Lancashire Holdings Limited

Alex Maloney - Group CEO Paul Gregory - CEO and Group Chief Underwriting Officer Elaine Whelan - CFO

Ben Cohen - Canaccord

Okay, thank you. Good morning, good afternoon, ladies and gents.

Today we have myself presenting. We have Paul Gregory – easy for me to say – our CUO, Elaine Whelan, our CFO.

We have Peter Scales, CEO of Cathedral. We have Darren Redhead, CEO of Kinesis, and Denise O'Donoghue, who's our CIO.

I'm delighted to report we grew fully converted book value per share by 2.3% for the first quarter, with an excellent combined ratio of 72%. Excluding the dilutive effects of the warrant exercises, the growth in fully converted book value per share is 4.3%, which again demonstrates the quality of Lancashire's underwriting, weight of specialty insurance business, and our ability to trade through this stage of the cycle.

So, I'm happy we continue to demonstrate the strength of the Lancashire Group in what are the most competitive trading conditions we have seen in a decade. I think that underwriters can forget that our business is cyclical, and in our opinion will always be, so we just have to deal with the current environment until things improve.

There is no point spending all your efforts complaining about it. Others in the market will amend their strategy to try either underwrite their way out of it, or innovate into new products.

We will not. All we've focused on is being the very best underwriters we can be, with relentless risk selection and adjusting the risk we are carrying versus the opportunity we see.

The change in the market is rapid, probably quicker than any of us have seen before, but the fundamentals remain the same. You have to add value to survive.

Quality companies we've established books of business with the best underwriters have the best chance to continue to provide acceptable returns for their shareholders. And I'm confident we're still in a top tier of companies for our areas of expertise.

So, we will continue to be disciplined and stick to the areas where we feel we can add genuine value. We accept that we can't swim against the tide, but we can take advantage of it.

And we have seen opportunities to bring our risk levels down utilizing the best reinsurance market we have seen in 10 years. So, none of what I've said is earth-shattering, but we're not a company that tries to make big statements or tries to predict the future.

All we really care about is trying to do the best job for our shareholders, clients, and brokers. I'll now hand over to Paul Gregory.

Thanks, Alex. In today's rapidly changing and fiercely competitive market, our mantra of underwriting comes first has never been more important.

With the specialty insurance lines now witnessing the same competitive pressures that the reinsurance lines have been experiencing for the past 18 months, now is the time to focus clearly on those areas that you understand and add value whilst not being afraid to make the correct underwriting decisions. Through the first quarter, we've done exactly what we spoke of last quarter, which is to defend the high quality portfolio we're fortunate enough to have.

With rates under pressure, walk away from non-core business where the margin is no longer sustainable. As you'd expect from us, as rates soften, we retract] to our core portfolio, the availability of opportunistic business is less.

It is this focus on profitable core business, backed up with a more comprehensive reinsurance program, that we believe will carry us through the softer part of the cycle. As Alex has already alluded to, it's those companies with the best underwriters and established books of business that are best set to weather this competitive storm whilst maintaining accessible returns to shareholders.

We said before we cannot influence the market, or indeed macroeconomic factors such as oil price, which only further heighten competition within it. What we can do is ensure we're in the top tier of markets within our specialisms to continue to produce top tier underwriting results.

Once again, I'm extremely pleased with what our underwriting teams across the Group have achieved. Other than a medium-sized energy loss, it was a relatively benign quarter.

But nonetheless, a combined ratio of 72% is a very good result in this part of the cycle. All platforms are contributing to the underwriting profits of the Group, highlighting the benefit of the diverse pod business we've built up over the past few years.

The buildout of 3010 has continued well, with new premium from energy, terrorism, and aviation adding to the Group income. And with the swirling winds of M&A continuing, we look for any people displacement caused by this to add new talent to our bench.

The decision to commit part of our portfolio on a multi-year basis in 2014 may be impacting year-on-year premium volumes, but it does mean we're seeing the benefit of portions of our property, cat, and energy book still earning at 2014 rating. Not only do we get the benefit of better rating, but on some parts of the book, in particular Gulf of Mexico Energy, we have somewhat insulated ourselves from the impact of oil price on demand.

The second quarter is a significant quarter for this sub-class, and last year a proportion of income was tied into multi-year deals, meaning the remaining plays through to 2016. These contracts are usually with core partners, and as we've done every year, we'll always entertain commercial discussions, but these will only be cancels-and-replace should the terms be mutually agreeable.

Quite rightly, there's a lot of market commentary on the energy market at present. Increased capacity in the sector, combined with oil price lows, has created a perfect storm.

For the first time in years, capacity and values at risk are heading in different directions, creating a demand and supply imbalance that in any market leads to inevitable competition. We cannot influence this, but as a market leader in the sector, we get to pick and choose how we mold our portfolio.

