Lancashire Holdings Limited · LSE:LRE
Lancashire — Q3 2011 Earnings Presentation
27 slides from Lancashire's earnings presentation, November 2011
Slide 1: Investor Presentation Q3 2011
Investor Presentation November 2011 Q3 2011 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 CONTAININ THE WORDS BELIEVES', '
Slide 3: An established and successful market leader
an established and successful market leader Lancashire is a global provider of specialty insurance products operating in Bermuda and London. Lancashire focuses on short-tail, mostly direct, specialty insurance risks under four general categories: property, energy, marine and aviation. • Fully conver
Slide 4: Q3 2011 headlines
Q3 2011 headlines • Combined ratio of 43.5% (YTD 60.7%)1 • Reported loss ratio of 12.2% (YTD 29.3%); accident year loss ratio of 27.7% (YTD 57.5%) • Combined ratio since inception of 57.3%1 • New Zealand / Australia catastrophe loss of $21.3m net of RIP • Reserve of $76.1m (gross & net) for Japan qu
Slide 5: Our consistent and excellent track record
our consistent and excellent track record RoE * since inception 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 YTD 2011 ** combined ratio since inception 100% 80% 60% 40% 20% 0% 2006 2007 2008 2009 2010 YTD 2011 ** total investment return since inception 8% 6% 4% 2% 0% 2006 2007 2008 2009 2010 YTD 2011
Slide 6: Consistency: exceptional underwriting performance
consistency: exceptional underwriting performance 5 year 2006 2007 2008 2009 2010 ytd 2011 2 average 1 loss ratio 16.1% 23.9% 61.8% 16.6% 27.0% 30.9% 29.3% acquisition 14.3% 12.5% 16.4% 17.8% 17.3% 15.8% 18.5% cost ratio expense ratio 13.9% 9.9% 8.1% 10.2% 10.1% 10.0% 12.9% combined 44.3% 46.3% 86.3
Slide 7: Consistency: strong investment performance
consistency: strong investment performance 5 year cumulative ytd 2006 2007 2008 2009 2010 annualised 2011 4 return 3 total return 1 6.1% 6.2% 3.1% 3.9% 4.2% 4.7% 1.2% sector total 4.7% 5.7% (2.8%) 6.4% 3.9% 3.5% 1.4% return 2 Lancashire out- 1.4% 0.5% 5.9% (2.5%) 0.3% 1.2% (0.2)% performance 1 Total
Slide 8: Consistency: excellent return on equity
consistency: excellent return on equity1 Lancashire sector 2 S&P 500 2006 17.8% 27.4% 15.8% 2007 31.4% 23.3% 5.5% 2008 7.8% 2.9% (37.0%) 2009 26.5% 26.1% 26.5% 2010 23.3% 17.0% 15.1% ytd 2011 3 10.4% (5.9%) (8.69%) compound 4 19.8% 15.7% 2.28% 1 Return on Equity = growth in fully diluted/converted b
Slide 9: Performance in recent cat events
performance in recent cat events Q4 2010 to Q3 2011 loss events as a % of 2010 shareholders equity As of 8 November 2011. Source: Company reports and Aon Benfield 9
Slide 10: Strategy for long-term success
strategy for long-term success our goal To provide an attractive risk-adjusted return to shareholders over the long-term shareholder return cross-cycle return of financial targets risk free plus 13% Success in achieving our goals is measured against risk and return targets profitable 4 years out of
Slide 11: Underwriting comes first
underwriting comes first 64% insurance 36% reinsurance 40% nat-cat exposed 60% other GoM energy 4% property cat 18% offshore WW energy 22% energy 29% political risk 4% onshore WW energy 1% energy construction 2% aviation 6% terrorism 9% aviation AV52 6% marine hull property 54% 3% marine constructio
Slide 12: Underwriting comes first: technology and culture
underwriting comes first appropriate mix of technology and culture culture and techniques BLAST proprietary model • Daily underwriting call – • Remetrica platform management awareness • Collegiate approach – cross • Lancashire custom features class/many sets of eyes • RMS 11 implemented • Multiple p
Slide 13: Underwriting comes first: trading outlook, catastrophe
underwriting comes first trading outlook: catastrophe positive no broad market turn - yet Property Insurance RMS 11 positively impacting renewals for catastrophe driven accounts. Seeing a selection of international catastrophe exposed accounts with increased rates. Reinsurance International property
Slide 14: Underwriting comes first: trading outlook, energy
underwriting comes first trading outlook: energy modestly positive Energy Gulf of Stable market outlook. Drilling is picking up, although Mexico demand for Lancashire GOM wind product largely unaffected by drilling slowdown. Looking to lock in pricing with a limited number of selected longer term co
Slide 15: Underwriting comes first: what could drive change?
