Lancashire Holdings Limited

Alexander Maloney - Group Chief Executive Officer, Executive Director and Chairman of Underwriting & Underwriting Risk Committee Paul Gregory - Group Chief Underwriting Officer, Member of Underwriting & Underwriting Risk Committee and Chief Executive Officer of Lancashire Insurance Company (UK) Limited Elaine Whelan - Group Chief Financial Officer, Executive Director and Chairman of Investment Committee Richard Williams - Peter D. Scales - Chief Executive Officer, Director and Member of Group Remuneration Committee

Andrew Broadfield - Barclays Capital, Research Division Benjamin Cohen - Canaccord Genuity, Research Division Thomas Fossard - HSBC, Research Division Kamran Hossain - RBC Capital Markets, LLC, Research Division Janet Van Den Berg - Morgan Stanley, Research Division Olivia Brindle - Deutsche Bank AG, Research Division Anthony Da-Costa - Peel Hunt LLP, Research Division Jonathan Urwin - UBS Investment Bank, Research Division

Hi, good morning, ladies and gents. We have a number of people on the call today.

We have myself. We have Elaine Whelan, our group CFO; Paul Gregory, our group CEO.

We have Darren Redhead, who is the CEO of Kinesis. We also have in London, Pete Scales; John Hamblin; and Richard Williams from the Cathedral side; and obviously, everyone's available to answer any questions.

I'm happy to report we grew fully converted book value per share by 1.6% for the third quarter with an acceptable combined ratio of 82.4% and 74.5% for the year-to-date. These third quarter results have been impacted by a couple of losses that were -- they are within management expectations but, obviously, when looking at a single quarter, can distort the quality of the underwriting portfolio.

We're a company which focuses on maximizing our ROE across the cycle, and we clearly do that. So we will accept the odd lumpy quarter.

We have and we'll continue to be more candid than most about the current environment which we trade in. It's fair to say this market is the most difficult we are seeing since the formation of Lancashire, but it is not the most difficult many of us have seen before.

We still believe in the cycle, and we do not believe this is a new normal, albeit we will need to see a large amount of capital retract from the market for the market to turn. No one can predict that -- what will change the current environment, but history suggests that eventually events force cats [ph] will provide us to demand higher returns.

We believe that getting distracted away from your core business and customers in the current environment could be very dangerous. You will not see Lancashire entering new lines of business or writing new products unless we are 100% convinced we have the right personnel and understand the business.

Our commitments on underwriting the cycle has meant our risk levels have reduced in line with our view of the market. This has allowed us to pay a large special dividend, which demonstrates our commitments to only deploy capital if we think it's in the best interest of our shareholders.

The market is changing, but companies with the right people, core business and sensible strategic plans will weather the storm. Others getting distracted or companies with overoptimistic plans will find it very difficult.

And I'll now pass over to Paul Gregory.

Thanks, Alex. We've spoken often about the importance of nimbleness.

In today's rapidly changing market, nimbleness remains as important as ever. Historically, we reacted swiftly to market changes by entering, exiting, growing and shrinking in markets in accordance with the opportunities or lack thereof.

This is a part of the Lancashire DNA and still remains the case today. Over the past few years, we've redeployed capital away from D&F and retro to build out a core Lancashire property cat portfolio, and this build-out was effectively completed earlier this year.

We're now at the stage of strategically managing this portfolio, and as product in terms and conditions weaken, we will carefully underwrite through the cycle as we've always done. You see evidence by a reduction in premium for both property cat and retro in Q3 as we look to optimize the book of business and stay true to our selective underwriting approach.

As we've had with our speciality insurance lines for many years, we now have a strong core book of reinsurance business across the group. It is ours to defend and mold as we see fit upon -- dependent upon market conditions.

In this market, having the portfolio of business puts you in a far stronger position than that of someone trying to gain market share. Where we've been increasingly nimble in recent times is when we're outwards purchasing.

We've always said that in hard markets, we're willing to take more risk on the balance sheet, but when markets soften, we'll take less. That's exactly what we have done and we'll continue to do.

This does not mean that we comprise our underwriting standards on the front end but simply manage our volatility in a market where opportunities are less plentiful and pose those opportunities at shorter duration. We are just underwriting the market we see in front of us, which is exactly what we've been doing since our inception.

