Lancashire Holdings Limited (LCSHF) Q4 2023 Earnings Call Transcript

Lancashire Holdings Limited (OTCPK:LCSHF) Q4 2023 Results Conference Call March 6, 2024 9:00 AM ET

Company Participants

Alex Maloney – Group CEO

Paul Gregory – Group Chief Underwriting Officer and LCM CEO

Natalie Kershaw – Group CFO

Denise O’Donoghue – Chief Investment Officer

Jelena Bjelanovic – Investor Relations

Conference Call Participants

James Pearse – Jefferies

Kamran Hossain – JPMorgan

Nick Johnson – Numis

Andreas van Embden – Peel Hunt

Andrew Ritchie – Autonomous

Ivan Bokhmat – Barclays

Darius Satkauskas – KBW

Will Hardcastle – UBS

Operator

Hello, and welcome to the Lancashire Full year 2023 Earnings Call. [Operator Instructions] Please note that this call is being recorded. Today, I’m pleased to present Alex Maloney, CEO. Please begin your meeting.

Alex Maloney

Good morning, everyone, and thank you for joining our call today. I will just give you some brief highlights of the progress that we’ve made through the fourth quarter. And some of the highlights we’ve made throughout 2023. Paul will then focus on our underwriting progress, and Nat will cover our financials and then we’ll go to Q&A.

We have delivered strong profits for the year, strong capital returns for our investors and maintained strong capital flexibility to fund the investments in our business. Lancashire continues to grow in line with our long-term strategy to grow and the underwriting opportunities are strong.

We continue to grow our premiums in excess of the strong rate change we have seen throughout 2023, demonstrating real momentum at the right time in the underwriting cycle. We have in fact grown our premiums in excess of the positive rate change we have seen in the last five years. If you believe in the underwriting cycle as we do, you have to demonstrate real momentum in strong underwriting markets.

Our 2023 result of nearly a 25% return on equity is clearly a strong result for Lancashire. Risk adjusted, probably the best in our history. We have benefited from the steep increase in rating across our underwriting portfolio where we saw real dislocation in our reinsurance segments and continued hardening in our insurance segment.

We’ve also benefited from the strengthening of retention levels in our cat exposed lines. We saw real benefit in a year that produced another year of insured losses, which exceeded $100 billion. Our insurance lines have also benefited from the tightening in terms and conditions driven by recent world events.

All these factors have led us to build a better risk adjusted underwriting portfolio to help us navigate the heightened level of risk we witnessed in the world today. Our investment portfolio has grown in tandem with our business. Our current portfolio is the largest we have managed at a time when yields have significantly improved. Due to the short duration of our portfolio, we’ve been able to benefit from the reinvestment rates, which quickly add a further income stream to our business.

During 2023, we benefited from more yield from our underwriting portfolio and more yield in our investment portfolio. This just means our capital usage is materially more efficient, and we’re just generating more dollars as a business. Our capital management strategy remains the same. We constantly assess our capital needs versus the opportunities we see during the next 12 months.

Our plan is to continue to grow our business throughout 2024, where we see exciting opportunities, particularly with the opening of our new E&S business in the U.S. Due to the excellent underwriting result we have, coupled with a much higher investment returns, we find ourselves in an excess capital position, which enables us to announce a further special dividend of $0.50 today.

We still have excess capital to grow our underwriting and capital flexibility for any unforeseen underwriting opportunities. Lancashire is a more diverse, larger, more resilient and less volatile business than it has been the case in the past. We believe it’s appropriate to raise our ordinary dividends for our shareholders to benefit from the hard work we have done to build the business we are today. Our ordinary dividends will increase by 50%.

So we have delivered what we said we would do. Our long-term strategy of demonstrating real growth at the right time in the underwriting cycle is benefiting our business. We see lots of opportunity to continue to grow in the buoyant underwriting markets we operate in.

We maintain our strong capital flexibility for an uncertain risk environment, coupled with great people to continue our momentum throughout 2024.

I’ll now pass over to Paul.

Paul Gregory

Thank you, Alex.

As Alex has just explained, we’re extremely pleased with the 2023 underwriting result. We have delivered a combined ratio of 82.6% and a net insurance services result of $382 million. This is in a year of natural catastrophe losses of over $100 billion and continued global political unrest.

We are incredibly proud of the underwriting team and all those in the business that support us in delivering this result. We continue to deliver our strategic objective of growing once the market is favorable to develop a more robust, less volatile and highly profitable underwriting portfolio.

