Lancashire Holdings Limited · LSE:LRE
Lancashire — Q2 2013 Earnings Presentation
32 slides from Lancashire's earnings presentation, July 2013
Slide 1: Investor Presentation Q2 2013
Investor Presentation July 2013 Q2 2013 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 aviation
Slide 4: Key messages
key messages • Now over 7 years of consistent excellent performance • We have remained true to our business plan, while adapting to market changes • London and Bermuda remain our underwriting centres • Capital management division launched and key individuals hired • Demonstrated excellent risk manag
Slide 5: 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 400% 350% 300% 250% total shareholder return 200% 150% 100% 50% 0% (50%) (100%) S&P 500 FTSE 250 FTSE 350 Insurance S&P Financials S&P Banking
Slide 6: Consistency: total value creation (TVC)
consistency: total value creation (TVC) five year standard deviation(1) in TVC 20% Hiscox Lancashire 15% Amlin Beazley Ren Re five year RoE Validus Endurance Aspen Axis 10% Montpelier Argo Catlin 5% 0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0% 21.0% standard deviation of RoE • Lancashire has one
Slide 7: Consistency: total value creation (TVC)
consistency: total value creation (TVC) • With full-follow broker facilities back in the spotlight, Lancashire’s commitment to underwriting remains unchanged • Five new underwriting hires in 2013 including a new head of energy and marine • Why? Because we really believe that underwriting comes first
Slide 8: Consistency: long-term performance vs peers
consistency: long-term performance vs peers (1) 5 year compound annual RoE (2) 20% 15% 10% 5% 0% (1) Peer group as defined by the Board. (2) Compound annual returns for Lancashire and sector are from 1 January 2008 through 31 December 2012. RoE calculated as the internal rate of return of the change
Slide 9: Consistency: exceptional underwriting performance
consistency: exceptional underwriting performance 5 year 2008 2009 2010 2011 2012 H1 2013 average (1) Loss ratio 61.8% 16.6% 27.0% 31.7% 29.9% 33.5% 23.5% Acquisition 16.4% 17.8% 17.3% 19.6% 20.5% 18.3% 22.1% cost ratio Expense ratio 8.1% 10.2% 10.1% 12.4% 13.5% 10.8% 13.2% Combined ratio 86.3% 44.6
Slide 10: Consistency: exceptional underwriting performance
consistency: exceptional underwriting performance combined ratio by operating segment (1) 200% 200% property energy 175% 175% 150% 150% 125% 125% 100% 100% 75% 75% 50% 50% 25% 25% 0% 0% 200% 200% marine aviation 175% 175% 150% 150% 125% 125% 100% 100% 75% 75% 50% 50% 25% 25% 0% 0% (1) The combined r
Slide 11: Consistency: dividend yield
consistency: dividend yield (1) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% (3) (4) 2008 2009 2010 2011 2012 2013 5 year average (2) Lancashire ordinary dividend Lancashire special dividend sector average (1) Dividend yield is calculated as the total calendar year cash dividends divided by the year end s
Slide 12: Performance in recent cat events
performance in recent cat events Sandy loss as a % of 2012 shareholders equity (1) 10% 9% 8% 7% % of December 2012 S/E 6% 5% 4% 3% 2% 1% 0% (1) As of 1 May 2013. Source: Company reports. 12
Slide 13: Underwriting comes first
underwriting comes first 70% insurance 30% reinsurance 34% nat-cat exposed 66% other property other GoM energy 2% 6% property cat 15% offshore WW energy energy 34% 24% political risk 7% property 48% energy other 4% terrorism aviation AV52 10% 4% aviation 8% aviation satellite 4% Accordion retrocessi
Slide 14: Underwriting comes first: mix of technology and culture
underwriting comes first appropriate mix of technology and culture Micro – UMCC (1) Macro – RRC (2) • Fortnightly review with underwriters, • Daily underwriting call – management finance, operations, risk & actuarial awareness departments • Collegiate approach – cross class/many • Risk levels monito
Slide 15: Underwriting comes first: property catastrophe reinsurance
underwriting comes first: property catastrophe reinsurance mitigating impact of falling rates ability to compete • Utilising a modified line size matrix – weighted so that • Multi year capacity / Reinstatement larger capacity deployed on bigger programmes • Willing to offer more multi-layer support
Slide 16: Underwriting comes first: energy
underwriting comes first: energy mitigating impact of falling rates ability to compete • We write the risks with large limit requirements which • Large lines make us relevant and dangerous as a quoting more insulated from the lows of rating trend market to other brokers • Relatively low attritional
Slide 17: Underwriting comes first: property terrorism and political violence
underwriting comes first: property terrorism and political violence mitigating impact of falling rates ability to compete • Have hired two new graduates to free up team to spend • Large lines make us relevant and dangerous as a quoting more time marketing market to other brokers • TRIPRA uncertainty
