust financial position.

The company’s cautious approach in the casualty reinsurance business, taking into account market changes and potential increased loss cost trends, reflects its commitment to prudent risk management. Despite the BMA’s changes to capital requirements, Lancashire’s capital flexibility remains unaffected. The company’s strong capital position is further reinforced by the expectation that capital generation in the second half of the year will be less burdensome due to the capital-intensive business written in the first half.

Lancashire Holdings Limited’s disciplined strategy and favorable market conditions have positioned the company for continued success in the remaining half of 2024. With a stable natural catastrophe exposure and a successful U.S. E&S platform launch, the company is poised to maintain its growth trajectory and deliver on its full-year guidance.

InvestingPro Insights

Lancashire Holdings Limited (LCSHF) has not only reported impressive first-half results for 2024 but also shows strong indicators of financial health and growth potential according to InvestingPro data and tips. The company’s market capitalization stands at $1.98 billion, reflecting its significant presence in the specialty insurance and reinsurance markets.

InvestingPro Tips highlight that LCSHF has raised its dividend for three consecutive years and has maintained dividend payments for 17 consecutive years, showcasing its commitment to shareholder returns. Additionally, the company is trading at a low earnings multiple with a P/E ratio of 5.41, suggesting that its stock may be undervalued relative to its earnings. This could be an attractive point for investors looking for value in the market.

From a financial performance perspective, LCSHF’s revenue growth is robust, with a 63.85% increase over the last twelve months as of Q2 2024. This significant growth rate is a testament to the company’s successful operations and strategic initiatives. Moreover, the company’s operating income margin stands at a healthy 30.71%, reflecting efficient management and a strong competitive edge in its industry.

For readers interested in deeper analysis, there are additional InvestingPro Tips available on the company’s performance and prospects at https://www.investing.com/pro/LCSHF. These insights could provide valuable context for understanding Lancashire Holdings Limited’s market position and future potential.

Full transcript – Lancashire Holdings Ltd (LCSHF) Q2 2024:

Operator: Ladies and gentlemen, welcome to the Lancashire Holdings Limited First Half 2024 Earnings Call. Throughout the call, all participants will be a listen-only mode and afterwards there will be a question-and-answer session. Please note this call is being recorded. I would now like to hand the conference over to your speakers today: Alex Maloney, Group CEO; Natalie Kershaw, Group CFO; Paul Gregory, Group CUO. Thank you. Alex, please go ahead.

Alex Maloney: Thank you, operator. Good morning, everyone. Thank you for joining our call today. As always, I’ll just give some brief highlights of the progress we’ve made so far this year and the priorities for our business, Paul will then focus on the underwriting trends, Natalie will cover the financials and then we’ll go to Q&A. We’ve delivered an outstanding result for the first half of 2024. It’s our best ever since the inception of Lancashire. Our return on equity as measured by the change in diluted book value per share of 14% is the strongest it has ever been for the first six months of any year since Lancashire was formed. Importantly, both underwriting and investments have contributed strongly to the bottom line. Starting with underwriting, we continue to take advantage of favorable market conditions. We have grown our premiums by 8%. This is again in excess of the rate change we see, which puts us well on track for the largest footprint we’ve had as a business for 2024. As I’ve said many times before, our long-term strategy is to grow when the underwriting opportunities are strong and this is the delivery of that strategy. Importantly, the benefits of this growth are coming through to our earnings. In the first half of 2024, the industry has yet again seen high catastrophe losses and large risk events. Against this backdrop, we have delivered an excellent combined ratio of 73% or 82.2% on an undiscounted basis. And none of the first half of insured events were individually immaterial for our group. Our investment portfolio performed strongly too delivering the strongest dollar contribution to results in the half year. Overall, our best first half since Lancashire started nearly 20 years ago back in 2005 and as such, we’re in a position to affirm our full year guidance for an undiscounted combined ratio of the mid-80%s and a return on equity of around 20%. As I look to the rest of the year and into 2025, we continue to see attractive opportunities to deliver superior returns for our investors be it by growing our existing lines, further expanding our newly minted U.S. operation or should the right team arise, looking at new product lines. As I’ve said before, I’m extremely pleased that at this stage in the cycle, we have a healthy balance sheet to allow us plenty of flexibility to underwrite the opportunities we see. We continue to deliver what we said we would do. I’ll now hand over to Paul to talk you through our underwriting trends.