Reduced portfolio volatility along with the market not particularly awash with exciting underwriting opportunities allows us to review our capital requirements as can be seen from the special dividend declared today. Although the course has been relatively free of headline losses, for us, it has been more attritional quarters than normal with nothing of any real significance other than a satellite loss of circa $14 million combined for the group.

It is always worth remembering that our business still remains specialty insurance focused, and in these sectors, you can have lumpy quarters, and this was one of them. That said, our year-to-date combined ratio of 74.5% more than demonstrates the quality of our underlying portfolio and is a testament to the efforts of our underwriting team across the group.

Expectations for 1/1 are for continued softening in the majority of our lines with some additional pressure in terms and conditions in the reinsurance classes. Our established position as a leader with a high-quality portfolio business does not insulate us entirely from the vagaries of the market but does put us in a better position than most to navigate through the softening cycle.

As we said before, we're now a bigger buyer of reinsurance than we've ever been. So a soft reinsurance market brings with it many positives for us.

It allows us to better protect the balance sheet and defend the quality core of the business we're fortunate enough to have. In our buying of numbering retro, we're utilizing the expertise within the group with Mark Wilson of Cathedral now spearheading this purchase.

The build-out of Syndicate 3010 continues to progress well. Our aviation teams led by Bruce Carman and John Spence are now fully up and running and in the midst of aviation renewal season as we speak.

We're well placed to take advantage of the aviation war opportunities, and even if these are not quite reaching the levels we'd hope for in the immediate aftermath of the losses, it's still a significantly better market than when we took the decision to enter the class. Darren and his team have continued the excellent progress with Kinesis.

Kinesis now has an established set of investors and clients, which is a strong set of foundations to build from, and Kinesis will look to deploy more limits at 1/1 if the underwriting opportunities exist. At this point in time, the outlook is positive as both existing and new clients see the benefits of the Kinesis products, signaling an increased demand.

As always with Lancashire, the viability of the underwriting opportunity will determine the course of action. I'll now pass over to Elaine.

Thanks, Paul. Hi, everyone.

Our results are on the website as usual. We've produced an ROE for the quarter of 1.6% bringing us to 8.1% for the year-to-date.

With a small loss recorded this quarter before acquisition adjustments, Cathedral has now contributed 0.8% to consolidated for the year-to-date. Warrant exercises for the year-to-date have reduced ROE by 0.7%.

To save any confusion, I think it's worth reminding you that last year's Q3 results reflected the equity issuance and foreign exchange transactions we had entered into as part of our agreement to buy Cathedral. Together, they added about 6% to ROE.

In terms of premiums, again, most of our increase in the quarter comes from Cathedral. We added $50.3 million of premiums showing this quarter.

For the preacquisition lines we're behind last year, that reduction was almost entirely offset by new premiums written in the energy and terror lines that Cathedral rights and also by additional income in the new aviation team. Those lines are all written in Syndicate 3010.

For Lancashire London and Bermuda, property premiums are behind last year mostly due to the impact of long-term contracts which are not due to renew. Also as Paul mentioned, we continue to see worsening terms and conditions in placing and property cat deals.

And as a result, some deals were not renewed. Although some movements within energy subclasses, the energy portfolio overall was pretty flat compared to Q3 2013.

For the fourth quarter for Lancashire's book, we will likely continue to see some reductions. The same is true for Cathedral, although we should continue to see growth in the new terror, energy and aviation lines.

As in prior years, we don't give top line guidance, but bear in mind, we have a number of multiyear deals in 2014. Ignoring lines that are generally nonannual across the property cat and energy lines, they added $115 million of premium from multiyear deals.

While we have the benefit of those earning out over the next year or 2, you'll see a notable reduction in our gross written premiums in 2015. That will be offset by some new business we expect and also further growth in the new lines of business in Syndicate 3010.

For our top line, we'll be significantly lower than 2014. The impact of net premiums earned will be substantially less given the earnout of the multiyear deals from 2014.

Our net loss ratio was 44.8%. As Paul said, while there have been no major events this quarter, there were a number of smaller losses that had an impact.

