Lancashire Holdings Limited · LSE:LRE
Lancashire — Investor Day (March 2011)
33 slides from Lancashire's investor day presentation, March 2011
Slide 1: Five years of Lancashire
Five years of Lancashire Four business segments Three strategic priorities Two underwriting centres One goal Investor Day Presentation lancashire HOLDINGS LIMITED Match 2011 www.lancashiregroup.com
Slide 2: 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 Financial targets cross-cycle return of risk free plus 13% Success in achieving our goals is measured against risk and return targets profitable 4 years out of
Slide 3: Consolidated combined ratios 2006-2010
Consolidated combined ratios 2006-2010 Property Energy 32.6% 66.0% Consolidated 56.7% Marine Aviation 72.0% 19.3% Class combined ratios do not include an allocation of G&A expenses. The portfolio 3 consolidated combined ratio does.
Slide 4: Consistency
Consistency ROE* since inception 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 Combined ratio since inception 100% 80% 60% 40% 20% 0% 2006 2007 2008 2009 2010 Annual total investment return since inception 8% 6% 4% 2% 0% 2006 2007 2008 2009 2010 * ROE is defined as growth in fully converted book value
Slide 5: Overview of Lancashire portfolio
Overview of Lancashire portfolio 5
Slide 6: Offshore energy
Offshore energy Property Damage, LOPI1 & LOH2 Control of Well Operators - 10% to 15% swing post DH3 10% to 50% swing post DH dependent upon Contractors - 10% to 20% swing since DH exposure Rate increases now at the lower end of the Increased limits & new excess limits purchased swing range Excess la
Slide 7: Offshore energy
Offshore energy Market Driver Impact Treaty Reinsurance 1) Increased pricing at 1/1, +20% to 40% renewals 2) Should flow to direct portfolio BUT need for income and lack of discipline fuels competition Conclusion: Still a positive swing post DH but rate rises less than expected Lack of drilling in t
Slide 8: Offshore energy
Offshore energy Market Driver Impact Oil company focus on 1) Demand for increased limits - particularly Control of Well insurance 2) Liability coverage becomes a priority Conclusion: Overall more opportunities for Lancashire Offshore energy market 1) Only one market exited - still a surplus of capac
Slide 9: Political & sovereign risk
Political & sovereign risk Political risk cover Sovereign risk cover Confiscation Non-payment or contract frustration on loans, Expropriation guarantees and contracts with Nationalisation sovereign /quasi sovereign obligors Deprivation Currency convertibility/ Non transfer UMCC Customers What we don
Slide 10: Property D&F, terrorism, marine and aviation
Property D&F, terrorism, marine and aviation Property D&F1 Prefer light to heavy industry Terrorism 97% of portfolio excess layers We prefer closed access risks2 versus open access risks3 2009 to 2010 book reduced by 25% Outlook: RPI off 10%, market competitive, new Outlook: RPI off 10%, domestic ma
Slide 11: Reinsurance cycle management
Reinsurance cycle management Hard market Lancashire Competition Portfolio Marginal pricing Portfolio optimisation optimisation Marginal pricing Retain capital Hard market retro Status quo Write diversified portfolio Cocoon mentality Nimble 11
Slide 12: Reinsurance cycle management
Reinsurance cycle management Soft market Lancashire Competition Portfolio Marginal pricing optimisation Portfolio optimisation Marginal pricing Manage capital Nationwide long term deals Post loss retro/marine retro Worldwide retro Property cat hot/cold spots Aggregate deals Back ups/live cat Heavy r
Slide 13: Market position, brand & distribution
Market position, brand & distribution Opportunistic Class Renewing business1 New business2 Core business3 business4 Property 64% 36% 72% 28% Energy 65% 35% 82% 18% Marine 83% 17% 96% 4% Aviation 96% 4% 100% 0% Overall 69% 31% 80% 20% “Brokers are our clients” – our brokers are our distribution base
Slide 14: Model changes and price education tools
Model changes and price education tools 14
Slide 15: RMS version 11
RMS version 11 Coastal wind still drives results Non coastal Commercial wind risk up increases more substantially than residential RMS v11 Wind and waves Some coastal modelled for wind risk down offshore Storm surge risk increases Changes will vary greatly for individual portfolios 15
Slide 16: RMS version 11: additional impact of surge
RMS version 11 Additional Impact of Surge on top of Wind1 160 +15% 140 120 100 $ billions 80 +10% 60 +35% 40 +10% +20% +25% 20 0 Texas Gulf Florida Southeast Mid Atlantic Northeast v11 Wind only v11 wind + surge 1100-yr OEP loss - using 2011 Industry Exposure Database (IED); Uses RMS default assumpt
Slide 17: RMS version 11 offshore model impact