Paul Gregory: Thank you, Alex. As Alex has just explained, it’s been a very strong first half of the year. We’re incredibly pleased with all aspects of underwriting performance in the first six months. We’re seeing the benefits of the underwriting strategy we put in place and executed over the past few years. We have produced significant underwriting profitability despite an active loss environment and we have continued to grow ahead of rate. To give you a quick overview, the rating environment remains very supportive with a year-to-date RPI of 102%. From a rating perspective, almost all our lines remain in a very healthy and attractive position. This is why we continue to grow ahead of rate and we still see opportunity to do this in the second half of the year and beyond. We guided to approximately 10% growth in gross premiums and whilst we’re marginally behind this at half year, we still feel this is a reasonable guide for full year. Our underlying growth rate, which excludes impacts such as reinstatement premiums, is much closer to 10%. As ever, our focus will not be on hitting certain premium numbers, but underwriting the opportunity to build the best quality portfolio that we can. We have the most resilient portfolio in our history and are comfortable with the balance of our book. I’ll now move on to more detail on the underwriting environment starting with reinsurance. It’s very pleasing that underwriting discipline is being maintained. Whilst it’s fair to say there’s more appetite from existing carriers to deploy, we did not see new capacity in the market and we continue to see increased demand, particularly from our existing clients. As we’ll keep reminding everyone, for majority of the products, the margins are extremely healthy. In property reinsurance, there was no material changes to attachment points or rating levels. Instead, as we saw at the midyear renewals; if aggressive orders were sought, the market held firm with sensible underwriting prevailing. This is encouraging. Demand continues to increase in property reinsurance, which helps offset the increased willingness to deploy capacity. We see the property reinsurance market as a great place to be with ample opportunity to write well-priced and structured business. Turning now to casualty reinsurance. The continued prior year loss development for the market helps keep the pressure on current underwriting years with the market being able to continue to push for rate increases on the underlying business. As a reinsurer, we get the benefit of this underlying rate momentum as well as seeing slight downward pressure on ceding commissions, both of which helped maintain margin. We are very happy with the rate adequacy and margin embedded within our casualty reinsurance portfolio and we remain confident in the prudence of our loss cost assumptions. I know you will get bored of us reminding you that we entered this class in 2021 so have come from a position of strength, a time when a number of problems in those old underwriting years were already known. This allowed us to cater for them in our pricing and reserving. On top of this underwriting margin, we continue to hold very prudent reserves and we’ll continue to do this for the foreseeable future given the long-term nature of the class. Importantly, we are not seeing any trends that make us question our pricing assumptions at this stage. If I now look at our specialty reinsurance book where we have continued to build out our offering. This is a targeted area of growth for us this year and we achieved our objective by growing our existing client portfolio as well as adding new business. This will remain an area of growth for us in the coming years given we are still relatively underweight. Now moving to the insurance segment. In the insurance lines, rating remains positive at midyear. Much like reinsurance, there is an increased willingness from existing carriers to deploy more capacity; but on the whole, underwriting discipline remains. As with reinsurance, the majority of classes are sitting in a very strong position from a rating perspective following seven years of compound rate increase and this is the most important point. In property insurance, we anticipated growth and we have been successful in achieving this. We have done this through our established property insurance portfolio as well as our more recent initiatives such as our Australian and U.S. operations as well as via our construction team. The robust nature of the rate environment has enticed others to grow in property so competition will increase. Nevertheless, demand remains strong and rating is at historically high levels. Outside of property, we see an orderly market in most other insurance classes. Any class with a casualty focus such as energy liability and marine liability are still seeing positive rate trends. This is an overspill of the broader casualty market dynamics. In lines such as marine, energy and terrorism; there is more competition and rates have plateaued. Importantly, in the majority of classes, margins are at very healthy levels. In conclusion, we are very satisfied with where we are at midyear. By growing our footprint when rating levels are good and as good as they are just prolongs the earnings power of the portfolio helping future underwriting years. We are encouraged that it remains good opportunity for more profitable growth for 2024 and beyond. I’ll now hand over to Natalie.