With net releases in prior years of $11.3 million for the quarter, our accident year ratio was 50.1%. That's obviously higher than we would expect to attrition to run on, but there have been a few smaller headline events which have impacted the results for the quarter.

We don't comment on individual claims, but I think you will all have seen announcements in the press about the recent aviation losses. With Cathedral's strong presence in the aviation market, that's obviously an area where we picked up some losses, although we also avoided some too.

Cathedral also has an exposure to Hurricane Odile in Mexico. As for Lancashire, we had some exposure to the recent satellite loss that was reported plus a few million here and there on very small events [ph] over the quarter.

The attrition in the quarter is not indicative of an increase in our expectations for loss ratios. Our business is lumpy, and individual quarters are not representative of the book.

For Lancashire, it was previously the low 20s we had indicated at the beginning of this year. That increased to the mid-20s with the softening market.

The addition of Cathedral with a less-volatile but typically lower attaching property portfolio increases our attritional risk to the low 30s. Hopefully, that makes it a little bit clearer.

Bearing in mind that these are estimates and the quarters will vary depending on what's going on in the world. As Alex said, individual quarters are not reliable guides to the overall trend.

On investments, including FX hedging impacts, the portfolio was flat for the quarter as it was impacted by treasury yields increasing and credit spreads widening. There's been no real change in our investment strategy, although we have adjusted our asset allocation slightly.

It's not just on the underwriting side of the business. We try not to take a quarterly review of our investment portfolio but rather structure it for the longer term, just making tactical adjustments around the edges.

We've been increasing our duration a little and are happy now around the 1.5-year mark. As I mentioned last quarter, we've allocated just under $100 million to a low-volatility hedge fund portfolio.

We may add a little more to that later on this year or in [ph] the next. The goal there is not to go crazy with the risk assets in our portfolio but really just to diversify and help in managing our exposure to interest rates in advance of the Fed hike in rates.

We've also increased our floating rate product a little and continue to hedge our interest rate exposure. The hedge fund portfolios returned 0.3% for the quarter and 1.4% for the year-to-date.

On KCM and capital deployed, to-date, we'll add about $6.2 million in underwriting fees this year. As I've mentioned previously, we do add most fees in line with underlying exposure in Kinesis Re's portfolio.

Most of the exposure is over U.S. hurricane season, so the bulk of the fees for the year are earned now [ph] with $2.9 million included in other income for the quarter and $4.3 million for the year-to-date.

The earning pattern by quarter this year has been 10% in Q1, 12% in Q2, 47% in Q3 and 31% in Q4. Just bear in mind that depending on how the portfolio renews, those percentages might change a bit next year.

We expect to recognize some profit commission in the first quarter of 2015. Depending on loss activity between now and the end of the year, we could earn up to $5.8 million.

KCM's expenses are reflected within Lancashire's other operating expenses. The remaining other income is managing agency fees and profit commissions from Cathedral.

Our G&A includes $8.1 million of Cathedral costs and our final amortization charge in relation to the finite life intangible asset from the acquisition. We've booked about $1.5 million for that this quarter.

We've been buying back a small amount of shares given the overall market has been trading down and there have been pockets of volatility. The aim there is not really so much about any signs of capital return but more about building up treasury shares for stock comp exercises that we know are coming for the deadline.

Lastly, as you know that you saw in our press release, we declared a special dividend of around $250 million in total. From 2012 or 2013, we have reasons to hold some extra capital in the fourth quarter.

Potential impacts of Sandy in 2012 and our integration of Cathedral in 2013. This year, we're pretty confident in our market outlook and see no reason to hold back any capital that we don't need.

I would anticipate our capital requirement for next year to be around $1.5 billion of tangible capital and nothing else when the market changes. With that, I'll now hand over to the operator for questions.

Two questions, please. One, just on the capital side of things.

You've just indicated $1.5 billion as your tangible capital as your target. What does that represent?

Is that constraint a rating agency 1, your economic model, that would be so to understand it? And also just within that context, I think you said in the past for the outward reinsurance program that you've been adapting and buying more of a set of -- more profound impact on your economic capital in the house potentially on your rating agency capital.

So just some update on that would be useful. And the other question is just on your ROEs.

I think, from memory, your management target ROEs range between 12% and 18% for your various LTIPs or equivalent. How long does that last for, a, is that right, b, how long does that last for and when is it due to be revised?