This is important in a lower price environment because, historically, losses tend to follow periods of depressed oil price, and we've already witnessed 2 reasonable-sized energy losses in the sector this year. In energy, and across all our lines of business, we wholeheartedly believe that remaining focused on underwriting excellence is what will deliver superior returns.

We've demonstrated this since our inception, and remain committed to do so in the future. I'll now pass over to Elaine.

Thanks, Paul. Hi, everyone.

Our results are on our website, as usual. We had a very good quarter, but our results are somewhat complicated by warrant exercises in the quarter, as our largest warrant holder chose to exercise his warrants on a cashless basis.

In total, $17.2 million of the $18.7 million remaining warrants were exercised in the quarter. Given the cash (inaudible), that has an impact on our normal headline ROE.

ROE is 2.3%, but when we remove the impact of the warrant exercised, ROE is actually 4.3%, which is a fair reflection of our actual underlying performance. The remaining $1.5 million warrants expire in December.

If the holders of those also exercise on a cashless basis, there will be a further impact on our normal calculated ROE. But, with such a small amount remaining, that impact will be very small.

Going forward, our only dilutive instruments will be our RSS awards. Our ROE of 4.3% breaks down as a 0.7% contribution from Cathedral, 0.4% from Kinesis, and the remainder from the original Lancashire platforms.

With a fairly quiet quarter for losses, most of our performance comes from underwriting. Our investment portfolio also performed well, producing a return of 1% for the quarter.

Looking at our top line premiums written is a significant reduction compared to last year. If you recall, we talked last year about no-tier policies we wrote in our property, cat, and energy books.

In the first quarter last year, we wrote $28.5 million of non-annual term contracts in the property, cat, and energy offshore books. They're not due to renew yet, so that the dropoff in the premiums written, but we still have the benefit of those earnings coming through and often stronger pricing than the current market.

We also saw reductions in our terrorism and political risk books. Both of those typically have longer-term contracts, and business can be lumpy, so the reduction isn't indicative of any particular trend there.

Cathedral saw some reductions in some lines of business, with pricing coming off, and also the timing of some renewals, but that was partially offset by more new premiums in the new energy, terrorism, and the aviation lines added last year. Our 1-to-4 property cat renewals held up reasonably well, but we did see further reductions in pricing, and our premiums are down compared to last year.

I'd remind you that, in the second quarter last year, we highlighted [indiscernible] $70.5 million of energy Gulf of Mexico premiums written, about $64.5 million of that related to multi-year deals. That will obviously have a significant impact on our top line, but less than 20% of that earned last year.

We'll see about 35% of that coming through in earnings this year, and again with energy pricing under pressure, that's off a better priced business. Most of the rest we'll earn in 2016, with only a small amount deferred until 2017.

So, all in, we said last year that ignoring the lines of business that tend to be characterized but not under contracts, we wrote about $120 million of multi-year deals across our property, cat, and energy lines. About 30% of that earned in 2014, about 45% to 50% of that we'll earn this year, with the majority of the rest earning in 2016.

As we continue to see pricing pressure over the rest of the year, I'd expect our Q3 and Q4 premiums to come off of it. But, with about 65% to 70% of our business written in the first half of the year, that will be a smaller impact, and we expect some growth in the new lines of business added to syndicate 3010.

On the CD side, spend this quarter is broadly in line with Q1 last year, but behind that the original Lancashire platforms spent more and bought more cover, which generally attaches lower. Cathedral was able to obtain further price reductions but still buy more cover.

Overall for the year, you should see a little less spend than last year. We have again been able to improve the terms of our cover.

Our acquisition cost ratio looks high this quarter. Q1 2014 acquisition costs were impacted significantly by the [indiscernible] as we see $6.7 million of profit commission on the computation of our quota share.

We see $5.1 million of profit commissions from Kinesis this quarter, but they are included in other income and did not impact our acquisition cost ratio. Excluding profit commission and reinstatement premiums, the Q1 2014 ratio would have been a more normal 20.3%.

Q1 this year's higher than that due to the additional reinsurance we purchased, plus general changes in business mix that can impact the ratio. That will normalize a bit over the rest of the year, and I would expect it to be around 23%-ish for the year.

On losses, as I mentioned, it's been a relatively quiet quarter. We did see 1 mid-size energy loss, so our [indiscernible] year ratio is elevated due to that at 45.4%.

We've talked before about assuming a mid-30s attritional loss ratio, and I see no reason to change that. Otherwise, we had some favorable developments which included additional recoveries on our 2011 Thai flood losses, with 1 large claim to resettling in the quarter.

On investments, including our currency hedging, the portfolio returned 1% for the quarter. While volatility remains, our hedge funds and bank loans performed well.