Natalie Kershaw: Thanks, Paul. Our first half performance was excellent. We have continued to demonstrate the benefit of the strategic changes we have made to the business in the last few years, in particular in improving our return on capital as measured by the growth in diluted book value per share. I would like to draw your attention to three key highlights. We continue to focus on profitability and efficient use of capital. This has resulted in an ROE of 14% for the first half of the year. Our investment performance was excellent with the overall return in the half year at 2.3%. The outstanding first half performance means that we are more than happy to reiterate our full year guidance of an undiscounted combined ratio in the mid-80%s and ROE as calculated as growth in book value per share about 20%. I’ll talk about this later. A summary of our results for the year is laid out on Slide 8. Our profit after tax of $200.8 million represents an increase in profit of 26% compared to the first half of 2023. This is exceptional and reflects strong underwriting and investment performance. Insurance revenue increased by 18.5% compared to the first half of 2023. As you know, it takes us a bit of time to earn the premiums through. Hence, revenue has increased at a higher rate than gross premiums written as it benefits from the significant premium growth over the last few years. The rate that premiums earned through with insurance revenue will vary dependent on business mix. The allocation of reinsurance premium is flat compared to 2023. We are retaining more risk across the business given the positive market and stock of robust earnings. We continually refine our reinsurance purchasing. The allocation of reinsurance premiums as a percentage of insurance revenue was 25%, down from 29.5% in the prior year. Our undiscounted combined ratio was 82.2% or 73% on a discounted basis. This includes all expenses incurred by the group, operating as well as underwriting related, and therefore, may not be directly comparable to headline combined ratios reported by others given that we include all our costs. The combined ratio has resulted in an insurance service result of $222.8 million, that is 18% higher than last year. This is reflective of changes in business mix as we focus on overall profit and return on capital. Our operating expense ratio is relatively similar to 2023 at 7.8% compared to 8.6% with the increase in operating expenses in dollar terms being proportionately lower than the increase in revenues. Employment costs are the most significant driver of the dollar increase due to additional headcount supporting the business growth. These headcount increases also result in higher related expenses such as building costs, IT expenses and so on. Moving on to the claims environment on Slide 9. During the first half of 2024, the loss environment was far from benign for the industry. However, for Lancashire, there were no catastrophe losses of any significance and our large risk losses were a manageable $45.5 million. This includes the impact for the Baltimore Bridge disaster. Our exposure to the Baltimore bridge loss is within our expectations for this kind of loss and does not impact our overall guidance for the year. The growth and diversification efforts we have successfully implemented over the last five years means that losses such as this are much less impactful to our earnings. Turning now to our reserving. Our confidence level of 87% is in line with the recent periods. This represents a net risk adjustment of $267.6 million or 17.3% of total net insurance contract liabilities. There has been no change to our reserving approach or philosophy and we expect the disclosed reserve and confidence level to remain within the 80 to 90 percentile band unless there is a change in our reserving risk appetite. The disclosed percentile will move around within this range from period to period depending on the mix of reserves and our view of our associated risk. Prior year releases totaled $52 million compared to $72.1 million in 2023. Both years benefited from prior year IBNR releases as well as reductions in prior year catastrophe reserves. Due to the specific events released in 2023, there was a larger benefit from the release of expense provisions and reinstatement premiums than in the current year. As I have said before, the timing of reserve releases can vary quarter-to-quarter given the nature of the risk that we are exposed to. The total impact of discounting in the year was a net benefit of $40 million compared to a net benefit of $15.8 million in the same period of 2023. Discount rates across all our major currencies remained at a relatively high level throughout the period. This resulted in a net initial discount of $59 million largely on the 2024 accident year loss reserve offset by $33.4 million net unwind of the initial discount previously recognized in relation to prior accident years. The impact of the sustained high interest rate environment is seen in the growing unwind period-on-period. A small increase in rates during the period drove a $14.4 million impact of the change in discount rate assumptions applied in the year. In the prior year, interest rates for H1 were more closely aligned with the year-end position meaning that the impact of the change in yield curve assumptions was relatively minor. The investment portfolio performed well generating an investment return of 2.3% or $75.2 million. The returns were driven primarily from investment income given the high yields during the year on the growing portfolio. While treasury rates increased and there was a slight spread widening, any resulting unrealized losses were mitigated by the higher yields. The risk assets also had strong returns in the first half of the year. The investment portfolio remains relatively conservative with an overall credit rating of AA-. As previously mentioned, we have modestly increased duration in the first half of 2024. We will continue to maintain a short high credit quality portfolio with some diversification to balance the overall risk-adjusted return. Moving on to capital on Slide 11. We continue to remain extremely well capitalized. Looking at the BSCR on the same basis as year-end, the ratio is just over 300%. The profitability in the period means we have generated quite a lot of capital, which is offset by the $156 million paid for our final regular and our special dividends. In addition, we continue to grow the business. The BMA has introduced model changes to the BSCR model during the quarter. The main impact of these changes for Lancashire is to increase the capital requirements for manmade catastrophe exposures. The increased charge will be transitioned into the model over the next three years. We have estimated the impact for 2024 to be in the region of 10% as shown on the chart. This does not impact our overall capital flexibility as there are no equivalent increases in capital charges in the rating agency capital model, which remain our most constraining capital requirement. We remain exceptionally well capitalized on all basis and in a strong position going into peak wind season. Moving on to forward guidance. As a reminder, the work we have done over the past five years to ensure a more sustainable return profile enabled us to be more specific in our forward-looking guidance for 2024. We guided for an undiscounted combined ratio around the mid-80%s resulting in ROE in the region of 20%. I am pleased to say that we are well on track to deliver on our guidance for this year. Note that we always expect a higher loss load and combined ratio in the second half of the year given the timing of the North American hurricane season. With that, I’ll now hand back to Alex to conclude.