The market was certainly very healthy in ’23, which helped us achieve our goals of continuing to grow ahead of rate, broadly maintaining our net cat footprint whilst improving portfolio shape and margin, continuing to build out our franchise in newer product lines such as casualty construction and specialty reinsurance as well as profitably growing in areas of opportunity such as property insurance.

With regard to top line growth, we slightly exceeded the expectations we set out at the start of the year. This was down to the portfolio RPI of 115% and increased demand across a number of our product lines. Most pleasing is the shape and balance of our overall portfolio, which is testament to some of the strategic investments and decisions made over the past six years.

I’ll now talk briefly about the market dynamics in a few of our product lines before moving on to outlook for this year. I’ll first pick out the reinsurance segment and then a couple of classes within our insurance segment. In reinsurance, the property reinsurance market, that was a true hard market with a reduced supply and increased demand. Pricing was buoyant and as importantly, structural changes were made as the product reverted to protecting balance sheet as opposed to just protecting earnings.

The value of this structural change and the increased levels of attachment have been proven this year with a large number of small to midsized catastrophe losses having far less impact than would have been the case in previous years. For casualty reinsurance, there continues to be a lot of headlines around prior year deterioration. It’s always worth reiterating that this is a class we entered during 2021, and the problem years in the headlines precede our entry.

If anything, the continued pain of reserve deterioration has strengthened our ability to build a portfolio that will be accretive to bottom line over the longer term. As we said many times before and as we do for any new class of business, we begin by reserving very prudently. We believe this is even more appropriate for longer tail lines such as casualty. We are prepared to allow this to drag our short-term profitability in order to build a business where the underlying profitability will be accretive over time and allow us to manage the cycle.

Our specialty reinsurance portfolio has been another area of growth. There were very strong rating conditions in our more established product lines such as retro and aviation reinsurance. In these classes, risk adjusted rate change was as much due to policy structure terms and conditions as it was right. So whilst you may not see all the great flow through in premium, the underlying quality of the portfolio is significantly better. The build out of our marine energy and terrorism reinsurance offering continued successfully in favorable market conditions.

Moving to our insurance lines, I’ll focus on a couple of key points. Every insurance class we write had positive rate change in 2023. For most classes, this was a sixth year of upward rate in trajectory with these classes now sitting at very healthy levels of adequacy.

In aviation, we saw the whole spectrum of market dynamics. In some of our niches that provide war and terrorism type coverage, there was healthy rate momentum and good opportunities to grow. In other niches, rating remain positive albeit less pronounced, but importantly remain at really robust levels producing excellent profitability.

In contrast, I’ve talked before about our ambitions in areas such as major airline or risks should market conditions improve. Unfortunately, this did not happen and the market seems to defy logic. But overall, we grow our more profitable aviation niches year-on-year, we’re able to leverage across our broader portfolio effectively and importantly maintained our discipline in those other areas. One of the standout product lines in the year was property. This is both property direct and facultative insurance in our property construction portfolio.

Breaking conditions were strong and ahead of our original expectations. Alongside this, demand was also supportive and we took advantage of these conditions to grow our footprint with property forming a core component of 23 premium growth positively.

I’ll now move on to ’24 outlook. We started the year positively. It’s fair to say the trading conditions at the 1st January were far more stable than 12 months prior, and but importantly, market discipline has been maintained. We successfully purchased our outward reinsurance protections at 1/1 and given the more stable market conditions, we have a more efficient reinsurance structure than we had last year.

In terms of reinsurance spend, we anticipate spending marginally more dollars given the anticipated premium growth on the inwards book as a percentage of inwards premium spend will reduce. This very much follows the trend of the last few years. Much like 1/1, our outlook for rating across 2024 is one of broad stability with healthy levels of profitability. Each product line will have its own dynamics, but all things remaining equal, we do not anticipate any significant hardening or more importantly any significant softening.

The key point for us is that the vast majority of classes, the underlying rating levels remain strong with pricing adequacy in a very robust position and this is why we will continue to grow. Current consensus has our 2024 premium growth of approximately 10% ahead of 2023 and that level of growth feels pretty sensible based upon anticipated market conditions.

We will continue to grow above rate, but some drivers of growth in recent years such as casualty are closer to maturity in terms of overall size. So we will see less growth here than we’ve seen in recent years. However, in line such as property insurance and specialty reinsurance, we still see very attractive opportunities to grow materially and we, of course, have our U.S. office sizing underwriting during the course of 2024.