And what are your thoughts around that at the moment?

Okay, they're all mainly for Elaine. I would say just on the reinsurance point is that one where we've done a fair bit of work this year looking at portfolio, buying more reinsurance.

That's been because we think that's the right thing to do. That's obviously led us to have an excess capital position, but that wasn't the only reason we've done it.

So I think trying to stick to what we've always said to you guys, if we have excess capital and we don't think the market is there, we'll always give it back. We'd be delighted to keep the capital because that would mean we got a big opportunity.

But we believe what we're doing in this current trading environment, which is very difficult, is exactly the right thing to do, and we've questioned others that are not being as disciplined as us, writing new products over opportunistic plans. I think it's a very difficult time in the market.

So we're trying to stick to what we've always said to you, and that's why you've seen that -- saw a special dividend.

Andy, in terms of capital, we look at capital a number of different ways. We look at it for regulatory purposes, economic purposes, mitigation purposes.

Our biggest capital driver rotating over time depending on what's going on. And at the moment, the rating agencies are bigger capital drivers than anything else in our business.

So that's where that number, and that's how we derive our capital requirements at the moment. In terms of reinsurance buying, it's nice to buy reinsurance that helps in the capital models and the rating agency models, but I think, our first focus is on an economic basis making sure that we're buying the right reinsurance cover for our business.

And on RSS awards, the exit stuff, and it's pretty much all done. That was way back when we first started.

And 2008 was when we started the RSS program, and we are -- there's a combination of ROE targets and TSR targets on those -- though there are awards made every year, it's a 3-year vesting period. So they're just kind of continuing to roll off and over time, there will be new awards granted each year.

Okay. So just to come on to that back there, maybe it's my confusion, the 12% to 18%, I thought that -- what's the existing target range for you -- fees for the management team?

There are different targets for bonuses, and there are different targets for the RSS. The RSS ROE target is a range over treasury, and the management target for bonus is the range that you're looking at, and so that's set by Rencom [ph] on an annual basis.

Annual basis. Okay.

Is it fair to say that the work that you've been doing on the outward with reinsurance side has probably had a bigger effect on your economic capital that it has on your rating agency capital?

Again, some of the impact is taken on the capital, some of the impacts, the rating agency models.

I have 2 questions please. The first was just to clarify Elaine's remarks about the attritional loss ratio.

I took it -- I took your remarks to mean that you see that loss ratio fairly stable going forward. I just wonder how that would be the case if you expect pricing to go down looking into 2015 and maybe terms and conditions worse as well.

And the second question I had was in the context of the ROE you achieved for the year, do you feel that your capital structure with a lot of the capital kind of sitting in Bermuda and back in the rating there, puts you at a competitive disadvantage, which is going to be ever more kind of painful, at least against your competitors at Lloyd's. And is there anything from a sort of structuring point of view that you can actually do to essentially reduce your capital requirement in this environment?

All right. That's Elaine, Elaine.

Elaine?

My [indiscernible] today. And in terms of the attritional loss ratio, and we've had a number of questions from people just looking for some guidance on it, so all we're trying to do is tell you where we think a decent kind of attritional ratio sits for our particular business at the moment.

And we don't really have an attritional loss target, per se, in terms of next year, then, yes, we did surprise adjust our loss ratio for any changes in pricing. But also as terms and conditions change, we just are broken exporters as well, so there's now environment factors then too.

But the numbers that I gave you earlier are really to help you guys come up with something that's a bit more stable than your own models. In terms of our capital structure, the rating agencies do think we carry more capital than Lloyd's does, [indiscernible] and our other benefits from being based in Bermuda as well.

But we do benefit somewhere between the U.S., modeling cat companies and the Lloyd's companies. So I don't think that where we sit in terms of the capital base is inappropriate from that view, and we have done quite a lot of stuff with the Cathedral guys in terms of bringing the companies together and making sure that we're taking advantage of the efficiencies.

There's undoubtedly more that we can do, and we're always looking at structure and things we think that we can change and welcoming new ideas. At the moment, there's no major plans in the pipeline.

Sorry. And just to follow up on the capital side, has your capital requirements for Cathedral now been agreed with Lloyd's so that's essentially set for the next 12 months?

