Lancashire Holdings Limited · LSE:LRE
Lancashire — Q4 2015 Earnings Presentation
37 slides from Lancashire's earnings presentation, March 2016
Slide 1: Underwriting comes first: Investor Presentation March 2016
Underwriting comes first Effectively balance risk and return Operate nimbly through the cycle Investor Presentation March 2016 Q4 2015 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: Lancashire Group: Sticking to the Strategy, Managing the Cycle
Lancashire Group Sticking to the Strategy, Managing the Cycle • “Lancashire's strategy since day one has always been to write the most exposure in a hard market and the least in a soft one. There are now abundant reinsurance and retrocession opportunities that allow us to maintain our core insurance
Slide 4: Overview of Lancashire: our 10 year history
overview of Lancashire: our 10 year history 2005 2010 • LHL Incorporated • S&P assign A- rating, ERM rating • AM Best assigns A- rating adequate with strong risk controls • IPO & listing on AIM • Moody’s assign A3 rating 2005 2006 2007 2008 2009 2010 Combined ratio n/a 44.3% 46.3% 86.3% 44.6% 54.4%
Slide 5: Overview of Lancashire: our 10 year history
overview of Lancashire: our 10 year history 2011 2013 2015 • Accordion sidecar launched • Purchase of Cathedral Capital • Syndicate 3010 capacity • AM Best upgrade to A rating Limited expanded to £100 million • Significant peer(1) outperformance • Launch of Kinesis Capital • New aviation team hired
Slide 6: Price / tangible book value
Changes from last year – what’s new? – M&A activity continued Reported price vs tangible book value multiple of recent acquisitions 2.5 2.0 price / tangible book value 1.5 1.0 0.5 0.0 Lloyd's platform Other • Lancashire paid a reasonable price for a high quality business Sources: Ernst and Young Spe
Slide 7: Lancashire Group
Lancashire Group Three platforms give Lancashire more clout in the market place. More broker relationships, more cross selling and referral opportunities and more reinsurance purchasing power Lancashire • CEO/CFO built Lancashire from start up to established, respected leader with strong team produc
Slide 8: Cathedral
Cathedral • Founding partner Richard Williams will be appointed as Active Underwriter (subject to regulatory approval) in 2016 • Alex Maloney appointed as CEO of Cathedral Capital Limited • Top tier Lloyd’s Combined Ratio • Syndicate 3010 now has 4 new lines to complement original Cargo book – Stamp
Slide 9: Our long-term performance is one of the most consistent in our peer group
Our long-term performance is one of the most consistent in our peer group (1) RoE ranking in peer group (1) 5 year compound annual RoE (3) 20% Company(2) 2011 2012 2013 2014 2015 5 yr avg Beazley 2 1 1 1 1 1 Lancashire(3) 1 3 4 4 4 2 15% Hiscox 4 7 2 2 2 3 Everest 7 2 5 3 7 4 Ren Re 11 4 3 6 5 5 10%
Slide 10: FTSE 350 Index Top Dividend Yields
FTSE 350 Index Top Dividend Yields(1)(2) 9% 8% 7% 6% (1) FY2017 Dividend Yields as of 3rd March 2016 (2) Source: CapitalIQ 10
Slide 11: Valuation Recap – Lancashire vs. Peers
Valuation Recap – Lancashire vs. Peers Lancashire Undervalued Relative to Lloyds Peers Price/Tangible Book Value Evolution MRQ(3) Price/Tangible Book Value MRQ(3) 2010-2016 x RoTE 13.8% 13.0% 9.7% 7.4% 8.0% 7.7% 2017E 2.5 13.2% 11.1% 8.1% 10.2% 9.9% 10.1% x 2.0 1.9x 3 2.0 1.9 1.5 1.5x 2 1.5 1.5 1.5
Slide 12: Underwriting comes first
% = Underwriting SAN comes first
Slide 13: Underwriting comes first
Underwriting comes first 63% insurance 37% reinsurance 37% nat-cat exposed 63% other property 30% property cat 17% terrorism property other 6% 1% political risk 4% retrocession property reinsurance 2% 13% energy other 3% Lloyd’s 38% offshore WW energy property D&F 14% 10% energy 19% marine cargo GoM
Slide 14: Underwriting comes first: Cathedral
