Analyst briefing 15th Jan 2019 Underwritin g comes
Analyst briefing 15th Jan 2019 Underwritin g comes first Effectively balance risk and return January 2019 Operate nimbly through the cycle www.lancashiregroup.com Safe harbour statements NOTE REGARDING FORWARD-LOOKING STATEMENTS: CERTAIN STATEMENTS AND INDICATIVE PROJECTIONS Body text(WHICH smallMAY INCLUDE MODELED LOSS SCENARIOS) MADE IN THIS BRIEFING PAPER OR OTHERWISE THAT ARE NOT Click to edit Master text styles BASED ON CURRENT OR HISTORICAL FACTS ARE FORWARD-LOOKING IN NATURE INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING Heading WhiteTHE WORDS BELIEVES, ANTICIPATES, PLANS, PROJECTS, FORECASTS, GUIDANCE, INTENDS, EXPECTS, ESTIMATES, PREDICTS, MAY, CAN, LIKELY, WILL, SEEKS, SHOULD, OR, IN EACH CASE, THEIR NEGATIVE OR COMPARABLE TERMINOLOGY. ALL SUCH STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDING, WITHOUT LIMITATION, THE GROUPS FINANCIAL POSITION, LIQUIDITY, RESULTS OF OPERATIONS, PROSPECTS, GROWTH, CAPITAL MANAGEMENT PLANS AND EFFICIENCIES, ABILITY TO CREATE VALUE, DIVIDEND POLICY, OPERATIONAL FLEXIBILITY, COMPOSITION OF MANAGEMENT, BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS (INCLUDING DEVELOPMENT PLANS AND OBJECTIVES RELATING TO THE GROUPS INSURANCE BUSINESS) ARE FORWARDLOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE GROUP TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. Bullet Body text THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO: THE ACTUAL DEVELOPMENT OF LOSSES AND EXPENSES IMPACTING ESTIMATES FOR HURRICANE FLORENCE, THE TYPHOONS AND MARINE LOSSES THAT OCCURRED IN THE THIRD QUARTER OF 2018, HURRICANE MICHAEL WHICH OCCURRED IN THE FOURTH QUARTER OF 2018, HURRICANES HARVEY, IRMA AND MARIA AND THE EARTHQUAKES IN MEXICO THAT OCCURRED IN THE THIRD QUARTER OF 2017 AND THE WILDFIRES WHICH IMPACTED PARTS OF CALIFORNIA DURING THE FOURTH QUARTERS OF 2017 and 2018; THE IMPACT OF COMPLEX AND UNIQUE CAUSATION AND COVERAGE ISSUES ASSOCIATED
WITH ATTRIBUTION OF LOSSES TO WIND OR FLOOD DAMAGE OR OTHER PERILS SUCH AS FIRE OR BUSINESS INTERRUPTION RELATING TO SUCH EVENTS; POTENTIAL UNCERTAINTIES RELATING TO REINSURANCE RECOVERIES, REINSTATEMENT PREMIUMS AND OTHER FACTORS INHERENT IN LOSS ESTIMATION; THE GROUPS ABILITY TO INTEGRATE ITS BUSINESSES AND PERSONNEL; THE SUCCESSFUL RETENTION AND MOTIVATION OF THE GROUPS KEY MANAGEMENT; THE INCREASED REGULATORY BURDEN FACING THE GROUP; THE NUMBER AND TYPE OF INSURANCE AND REINSURANCE CONTRACTS THAT THE GROUP WRITES OR MAY WRITE; THE GROUPS ABILITY TO IMPLEMENT SUCCESSFULLY ITS BUSINESS STRATEGY DURING SOFT AS WELL AS HARD MARKETS; THE PREMIUM RATES WHICH MAY BE AVAILABLE AT THE TIME OF SUCH RENEWALS WITHIN THE GROUPS TARGETED BUSINESS LINES; THE POSSIBLE LOW FREQUENCY OF LARGE EVENTS; POTENTIALLY UNUSUAL LOSS FREQUENCY; THE IMPACT THAT THE GROUPS FUTURE OPERATING RESULTS, CAPITAL POSITION AND RATING AGENCY AND OTHER CONSIDERATIONS MAY HAVE ON THE EXECUTION OF ANY CAPITAL MANAGEMENT INITIATIVES OR DIVIDENDS; THE POSSIBILITY OF GREATER FREQUENCY OR SEVERITY OF CLAIMS AND LOSS ACTIVITY THAN THE GROUPS UNDERWRITING, RESERVING OR INVESTMENT PRACTICES HAVE ANTICIPATED; THE RELIABILITY OF, AND CHANGES IN ASSUMPTIONS TO, CATASTROPHE PRICING, ACCUMULATION AND ESTIMATED LOSS MODELS; INCREASED COMPETITION FROM EXISTING ALTERNATIVE CAPITAL PROVIDERS, INSURANCE LINKED FUNDS AND COLLATERALISED SPECIAL PURPOSE INSURERS AND THE RELATED DEMAND AND SUPPLY DYNAMICS AS CONTRACTS COME UP FOR RENEWAL; THE EFFECTIVENESS OF THE GROUPS LOSS LIMITATION METHODS; THE POTENTIAL LOSS OF KEY PERSONNEL; A DECLINE IN THE GROUPS OPERATING SUBSIDIARIES RATING WITH A.M. BEST, S&P GLOBAL RATINGS, MOODYS OR OTHER RATING AGENCIES; INCREASED COMPETITION ON THE BASIS OF PRICING, CAPACITY, COVERAGE TERMS OR OTHER FACTORS; CYCLICAL DOWNTURNS OF THE INDUSTRY; THE IMPACT OF A DETERIORATING CREDIT ENVIRONMENT FOR ISSUERS OF FIXED MATURITY INVESTMENTS; THE IMPACT OF SWINGS IN MARKET INTEREST RATES, CURRENCY EXCHANGE RATES AND SECURITIES PRICES; CHANGES BY CENTRAL BANKS REGARDING THE LEVEL OF INTEREST RATES; THE IMPACT OF INFLATION OR DEFLATION IN RELEVANT ECONOMIES IN WHICH THE GROUP OPERATES; THE EFFECT, TIMING AND OTHER UNCERTAINTIES SURROUNDING FUTURE BUSINESS COMBINATIONS WITHIN THE INSURANCE AND REINSURANCE INDUSTRIES; THE IMPACT OF TERRORIST ACTIVITY IN THE COUNTRIES IN WHICH THE GROUP WRITES