Alex Maloney: Thank you, Natalie. So just to summarize. Our strategy is completely on track for where we want to be, part of the underwriting cycle. We continue to grow our underwriting portfolio ahead of the rate change we’ve seen, which has been a key priority for us ever since the market heightened six years ago. We have lots of capital that gives ourselves flexibility in an increasingly uncertain world and we’re seeing strong earnings coming through our business based on the work that we’ve done over the last five years. So very happy with the results and happy to go to Q&A now.

Operator: (Operator Instructions) Our first question comes from the line of Kamran Hossain from JPMorgan.

Kamran Hossain: A couple of questions from me. The first one is just on thinking about the outlook for capital deployment into next year. The market has clearly been on like a rip since 2018; premiums have gone up, prices have gone up, you’ve been able to add business kind of everywhere and it’s transformed Lancashire. Do you still think there will be that many opportunities to deploy capital at attractive rates into next year and is this to kind of any extent dependent on kind of hiring of new teams, et cetera? The second question is just on the guidance of the mid-80%s combined ratio. Just wanted to square two things. I think in the comments it was stated that first half was a little bit lower than expected on cats. So why is your guidance not improving because you would assume there’s some cat in the first half? Is this just hurricane season caution, et cetera? Just interested in the view on that. I suspect it’s caution, but I just wanted to clarify that.

