Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
Earnings Call Analysis
Q4-2023 Analysis
Lancashire Holdings Ltd
In a challenging market environment, Lancashire delivered exceptional results in 2023, achieving a return on equity of nearly 25%, one of the best in the company's history. This growth is credited to disciplined underwriting and a focused capital management strategy. Rates in the insurance segment hardened due to catastrophic losses exceeding $100 billion, and the reinsurance segment saw positive structural changes. Investment returns surged due to improvements in yields and overall capital efficiency. Looking ahead, Lancashire plans to tap into new business opportunities, such as the U.S. E&S venture in 2024, and is well-positioned with a capital surplus that has enabled the declaration of a $0.50 special dividend, alongside a 50% hike in ordinary dividends.
Paul, focusing on underwriting results, highlighted a strong combined ratio of 82.6% and a net insurance service result of $382 million, defying a tumultuous year with network catastrophe losses topping $100 billion. The growth trajectory has exceeded expectations due to a portfolio RPI of 115% and burgeoning demand across products. In the reinsurance segment, property reinsurance encountered a true hard market with high rates and demand, while casualty reinsurance remained prudent against historical deterioration. The outlook for 2024 is stable, with forecasted premium growth of approximately 10% over 2023 based on current market conditions.
Natalie Kershaw expressed satisfaction with the 2023 performance, underscoring a 24.7% increase in diluted book value per share. The company could announce substantial dividends due to a diversified capital base and the successful navigation of the IFRS 17 and IFRS 9 implementations. For 2024, a mid-80s combined ratio is expected and should contribute to a target ROE of around 20%. She explained that the company's excess capital allows for sustained business operations post-catastrophic events, reasserting a commitment to immediate recovery and market presence post-disaster. This strategic approach allows flexibility in capital returns based on upcoming opportunities.
Both Natalie Kershaw and Alexander Maloney assured investors of their active capital management and future-oriented dividend policy. Despite significant returns to shareholders, they reiterated the intent to harness capital for growing profitable business lines as and when opportunities arise. Maloney stated that newly announced dividends represent a reset aligning with the company's evolved business stature, and it showcases a commitment to leveraging capital optimally, focusing on underwriting and growth opportunities rather than fixed payout structures.
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Hello, and welcome to the Lancashire Full Year 2023 Earnings Call. [Operator Instructions] Please note this call is being recorded. Today, I'm pleased to present Alex Maloney, CEO. Please begin your meeting.
Good morning, everyone, and thank you for joining our call today. I'll just give you some brief highlights on the progress that we've made through the fourth quarter and some of the highlights we have made throughout 2023. Paul will then focus on our underwriting progress and Natalie will cover our financials, and then we'll go to Q&A. We have delivered strong profit for the year, strong capital returns for our investors and maintain strong capital flexibility to fund the investments in our business. Lancashire continues to grow in line with our long-term strategy to grow when the underwrite 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 5 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 segment 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 benefits in a year that produced another year of insured losses, which exceeded $100 billion. Our insurance lines have also benefited from the tightening terms and conditions driven by recent well 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 witness in the world today. Our investment portfolio has grown in hand to move our business. Our current portfolio is the largest we have managed at the 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 for our business. During 2023, we benefited from more yield from our underwriting portfolio and more yield on 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 would 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 the underwriting cycle is benefits in our business. We see lots of opportunities 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.
Thank you, Alex. As Alex has just explained, we're extremely pleased with the 2023 underwriting results. We have delivered a combined ratio of 82.6% and a net insurance services result of $382 million. This is in a year that network catastrophe losses of over $100 billion and continued global [indiscernibe]. We are incredibly proud of the underwriting statement all guiding the business that has forced us in delivering this result. We continue to deliver our strategic objectives 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 grades, broadly maintaining our net cash footprint whilst improving portfolio shakedown margin, continuing to build out our franchise and newer product lines, such as casualty construction and specialty reinsurance as well as profitably growing in areas of opportunities 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 is 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 6 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, property reinsurance market over a true hard market with reduced supply and increased demand. Rating was buoyant and as importantly, structural changes were made as the product reverted protecting balance sheet as opposed to just protecting earnings. The value of this structural change and the increased levels of attachment has been improved in this year with a large number of small to mid-sized catastrophe losses had a silent 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 presaved our entry. If anything, we continued pain of reserve deterioration and strengthened our ability to build a portfolio that will be accretive to bottom line over the longer term. As we've 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 us to drive our short-term profitability in order to build a business where the underlying profibility 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 waiting conditions in our more established product lines such as retro and aviation reinsurance. In these places, risk-adjusted rate change was as much due to policy structure terms and conditions as it was rate. 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 [indiscernible] had positive rate change in 2023. For most classes, this was the sixth year of upward rating trajectory with these parties 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 [indiscernible], rating remained 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, shores market could condition improve. Unfortunately, this did not happen and the market seemed a defilogic. But overall, we grow a more boxable utility 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 tacitative insurance and our property construction portfolio. Braking conditions were strong and ahead of our original expectations. Alongside this, demand was also supported, and we took advantage of these conditions to grow our footprint with property forming a core component of '23 premium growth and profitability. I'll now move on to '24 outlook. We started the year positively. It's fair to say the trading conditions at the 1 of January were far more stable than 12 months prior. And marked us, 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 restructure than we had last year. In terms of reinsurance spend, we anticipate spending marginally more dollars given the anticipated premium growth on the [indiscernible] as a percentage of inland 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 [indiscernible] approaches 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 in property insurance and specialty reinsurance, we still see very attractive opportunities to grow materially, and we, of course, have our U.S. office starting underwriting during the course of 2024. As ever, we'll 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 legit franchise. I'll now pass over to Natalie.