As ever, will be driven by the market opportunity and we will underwrite accordingly. We remain very, very well capitalized to continue to invest in the business and build the Lancashire franchise.

I’ll now pass over to Natalie.

Natalie Kershaw

Thanks, Paul.

I’m really happy with our overall performance in 2023 how we have been able to demonstrate the benefit of strategic changes we have made to the business in the last few years. In particular, I would like to draw your attention to three key highlights. Our increase in diluted book value per share of 24.7% is excellent and reflects strong underwriting and investment performance even in a relatively active cat year.

Our strong balance sheet and diversified capital position has enabled us to pay back a substantial amount of our earnings to shareholders. And the successful implementation of IFRS 17 and IFRS 9 is accumulation of many years’ work from the finance and actuarial teams and stands us in good stead for any future data or reporting challenges. A summary of our results for the year is laid out on Slide 9.

I am exceptionally pleased with our underwriting performance for 2023. We have been able to successfully demonstrate the impact of our growth and diversification strategy. Our undiscounted combined ratio was a healthy 82.6% or 74.9% on a discounted basis. This translates into a net insurance service result of $382.1 million. With the positive investment performance also contributing to results, our overall profit after tax was $321.5 million resulting in a 24.7% increase in diluted book value per share for the year.

The strong operating performance and our continued healthy and sustainable capital position means that we have been able to announce a further special dividend of $0.50 per share alongside a 50% increase in our standard ordinary dividend. This follows on from the special dividend announced with our Q3 results, taking the total capital returned via dividends in relation to 2023 to approximately $287 million.

We also announced a share buyback of up to $50 million at Q3. The uptick in our share price following our third quarter results was maintained into the first quarter of 2024. And given share back parameters agreed by the board, we were not able to fulfill the buyback. Following these capital returns, we remain exceptionally well capitalized and are able to fund all our planned growth in 2024 from internally generated capital.

The benefit of our growth over the last few years comes through in insurance revenue and ultimately profits. Insurance revenue increased by 23.9% compared to 2022, largely as a result of the factors impacting gross premiums written that Paul has just discussed. As a reminder, insurance revenue is comparable to IFRS 4 gross premiums earned less inwards reinstatement premium and is net of commission costs.

Earnings will continue to come through this line from the additional premiums written in the last few years. The rate that the premiums earned through as insurance revenue will vary dependent on business mix, which impacts the period over which premiums are earned as well as the quantum of related commissions.

The allocation of reinsurance premium is a similar concept to insurance revenue but for outwards reinsurance, i.e., it comprises ceded earned premium that’s outwards reinstatement premium, net of commission. The allocation of reinsurance premiums increased by 14.3% in 2023 compared to 2022. The main reason for the increase is rate increases across the book as well as additional cover purchase for new lines of business.

However, we are generally retaining more risk across the business as pricing has improved. Overall, the allocation of reinsurance premiums as a percentage of insurance revenue was 27.9%, down from 30.3% in the prior year. Our operating expense ratio is higher than 2022 at 9.8% compared to 6.8%. Employment costs are the most significant driver of the increase due to headcount increases, combined with a higher rate of variable pay compared to 2022, given the group’s stronger financial performance.

Moving on to the claims environment on Slide 10. On an IFRS 17 basis, the insurance service expense and allocation of recoverables from reinsurers totaled to net insurance expenses. This incorporates expenses directly attributable to underwriting, discounting and reinstatement premiums as well as the pure loss numbers.

During 2023, the market loss environment was reasonably active with estimates of global insured losses from natural disasters hitting $119 billion. This is more than 30% higher than the average since 2000. Despite this, we did not incur any individually material catastrophe or large losses. The total undiscounted net losses, including reinstatement premiums from catastrophe and large loss events, was $106.1 million.

IFRS 17 provides more visibility on our stated conservative reserving approach with its new required disclosures. There has been no change to our reserving approach or philosophy under IFRS 17, and we expect the disclosed reserving confidence level to remain within the 80th to 90th percentile band, unless there is a change in our reserving risk appetite. We expect the digitized percentile to move around within this range from period to period depending on the mix of reserves and our view of our associated uncertainty.

The reserve in confidence level at 31st December 2023 is 88%, which represents a net risk adjustment of $239.1 million or 16.7% of net insurance contract liabilities. On an IFRS 17 basis, total prior year releases include the release of expense provisions as well as the impact of reinstatement premiums. Total releases on this basis are $78.8 million compared to $134.5 million in 2022.