Alex Maloney: Okay. Kamran, I’ll take the first one and then Natalie will take the second one. Look, for me, we think we’re in a great place. We think the market’s in a great place. Rating has been strong. As you said, we’ve seen north of six years of positive rate change. So we believe whatever happens in the next sort of year to 18 months, that’s still going to be in a great place. When you’re at the top of the cycle, you don’t go from a great market to a market where you’re struggling to find opportunity in a year. That doesn’t happen. So yes, we definitely think there’s opportunity through ’25 or it happens this year. But equally if you believe in the cycle as we do, at some point it’s just going to get more difficult, but that’s fine. I think for us also with our U.S. platform, that gives us a nice growth opportunity there. New teams is always something we’re always focusing on. And also lastly, I think M&A will start at some point and M&A for us is generally being good. And what I mean by that is it disrupts people and that tends to mean we’ve had good opportunity of M&A, whether that’s people or products. So that’s another benefit for us. So the outlook is strong. Whatever happens to rate, we’re positive. We think there’s opportunity next year, but we’d generate more capital as a business as well. So we’re just thinking in a really good place.

Natalie Kershaw: Kamran, on your second point about the guidance. Obviously we’re in the middle of the hurricane season at the moment so we wouldn’t update guidance at this point. We probably will plan to update guidance at the next earnings call. But as you said, you’re right, we have a much heavier cat load in the second half of the year than the first half of the year. So we would always expect that the second half of the year combined ratio is higher than the first half.

Operator: Our next question comes from the line of Derald Goh from RBC Capital Markets.

Derald Goh: I’m just curious to hear about the attritional loss ratio. So it’s if I kind of ex out discounting, large losses (EYD), It looks to be about flat year-on-year. I’m just surprised why isn’t there more of an improvement or is it a case that maybe there’s some seasonality between how you book the first half and second half? The second question, it’s the expense ratio so it’s about an 80 basis point improvement year-on-year. What is the trajectory that you’re expecting from second half onwards? Do you think it could improve further, please?

Natalie Kershaw: Derald, it’s Natalie speaking. As we’ve mentioned previously this year, we’re just giving guidance on the overall combined ratio. We’re not looking to split out the components. What we look at really is the overall profits and the overall return on capital, which we’re more than happy with. So we’re not particularly focused on attrition. As we’ve said before, it changes depending on the business mix. But the most important thing is that we’re generating profits, I mean most efficiently using the capital base that we have. And on the expense ratio, it’s the same month so really it’s all included in the combined ratio and all included in the combined ratio guidance.

Derald Goh: Got it. And can I just check if I heard correctly in your response to Kamran, you’re saying you expect a higher combined ratio in the second half than the first half because of the heavy cat load.

Natalie Kershaw: Yes, that’s correct.

Derald Goh: Okay. I would have thought I mean cat businesses would tend to run at a lower combined ratio, right, all else equal?

Natalie Kershaw: Sorry, what was that?

Derald Goh: A nat cat to nat cat combined ratio, an all-in combined ratio for nat cat business would typically be lower than other lines of businesses, right? So if you have a higher share of cat business in the second half, wouldn’t you expect a lower combined ratio?

Natalie Kershaw: No. Because you’d expect a lower combined ratio if there were no cats. But obviously we’re more exposed to actual catastrophe events in the second half of the year. So assuming a reasonable catastrophe load from the hurricane season, your combined ratio will be higher.

Operator: Next question comes from the line of Tryfonas Spyrou from Berenberg.

Tryfonas Spyrou: I guess two questions for me. I was wondering if you can give us an update on the new sort of E&S platform on the progress so far and how has this evolved versus your expectations coming into this? How much premiums do you roughly expect to write this year? And what would be sort of the planned step-up for next year? Second question is on if you can comment a little bit on what you’ve done with the nat cat exposures during the period. It looks like you put on a little bit more exposure on the book, the (100 and 150) is up a little bit this year and how should we think about this in the context of the expected active wind season?