underwriting comes first What could drive change? Higher demand for cover Restricted supply of capital Capital shortfalls Reduced investment yields RMS11 US/Europe Poor results Loss history/PML calibrations Trading below book Reserve shortfalls Closed debt markets Fear Nervous investors Rating agenc
Slide 16: 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 251 (16%) 369 (24%) california earthquake 99 (6%) 189 (12%) pacific northwest earthquake 36 (2%) 123 (8%) pan-european windstorm 110 (7%) 16
Slide 17: Effectively balance risk and return: RMS and AIR models
effectively balance risk and return • Using the same exposure database, RMS and AIR give similar baseline results at the industry level • We note two major differences between these models: • Medium term rates: RMS assumes that more hurricanes are likely to develop in the short run than AIR, to acco
Slide 18: Lancashire response to RMS 11
effectively balance risk and return Lancashire response to RMS 11 • US wind • Dialogue with RMS and AIR began late 2008 for offshore risks and October 2010 for onshore • Identified potential highly impacted RMS 11 accounts in Q4 2010 and modelled them to identify key drivers of capital and least eff
Slide 19: Consistent positive reserve development
effectively balance risk and return consistent positive reserve development 1 110 100 90 2008 AY 80 2010 AY 2 70 2006 AY 2009 AY 60 2007 AY 50 at end of AY after 12 months after 24 months after 36 months after 48 months • Further favourable reserve development in 2011 of $118m, $36.9m in Q1 from an
Slide 20: Loss event estimate changes
effectively balance risk and return % increase / (decrease) of Q4 2010 & H1 2011 loss event estimates Benefit of UMCC, risk selection and strong relationships As of 8 November 2011. Source: Company reports 20
Slide 21: 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 products, 6% cash and agency short term AA structured securities, (50%) products, 20% 12% average duration other AA** government 1.7 years and municipal bonds, 9% A
Slide 22: Investments rule #1: market outlook and risk profile
effectively balance risk and return investments rule #1: ‘Don’t lose your money’ • Our market outlook remains negative: • Continued concerns about Europe and it’s potential contagion; • Continued elevated volatility; and • Continued weak economic data • Therefore, preservation of capital is paramoun
Slide 23: Accordian outlook excellent
operate nimbly through the cycle accordian outlook excellent • Rationale • Accumulation of catastrophe events • Exhaustion of programme limits • Implementation of RMS 11 US & Europe • Product offering • Worldwide product attaching around approximately $15b for international catastrophe & $35b for US
Slide 24: Change in tax residency
operate nimbly through the cycle change in tax residency • Why? • UK government aim to increase competitiveness of UK tax regime • Change in UK Controlled Foreign Corporation rules • Reduces operating risk, no impact on corporation tax liability for Bermuda operations • Increases management flexibil
Slide 25: Proven record of active capital management
operate nimbly through the cycle proven record of active capital management 2007 2008 2009 2010 ytd 2011 total $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 2 918.1 ordinary dividends - - 10.5 9.4 9.5 29.4 – interim 1 ordinary dividen
Slide 26: Strategy for long-term success
strategy for long-term success our goal To provide an attractive risk-adjusted return to shareholders over the long-term compound return since inception of 19.8% profitable five years financial targets out of five Success in achieving our goals is special dividend 4 out of last measured against risk
Slide 27: www.lancashiregroup.com
www.lancashiregroup.com (1) 441 278 8950 27