Lancashire Holdings Limited

Alex Maloney - Group Chief Executive Officer Richard Williams - Active Underwriter, Cathedral Darren Redhead - Chief Executive Officer, Kinesis Denise O’Donoghue - Chief Investment Officer Paul Gregory - Group Chief Underwriting Officer and Chief Executive Officer, Lancashire Insurance Company Elaine Whelan - Group Chief Financial Officer and Chief Executive Officer, Lancashire Insurance Company Jonny Creagh-Coen - Head, Investor Relations

Kamran Hossain - RBC Thomas Seidl - Bernstein Ben Cohen - Canaccord Nick Johnson - Numis Xinmei Wang - Morgan Stanley Olivia Brindle - Bank of America Frank Cawood - Frank Cawood & Associates Thomas Fossard - HSBC

Okay, thank you. Thanks for dialing in, everyone.

We also have Richard Williams, Active Underwriter of Cathedral; Darren Redhead, CEO of Kinesis; and Denise O’Donoghue, Chief Investment Officer on the call for questions. I am pleased to report that we have started 2016 with a strong return on equity of 3.8% for the first quarter.

Our combined ratio of 72.7% demonstrates the quality of our portfolio and our total commitment to underwrite the cycle. As we have always stated, we are underwriters first and foremost.

So we will continue to focus on underwriting excellence, efficient capital management and managing our investment portfolio in a conservative manner. We have adjusted the amount of insurance risk that we currently hold as we embrace the current environment.

We have enhanced our reinsurance program at January 1 and believe that we have the right risk adjusted return for this stage in the cycle. So, I am satisfied that we continue to demonstrate our ability to add value for our clients and brokers in this challenging market.

As we have said many times before, unless you are relevant you really are going to struggle to make any acceptable return for your shareholders in the current underwriting environment. We have experienced the period of change at Cathedral, our Lloyd’s business.

I see this as a natural evolution of the business as certain incentives mature and a period of opportunity for the next generation of leaders within that business. I am delighted that Richard Williams has assumed the role of active underwriter subject to the necessary approvals.

Richard is supported by an experienced team of colleagues, many of which have been with the Lloyd’s business for the last decade who will assist him with the continuation of excellent underwriting contribution, which Cathedral provides to the group. We have also made new underwriting hires, who will underwrite the North American property CAT portfolio and the international property CAT portfolio.

All three hires have been chosen for their in-depth experience in dealing with the specific customer and broker base. We will be able to publicly announce them in the near future.

Lastly, I would like to welcome Heather McKinlay to Cathedral. Heather will assume the role of Chief Financial Officer, again subject to the relevant approvals.

So, we have a lot going on, all of which I believe is positive for the group as we evolve as a business. We have been through periods of change before and this is no different.

I am delighted with the reactions of people who work for us and this period of change has opened the door to many conversations, which we continue to have. We see no immediate change to the current underwriting climate, but we do believe that things will change when capital is impaired.

With low margins in CAT free years, we believe that not much needs to happen before the industry is in the red. This in itself may not change things immediately, but we do believe that shareholders across the insurance sector will not accept low returns indefinitely.

I will now pass over to Paul Gregory.

Thanks, Alex. Good afternoon, everyone.

Once again I am pleased to report an excellent quarter from an underwriting perspective, with a combined ratio of 72.7% demonstrating the quality of the underlying portfolio. In this benign loss environment, you would truly expect a combined ratio to be within 100%, but having a healthy margin certainly gives a degree of comfort when market losses return to historically normal levels, which will no doubt happen at some point.

The market across almost all of our business lines continue to soften through the course of Q1, albeit the pace of change in certain lines, in particular U.S. property CAT has certainly slowed.

Premiums across the group are broadly in line with expectation, given the market dynamics in each class. Premiums in the Lancashire property and aviation portfolio have remained robust offsetting reductions across marine and energy.

Rate reductions continue in the challenging energy market and we anticipate similar levels of rate reductions through Q2. As expected, premium levels are also impacted by lower values and activity.

However, we have been successful in maintaining and improving our shares on the core portfolio. Cathedral premiums year-on-year have reduced in line with expectation, given rating trends and the continued disciplined underwriting approach.