Whereas both years benefited from prior year IBNR releases, these were offset in 2023 by some late reported weather losses from 2022. We have always said that our releases can be uneven given the type of business that we write. As we have been talking about over the last few years, continued growth in the new more attritional lines of business has had an impact on our underlying combined ratio. For example, in 2023, absent the new casualty lines of business, the combined ratio would be around 5% lower.

The underlying combined ratio, therefore, can vary depending on the mix of business in each year. And as I have said in the past, our core focus is on a healthy group ROE as measured by the change in diluted book value per share rather than the individual component parts of the combined ratio. We have summarized the impact of discounting on our results on Slide 11. The close impact of discounting in the year was net income of $18.1 million compared to net income of $85.9 million in the prior year.

In the current year, the discount benefit comprises a net initial discount of $84.7 million largely on the 2023 accident year loss reserves, offset by $55.8 million net unwind of the initial discount previously recognized in relation to prior accident years and a $10.8 million adverse impact of the change in discount rate assumptions applied in the year. Discount rates across all our major currencies were at a relatively high level throughout the year with a small decrease in the fourth quarter.

This drove the high initial discount impact and relatively low change in assumption impact. In comparison, 2022 began with a relatively low discount rate being used by the group, which then experienced significant discount rate increases across all currencies throughout 2022. The impact of Hurricane Ian losses during the fourth quarter of 2022 and a generally active loss environment contributed to a relatively high initial discount of $72.5 million.

The increase in rates across the year resulted in a favorable $39.4 million impact from the change in discount rate assumptions. This is only partly offset by $26 million unwind of the initial discount previously recognized in relation to prior accident years, which have been set in a low rate environment.

Turning to our investments. In a year of continued volatility, the investment portfolio generates an investment return of 5.7%. The returns were driven primarily from investment income given the higher yields during the year. While the Federal Reserve raised rates by 1% this year, the high yields and tighter spreads mitigated any losses on the portfolio.

In addition, the risk assets, notably the bank loans, hedge funds and private credit, all contributed positively to the overall investment return. The investment portfolio remains relatively conservative with an overall credit rating of AA-. Given the volatility and inverted yield curve, we remain cautious, but we look to modestly increase duration in the first half of 2024. We will continue to maintain a short high credit quality portfolio with some portfolio diversification to balance the overall risk adjusted return.

Moving on to capital on Slide 13. We have a strong regulatory capital position, finishing the year with an estimated ratio just over 320%, which would reduce approximately 280% following a one-in-one 100-year Gulf of Mexico wind event. Following our recently announced capital actions, we remain comfortably capitalized for the opportunities that we see in 2024 with the BSCR ratio in the region of 300%. We continue to see the benefits of our diversified business on the amount of capital we are required to hold for both regulatory and rating agency requirements.

Away from the reported numbers, the new Bermuda corporate income tax rules come into effect from 1st January 2025, and a significant number of Bermuda based companies have recently booked material deferred tax assets in their financial statements. Given our limited geographical presence, we are out of scope for the Bermuda tax rules until 1st January 2030. This has enabled us a longer period to consider the merits of entering into the economic transition adjustment under the new rules of some of our peers. If we decide to enter into the ETA, we will likely have deferred tax assets that will be allowable at some point in the future.

Moving on to forward guidance. The growth in our non-catastrophe exposed lines of business, along with better pricing and improved terms and conditions and higher investment leverage, means that we can absorb higher dollars amounts of catastrophe and large losses than historically into our regular earnings. This has enabled us to simplify our forward looking guidance, which is also helpful with the complexities of IFRS 17 to navigate.

For 2024, we expect that in an average loss year, our undiscounted combined ratio will be around the mid-80s. At this level, we would expect the group’s ROE defined as increase in diluted book value per share to be around 20%. Importantly, we don’t anticipate material changes to consensus post tax earnings on the back of this guidance.

With that, I’ll now hand back to Alex to conclude.

Alex Maloney

Okay. Thank you, Natalie. So just to summarize, we see continued opportunities to grow our business. It’s important that we stay on the path that we are and maintain our underwriting discipline but consistently look for opportunity. Our capital position again is very strong as we start ’24. That gives us lots of flexibility for any future growth and opportunity. And I’d just like to thank everyone for just building a really good business for the last five years.

And we’ll now go to questions please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of James Pearse from Jefferies.

James Pearse

First one is just on excess capital. Can you remind us just about how you think about that? I know that you’re currently at ECR ratio of around 300% after the special dividend. I think in the past, you might have said that you’re happy to operate at 200% ratio. In a normal year, would you aim to operate at a level such that you could absorb a one in 100-year loss or a one in 250-year loss and still maintain a capital ratio above 200%?