Paul Gregory: It’s Paul here. I’ll take both of those. So as we mentioned on the last call, the U.S. E&S platform got up and running for the 1/4 renewals, which we were very pleased about. We’ve been really successful in hiring for that operation that’s both on the underwriting side and the non-underwriting side. So we’re up and ready to write business in the two classes that we started with, which was property E&S and energy casualty. Been really, really happy with how we started. Obviously we’re only three months into underwriting, but we’re very much on track with what we expected to. We’re pleased with the market conditions that we’re seeing. As I said, we’re really pleased with the underwriting hires that we’ve got and it’s been a really encouraging start. There will be more business in those classes of business as we move through the balance of the year. So that will continue to grow. We haven’t given any guidance on individual premium levels for that operation and I won’t be doing that now I’m afraid. But it’s fair to say that you’ll see we’re going to see continued growth from that operation not just this year, but beyond. We’ll also be looking at are there any other lines of business we can add to that operation. That’s something that we’re currently underway in doing. So it’s definitely going to be one of the drivers for growth, as Alex mentioned earlier, for us going forward. In terms of nat cat exposure, yes, there’s been some moving parts as there always are. As I always remind everyone, they are a snapshot in time, they’re modeled numbers and they don’t always move for logical reasons. But overall, our cat footprint across all perils is broadly stable. Some have come down and then some have gone up. In summary, we obviously sit in a really healthy capital position. We retained some of our earnings last year going into this year to write more business. There were some really good opportunities to write increased lines, increased shares with existing clients that were buying kind of more limit on very well-structured placements. At this point in the cycle, as we’ve alluded to, with the rate environment is in a very healthy position, that’s exactly what we should be doing and there were some opportunities to do that so we did that. But as you said, they’re relatively small movements overall, but we did have the opportunity to write a bit more business and we took that.

Operator: Our next question comes from the line of Will Hardcastle from UBS.

William Hardcastle: The first one is on the BMA uplift in the capital requirement. I just wanted to confirm. I think you said that essentially this is not your binding constraint so therefore, there’s no potential impact really on anyone thinking about shareholder distribution. But I also wanted to just check, you do a stress scenario in the slide deck, which is always really helpful. I guess that’s gone down obviously, but just making sure that’s fully loaded on the full three-year impact, it’s not a transitional type of impact. And then a bit of a history lesson for me and a reminder maybe. It’s clearly that stage where you’re going through a buildout of new teams and you’re booking, you always book new teams initially very conservatively. I wonder if we’re some way down that stage and processing where we’re starting to book some of those new teams that were added over the last three or four years at maybe less prudent levels and the more normalized prudency level. It’s been a long day.

Natalie Kershaw: So I’ll take the first question, Will, on the BMA uplift. This is a specific change in the BMA model to take account of manmade catastrophe exposures. Now we’ve estimated that for the year-end 2024, that will have around about a 10% impact on the BSCR ratio and that is just the first year impact. So it does come in over three years. Obviously we don’t know the exact impact for the next two years, but you could assume it would be in the region of 10% each year. So the overall impact may be in the region of around 30%. But as you said, the most important thing to note is there’s no impact from this on any of the rating agency capital models which remain our binding constraint. So we’re just in a great capital position going forward, exactly the same as we were last quarter.

Paul Gregory: Will, I’ll take the second question. Look, on new teams, our general kind of rule of thumb for the shorter tail classes is we take a reasonably prudent approach for the first three years, then we look at where we are and adjust as necessary. So it would be fair to say some of the classes that we went into, say, ’18, ’19, ’20; they’re now running at where we’d expect to be. I would overlay that generally our normal reserving approach is reasonably prudent as well. And then obviously for the newer classes and there’s been less shorter tail classes in recent years, that would still be unwinding. Obviously casualty is somewhat different. We take a different view on longer tail. We only entered that class in 2021. As you know, we are reserving that incredibly prudently and as I said in my script, that will continue for the foreseeable future. But things like the U.S. operation, which is new; Australia’s reasonably new; construction is reasonably new. They’re still within that kind of three-year window. So you have still got some of that that we will reassess kind of at the end of that three-year period. Does that answer your question?