They contributed just under 40 basis points to the overall return. Our hedge fund allocation now stands at $156.6 million, and we added a bit more to that on April 1 to bring that to just under $175 million.

We don't intend to add any more to that portfolio now. We have more risk assets in our portfolio now than we've had in recent years, but there's no real change in our investment strategy.

The risk assets we've added are generally lower volatility and are there to address our interest rate risk. We'll stay pretty short duration this year and start increasing that to the expected Fed rate hikes.

We also had fairly high cash balances at the end of the quarter. That's in part due to funding our dividend payment, and in part due to the closeout of the 2012 year account at Cathedral.

You should see that cash balance come back then again next quarter. On KCM, I mentioned we received our first profit commission this quarter from the closeout of the first underwriting cycle.

We expect about another $0.7 million to come through from that in the second quarter. The 2015 underwriting fees are earned in line with the underlying risk profile, so you'll see most of that come in over the US hurricane season again.

If there are no losses on the 1-1-15 underwriting cycle, profit commissions could be just under $7 million, but the earliest to receive that would be Q1 2016. We've added a new page to our supplement baking out what's included in other income, so you can see the contributions from KCM and Cathedral there.

Our G&A includes KCM's expenses. Our G&A ratio looks a little higher this quarter, and that's largely due to bonus accrual adjustments.

Cathedral's bonus accruals are linked to their profit, so you'll likely see that move around a bit over the year. Our G&A ratio should normalize over the rest of the year, and we should trend around the same level as last year, possibly slightly lower.

Finishing off on capital, we're pretty comfortable at the level we're at. And if nothing happens to change the market this year, we'll likely return earnings at the end of the year.

If the market does change, we'd anticipate using some or all of our extra capital for underwriting. With that, I'll now hand over to the operator for questions.

Thanks very much. Good afternoon.

I had a couple of questions. Firstly, on the Gulf of Mexico renewal, you mentioned that you wrote a lot of multi-year premium last year.

Could you just be more specific as to what you actually wrote in this period, how that renewal went? And could you also say a bit more about where you've been reserving releases from specifically on the 2011 and 2014 years, and could you just remind us what you would expect as a kind of normal level of release in a year?

Thanks.

Right, okay. I think that both of those ones are for Elaine.

The only comment that I would have on Gulf of Mexico multi-year is that we started turning multi-year a number of years ago, so post-Hurricane Ike we started turning multi-year for some of our core clients. But, I'll let Elaine talk to you about the numbers.

Yes. Not really sure what to add to your question, so if maybe you can get a bit more specific with me, then I'd be happy to answer it.

We wrote $70.5 million, and mostly 2- and 3-year deals. So, as I said, $64.5 million of that was multi-year, so 20% of that earned last year, and 35% we'll earn this year, with the rest of that coming through mostly in the following year.

Was there something more specific?

No, it was just – so do we take it that on that renewal this year, or the lack of multi-year, that essentially goes to zero, that part? I mean, what did you write that was new this year on the 8-4 renewal?

That's my question in terms of the gross written premium.

All right. Those renewals are still ongoing.

We were kind of working through the Gulf of Mexico renewals, [indiscernible] can give you a bit more information on that.

Yes. Hi, Ben, it's Paul.

Yes, most of the – as Elaine mentioned, most of those fall into Q2, and most of them fall into kind of mid-May to June. So, there are a couple of annual renewals ongoing, so there will be then those coming through.

Obviously the vast majority is in multi-year, as we have done, as I mentioned in my script, in previous years. We only offer a certain amount of clients multi-years.

They tend to be core clients. Sometimes we do re-negotiate those if we can extend them out for a further year if there's a mutually agreeable deal to be done.

So, that could happen, but we're literally just at the stage of talking to clients and brokers at the moment. So, it's a little bit too early to say, I'm afraid, but obviously next quarter we'll be able to give you the full color on that.

Yes. And then, on reserve, reserve will be [indiscernible] of it, and we settled some of our Thai flood loss claims this quarter.

And as a result of settling those claims, reviewed our policies and our reinsurance recovery, so that's where the recovery there is coming from. And that's what's driving most of the 2011 development.

2014, there's nothing real specific in there. It's really just in a standard reporting pattern's been released and the lack of claims coming through.

Okay. And there's sort of a normal progression?

Because I guess Q1 was quite high.

Q1 is quite high, and a main part of that is because of that recovery and just generally it being quite quiet, nothing coming through. I mean, if you look at where we've been over the last few years, the average has probably been in the kind of 15 to 25 range, not that we plan for reserve releases.

Obviously we're reserving to what we actually think is the best estimate on it. But always nice to see some paperwork coming through.

Okay, thank you very much.

Thanks thanks, Ben, for asking the question.

Yes. Thanks for that.

We'll talk to you next quarter.