Yes, that's fine.

Two questions from my side. The first question will be on the NLB [ph] side for next year.

How would you expect demand to evolve with falling oil prices? Do you see already we see some postponing of new drilling projects?

And how could this negatively impact your business line next year and '16 potentially? And the second question, would you be able to comment again about your -- how you feel about your franchise and [indiscernible] in the market if you see there is lot of talk about around that in the current soft market environment with some people in the market talking of tiering and people referring to go for big balance sheet rather than specialty player.

So how do you feel in the current environment and how your relation with broadcasts have been so far?

Well actually, Thomas, I'll actually answer the second one first, and then Paul will do the energy one. The relevance question is a good one.

We've spoken about relevance in the past. The part of the reason we were attracted to Cathedral was that not only is it a great business with very good people, it would give us more size in the market, which undoubtedly is useful.

I think that what you got to remember though, that if you just look at a market cap versus some of our competitors, yes, we are on the small side, but thankfully, our core clients and brokers don't always just look at that. And one thing that we've always done since the inception of Lancashire is that we've always been relevant in the markets we're in.

So if you think about our business model, we're not actually in that many markets. But the markets we're in, we're very relevant.

So let's just pick LNG. We're in the top 5 energy markets in the world.

We're not a top 5 market cat player. So we're kind of punching above our weight.

If you think about what Cathedral have always been about, it's always been about relevance and core clients. So if you look at someone like John Hamblin's book of business at Cathedral, I'm pretty sure his clients -- I mean, obviously, you need an acceptable rating, but I can't see any of his clients coming to us, saying, unless you're a $5 billion company, we can't deal with you.

So relevance is important. It's not the only thing.

I think the Cathedral acquisition did make us more relevant. And even things like reinsurance.

We probably did buy $50 million of reinsuranced a couple years ago. Our budget this year with Cathedral is more like $150 million.

So when you're spending that money with the big brokers, that does give you the leverage factor because it is fair to say relevance is a good question at the moment. Brokers are trying to leverage everything they can.

We're trying to leverage everything we can. And then even things like Kinesis with products that Darren is creating for brokers means they're getting commission.

Obviously, we're going to leverage that as much as we can with the brokers. So it's a good question.

It is important. It's not just about size.

You gather the right people, the right business, but I think we're relevant in everything we do. And we weren't going to anything where we're not relevant because in this market, you're just set up to fail.

Unless you're relevant in a market, you will get destroyed, and I think people will find it very difficult. I'm confident that we're as relevant as you need to be for the current climate.

I'll just pass over to Paul [indiscernible].

If I can just follow-up on this one. Can you assure as that obviously, you've seen no fee page from what -- from your start-of-the-year position, i.e., I fully understand what you're saying.

I'm more in switching [ph] to the momentum and the dynamic you may have perceived coming from your brokers.

Yes. So an example of that would be if the worst example you see in this market, which thankfully is not happening to us is that clients or brokers just say, you're too small to even be shown the business.

We are very much not in that camp. Of course, we're subject to signing issues and pressure on pricing, but that's just normal.

But the problem you've got with some carriers out there is that they're just not big enough by themselves to even get on the panel. That's definitely not happening to us.

Okay, Thomas, I'll actually just add a couple of examples to what Alex is talking about there, then I'll come on to the oil price question, which is a very good one. This year -- I mean we've been in the softening market this year.

And as Elaine mentioned in her script, we've been building out Syndicate 3010 with energy and terror, 2 of our biggest lines of business. And what we've seen there is actually clients and brokers giving us more business at the detriment at some other markets out there.

So when we start at that syndicate, we had existing clients that were giving the Lancashire group bigger shares than what we've had before. So in fact, we were getting more rather than less.

So I think that's always a good indication of you're relevance in a market, and we've seen some good evidence of that this year. Coming on to the oil price question.

There's no doubt that if oil prices are depressed for a prolonged period of time, then this does impact demand in the energy sector. What you tend to see first are construction projects that have been scheduled get mothballed or put on hold for a while.

Now for us, that's actually not particularly a bad thing. Less than 5% of our energy portfolio is in the construction space.

We only really participate in the construction world on high-value projects. Now we might see a little bit less demand there, but as I said, in the overall portfolio, it's relatively small.