Operator: Our next question comes from the line of Freya Kong from Bank of America.

Freya Kong: Can I just clarify if the 250% stressed BSCR includes a 10-point impact from this year of the BMA model change? And then second question is on reinsurance spend. It’s gone down a bit to 25% from 29% last year as you’ve decided to retain more business. How should we think about your reinsurance use going forward even at least just some directional there?

Natalie Kershaw: Freya, on the first question, yes, the 250% is after the impact of the model change.

Paul Gregory: On the second point on reinsurance spend, Obviously, as we’ve mentioned, given that we’re writing more business at the top of the cycle, our earnings going forward look to be very strong. When that is the case, generally you will expect our reinsurance spend as a percentage to decrease. That’s exactly what’s happened over the last few years. Dollar amount can sometimes go up given we’ve got to book the book, but I would very much anticipate that same trend in 2025.

Operator: Next question comes from the line of Nick Johnson from Deutsche Numis.

Nicholas Johnson: Question on the Solvency ratio. So on the chart on Page 11, capital consumption from business growth seems to be higher this year than it was in 2023 and that’s despite I think slower top line growth this year than last year. From the charts, I don’t know if it’s correct, but it looks like capital consumption this year is about 40 points off the Solvency ratio and last year it was 10 points. Just wondering what’s going on there. Does that mean the diversification benefit from growth in new lines has now sort of reached its full extent or something else happening? Could you just possibly expand a bit on the mechanics there?

Natalie Kershaw: Yes. I mean it just depends what new business we write and then therefore, what impact that has on the various different metrics within the solvency model. And obviously the last few years we expanded casualty quite significantly, which doesn’t have as much of an impact on the solvency ratio. And I think as PG said, we’re kind of happy with where the casualty portfolio is now so the growth this year has been in other lines of business, which have more of a capital impact. But it’s not to say that we’re not getting diversification benefit, we definitely are. But we do what we do all the time. We look at capital and we look at the lines of business we want to write and we match the two things together.

Operator: Our next question comes from the line of Darius Satkauskas from KBW.

Darius Satkauskas: Two please. So the first one is just to clarify on one of the questions asked before. I also don’t understand why the combined ratio would be higher in second half versus first half. Yes, losses should be higher, but so should the earned premiums as you earn most of the cat risk in the second half and cat business in normal year should be a lower combined ratio business. So could you please clarify what are we missing here? And the second one is one of your peers recently started disclosing Solvency II ratio. I understand that you don’t have to report it, but do you know internally what your Solvency II ratio is and would you consider reporting it in the future or disclosing it?

Natalie Kershaw: Darius, I’ll take both of those. Earned premium from the catastrophe business is even throughout the year. You don’t earn more of it in the second half of the year and obviously you’re exposed to more losses in the second half of the year. So your combined ratio will be higher in the second half of the year. And then we don’t have a group Solvency II ratio because we’re regulated by the BMA, which is why we disclosed the BMA BSCR ratio. Hopefully, that’s helpful.

Darius Satkauskas: I know you don’t have to report it, but my point is do you know what your Solvency II would be?

Natalie Kershaw: It’s equivalent to the BSCR ratio. There is equivalence with Solvency II.

Darius Satkauskas: But one is exposure based, the other one isn’t so I think there’s differences.

Denise O’Donoghue: Just on that, Darius. There will be — obviously under different methodologies, there will be different approaches as we demonstrated in our Investor Day last year. But importantly, neither the BSCR nor Solvency II in any of our operations is the binding constraint for the business. We ultimately look to our rating agency models where we sit on a very, very comfortable cushion. So I appreciate there’s a lot of conversation about sort of changes to the BSCR model. It doesn’t really drive our decision-making.

