Lancashire Holdings Limited · LSE:LRE
Lancashire — Q2 2012 Earnings Presentation
27 slides from Lancashire's earnings presentation, August 2012
Slide 1: Investor Presentation Q2 2012
Investor Presentation August 2012 Q2 2012 www.lancashiregroup.com
Slide 2: Safe harbour statements
safe harbour statements CERTAIN STATEMENTS AND INDICATIVE PROJECTIONS (WHICH MAY INCLUDE MODELED LOSS SCENARIOS) MADE IN THIS RELEASE OR OTHERWISE THAT ARE NOT BASED ON CURRENT OR HISTORICAL FACTS ARE FORWARD-LOOKING IN NATURE INCLUDING WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS 'BELIEVES',
Slide 3: An established and successful market leader
an established and successful market leader Lancashire is a provider of global specialty insurance and reinsurance products operating in Bermuda and London. Lancashire focuses on short- tail, mostly direct, specialty insurance risks under four general categories: property, energy, marine and aviatio
Slide 4: Key messages
key messages • Now over 6 years of consistent performance • We have remained true to our business plan, while adapting to market changes • London and Bermuda remain our underwriting centres • Demonstrated excellent risk management through significant number of worldwide catastrophe and risk losses •
Slide 5: Growth in fully converted book value per share plus dividends
our goal: to provide an attractive risk-adjusted total return to shareholders over the long-term 215% 205% 195% growth in fully converted book value per share plus 185% 175% 165% 155% 145% 135% 125% 115% dividends 105% 95% 85% 75% 65% 55% 45% 35% 25% 15% 5% -5% 5
Slide 6: Consistency: total value creation (TVC)
consistency: total value creation (TVC) five year standard deviation(1) in TVC 25% Hiscox Amlin 20% Lancashire Beazley 15% Endurance Aspen Ren Re Validus five year RoE (2) Axis 10% Montpelier Catlin 5% (0%) Flagstone (5%) 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% standard deviation of RoE
Slide 7: Consistency: long-term performance vs peers
consistency: long-term performance vs peers (1) 5 year compound annual RoE (2) 25% 20% 15% 10% 5% 0% (5%) (1) Peer group as defined by the Board. (2) Compound annual returns for Lancashire and sector are from 1 January 2007 through 31 December 2011. Source: Company reports. 7
Slide 8: Consistency: exceptional underwriting performance
consistency: exceptional underwriting performance 5 year 2007 2008 2009 2010 2011 H1 2012 average (1) loss ratio 23.9% 61.8% 16.6% 27.0% 31.7% 32.3% 31.7% acquisition 12.5% 16.4% 17.8% 17.3% 19.6% 16.7% 21.3% cost ratio expense ratio 9.9% 8.1% 10.2% 10.1% 12.4% 10.1% 14.2% combined 46.3% 86.3% 44.6%
Slide 9: Consistency: exceptional underwriting performance (combined ratio)
consistency: exceptional underwriting performance combined ratio (1) 120% 100% 80% 60% 40% 20% 0% 2007 2008 2009 2010 2011 5 year average H1 2012 Lancashire Sector average (2) (1) 5 year average based on 2007 to 2011 reporting periods. Lancashire ratios weighted by annual net premiums earned. Annual
Slide 10: Consistency: dividend yield
consistency: dividend yield (1) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2010 2011 5 year average Lancashire Sector average (1) Dividend yield is calculated as the total calendar year cash dividends divided by the year end share price. Dividends include recurring dividends, special divi
Slide 11: Underwriting comes first
underwriting comes first 66% insurance 34% reinsurance 41% nat-cat exposed 59% other GoM energy 10% energy 35% offshore WW energy property cat 22% 14% political risk onshore WW energy 5% 1% energy construction 2% terrorism 9% aviation AV52 6% aviation 6% property 49% marine hull D&F (1) 4% 3% marine
Slide 12: Underwriting comes first
underwriting comes first appropriate mix of technology and culture Micro - UMCC Macro - URRC • Daily underwriting call – • Simple platform structure enables management awareness frequent comprehensive analysis of • Collegiate approach – cross risk and reward drivers class/many sets of eyes • Remetri
Slide 13: Underwriting comes first: direct and facultative
underwriting comes first: direct and facultative why exit? • Unmodeled losses such as SRCC(1), tsunami, hail, brush fire not being priced for elevated risk • Weak data on tornado and flood models • RMS 11 – impact of capital increase not being priced in • Reinsurance costs significantly increased du
Slide 14: Underwriting comes first: property reinsurance and retro