I think if the oil prices continue to be depressed, then our can't see values going down, but what we've seen in recent years is inflation within that sector keep up with the increasing capacity in the energy market. Now as it continues to be increased capacity in the energy market and if you got a depressed oil price, then your inflation factors in the industry are not going to be as strong as they were, and you're going to see relatively stable limits.

So it will put some pressure on. There's no doubt about that.

Again, going back to Alex's point, we're a top 5 energy market. We're one of the haves rather than the have notes.

So we're in a pretty good position to manage that but a reduced oil price will have some impact on demand.

Congratulations on working through the soft market in what I think is a very appropriate way with your capital position, and I would just like to share my point of view that you have a lot of companies that talk about capital management then passing on business when the market gets a little bit soft and then you have some that actually lose that. So I could not think of any way that Lancashire's position is unfavorable compared to others because market is so hard and the ones who have a low-risk profile when that occurs will be sitting in the catbird's seat.

So is this the Lancashire view of our managers here?

Well, thanks for that, Frank. Yes, that's 100% our view.

I think that we have always said -- which sounds perfectly -- perfect common sense for me that you write as much business as you can when the rates are very high or you accept as much exposure as you can when rates are hard. And then when you're in the softer part of the cycle, which we're now in, you obviously pull back and you wait for better times.

I think we have always been -- we've always tried to be completely honest about what we are at Lancashire. We're an underwriting company, and we are mainly doing what we think is the right underwriting things.

We would suggest that others talk the talk, but they don't walk the walk, so I think, at the moment, you're seeing some kind of strange activity from some other companies. From my point of view, we're trying to keep things simple here.

We're trying to manage our capital as appropriately as we can. And as we said in the script, if we can't find opportunities for capital, we're giving it back to shareholders.

So I'm 100% convinced, we're doing the right thing. I'm 100% convinced that, exactly as you said, the market will turn at some point.

It always does. It's a supply-and-demand game.

We do agree there's a huge capital position out there and that may lead that so terms take -- longer term than what we would like. But whoever comes through the soft cycle, as you said, will be there.

And that's when you can make some serious money. You just have to be patient now.

You got to be realistic about the market. You can't -- as much as we think we're going to hold our own in the market, we can't swim against the tide.

So we're trying to be realistic. We're trying to get our capital positions where we can.

So yes, we firmly believe in our strategy.

Good. And then I just want a second your actions here on returning us very substantial capital to the shareholders.

We love that. We are not big dividend hounds, per se, but when you don't have a really outstanding use for the extra capital, I just want to commend Lancashire for really walking the talk there, so to speak.

It's Kamran Hossain from RBC. Three quick questions.

First one is coming back to attritional loss ratio. I'm just trying to work out exactly kind of how much the larger attritional losses were in the quarter?

And it's kind of deceiving that your 51.1% minus that kind of the difference between 51.1% and the mid 30s is about that kind of large attritional in the quarter. And the second question is just from the aviation war market.

I heard from one of the larger Europeans this morning, their prices in that market were up about 200% to 300%. Is that your definition of the kind of disappointing outcome.

Were you expecting for something a little bit higher than that?

Okay. So Elaine will take the first one, and then we'll bring in Richard Williams from Cathedral on the aviation question.

Yes. On the attritional loss ratio, again, there is a bit more volume of smaller attritional losses this quarter, and that happens from time to time.

In the past, in press releases, we've stripped out larger losses that generally can run with the $25 million mark. This quarter, we just had a number of claims that were below that level individually, but you had to adopt to being a little bit more meaty in terms of our actual gear ratio this quarter.

This is Rich Williams. Yes, on the aviation war question, I think it's fair to say after the Malaysian Airlines lost over the Ukraine and then the events in Tripoli, there's a lot of talk about having to reinflate the market sort of four, five, sixfold.

And that over coming weeks came down to sort of 200% to 300%. I think the reality is probably going to be somewhere a bit south of that.

No one's really pulled out of the market. There's still plenty of capacity, and there are kind of a lot of people trying to job hunt in the business as well, so the bulges [ph] are having a bit of a field day.

There'll be more money. It'll be better rates at the moment we said we were going to get into it, but it's not going to be as brilliant as some people are possibly inferring.