RISKS; A RATING DOWNGRADE OF, OR A MARKET DECLINE IN, SECURITIES IN THE GROUPS INVESTMENT PORTFOLIO; CHANGES IN GOVERNMENTAL REGULATIONS OR TAX LAWS IN JURISDICTIONS WHERE THE GROUP CONDUCTS BUSINESS; LANCASHIRE OR ANY OF THE GROUPS BERMUDIAN SUBSIDIARIES BECOMING SUBJECT TO INCOME TAXES IN THE UNITED STATES OR IN THE UNITED KINGDOM; THE INAPPLICABILITY TO THE GROUP OF SUITABLE EXCLUSIONS FROM THE UK CFC REGIME; ANY CHANGE IN UK GOVERNMENT POLICY WHICH IMPACTS THE CFC REGIME OR OTHER TAX CHANGES; AND THE IMPACT OF BREXIT (FOLLOWING THE UKS NOTIFICATION TO THE EUROPEAN COUNCIL UNDER ARTICLE 50 OF THE TREATY ON EUROPEAN UNION ON 29 MARCH 2017) AND FUTURE NEGOTIATIONS REGARDING THE UKS RELATIONSHIP WITH THE EU ON THE GROUPS BUSINESS, REGULATORY RELATIONSHIPS, UNDERWRITING PLATFORMS OR THE INDUSTRY GENERALLY. ALL FORWARD-LOOKING STATEMENTS IN THIS BRIEFING PAPER SPEAK ONLY AS AT THE DATE OF THE BRIEFING. LANCASHIRE EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING (SAVE AS REQUIRED TO COMPLY WITH ANY LEGAL OR REGULATORY OBLIGATIONS INCLUDING THE RULES OF THE LONDON STOCK EXCHANGE) TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT TO REFLECT ANY CHANGES IN THE GROUPS EXPECTATIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE GROUP OR INDIVIDUALS ACTING ON BEHALF OF THE GROUP ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THIS NOTE. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE FACTORS IDENTIFIED IN THIS BRIEFING PAPER WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER BEFORE MAKING AN INVESTMENT DECISION. 2 Our strategy is unchanged as we go into 2019 Active portfolio construction & risk management will continue to support our performance irrespective of market conditions. Our business model centres around our Underwriting comes first principle: 1. We aim to be one of the most profitable global specialty P&C insurers over the long run 2. We are highly selective in choosing risks to underwrite and we focus on higher margin business 3. We operate three capital platforms, which allows us further flexibility in accessing and underwriting the risks we wish to write 4. We actively manage our capital base to support healthy shareholder returns whatever the operating environment 55% insurance 45% reinsurance 37% nat-cat exposed 63% other(1) 5. Lancashire is run for shareholders by shareholders Property other; 4.00% Property Property cat; 16.00% reinsurance; 13.00% Lloyds 41 %
Terrorism; 5.00% Marine 5% Property D&F; 10.00% Political risk; 4.00% Aviation 8% Retrocession; 2.00% Energy 15 % Energy other; 4.00% Marine cargo; 6.00% Property 31% Offshore WW energy; 10.00% Aviation and satelite; 7.00% GoM energy; 1.00% Other hull; Lloyds; 5.00% Aviation Marine deductable; 5.00% Marine 2.00% AV52; other; 3.00% 3.00% 1) Based on 2019 forecast of gross premiums written as of November 2018. Estimates could change without notice in response to several factors, including trading conditions. 3 Pricing: What we said at Q3 Rating levels likely to stabilise or improve for 2019: Catastrophe rates will be flattish, with marginally negative pricing pressure in some territories, and marginally positive in others that have experienced losses this year or in 2017 Specialty insurance rates have been better than we planned for in 2018 and we expect this to continue into 2019 We expect capacity to reduce in most of the specialty lines in which we operate as the market struggles to improve profitability We are quietly confident about the opportunities presenting themselves for our book in 2019: Focused on specialty insurance lines
We have added new underwriting talent to the Group in 2018, complimentary to our existing book (downstream energy, power, aviation deductible) Our core strategy remains unchanged: We continue to demonstrate the underwriting and capital discipline we have had since the inception of our company 4 January renewals consistent with our messaging Catastrophe is flattish: Insured catastrophe losses of 2018 for the market were outsize relative to history, but below 2017 levels Different trends by geography and loss experience Overall flattish, awaiting April 1 renewals Specialty is benefiting from dislocation in the London market: Lancashire starting point is a position of strength: 60+% of our premiums are specialty and low 80s average combined ratio over the past 5 years Lloyds Decile 10 