Thanks, Paul. I'm really happy with our overall performance in 2023 and 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 3 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 cut 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 fans is in good stead for NCT 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 results of $382.1 million. With a 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 to the special dividend and on to our Q3 results, taking the total capital return by a dividend in relation to 2023 to approximately $297 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 in 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 profit. 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 in midstream statement premium and invested 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 earn through of insurance revenue will vary dependent on business mix, which impacts the period over which premiums are earned as well as the comp-related commissions. The allocation of reinsurance premium is a similar concept for insurance revenue but out with reinsurance, i.e., it comprise of ceded earned premium, the file with renamed premium, net of commissions. 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 in 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 total 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 is reasonably active with estimates for global insured losses from natural disasters hitting $118 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 disclosure of urban confidence level to remain within the 88% to 90% of our band, unless there is a change in our reserve in risk appetite. We expect the decrease to centile to move around within this range from period to period, depending on the mix of reserves and our view or associated uncertainty. The reserve and confidence level at 31, December 2023, is 88%, which represents a net risk adjustment of $29.1 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 of $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 2020. 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 from 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 VIX 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 total impact of discount nearing the year was net income at $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 by 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 a high initial discount impact and relatively no 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 COVID-19 and 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 generated 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 early losses on the portfolio. In addition, the risk assets, mostly 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 your curve, we remain cautious, but we'll 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 finance 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 solvency ratio just over 320%, which will produce approximately 280% following a 1 in 100 year Gulf of Mexico Windeven. Following our recently announced capital actions, we remain confidently capitalized for the opportunities that we see in 2024 with a DSCR 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 to both regulatory and rating agency requirements. Away from the reported numbers, the new believe or corporate income tax rules come into effect from 1 of January 2025 and a significant number of the new device companies have recently bought material deferred tax assets in their financial statements. Given our limited geographical presence, we allowed the scope for the initial until 1 of January 2013. This has enabled us a longer period to consider the merits of entering into the economic transition adjustment under the new rules in some of our periods. If we decide to enter into the EPA, 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 in the business, along with better pricing and improved terms and conditions and higher investment leverage means that we can afford a higher dollar amount 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 complexity of IFRS 17 to navigate. For 2024, we expect that in an average last year, our undiscounted combined ratio will be around the mid-80s. At this level, we would expect the group's ORE defined as an increase in diluted book value per share to be around 20%. Importantly, we don't anticipate any material changes to consensus post-tax earnings on the back of this guidance. With that, I'll now hand back to Alex to conclude.
Okay. Thank you, Natalie. So just to summarize, we see continued opportunities to grow our business. It's important that we stand a part that we are and maintain our underwriting discipline but can consistently look for opportunity. Our capital position, again, is very strong as we start '24, what gives us a lot 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 5 years and we now got 2 questions, please.
[Operator Instructions]. And our first question comes from the line of James Pearse from Jefferies.
Congratulations on the results today. So first one was 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 380% after the special dividend. I think in the past, you might have said that you're happy to operate at a 280% ratio. In a normal year, would you aim to operate at a level such that you could absorb a 1 in 100 year loss or 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?
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 and events. I'm not going to define the event, but we definitely want to be on the ground winning the next day following an event. So yes, you're right on that.
