Lancashire Holdings Limited · LSE:LRE
Lancashire — FY2009 Earnings Presentation
30 slides from Lancashire's earnings presentation, February 2010
Slide 1: Investor presentation Q1 2010
Investor presentation Q1 2010 February 2010 www.lancashiregroup.com 1
Slide 2: 2009 full year review
2009 full year review 1. How we have done 2. Where we are now 3. Where we are going 2
Slide 3: How we have done
How we have done lancashire HOLDINGS LIMITED
Slide 4: 2009 headlines: Another excellent year
2009 headlines: Another excellent year • Combined ratio of 44.6% • Reported loss ratio of 16.6%; accident year loss ratio of 27.2% • Combined ratio since inception of 57.5% (including G&A) • Total investment return of 3.9% • Positive total return in 15 out of 16 quarters since inception • Return on
Slide 5: Lancashire has an excellent track record
Lancashire has an excellent track record • Consistently strong performance • Investment return, Combined ratio and ROE all positive 15 out of 16 quarters • Inception to date1 : Combined ratio = 57.5%, compound annual ROE = 19.8%, annualised investment return = 4.8% • Excellent Risk Management • Hurr
Slide 6: Consistency: Exceptional underwriting performance
Consistency: Exceptional underwriting performance 4 year 2006 2007 2008 2009 average 1 Loss ratio 16.1% 23.9% 61.8% 16.6% 32.1% Acquisition 14.3% 12.5% 16.4% 17.8% 15.4% cost ratio Expense ratio 13.9% 9.9% 8.1% 10.2% 10.0% Combined 44.3% 46.3% 86.3% 44.6% 57.5% ratio Sector combined 70.4% 68.4% 86.9
Slide 7: Consistency: Excellent investment performance
Consistency: Excellent investment performance 4 year cumulative 2006 2007 2008 2009 annualised return Total return1 6.1% 6.2% 3.1% 3.9% 4.8% Sector total 5.2% 5.8% -2.3% 7.8% 4.1% return 2 Lancashire out- +0.9% +0.4% +5.4% -3.9% +0.7% performance 1 Total investment return = [Net investment income +
Slide 8: Consistency: Excellent Return On Equity
Consistency: Excellent Return On Equity Lancashire Sector 1 S&P 500 2006 17.8% 25.4% 15.8% 2007 31.4% 22.8% 5.5% 2008 7.8% -0.7% -37.0% 2009 26.5% 32.8%4 26.5% Compound 2 19.8% 18.5%4 -2.7% Return on Equity 3 = growth in fully diluted/converted book value per share, adjusted for dividends 1 Sector i
Slide 9: Consistency: Only One Negative Qtr. Since Inception
Consistency: Only One Negative Qtr. Since Inception ROE* since inception 10% 5% 0% -5% -10% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Combined Ratio since inception 200% 150% 100% 50% 0% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Slide 10: Consistency: Returns
Consistency: Returns Compound Quarterly ROE since December 31, 2005 120% 100% 80% 60% 40% 20% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 10
Slide 11: Where we are now
11 Where we are now lancashire HOLDINGS LIMITED
Slide 12: Strategy Success Sustainability
STRATEGY SUCCESS SUSTAINABILITY Underwriting comes first 57.5% combined ratio since inception Stay nimble Very active cycle management Deliver a cross-cycle return of at least risk-free Maintain a strong balance sheet Consistently profitable investments rate plus 13% Manage capital through the cycle
Slide 13: Underwriting Management Conference Call (UMCC)
Underwriting Management Conference Call (UMCC) Modeling PROPEL output per account EQ, Flood, Named Windstorm, Tornado/Hail ALWAYS PML. AAL, Loss Cost DTC Analysis CUO: Group & Operating company REVIEW CEO: Group & Operating company Rating Sheet Senior underwriter: Operating company Occupancy Loss Fr
Slide 14: 2009: Renewal Price Index vs. 2006
2009: Renewal Price Index vs. 2006 Class 2006 2007 2008 2009 Property Reinsurance 100 97 96 127 Property Direct & Facultative 100 92 83 90 Energy Gulf of Mexico 100 80 64 137 Energy Worldwide Offshore 100 80 68 84 Energy Construction 100 90 81 100 Marine 100 88 80 82 Terrorism 100 86 71 66 Aviation
Slide 15: Maintain a Strong Balance Sheet: Conservative approach
Maintain a Strong Balance Sheet: Conservative approach • We have consistently maintained our philosophy: Rule #1: “don’t lose your money” 24% – Positive investment return in 15 out of Agency MBS 31% 16 quarters – Close management involvement in FDIC Corporate 9% 8% tactical decision making • Conserv
Slide 16: 2009 Reserve adequacy