Is that the right way to think about it? So just any color you can provide on that would be helpful. And then the second one is on social inflation. Just wondering how comfortable you are with the prudence of your inflation assumptions when you’re pricing risk and casualty reinsurance and how the actual inflation trends are tracking versus your assumptions?

Natalie Kershaw

Hi, James. It’s Natalie. I’ll take the first question on excess capital. There’s been no change to our capital management strategy since our inception actually. We look at capital all the time and throughout the year. At the moment, we are very well capitalized, but we see a lot of opportunities in 2024 and that’s why we’re carrying capital around just over 300%. And we’ve always said I think that we want to be able to continue to write business post an event. I’m not going to define the event, but we definitely want to be on the ground running the next day following an event. So yes, you’re right on that.

Paul Gregory

Hi, James. I’ll take the second question on social inflation. I think the important thing for us is nothing that we’ve seen thus far in obviously anything that’s public or data that we receive as a reinsurer has given us any cause for concern. In terms of the assumptions that we’ve been making. And I think a really important point to make is just remembering when we entered the class, which is kind of Q1, Q2, 2021, when a lot of pain has already emerged.

And as people have listened to our commentary, we’ve always spoke about there’s probably more pain to come, which I think we are now starting to see. So obviously, with us thinking that there’s more pain to come, that went into some of our initial assumptions in terms of loss costs, etcetera. So look, we’re very happy with the book that we’ve bought up and the pricing level that we’ve got. And as I said, just to reiterate, there’s nothing that we’ve seen thus far give us any cause of concern in the underlying assumptions we have.

Operator

And our next question comes from the line of Kamran Hossain from JPMorgan.

Kamran Hossain

Two questions for me. The first one is on just the change that you’ve kind of flagged on the ordinary dividends. And I appreciate that a 50% bump in the ordinary is enormous. Just thinking about kind of how that might transition next year, I think, you know, you’ve given us guidance for the group, which is fantastic. You’re seeing more diversified, less a little bit more predictability. But at the same time for this year, the payout is kind of 80% is special and 20%-ish kind of ordinary. Would you plan to rebalance that next year? That’s kind of the first question.

Second question, sticking kind of on dividends and payouts. This year, 2022 has obviously been a really good year, produced excellent numbers, but you’re also fighting a 20% return on equity next year. If you get to that level, would you assume that you’d also have a similar level of payout? Because it feels like you’ve got plenty of caps, so you’ve got lots of [indiscernible]. You can probably grow relatively capsulate. We so it should be expected similar payout if you hit the numbers that you’re assuming, for this year? Thank you.

Natalie Kershaw

To come around on the second part of your question, and I don’t know if Alex might jump in as well. As we just said, we think about capital all the time and level of payout or not payout will always depend on the opportunities that we see in front of us. And at this moment in time, we don’t really know what the opportunities are going to be this time next year. So it’s really dependent on that.

Alex Maloney

Yes, Kamran, I think the special is the special and that’s just driven by excess capital and our view has never changed and we always say, if we can use that capital to grow our business to underwrite, that’s what we will do. If we think its better going back to shareholders that’s what we will do.

I think the ordinary is different. We are a bigger business. We are a more diversified business and it was just a rebase of a dividend that we haven’t changed in north of 10 years. So it’s not going to be a progressive dividend. We just see it as resetting that ordinary dividend for the business we are today versus the business we were 10 years ago.

Operator

And our next question comes from the line of Anthony Yang from Goldman Sachs. [Operator Instructions] Our next question comes from the line of Nick Johnson from Numis.

Nick Johnson

I’ve got three questions, please.

Firstly, quite surprised that growth in Q4 in the Insurance segment was negative 2%. Would have thought there have been some growth in the quarter? I know you mentioned that airline haul was disappointing. Just wondering if there’s anything else going on, perhaps you could provide some color on the moving parts in Q4 in the Insurance segment. Sorry to be panicky on that one.

Secondly, on the combined ratio, you mentioned a 5% difference due to casualty classes. Just wondering if you can say how much of that 5% difference relates to sort of the excess reserve prudence you’re putting in because of early stage of that line of business. And how much the 5% relates to sort of intrinsic margin difference in the casualty lines versus the rest of the portfolio?

And then lastly, just quickly, just wondered how much private credit there is in the investment portfolio. Does that sit just within the, what’s shown as private investment funds on the pie chart? Or is there some private credit in the corporate and bank loan segment as well?