Operator: Our next question comes from the line of Faizan Lakhani from HSBC.

Faizan Lakhani: The first one is coming back to the cat loss or cat budget in H1. I know you didn’t give a budget exactly. But could you provide some of the steer of what the split should be between half year and H2? And the second one is how should we think about capital generation in H2 and is there any seasonality in that?

Denise O’Donoghue: I’m actually not going to let Natalie answer this one. We have given a very clear combined ratio guidance for the full year. So H1 versus H2, it’s sort of almost irrelevant. This morning we have affirmed our guidance for the full year. We appreciate we are well on track to do particularly well relative to that guidance that we are still very happy with full year consensus where it sits. And as far as capital generation is concerned, you’ll note of course that we write a lot of our capital intensive business in the first half of the year. That means the capital requirements in the second half are potentially less onerous. But obviously we’ll revisit capital in Q3.

Operator: Our next question comes from the line of Andreas van Embden from Peel Hunt.

Andreas van Embden: I’ve got a question on the casualty reinsurance business. Paul, you mentioned in your introductory remarks that there weren’t any trends that would question your pricing assumptions at this stage. But listening in to what reinsurers in the U.S. are saying that among cedents, there is a revisiting of initial loss picks for the recent underwriting years ’21 to ’23. I was just wondering when you look at your own book and you’re not seeing these trends with your own cedents, is it because you don’t write this business or your cedents don’t write this business or have your cedents certainly been prudent? So you’re quite happy with the loss picks that your cedents have put up or is it really the fact that you put in an additional layer on top of our cedents loss pick? So you’re very, very prudent and therefore, pretty comfortable with your pricing assumptions?

Paul Gregory: Andreas, I think to be honest, it’s more of the latter point that you made. I mean I keep saying it, but we entered the class in ’21. The reason we entered was the market was changing because of some of the issues that we are still seeing from prior years. So you’re going into it with your eyes open, you know some of the drivers of increased loss cost trend. I completely know what you’re saying about some carriers are now changing their loss cost trends on more recent years. Now obviously I don’t have full insight into any of our competitors’ views. What I can say though is we do get a lot of information from our cedents. We are incredibly prudent. We don’t just follow what our cedents provide us. We have our own view of risk, which does tend to be prudent on how we price the business. Obviously on top of that, you have the increased buffer of how we’ve been reserving that business. So, the fundamental point for us is the assumptions we put into our pricing on loss cost trends or anything else for that matter, we are very comfortable with and haven’t made any changes to since we entered the class. Now obviously we will always continue to review that as we would do with any other line of business. But as we sit here today, we’re comfortable with how we’ve priced the business and the embedded margin that’s within it and also even more comfortable given how we’ve reserved it. Hopefully, that answers your question.

Operator: Our next question comes from the line of Tryfonas Spyrou from Berenberg.

Tryfonas Spyrou: So just a very quick follow-up on the capital again and I appreciate you said this doesn’t have any impact whatsoever on (E&S). But I think you previously mentioned sort of the 200% level as being somewhat commensurate maybe or maybe this is a minimum level you want to operate at even post the stress scenario. So can we maybe assume that now that level is sort of trending around at 190% and closer to 170% in time given mechanical impact of this BSCR charge?

Natalie Kershaw: Yes, that would be logical. Tryfonas, actually we haven’t done the full model change yet. We’re just giving you an indication of the impact. So we can update that 200% guidance maybe when we get to the year-end. Maybe the most important thing is there’s no impact from the rating agency models and we’re more than well capitalized on that front.

Operator: (Operator Instructions)

Denise O’Donoghue: If there are no questions, we can conclude the call here.

Operator: At the moment, there are no further questions. You can go ahead and conclude the call. I’ll pass it back to you for closing remarks.

Alex Maloney: Okay. Thanks very much for your questions today. We’ll close the call now.

Operator: Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.

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