I have just a quick question on your capital. So I was wondering whether your capital requirements have any sensitivity to the Lloyd's internal model being approved or not for Solvency II?

Okay, that's one for Elaine.

The short answer is no. The guys at Cathedral are, obviously, going through the process there, and our biggest capital driver at the moment remains the rating agencies.

So we carry a higher level of capital than Lloyd's requirement anyway.

I've got quite a few questions, actually, if that's okay. So I'll go through [ph] them quite quick.

So probably the quickest one just on the expense ratio. And you mentioned and you previously said $1.5 million is amortization for Cathedral, but even if we backed that out, it looked like the expense ratio is a bit high.

Just wondering if you could tell us if there any other funnies in there and whether x the $1.5 million that's now run rate. And secondly, going back to this point about the attritional loss ratio.

You previously mentioned a sort of roughly 34% level. And I'm just wondering if you could tell us what changes that.

So if next year, rates go down another 10% or 15%, how sensitive is that? Or do you think that still broadly remains at 34%.

So just some thoughts on how that develops really. And then a third point on your satellite book.

You've referred fairly recently to the fact that maybe losses on that book have been higher than you expected when you went back into it. And so what's your latest thinking there?

And obviously, if you were to reduce your exposure there, then that would drive the top line coming down next year as well. And a final question, sorry.

Just on your ROE. You were fairly recently talking about a sort of 14%, 15% level for this year.

Just wondering if you still think that's realistic? And also, is that a good benchmark for, say, 2015?

Or should we expect that to deviate materially, do you think?

Well, okay. We've got different questions there.

I think just on the ROE point, I think that's very much at the top end what we thought we could achieve this year. So I'm not sure that's the right number on that one.

On the expense ratio, Elaine has got the next one, and then we'll pass to Paul on the satellite.

Yes. And within our G&A, there's amortization, it was a heavier charge earlier on the year.

So there's $8.4 million in there for the year. If you adjust that back out over year-to-date, G&A ratio, you get to the 14%, which is a little bit more realistic run rate.

I think if you look at Lancashire's G&A through Q3 last year and Cathedral's G&A through Q3 last year, and they're both in the supplement and you add them together, they kind of pick up our fourth quarter when we were more or less really combined, and then you get to something that's a reasonable run rate. There were some expenses in last year for both parties for the transaction.

But otherwise, that'll give you a more reasonable rate, but I think we're -- where we're trending just now is not what I expect to see going forward. And in terms of what changes our attritional loss ratio and see if pricing comes off 10% and then you have to add adjusted loss ratio.

And we will also be looking at exposure so that we may come off a few more occurrences if we don't let the pricing there so that, that might drop about [indiscernible] quite extremely just a straight price adjustment.

Olivia, it's Paul here. I think you're right on the satellite.

It hasn't gone quite as we'd expected to be perfectly honest, but that does happen sometimes. If you look at the market stats for the satellite market, it's had a couple of bad years compared to its history.

And we're tracking the market. As with any other business, we'll look at it.

If we don't think we can make money out of it through the cycle, then we'll take appropriate action. At this point, we have only been in it for just about 2 years.

So there's no view in our part yet to come out of that market. But if the loss trend continues, then obviously, we're going to look at that very closely if the market doesn't adjust in accordance with those losses.

And I just have one more thing on the G&A side of things. Olivia, I mentioned it the last quarter, but it may be missed with the other comment.

We did pick up the cost for KCM and other operating expenses so that, that impacts Lancashire's G&A. So that would be trending slightly higher than it has been in the past before that.

We obviously get compensated in terms of the fees for that, but it does sharpen in our G&A ratio.

And just on that expense line as well. The acquisition expense ratio looks a little high as well, so if you could just maybe touch on that as well.

And just the other follow-up on the ROE question for Alex. So the top end of the range, is that also the case going forward?

So in reality, that would probably be, again, the top end of what we should expect, so, say, 2015?

Yes. In terms of the acquisition cost, I think it's probably a reasonable run rate.

I'd expect it to be around the kind of 20%, 21%, 22% level, and it was a lot lower in the first quarter because we got some profit commissions in from Accordion. It does get -- it does mirror our own a bit depending on our business mix and depending on what's happening with our reinsurance program as well.