underwriting comes first: property reinsurance and retro core non-core / opportunistic • Major market placements with limited exposure to non • Worldwide, lower layer and any aggregate programmes modeled perils • Retro (post-loss product for Lancashire) • U.S. - Regional • Distressed markets e.g. As
Slide 15: Underwriting comes first: energy
underwriting comes first: energy core non-core / opportunistic Offshore operating risks Onshore operating risks • Focus on internationally recognised operators and • Will entertain in a cyclical broad market hardening contractors Offshore construction risks • Deepwater Gulf of Mexico wind product •
Slide 16: Underwriting comes first: property terrorism and political risk
underwriting comes first: property terrorism and political risk core non-core / opportunistic Terrorism Terrorism • Construction risks • Heavy retail accounts with exposures across the U.S. • Closed access risks e.g. restricted public access • Open access risks e.g. unrestricted public access Politi
Slide 17: Underwriting comes first: marine and aviation
underwriting comes first: marine and aviation core non-core / opportunistic Marine Hull Marine Hull • Larger, higher quality marine hull fleets which offer • Bulker fleets, container fleets, ferries, general old/low newer tonnage, which historically performs significantly valued vessels better than
Slide 18: Underwriting comes first: market position, brand and distribution
underwriting comes first: market position, brand and distribution Opportunistic Class Renewing business (1) New business (2) Core business (3) business (4) Property 73% 27% 69% 31% Energy 67% 33% 88% 12% Marine 81% 19% 87% 13% Aviation 97% 3% 100% 0% Overall 73% 27% 80% 20% • “Brokers are our client
Slide 19: Underwriting comes first: lessons learned
underwriting comes first: lessons learned What did we do; what did we learn? Australia, • Confirmed our view that we stick to the “single peril” higher layers to avoid flood, brushfire and hail New Zealand and losses; these perils are not adequately understood, modeled or rated Chile • Confirmed our
Slide 20: Effectively balance risk and return
effectively balance risk and return 100 year return 250 year return period $m period $m zones perils (% of capital) (1) (% of capital) (1) gulf of mexico hurricane 326 (21%) 464 (30%) california earthquake 114 (7%) 267 (17%) pacific northwest earthquake 43 (3%) 198 (13%) pan-european windstorm 190 (
Slide 21: Usefulness of model in underwriting
effectively balance risk and return model credibility usefulness of model in underwriting US Wind Europe Wind US Quake Japan Quake ROW Quake Natural catastrophe models are relied on more where: • Frequency of loss helps to validate them • Data quality is higher 6 years on: • Don’t diversify for dive
Slide 22: Reserve adequacy: prior year reserve releases
reserve adequacy prior year reserve releases $m consistent favourable reserve development $150 $130 $110 $90 $70 $50 $30 $10 ($10) 2007 2008 2009 2010 2011 H1 2012 aviation marine energy property • Reserving record has demonstrated conservative reserving • 2006 accident year developed favourably by
Slide 23: Investments rule #1: Don't lose your money
effectively balance risk and return investments rule #1: ‘Don’t lose your money’ asset allocation credit quality non agency structured cash and AA products, 5% short term 55% securities, agency 17% structured products, other 20% government and municipal bonds, 9% average duration AA- 1.7 years A 18%
Slide 24: Effectively balance risk and return: investment outlook
effectively balance risk and return • Our market outlook remains subdued: • Continued concerns about Europe and it’s potential contagion • Continued elevated global volatility • Therefore, preservation of capital is paramount and we will keep a very low risk profile: • Maintain reduced investment po
Slide 25: Operate nimbly through the cycle
operate nimbly through the cycle proven record of active capital management 2007 2008 2009 2010 2011 2012 total $m $m $m $m $m $m $m share repurchases 100.2 58.0 16.9 136.4 - - 311.5 special dividends (1) 239.1 - 263.0 264.0 152.0 - 918.1 ordinary dividends - - 10.5 9.4 9.5 9.6 (3) 39.0 – interim (1
Slide 26: Conclusion
conclusion • Lancashire has one of the best performances and yet the lowest volatility in the London and Bermuda markets • We have remained true to our business plan, while adapting to market changes • We have exhibited the best underwriting discipline in our peer group • Our financial strength and
Slide 27: www.lancashiregroup.com
www.lancashiregroup.com Bermuda - (1) 441 278 8950 London - 44 (0)20 7264 4000 jcc@lancashiregroup.com charles.mathias@lancashiregroup.com 27