I'll take the second question on social inflation. I think that the important thing for us is nothing that we've seen thus far in obviously, anything that's public or data that we received as reinsurer given us any cause of concern in terms of the assumptions that we've been making. And I think the really important point to make is just remembering when we ended the class, which is kind of Q1, Q2 2021 when a lot pain has already emerged and the people who live 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 time to come that went into some of our initial assumptions in terms of loss cost, et cetera. So that 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 sent far give us any cause of concern in the underlying assumptions we have.
[Operator Instructions] And our next question comes from the line of Kamran Hossain from JPMorgan.
Two questions from me. The first one is on just the change that you've kind of flagged on the ordinary dividend, 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've given us guidance for the group, which is fantastic, it's even more diversified less cat and a little bit more predictability. But at the same time, for this year, the payout is kind of 80% is a special and 20-ish-percent 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, 2023 has obviously been a really good produce excellent numbers, but you're also flagging 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 pullout because it feels like you've got pent impact or you've got lots of lot. You can probably grow relatively capital light. We should we expect to similarly out if you hit the numbers that you're assuming for this year?
I'll handle the second part of your question, and I don't know if Alex might jump in as well. As we've just said, we think about capital all the time and the level of payout well not payout will always depend on the opportunities that we see in front of us. And at this moment in time, you don't really know what the opportunities are going to be this time next year. So it's really dependent on that.
Yes, Kam, I'll answer. I think the specialties are 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 a business to underwrite, that's what we will do if we think it's better going back to shareholders, that's what we will do. I think the ordinary [indiscernible] is different we are. We are eager business. We are a more diversified business, and it was just a rebase of 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.
tor Instructions] And our next question comes from the line of Anthony Yang from Goldman Sachs. And as we're not getting a response, we're moving on to our next question. Our next question comes from the line of Nick Johnson from Numis.
That's fantastic. I've got 3 questions, please. Firstly, quite surprised that growth in Q4 in the Insurance segment was negative 2%. I would have thought there have been some growth in the quarter. I know you mentioned that airline Hal 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 next on that one. Secondly, on the combined ratio, you mentioned the 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 of the 5% relates to sort of intrinsic margin difference in the casualty line versus the rest of the portfolio? And then lastly, just quickly, just wondered how much private credit there is new 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?
Nick, I'll take the first point on Q4 growth in the insurance. To be honest, it's primarily down to 1 large contracts we had in our specialty insurance sector that was always going to be restructured, which we obviously hear 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 or above that. So there's nothing underline of concern at all, the market played out as we expected in terms of rate environment sort of demand, as we expected, and we renewed business we expected to renew and we've got new business as we expected to. So there's nothing fundamentally underlining [indiscernible] any concern for us at all.
Nick, I'll take question 2. 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 reversing. And I'll pass over to the new Chief Investment officer for question 3.
Sure. The private credit is about 6% of the portfolio, so $165 million, and that is true private in a few different funds. But there's no private credit within the corporate bank loans. So it's pure private is the 15%.
Got it. And are you relying on the funds to mark those product credits themselves? Or would you sort of scrutinize how they're marketing them?
We scrutinize how they're marketing 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 that a late about private credit are not getting mark to market, but we do scrutinize them a lot and go through their modeling.
And our next questi on comes from the line of Andreas from Peell Hunt.
I just had a question around rate adequacy. Obviously, a lot of your capital paid out in your property cat book, and then you kept your risk appetite flat in 2023, and we've seen a sharp rate increases come through. And as most of the profitability of your reinsurance brokers is in 2023 property cat book. Now looking forward with your guidance of a 20% return, I just want to tell the rate adequacy that prompt the cut book, but how much would profit cut rates need to decline for your ROEs to get back to your cost of capital? Is that very significant?
Yes, look, as I mentioned in my script, it was certainly a proper heart market for property cut in '23, and we're at a level now where rates in and structure, which is obviously as important are in a really good spot. I think what we saw at 1/1 was the market discipline was been maintained. It was a very -- it was more stable. But for property cat, you were actually still saying same marginal rate improvement. And I think that's primarily because of 23% is a good year. We have seen good margin overall, but also on that portfolio, but let's not forget that kind of prior years have been reasonably monthly. So market discipline as far as we instilled there is more supply or more willingness to deploy from existing carriers, which is why we're talking about a more stable market. We kept our footprint the same because we had a large footprint to start with. Let's not forget that, but also 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 opinion that rate adequacy needs to remain, which is why you're seeing the underwriting discipline that you're seeing.
How much headroom do you have an updated adequacy to say to continue to generate 20% returns even aligned for rate declines, let say, later this year or potentially in 2025. How sensitive are you nowadays giving you diversification to the rate cycle and [i ndiscernible]?