Paul Gregory

Hi, Nick. I’ll take the first point on the Q4 growth in the insurance. To be honest, it’s primarily down to one large contract we had in our specialty insurance sector that was always going to be restructured, which we obviously knew about. So there’s nothing underlying where there’s an issue. I think if you look at my commentary, our commentary throughout the course of the year, we guided to $1.9 billion, we’re above that.

So there’s nothing underlying of concern at all. The market played out as we expected in terms of rate environment. Demand as we expected and renewed business we expected to renew and got new business as we expected to. So there’s nothing fundamentally underlying in Q4 that creates any concern for us at all.

Natalie Kershaw

Hi, Nick. I’ll take question two on the combined ratio. As we’ve continued to say, we are reserving casualty exceptionally prudently. So you can assume that that extra 5% is really just prudent in the reserveding. And I’ll pass over to Denise, Chief Investment Officer for question three.

Denise O’Donoghue

Sure. The private credit is about 6% of the portfolio, so $165 million and that is true private credit in a few different funds. But there’s no private credit within the corporate within the corporate bank loan. So it’s pure private is the $165 million.

Nick Johnson

And are you relying on the funds to mark those private credits themselves? Or do you sort of scrutinize how they’re marking them?

Denise O’Donoghue

We scrutinize how they’re marking them. We get their modeling. We kind of we talk to them all the time. So we feel confident. Obviously, there’s a lot in the news as of late about private credit and not getting mark to market, but we do scrutinize them a lot and go through their modeling.

Operator

And our next question comes from the line of Andreas van Embden from Peel Hunt.

Andreas van Embden

Yes. Thank you very much. I just have a question around rate adequacy. Obviously, a lot of your capital is tied up in your property cat book and then you’ve kept your risk appetite flat in 2023. We’ve seen the sharp rate increases come through. And so most of the profitability of your reinsurance book is in 2023 in that property cat book.

Now looking forward with your guidance of a 20% return, I just want to test the rate adequacy of that property cat book. By how much would property cat rates need to decline for your ROEs to get back to your cost of capital? Is that very significant?

Alex Maloney

Hi, Andreas. Yes, look, as I mentioned in my script, it was certainly a proper hard market for property cat in 2023, and we’re at a level now where rating and structure, which is obviously as important, are in a really good spot. Look, I think what we saw at 1/1 was the market discipline was being maintained. It was a very it was more stable. But for property cat, you were actually still seeing marginal rate improvement.

And I think that’s primarily because of 2023 is a good year. We have seen good margin overall, but also on that portfolio. But let’s not forget the kind of prior years have been reasonably bumpy. So market discipline as far as we can still see still there. There is more supply or more willingness to deploy from existing carriers, which is why we’re talking about a more stable market. Look, we’ve kept our footprint the same because we had a large footprint to start with. Let’s not forget that. But also it’s about the overall balance of our portfolio.

Look, there is margin in that book, that’s obvious. But in our opinion and what appears to be the market’s opinion that rate inadequacy needs to remain, which is why you’re seeing the underwriting discipline that you’re seeing.

Andreas van Embden

But how much headroom do you have in that rate adequacy to sort of continue to generate 20% returns even allowing for rate declines, let’s say, later this year or potentially in 2025? How sensitive are you nowadays, giving your diversification to that sort of rate cycle and propped cash?

Jelena Bjelanovic

Andreas, its Jelena. I think you’ve hit the nail right on the head. So the point here being that actually it’s not just about property catastrophe. All of our lines of business were very profitable last year. That’s what delivered to the nearly 25% ROE, which we’re obviously sort of looking at today. So it’s more about the balance of the business, the diversification that the team has worked on for the past 5 years and the quality of the portfolio.

Paul Gregory

I think as well, Andreas, if you look at if you just look at our business lines, there’s no we’ve lost the dominance of certain business lines. So in any product line, if you see any kind of aggressive reductions, we’re just not as impacted as we would have been in the past. That is the benefit of the portfolio we have today versus historically.

Operator

And our next question comes from the line of Andrew Ritchie from Autonomous.

Andrew Ritchie

Just wanted to understand a bit more on the ’24 guidance. I guess this is probably just my own ignorance. I just want to check, first of all, am I right to assume the source of drag, if you like, from prudence on casualty should be thought of as similar in ’24? I think we would then suggest maybe it’s beyond ’24 where there might be a bit less of a drag from casualties as presumably some of the prudence on lines. In addition on that guidance for ’24, I just want to understand fully what you say when you say average loss year.