2009 Reserve adequacy • We use industry loss data benchmarks • Reserving record has demonstrated conservative reserving: • 2006 Accident Year developed favourably 30% so far • 2007 Accident Year developed favourably 34% so far • 2008 Accident Year developed favourably 8% so far • We do not write cas
Slide 17: 2009 moderate appetite for risk
2009 moderate appetite for risk 100 year return 250 year return Zones Perils period ($m) period ($m) South East U.S. Hurricane 278 391 California Earthquake 190 292 Europe Windstorm 163 262 Japan Earthquake 138 236 Japan Typhoon 86 171 As of 31/12/09 The company has developed the estimates of losses
Slide 18: 2009 Capital Management
2009 Capital Management • Lancashire is one of most active managers of capital in the market. Why? • Capital is the means not the end • Too little capital = weak balance sheet, missed opportunities • Too much capital = hurts ROE, burns hole in pocket • Goldilocks strategy = “capital levels are just
Slide 19: 2009 Capital Management
2009 Capital Management Capital 1,750 1,500 1,250 $ millions 1,000 750 500 250 0 -250 -500 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 equity sub-debt retained earnings dividends paid share buybacks 19 19
Slide 20: Where we are going
20 Where we are going lancashire HOLDINGS LIMITED
Slide 21: 2010: Consistent Lancashire strategy
2010: Consistent Lancashire strategy • Underwriting • “Stick to our knitting” - no plans to dramatically change our business plan or execution • Further improve sophistication of capital allocation – Return on Capital (“RoC”) methodology • Expect 2010 risk levels to remain comfortably below toleranc
Slide 22: 2010: Trading outlook = acceptable for Lancashire
2010: Trading outlook = acceptable for Lancashire • Estimated that industry capacity restored in 2009 but further growth limited • Number of peers returning capital • Increased share buy back activity expected by Lancashire • Rates in general falling: projected average 10% reduction across Lancashir
Slide 23: 2010: Expected Portfolio Split
2010: Expected Portfolio Split 75% insurance 25% reinsurance 36% nat-cat exposed 64% other GoM energy Energy 26% 8% property cat offshore WW energy 17% 15% onshore WW energy 1% energy construction 2% Aviation 9% political risk Property 54% 5% aviation AV52 9% marine hull terrorism 4% 12% marine cons
Slide 24: 2010: Product focus & diversification - Property
2010: Product focus & diversification - Property • Reinsurance and Retro • Price reductions at 1/1: retro 5 to 10%; property cat 5 to 9% (U.S.) and 3 to 5% (Europe) • Further price reductions in retro unlikely, but buying likely to reduce as property cat market softens • Pricing pressure on property
Slide 25: 2010: Product focus & diversification - Property
2010: Product focus & diversification - Property • Political Risk/ Sovereign Risk • Very stable market, no significant entrants or leavers • Sovereign risk opportunity identified, producers seen and actively pursuing opportunities • Direct & facultative property • CORE business • Low process hazard
Slide 26: 2010: Product focus & diversification - Energy
2010: Product focus & diversification - Energy • CORE business: • Offshore operating risks • Focus on internationally recognised operators and contractors • NON-CORE business: • Onshore operating risks • Focus on excess of loss policies • Offshore construction risks • Prefer excess of loss policies
Slide 27: 2010: Product focus & diversification – Marine & Aviation
2010: Product focus & diversification – Marine & Aviation Lancashire has an extremely focused marine and aviation portfolio and believes the majority of the marine and aviation sector is inadequately priced • CORE business: • Larger, higher quality marine hull fleets which offer newer tonnage, which
Slide 28: 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 WORDS 'BELIEVES', 'ANTICIPATES', 'PLANS', 'PROJECT
Slide 29: Appendix 1: Richard Brindle Has a Track Record of Long-term Outperformance
Appendix 1: Richard Brindle Has a Track Record of Long-term Outperformance Syndicates 488 & 2488 vs. Lloyd’s market1 Ascot vs. Lloyd’s market1 Lancashire vs. peers2,3 Syndicates 488 & 2488 average = 17.5% Ascot average = 43.3% Lancashire average = 19.0% Lloyd’s average = 0.9% Lloyd’s avera
Slide 30: www.lancashiregroup.com
www.lancashiregroup.com (1) 441 278 8950 30