RMS version 11 Offshore Model Impact • Largest wave action will not always be in the region of the highest winds -Hurricane Ike • Inclusion of Deck Height as a primary characteristic for vulnerability differentiation AEP* % Change* % Change by Return Period Ground Coverage Up Loss AAL 100-year 250-y
Slide 18: Renewal price index
Renewal price index Why is it important? Measures the market cycle using real risk data. Change in RPI affects expected loss ratios for reserving, and business planning. Terms and conditions major factor in determining RPI Statistics only used For cat, we look at for like to like change in AAL and r
Slide 19: Renewal price index
Renewal price index Hurricane 100 Ike 150 90 140 Deepwater Horizon 80 130 Hurricane Ike & 70 financial markets 120 60 110 Premium (Millions) RPI% 50 100 40 90 30 Aggressive domestic markets; reduced D&F 80 book in Q4 20 10 70 - 60 Energy D&F 19
Slide 20: The financial side of our business
The financial side of our business 20
Slide 21: Effectively balance risk and return
Effectively balance risk and return Asset allocation Credit quality non agency structured agency products structured (3%) cash and BBB (11%) products short term A (22%) BB or (15%) investments below (22%) (3%) AA (8%) duration average 2.2 years AA US government corporates, bonds and including agency
Slide 22: Protecting the balance sheet: risk learning
Protecting the balance sheet: risk learning • In Q4 2010 a larger than anticipated rise in 5.0% interest rates caused a negative equities 0.0% investment return non agency structured • 5.0% The biggest current risk to the investment products 2.9% portfolio is interest rate risk agency structured 15.
Slide 23: Reserve adequacy - consistent positive reserve development
Reserve adequacy - Consistent positive reserve development Proven record since inception $110 prior year reserve releases millions $90 $70 $50 $30 $10 -$10 2007 2008 2009 2010 aviation marine energy property 23 23
Slide 24: Reserve adequacy
Reserve adequacy Development by Accident Year $500 $450 $400 $350 $300 2006 $250 2007 2008 $200 2009 $150 $100 $50 $0 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Q20 • Consistent favorable development for 2006 to 2009: • Commissioned Towers Watson to provide new benchmark development p
Slide 25: Operate nimbly through the cycle
Operate nimbly through the cycle Excess capital builds Constant adjustment of capital during the year if profits exceed share Our target capital An example over 12 months headroom increases repurchases & ordinary dividends in hurricane season 'excess' capital target headroom internal min capital reg
Slide 26: Operate nimbly through the cycle
Operate nimbly through the cycle Constant adjustment of capital Proven record since inception 1,750 1,500 1,250 share repurchases 1,000 dividends $ millions 750 retained earnings 500 sub-debt 250 equity 0 -250 -500 2006 2007 2008 2009 2010 26 26
Slide 27: Summary
Summary lancashire HOLDINGS LIMITED
Slide 28: An established and successful market leader
An established and successful market leader 5 year highlights • Total shareholder return of 187.2%1 since inception in late 2005, compared with 16.5%1 for S&P 500, 46.8%1 for FTSE 250 • Returned 114.3% of original share capital raised at inception or 87.1% of cumulative comprehensive income. • Posit
Slide 29: 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 5 year total return 187.2% Financial targets cross-cycle return of 20.3% Success in achieving our goals is measured special dividend 3 out of 4 against risk and return targets yea
Slide 30: Safe harbour statements
Safe harbour statements CERTAIN STATEMENTS AND INDICATIVE PROJECTIONS (WHICH MAY INCLUDE MODELED LOSS SCENARIOS) MADE THAT ARE NOT BASED ON CURRENT OR HISTORICAL FACTS ARE FORWARD-LOOKING IN NATURE INCLUDING WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS 'BELIEVES', 'ANTICIPATES', 'PLANS', 'PRO
Slide 31: Consistency: strong return on equity
Consistency: strong 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% Compound 3 20.3% 19.2% 12.0% 1 Return on Equity = growth in fully diluted/converted book value per share, adjusted for d
Slide 32: Consistency: strong underwriting performance
Consistency: strong underwriting performance 5 year 2006 2007 2008 2009 2010 average 1 Loss ratio 16.1% 23.9% 61.8% 16.6% 27.0% 30.9% Acquisition cost 14.3% 12.5% 16.4% 17.8% 17.3% 15.8% ratio Expense ratio 13.9% 9.9% 8.1% 10.2% 10.1% 10.0% Combined ratio 44.3% 46.3% 86.3% 44.6% 54.4% 56.7% Sector 7
Slide 33: Consistency: strong investment performance
Consistency: strong investment performance 5 year cumulative 2006 2007 2008 2009 2010 annualised return Total return1 6.1% 6.2% 3.1% 3.9% 4.2% 4.7% Sector total 4.7% 5.7% -2.8% 6.4% 3.9% 3.5% return 2 Lancashire out- +1.4% +0.5% +5.9% -2.5% +0.3% +1.2% performance 1 Total investment return = [Net in