Slide 18: Underwriting comes first: property sovereign & political risk
underwriting comes first: property sovereign & political risk mitigating impact of falling rates ability to compete • Have hired two new graduates to free up team to spend • Large lines make us relevant and dangerous as a quoting time marketing market to other brokers • Large demand for Political Ri
Slide 19: Underwriting comes first: marine
underwriting comes first: marine mitigating impact of falling rates ability to compete • Low attritional loss ratio as we write sizeable share of • Large lines make us relevant and dangerous as a quoting ancillary classes such as Marine war, breaches (piracy), market to other brokers MII, MAP • We h
Slide 20: Underwriting comes first: aviation & satellite
underwriting comes first: aviation & satellite mitigating impact of falling rates ability to compete AV52 • Large lines make us relevant and dangerous as a quoting • Leadership and line size allow us to set terms and market to other brokers manage rate softening • We have the ability and willingness
Slide 21: Underwriting comes first: Kinesis
underwriting comes first: Kinesis the Vehicle demand • Kinesis Re newly formed special purpose vehicle • Collaterised Multi-Class market approximately $10bn of • Established to write reinsurance business on a fully total limit collaterised basis • No meaningful seller of multiclass collateralised ca
Slide 22: Underwriting comes first: lessons learned
underwriting comes first: lessons learned What did we do; what did we learn? Sandy • We stick to the “single peril” higher layers to avoid flood, these perils are not adequately understood, 2012 modeled or rated • Confirmation not to write D&F & Binders • Confirmed marine classes such as cargo and f
Slide 23: We stick to our knitting but can adapt our expertise to new lines
underwriting comes first: we stick to our knitting BUT we can adapt our expertise to new lines new subclass written premium as % of total 8% 7% 6% 5% 4% 3% 2% 1% 0% 2010 2011 2012 H1 2013 satellite energy liability property proportional obligors • Obligors - uses same analysis elements as political
Slide 24: How property D&F has been replaced by property catastrophe
underwriting comes first: how property D&F has been replaced by property catastrophe property gross premiums written 140 gross premiums written $m 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 2012 2013 property treaty property direct • 2006/7 – Dislocated D&F market allowing swift entry for s
Slide 25: How this helps to optimise the portfolio
underwriting comes first: how this helps to optimise the portfolio • D&F accounted for 32% of Lancashire’s Tohoku EQ Loss, 95% of Thai Flood Loss, 69% of Superstorm Sandy Loss • Parameter Risk – the risk that the modelling is wrong. In the 2011 year pre-D&F run-off; • Lancashire’s D&F 100 year PML r
Slide 26: 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 (2) hurricane 243 (16%) 367 (24%) california earthquake 78 (5%) 195 (13%) pacific northwest earthquake 16 (1%) 140 (9%) pan-european windstorm 170
Slide 27: Effectively balance risk and return: reserve adequacy
effectively balance risk and return: reserve adequacy consistent favourable reserve development prior year reserve releases $m $160 $140 $120 $100 $80 $60 $40 $20 $0 ($20) ($40) 2008 2009 2010 2011 2012 H1 2013 aviation marine energy property • Reserving record has demonstrated conservative reservin
Slide 28: Effectively balance risk and return: capital preservation
effectively balance risk and return capital preservation asset allocation credit quality non agency structured AA (52%) products, 5% cash and short term agency securities, structured 22% products, 16% average duration other AA- government 1.3 years bonds and debt, 7% A (18%) corporates U.S. AAA (15%
Slide 29: Effectively balance risk and return: conservative investment philosophy
effectively balance risk and return: conservative investment philosophy • Our market outlook remains subdued: • With mixed economic news out of the U.S., and the markets’ swift reactions to the Federal Reserve’s statements, volatility continues to be the headline for the remaining half of the year •
Slide 30: Operate nimbly through the cycle
operate nimbly through the cycle proven record of active capital management 2007 2008 2009 2010 2011 2012 2013 total $m $m $m $m $m $m $m $m share repurchases 100.2 58.0 16.9 136.4 - - - 311.5 special dividends (1) 239.1 - 263.0 264.0 152.0 172.6 201.4 1,292.1 ordinary dividends - - 10.5 9.4 9.5 9.6
Slide 31: Conclusion
conclusion • Lancashire has one of the best performances and yet the lowest volatility in the London and Bermuda markets • We have provided shareholders with superior returns vs. major indices • We have remained true to our business plan, while adapting to market changes • We have exhibited the best
Slide 32: www.lancashiregroup.com
www.lancashiregroup.com Bermuda - (1) 441 278 8950 London - 44 (0)20 7264 4000 jcc@lancashiregroup.com charles.mathias@lancashiregroup.com 32