Underwriting comes first: Cathedral 59% insurance 41% reinsurance 49% nat-cat exposed 51% other property D&F 26% marine cargo 12% aviation and satellite 13% property reinsurance 36% energy contingency 8% terrorism 2% 3% Based on Lancashire Group share of 2016 forecast of gross premiums written as of
Slide 15: Our underwriting performance has been exceptional
Our underwriting performance has been exceptional Combined ratio (1) 120% Ike, Gustav 100% Japan EQ, NZ II, US Tornadoes, Thai Floods, 80% Gryphon FPSO Chile EQ, Costa Concordia, Deepwater Sandy Horizon 60% 40% 20% 0% (1) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10 year (2) average Lancashi
Slide 16: Managing the Cycle – strong weighting to low-attrition classes
Managing the Cycle – strong weighting to low-attrition classes Accident year attritional loss ratios – 5 year average 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% • Carefully balance classes with known attritional exposure (energy, marine, lower layer cat xl) with low attrition exposures (te
Slide 17: General market update
General market update Class 2016 Rating Expectation Market Dynamics Property • Clients using savings to buy more limit – Japan & certain U.S. clients Reinsurance & Rates off 5% – 10% • M&A reducing limit purchased for some carriers but also providing new Retrocession opportunities • Oil price impact
Slide 18: General market update: 2015 upstream energy market
General market update: 2015 upstream energy market Upstream Energy Market Estimated premium $1.75bn to $2.25bn Estimated losses $3.25bn to $3.75bn Upstream energy market 2015 loss ratio 144% to 214% Group estimated market share (based on premium written) Gross 6.7% to 8.6% / Net 5.0% to 6.4% Group 2
Slide 19: General market update: Tianjin
General market update: Tianjin Reported Tianjin loss by company (1) 300 275 250 225 200 175 $m 150 125 100 75 50 25 0 • One of the most costly man-made insured losses ever. Lancashire once again performed well with no surprise exposure; conservatively reserved • Lancashire avoided accumulation of ri
Slide 20: Kinesis Capital Management Indicative Results
Kinesis Capital Management Indicative Results Mean loss scenarios (10% EL) No loss scenarios Limit of Limit of Limit of Limit of Limit of Limit of $300m (1) $500m (1) $1B (1) $300m (1) $500m (1) $1B (1) Lancashire investment (2) 24.2 40.4 80.8 24.2 40.4 80.8 RoL (net) 21.0% 21.0% 21.0% 21.0% 21.0% 2
Slide 21: Third party capital: Fee income
Third party capital: Fee income 35 30 25 20 ($m) 15 10 5 0 2011 2012 2013 2014 2015 Associate underwriting fees Profit commissions from associates Equity pick-up on investment in associates Lloyd's profit commission Lloyd's fees Accordion overrider • Kinesis profit commissions of $1.8 million earned
Slide 22: Effectively balance risk and return
Effectively balance risk and return 22
Slide 23: Managing the Cycle – reducing net exposures
Managing the Cycle – reducing net exposures • Since April 2012, which was the high-tide mark of the pricing cycle, the Group has reduced PMLs across all key exposures, in spite of the addition of Cathedral • 400 PMLs are not perfect predictors of losses but they do provide consistent measures of cat
Slide 24: Exposure management – Increasing RI purchases
Exposure management – Increasing RI purchases Lancashire first loss XL limit 2012 vs 2016 Outwards RI 1st loss limit 2016 Outwards RI 1st loss limit 2012 Energy ex Energy ex Energy Energy Marine Marine Marine Marine Terrorism Terrorism US ANP Core Prop Japan Core Prop Political Political GOM GOM GOM
Slide 25: Exposure management – Increasing RI purchases (Cathedral)