Andreas, thank you. It's 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 ecstatically, all of our lines of business were very profitable last year. That's what's delivered a 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 team worked on for the past 5 years and the quality of the portfolio.
I think as well Andres, if you just look at our business lines, there's no loss of 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.
And our next question comes from the line of Andrew Ritchie from Autonomous.
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 sort of drag, if you like, from prudence on casualty should be thought of as similar in '24? I think you would then suggest maybe it's beyond '24 where there might be a bit less of a drag from casualty as presumably some of the prudence unwinds. In addition on that guidance of '24, I just want to understand fully what you say when you say average loss year, I'm assuming you're thinking average man-made and NatCat. 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 I have to think about the robustness of the world 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?
Andrew, it's Natalie. I'll start with the first question. So you're right on the '24 guidance, the drag from casualty, you would be expecting to see a similar range to this year. I think we said one went into casualty in 2021, it will be at least 5 years before we started releasing those in. 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 last year, we've done quite a lot of modeling forward and backwards. We are talking about cat and large losses. But 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.
On the second question, Andrew, Yes, what I meant by more efficient high level, the 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 buy because you don't know how much you're actually going to buy or how much interim 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 you just don't need to buy going forward. So that's what I mean by more efficient. In terms of overall shape retention level, et cetera, will be similar where the bits around the side, there were less we needed to buy because we get far more certainty on execution.
So the cost goes down to some of the levels of cover that effect? or consumer levels for peak recovery you are most likely to need.
Yes, it's just right, yes.
And our next question comes from the line of Ken Anders from Frank Keywood & Associates.
Frank and I would like to congratulate you all on these outstanding results that you reported today and also just thank each of you for your leadership, and we continue to look forward to the future.
Thank you very much, Ken, and please pass my thanks to Frank well.
I certainly will.
Our next question comes from the line of Ivan Bokhmat from Barclays.
I have a few questions. 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 really, 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 that you showed in 2023, i.e., is that commensurate to a 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?
Okay. 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 been start-ups 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. But 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 as that world is always cyclical. But I just think there's -- you see 1 or 2 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 growth attachment points. And I think Paul said in these comments, people are just more willing to deploy. But I just -- that's just good underwriting, right? 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, 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.
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, that I can confirm that includes all the expenses that we incur as a business the same way that our combined ratios we've given out this year includes absolutely all our expenses. And I think maybe that's where a little bit different from the other carriers. But yes, included in that guidance is the full amount of expense loading.
I'll take the final question. Yes, as you have seen on the press, there are a number of legal proceedings that are ongoing with regard to potential issues of aviation. But from our perspective, the message is really clear, nothing that we've seen thus far has changed our view on anything. And therefore, our reserve has remained consistent.
And our next question is from the line of Anthony Yang from Goldman Sachs. And as we're not getting a response, we're moving on to our next question. And our next question is from the line of Darius Satkauskas from KBW.
A few, please. So the first one is on the nonattributable 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?
Darius, I'll take the first and the third question. On the nonattributable expenses, John, it's really all down for 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 is the amount of capital we can return to our shareholders.
Darius, I think the cash 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. I guess 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 a classic combination of a very soft market and [indiscernible]social inflation, but it does also demonstrate doesn't and how long the tail is on the casualty book. So I kind of sit here. I still like our interim to 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 coterie reserves, for me, that just completely backs up our strategy of how we're approaching our casualty lines.
And our next question comes from the line of William Hardcastle from UBS.
[Indiscernible]. Just for impact to all 5% on the proven comment on casualty. Are you able to give us an idea of what this total share of group net interim revenue is essentially for casualty across the book. That would 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, a different mix than we've had in the past. I guess how low can that get long term in the perfect cycle environment.
On the casualty revenue point, we don't disclose revenue by segment, but we can look at the growth premium is and by segment that we have out on the slides on the presentation. So that will give you some idea to think about earnings to. And then on the reserving prudence, as I said, I think when we went into casualty in 2021, we said it will be at least 5 years before we considered releasing any of those reserves. So that's the kind of time frame you're looking at there.
On your second question with regards to how long could that be insurance percentage go, I think as I said in my script that we anticipate that percentage is 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 Inland portfolio because each line is different -- each line of business has somewhat different reinsurance arrangements. So for example, there really -- if we could really grow some parts of our insurance, but they have quota share protection, which is more appropriate for those lines of business that can obviously shift our percentages, if you go casualty, which traditionally has less kind of seeding 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 MS portfolio.
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.
Thank you for your questions today, and we're in the call net.
This now concludes our presentation. Thank you all for attending. You may now disconnect your lines.