impact is being felt in the market and a number of years of attritional losses are starting to bite Our new lines of business are seeing good rating momentum Our core strategy remains unchanged: We seek out the best opportunities to deploy our capital, be it in specialty (60+% of our book) or property catastrophe 5 Reinsurance purchasing strategy has not changed Retro market seeing some disruption: Products on offer changed given less capital available to some ILS capacity providers Structure of program is as important as the price (if not more so) As we go through 2019, the uncertainty around retro capacity and pricing may be more meaningful for the market Little impact for Lancashire from ILS market noise: Long-term relationships drive our approach : We use rated paper for the vast majority of our cover; ILS noise has had little impact for Lancashires core purchases We place our program early Our core strategy remains unchanged:
We actively manage our exposures and optimise the portfolio for best use of capacity 6 Kinesis: continued disciplined growth ILS market uncertainty may well continue in 2019: For 2018, the performance of most funds is likely to be negative/flat : We consider that larger, well-respected firms managed to raise more funds Market at 1/1 had enough capacity for good performing risks, less so for other risks Lower return funds may well come under pressure in 2019 to deliver on results especially if interest rates rise Kinesis remains strongly placed to benefit from uncertainty: Continued disciplined growth for the right reasons NOT fees Multi-class approach to outperform and give portfolio/investors diversification Given our approach, we would prefer a more regulated ILS market Our core strategy remains unchanged: We seek to deliver returns in line with investor expectations, and have the ability to scale-up depending on market conditions 7 Underwritin g comes first 8 Underwriting comes first, whatever the market environment Combined ratio (1) 120% Harvey, Irma, Maria, Wildfires Florence, Trami, Jebi 100% 80% Chile EQ,
Deepwater Horizon 60% Japan EQ, NZ II, US Tornadoes, Thai Floods, Gryphon FPSO Costa Concordia, Sandy 40% 20% 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Lancashire YTD Q3 201810 year average Sector average Delivering strong combined ratios in specialty insurance lines demonstrates Lancashires continued profitability in these lines of business Combined ratio outperformance vs peers over 3 years (6.5pts outperformance), 5 years (12.7pts outperformance) and 10years (22.7pts outperformance) 1) 2) 10 year average based on 2008 to 2017 reporting periods. Lancashire ratios weighted by annual net premiums earned. Annual sector ratios are weighted by annual net premiums earned
Sector includes Arch, Argo, Axis, Beazley, Everest, Greenlight Re, Hanover, Hiscox, Renaissance Re and Third Point Re. Third Point Re commenced underwriting operations in 2012. Source: Company reports 9 Effectively balance risk and return 10 Effectivelybalancing risk and return: Robust risk management process Daily Underwriting Marketing Conference Call (UMCC) Risk and Return Committee Disciplined capital deployment Allows for better risk selection and portfolio construction Helps ensure active management of exposures and capital Commitment to total shareholder returns, not growth and volumes Supports our Underwriting comes first principle: senior management and underwriters are on the call, allowing for more objective analysis of risk and fast feedback loops on market conditions Strategic overview of risk and portfolio optimisation that allow for best use of capacity Track record of active capital management via special dividends and buybacks when appropriate Unique underwriting approach with proven results, with participants from London, Bermuda, Cathedral allowing flexibility and best use of our
platforms Proven ability to manage risk / return dynamic via reunderwriting, risk selection and de-risking All employees participate in the restricted share scheme, fully aligning interests Three platform strategy enabling diversified access and a quick response to market events Excellent record of combined ratio outperformance 11 Operate nimbly through the cycle 12 Operate nimbly through the cycle: Active use of capital management further helps deliver shareholder returns 500 18.0% 450 250% 400 17.8% 15.2% 12.3% 17.3% 18.1% 300 200% 250