Exposure management – Increasing RI purchases Cathedral first loss XL limit Outwards RI 1st loss limit 2016 Outwards RI 1st loss limit 2015 Outwards RI 1st loss limit 2014 WW Treaty Cat WW Treaty Cat Energy GOM Energy GOM Marine Cargo Marine Cargo Aviation Direct Aviation Direct Aviation War Aviatio
Slide 26: Reserve adequacy: prior year reserve releases
Reserve adequacy Consistent favourable reserve development (1) $160 $140 $120 prior year reserve releases ($m) $100 $80 $60 $40 $20 $0 ($20) ($40) 2008 2009 2010 2011 2012 2013 2014 2015 property energy marine aviation Lloyd's 2011 reserve study (1) Excludes the impact of foreign exchange revaluatio
Slide 27: Effectively balance risk and return – investment philosophy
Effectively balance risk and return – investment philosophy • Our market outlook remains subdued • The U.S. economy continues to grow at modest levels • Revisions to global growth expectations in early 2016 have caused notable credit spread widening and market volatility • Central bank policies, geo
Slide 28: Capital preservation and interest rate risk management
Effectively balance risk and return Capital preservation and interest rate risk management asset allocation credit quality non agency cash and structured short term products, 9% securities, agency AA (46%) 11% structured products, 7% other government bonds, 4% hedge funds, 8% duration U.S. other, 1.
Slide 29: Risk asset levels still below peer group average
Risk asset levels still below peer group(1) average Risk Asset Allocation (2)(3) As at 31 December 2015 30% 25% 20% 15% 10% 5% 0% (1) Peer group as defined by the Board. Source: Company reports. (2) Risk Assets include: equities, hedge funds, private equities and corporate debt below investment grad
Slide 30: Operate nimbly through the cycle
Underwriting Operate nimbly comes first through the cycle 30
Slide 31: Operate nimbly through the cycle
Operate nimbly through the cycle proven record of active capital management 500 300% 450 18.0% 250% 400 17.8% 350 15.2% (2) 12.3% 17.3% 200% 300 18.1% ($m) 250 150% 8.3% 200 8.4% 100% 150 100 N/A 50% 50 0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1) (1) Share repurchases Special dividends Ord
Slide 32: Managing the cycle - dividend yield
Managing the cycle - dividend yield (1) Dividend yield versus peer group 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% (3) 2011 2012 2013 2014 2015 5 year average (2) Lancashire ordinary dividend Lancashire special dividend sector average 2015 Capital Returned As % Of Operating Earnings 199% 172% 161% 157%
Slide 33: Consistency: Total value creation (TVC)
Consistency: Total value creation (TVC) Five year standard deviation(1) in TVC 20% 18% Beazley 16% 14% Lancashire Five year RoE 12% Everest Ren Re Hiscox 10% Novae Validus Axis 8% Endurance 6% Hanover Aspen Argo 4% 2% 0% 2.5% 5.0% 7.5% 10.0% Five year standard deviation of RoE • Lancashire has one o
Slide 34: Sticking to our game plan
Sticking to our game plan 34
Slide 35: Conclusion
Conclusion • Lancashire has one of the best performances and yet the lowest volatility in the London and Bermudian markets • Our strategy is designed to cope with hard and soft markets, managing capital and exposures to provide superior risk-adjusted returns across the cycle • Group management is fu
Slide 36: Lancashire versus the FTSE 250
Lancashire versus the FTSE 250 Total shareholder return(1) Return on equity(2) 450 30% 400 350 +221% 25% 300 +213% 20% 250 200 15% 150 100 10% 50 0 5% Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 0% FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
Slide 37: Total shareholder return
our goal: to provide an attractive risk-adjusted total return to shareholders over the long-term Lancashire total shareholder return vs. major index returns 550% 500% 450% 400% 350% total shareholder return 300% 250% 200% 150% 100% 50% 0% (50%) (100%) S&P 500 FTSE 250 FTSE 350 Insurance S&P Financia