I’m assuming you’re thinking average manmade and cat. And is it average based on a look back the last 5 years allowing for any changes? Just give us a bit more granularity as to how to think about the robustness of the word average. So that’s the first question just around the ’24 guidance. The only other question I had is you mentioned in the introductory comments your retro for ’24 was more I think you used the word efficient. What does that mean in plain English terms?

Natalie Kershaw

Hi, Andrew. It’s Natalie. I’ll start with the first question. So you’re right on the 2024 guidance, drag from casualty you should be expecting to see a similar range to this year. I think we said when we went into casualty in 2021, it would be at least 5 years before we started releasing those reserves. So that’s not going to come through for another couple of years yet at least.

And then yes, when we’re talking about the average loss year, we’ve done quite a lot of modeling forwards and backwards. We are talking about cat and large losses. We are kind of expecting within that, that the loss environment has become more active in the last 5 years or so. So that’s what we’ve been taking account of. But yes, it does include catastrophe and large risk losses as well.

Paul Gregory

On the second question, Andrew, yes, what I meant by more efficient is high-level reinsurance we’ve purchased is broadly similar in shape to what we had last year. But in a market like last year where it was incredibly dislocated and reasonably chaotic, there are elements of reinsurance that you find because you don’t know how much you’re actually going to buy or how much reinsurance is going to be available.

So when you look back and you’re in a more stable environment where you can have more certainty on your planning, there are certain reinsurance purchases that you don’t need to buy going forward. So that’s what I mean by more efficient. In terms of overall shape, retention level, etcetera, broadly similar, but the bits around the side, there were less we needed to buy because we had far more certainty on execution.

Andrew Ritchie

So the cost goes down for similar levels of cover then in effect? Or similar levels for peak at peak for the cover you are most likely to need?

Paul Gregory

Yes.

Operator

And our next question comes from the line of Tim Andres from Frank W. Caywood & Associates.

Unidentified Analyst

Hi. Frank and I would like to congratulate y’all on these outstanding results that you’ve reported today. And also just, thank each of you for your, leadership. And, we continue to look forward to the future.

Alex Maloney

Thank you very much, Tim. And please pass my thanks to Frank as well.

Unidentified Analyst

I certainly will.

Operator

Our next question comes from the line of Ivan Bokhmat from Barclays.

Ivan Bokhmat

I have a few questions. Well, the first one is perhaps on the market outlook. We’re starting to see, I suppose, throughout 2024, capital returning to the market. And I was just wondering whether you see that at first affecting rather the frequency layers of the business, attachment points moving down. How quickly should we expect that to happen in your view? Is that something that might happen by summer or something more for the 2025 year?

And the second question, it’s a minor point, Brady. But when you think about the guidance for 2024, should we expect that the expense ratio within the combined ratio is at a similar 10% level as you showed in 2023? Is that come under to 20% ROE?

And maybe one final little bit. I think I’ve asked it before, but we’ve had several more lawsuits on the aviation leasing companies being settled. I was just wondering how you think about your reserves in that respect. Thank you.

Alex Maloney

Okay. Look, on the capital point, I think there’s a few different ways to answer that one. I think that we don’t really see lots of new capital coming to market. So by that, I mean, there’s no new Bermuda startups. We don’t see any real discipline from any existing carriers. I mean, clearly, where you do see new capital, things like the capital market at a high-level and that seems quite active. Again, that doesn’t really affect the business that we want to underwrite. I think you did mention things like frequency covers and things like that.

Again, I think we’re nowhere close to those kind of products coming back to market yet. I’m not saying it won’t happen because our world is always cyclical, but I just think there’s you see one or two areas of competition on, say, great cat layers at high levels and that’s just an appreciation from markets that were at great pricing levels, good great attachment points. And I think Paul said in his comments, people are just more willing to deploy. But I just that’s just good underwriting. People are just taking a good market.

So I don’t think we’re seeing lots of influxes of capital. I think actually even if you look at some of the other carriers and people looking to IPO and things like that, that doesn’t appear to be super easy at the moment. So I don’t think there’s a rush to this market yet. Clearly, if the industry has another good year, more confidence builds, the cycle continues as it always will do, but there’s nothing that’s spooking us at the moment.

Natalie Kershaw

Hi, Ivan. It’s Natalie. On the 2024 guidance point, on the combined ratio going forward, we’re not going to split out the component parts of that. I can confirm that includes all the expenses that we incur as a business the same way that our combined ratio we’ve given out this year includes absolutely all our expenses. And I think maybe that’s where we’re a little bit different from some of the other carriers. But yes, included in that guidance is the full amount of expense loading.