% of IPO capital returned ITD ($m) 350 300% 150% 8.4% 200 8.3% 10.5% 100% 150 100 N/A 2.0% 50% 1.6% 50 0 0% 2007 2008 Ordinary dividends 2009 2010 2011 Special dividends 2012 2013 2014
Share repurchases(1) 2015 2016 2017 YTD Q3 2018 Percentage of IPO capital returned ITD Strategic decision not to declare special dividend for 2017 to retain capital to take advantage of expected rate increases Special dividend declared in 2018 1) 2) Dividends included in the financial statement year in which they were recorded Dividend yield is shown above the data in the chart area. Annual dividend yield is calculated as the total calendar year cash dividends divided by the year end share price. Dividend yield at 30 September 2018 calculated as the total 2018 year to date cash dividends divided by the 30 September 2018 share price 13 Overview of Lancashire: our 13 year history 2005: LHL Incorporated; AM Best assigns A- rating; IPO & listing on AIM 2005 2006 2007 2008 2009 2010 2011 626 753 638 528 689 632
$1.4bn $1.5bn $1.4bn $1.5bn 5 57 79 91 101 103 115 (1) Return on Equity (2) Tangible capital No. of employees 2006 2008 2009 2010 Sirocco sidecar launched Hurricane Ike S&P assign A- rating, ERM Listing on LSE London office opened Credit crisis investmentInclusion in FTSE 250 index rating adequate with strong return 3.1% risk controls Moodys assign A3 rating 1) 2) 3) 2011
Accordion sidecar launched AM Best upgrade to A rating Significant peer(3) outperformance in 2nd largest aggregate loss year in history Dividend yield is calculated as the total calendar year cash dividends divided by the year end share price RoE excludes the impact of warrant exercises 2011 peer group included Amlin, Aspen, Axis, Beazley, Catlin, Endurance, Flagstone, Hiscox, Montpelier, Renaissance Re and Validus 14 Overview of Lancashire: our 13 year history 2012 2013 2014 2015 2016 2017 YTD Q3 2018 724 680 908 641 634 592 508 63.9% 70.2% 68.7% 72.1% 76.5% 124.9%
204 210 GPW ($m) Combined ratio Dividend yield (1) Return on Equity (2) Tangible capital No. of employees 2012 Rollover of Accordion sidecar Saltire facility launched Issued $130 million of 5.7% senior unsecured notes due 2022 1) 2) 3) 2013 Purchase of Cathedral Capital Limited Launch of Kinesis Capital Management, Kinesis Re and Kinesis Holdings 2014 Alex Maloney appointed as CEO Syndicate 3010 capacity added Energy and Terror
Accordion and Saltire placed in run-off 2015 Syndicate 3010 capacity expanded to 100 million 2016 Hired new management team for Cathedral and a new underwriting team for Cathedral Property Catastrophe and D&F portfolios 2017 Hurricanes Harvey, Irma & Maria, Mexico earthquakes and California wildfires Total shareholder return(3) of 9.4% in one of the top three years for aggregate industry insured losses in recent history 2018 Added new complimentary specialty insurance lines: downstream energy, power and aviation deductible Annual dividend yield is calculated as the total calendar year cash dividends divided by the year end share price. Dividend yield at 30 September 2018 calculated as the total 2018 year to date cash dividends declared divided by the 30 September 2018 share price RoE excludes the impact of warrant exercises Total shareholder return: The internal rate of return of the increase/(decrease) in share price in the period, measured in U.S. dollars, adjusted for dividends 15 Conservative investment portfolio structure focus on quality Asset allocation Credit quality non agency structured products; 8.00% cash and short term agency structured products; 7.00% AAA; 22.10% BBB; 15.20%
other government bonds and debt; 4.00% hedge funds; 9.00% equities & derivs; 1.00% BB or below; 6.90% securities; 17.00% duration 1.6 years U.S. government bonds and agency debt; 17.00% A; 17.40% corporates and bank loans; 37.00% AA; 38.40% Bi-annual external strategic allocation review Total portfolio at 30 September 2018 = $1,840 million Average portfolio credit rating of AA- (including internally managed cash) 16 Financial and events calendar: 2019 15 14 19 02 25 Jan Analyst briefing, London Feb Q4 2018 Earnings release 21 Mar Morgan Stanley Financials Conference May Q1 2019 Earnings release Jul Q2 2019 Earnings release 17 For more information: Investor Relations Media Contacts Jelena Bjelanovic
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