So I think if you stick in that range, then you've got a reasonable run rate.

On the ROE point, Olivia, I think you just got to be realistic out at the market. I think 15 points in this market would be an exceptional year for us.

I'm not sure -- that is very much at the top end, I believe, of what we can achieve in the cycle. If you don't -- what we've always stated, we've stated we can make 13% above the risk free over the cycle.

We're still way in excess of that target. So I think 15 would be a great number.

I would never say that we can do that next year. We may though, we may be lucky that it might be a very benign year, but I think everything would have to go [indiscernible] to get to 15 in this kind of market.

So I think that's a bit high.

Just a quick question on the special div. So obviously, 120 cents was declared in this part.

I was wondering what sort of -- what we need to think about if there will be possibly a second special dividend, how we should think about this in terms of what sort of payment could be paid out in -- at year end?

Okay. I'll let Elaine sort of back numbers because she's much better at numbers than me.

But the point I just want to make about the special is we -- in the past, we have done 2 specials, and that's mainly been to give us flexibility around the market. So what we've said in the past is, when we did the Cathedral transaction, we don't to because we were -- we wanted to get back capital position as good as we could until we were completely comfortable with the numbers.

But in general, when we look at capital, we're looking at the outlook, and we're looking at 2015, and where we've done 2 in the past, it's mainly been -- and we've said to you guys we're going to do a special -- we're going to say at 1/1 goes if there's opportunities, we might use some of that capital, if not, we'll give it back. I think, to be honest, unless something really dramatic happens, we see no change to the market next year that's going to require us to need any more cap, so that's why we're doing the sort of special in one lump.

But something may happen. We may end up with some extra capital at some point, but at the moment, we're just looking at the opportunity we see for next year, and that's why we can make a fair judgment on where we think '15 is going to be over there.

Yes. I think Alex is absolutely right.

And I would just add on to that, that there's no change in our policy to render ordinary dividends, so we still intend to go ahead with the interim $0.05 and $0.10 dividends. And as far as expectations for 2015 are concerned, it's obviously very early to make any calls on that, but if there's no change in the market, then we'll be looking at the same situation of the [indiscernible] either most, if not, all of earnings.

Jonny Urwin at UBS. Can you give [ph] a bit more color around Cathedral?

I know a few of the attritional losses were coming through Cathedral this quarter. But I just wonder, since acquisition, how have attritional losses been trending?

And how should we think about that going forward?

Is that one for you or Pete?

I can start and Pete can chip in if he wants to in there. I think it's past the question of lumpy quarters.

This quarter, there is just a bit more happening in lines that Cathedral has expertise and exposure. And I think if you go back to the numbers that I was giving you for attritional loss ratios and those in the low 30s, that's where we see it at the moment and subject to any changes in our book.

Pete, you're going to...

I think the only thing we see throwing around is nothing that we particularly see as anything exceptional. We've got pretty low retentions, though for instance, on the Odile loss, we're only returning 100% level $7.5 million.

And then so our share of that's probably $5 million. So they're quite small so workaday things, we would genuinely expect all of the time.

And the quarterly reporting nature of it just highlights where some of these things appear. But in terms of actual retentions, we went under the programs and sort of the preconceived plans that drop into them, be they, of course, many costs that we write.

There's nothing exceptional, and the underlying that cause the underwriting is pretty good.

Just very quick one on the buybacks strategy. I'm just interested, you have -- it's probably for the warrants-issued stock, which has been a little bit less dilutive than buying back a premium to book and then paying the warrant for the discount to book.

And is this just to be the mass that worked with the choice between buying back stock or paying a special? Because I would've thought it would have been better for you for that capital as a special than paying -- pay a bigger special -- not that it's not huge enough as it is.

But -- And then issue the stock [indiscernible] but maybe, I'm wrong. Can you just talk us through that?

Sure. And just to put that in context, we've spent about $12 million buying back stocks so far, so it's not big bucks by any stretch of the imagination.

And for larger award holdings, we have historically issued shares, and that would be our intention going forward as well, and this is more for giving this the RSS scheme. I'd rather buy them back where we're taking spend -- buy them back in a year's time when we're trading at 1.6x book.

Okay. Thank you.

See you next quarter.