Paul Gregory

Hi, Ivan, I’ll take the final question. Yes, as you’d have seen from the press, there are a number of legal proceedings that are ongoing with regard to potential issues with aviation. From our perspective, the message is really clear. Nothing that we’ve seen thus far has changed our view on anything and therefore our reserving has remained consistent.

Operator

And our next question is from the line of Anthony Yang from Goldman Sachs.

And our next question is from the line of Darius Satkauskas from KBW.

Darius Satkauskas

A few, please. So the first one is on the non-attributable expenses as a percentage of revenue. Can you just remind me, maybe I missed it, how come there was a jump year-on-year in that remarkable jump? That’s the first question.

Second question is, for someone with no legacy issues when it comes to U.S. Casualty entering casualty market, what are you seeing in the market that maybe we’re not getting comments on from people with exposures? And any comments on how bad is it or are there improving times would be helpful.

And the third question, how exactly did you determine the amount for the special? I mean, I’m just curious in your logic why the amount that you announced rather than something else?

Denise O’Donoghue

Thank you. Hi, Darius. I’ll take the first and the third question. On the non-attributable expenses, Jon, it’s really all down to the variable compensation. I think you can see that split out in the press release. And that’s really down to the performance of the group in the year compared to the performance last year.

And then on how we determine the special dividends, we just go through the same process that we always do. We look at the amount of capital that we think we need to support the growth in 2024 and then we work back from that as to the amount of capital we can return to our shareholders.

Alex Maloney

Darius, I think the casualty question, I’m going to try and answer it the way I think what you’re getting at. Look, for us, there’s been a lot of press recently about some of the bad casualty years and there’s been public companies adding some loss reserves for those years.

So I think it’s quite obvious those years are underfunded for some carriers and they’re clearly quite difficult and it was the classic combination of a very soft market and anything like social inflation, but it does also demonstrate, doesn’t it, how long the tail is on the casualty book. So, I kind of sit here. I still like our entry into casualty.

I think our timing was perfect, but it just totally reinforces the way that we’re reserving that book, because we’re trying to do everything we can to make sure that’s not happening to us. So when I sit here and I see these companies increasing their casualty reserves, for me that just completely backs up our strategy of how we’re approaching our casualty lines.

Operator

And our next question comes from the line of Will Hardcastle of UBS.

Will Hardcastle

Just going back to all 5% on the prudent comment on casualty, are you able to give us an idea of what this total share of group net insurance revenue is essentially for casualty across the book? That’d be really helpful. And presumably, over what time period would you think about unwinding some of this prudence would be helpful.

And then the second one, and I unfortunately cut out on Andrew’s question, it might be the same one. But thinking about the retention and the ceded premium, you’re down to 28% or so now. I hear what you’re saying will improve again on a percentage basis.

I guess, given the group structure these days, it’s a different mix than we’ve had in the past. I guess, how [Technical Difficulty]

Natalie Kershaw

New point. We don’t disclose revenue by segment, but we can look at the gross premium written by segment that we have out on the slide on the presentation. So that will give you some Adobe just think of that earning through. And then on the reserving credence, as I said, I think when we went into casualty in 2021, we said it would be at least 5 years before we consider releasing any of those reserves. So that’s the kind of timeframe you’re looking out there.

Paul Gregory

Hi, Will. On your second question with regards to how low could that reinsurance percentage go? I think as I said in my script, we anticipate that percentage coming down again in 2024. To be honest, predicting much beyond that becomes difficult, because it all comes down to what’s the shape of the in which portfolio, because each line of different each line of business has somewhat different reinsurance arrangements.

So for example, if we could really grow some parts of our insurance book that have quoted share protections, which is more appropriate to those lines of business that can obviously shift our percentages. If you go to casualty, which traditionally has less kind of CD reinsurance then obviously that has the opposite effect.

So I appreciate I’m not giving you the answer you’re asking for other than we directionally we will continue to move down, which I think is appropriate and that’s exactly what we’ve done. Looking beyond that, it will all come down to the shape of the invisible portfolio.

Operator

Thank you. And as we are slowly approaching the end of our Q&A, I would like to ask you to please register for any last questions you might have. And as there are no further questions, I’m handing back to our speakers for any closing comments.

Alex Maloney

Thank you for your questions today, and we’ll end the call.

Operator

This now concludes our presentation. Thank you all for attending. You may now disconnect your lines.