Property reinsurance premiums are reducing in line with rating movements with the portfolio remaining static. Whilst market conditions in aviation and property, direct and fac have meant that certain risks have declined to protect the profitability of the book.

I would like to thank everyone in Cathedral for their hard work, dedication and professionalism over the past few months in ensuring that our clients and brokers have had a business as usual service. And this has meant that our trading at one-fourth has remained in line with expectations.

We also thank our clients and brokers for their continued support, which whilst not unexpected is greatly appreciated. As Alex has mentioned, we have made a successful start to recruiting new talent to the syndicate, which is both pleasing and demonstrates our commitment to the business.

Just as pleasing has been the continuation of our historic ability to promote from within and allow younger talent the opportunity to take on more responsibility and more challenge. As a business, we have always encouraged this and benefited as a result.

Absent any significant market losses, we fully expect the market to remain challenging through the remainder of the year for our core book of business and pool of talent within the group positions us very well. We have the ability and the platforms to maximize opportunities as and when they arise in the future.

I will now pass over to Elaine.

Thanks, Paul. Hi, everyone.

Our results are on our website, as usual. Given the market environment we are in, we are delighted with our first quarter results.

With strong underwriting performance from both the Lancashire and Cathedral platforms, ROE for the quarter was 3.8%, with Cathedral contributing 1.2% of that. With a quiet quarter for losses and some reserve releases, our loss ratio was 29.6%.

Our investment portfolio also performed well in incredibly volatile markets producing a return of 0.7% for the quarter. While many of our key metrics this quarter looked very similar to our Q1 2015 metrics, the reduction in comprehensive income quarter-over-quarter, there are few moving parts this quarter and I will get into more detail on those.

But at a high level, investment returns were good, but down a bit on last year and the rest is due to prior year recoveries and the timing of receipt of profit commissions. While underwriting income was a bit behind last quarter, you may recall that we received additional recoveries on the settlement of a large Thai flood loss claim in Q1 2015, which boosted underwriting income for that quarter.

As I mentioned last quarter, the impact of the large number of multiyear policies written in 2014 has largely run through the top line now. So, there is much less impact from them.

On the Lancashire book, reductions in the energy and marine premiums due to rates and the timing of non-annual deals were offset by increases in the property book due to new business in the property CAT and in tourist books. Cathedral maintained a core book, but had some further reductions across most lines of business with rates continuing to soften.

Our 1/4 property CAT and energy offshore renewals in the Lancashire side held up reasonably well, with premiums just a little bit behind the prior year. Cathedral continued to see some further rate pressure, with the magnitude of premium reductions in line with the first quarter.

We expect pricing pressure to continue over the rest of the year, but expect Q3 and Q4 premiums to come off a bit. But Paul has said, the pace of rate reductions is slowing, but there shouldn’t be a significant impact.

Also, about 65% to 70% of our book is written in the first half of the year. Our ceded premium is a little lower than Q1 last year, but for the full year I would expect it to have around the same level of spend as last year as both Lancashire and Cathedral continue to buy more cover with savings from price reductions on our program.

Our acquisition cost ratio is in line with the expectations for the quarter and also for where we expect to be for the year. On losses, as I mentioned, it’s been a quietish quarter and we had some favorable developments.

We had a couple of midsized energy losses that we reserved in the quarter and those have pushed our accident year loss ratio up a little to 42.5%. If you strip those out, our attritional ratio is still in the mid 30s.

We had $17.7 million of favorable developments in the quarter compared to $26 million last year, with the difference being largely down to the Thai flood loss recovery I mentioned earlier. Otherwise, in both quarters, we are just releasing IBNR due to lack of any reported claims.

Investments, including our currency hedging, returned 0.7% for the quarter, with most of that coming from our fixed maturity portfolio. Our hedge funds were negatively impacted by the volatility in the quarter, but that was almost entirely offset by positive returns in our bank loan portfolio.

Our interest rate hedge and any gains or losses on hedge fund redemptions are included in the net realized gains, losses and impairments line in our income statement. The large negatives you see there this quarter is a result of those realizing losses and some redemptions in our hedge fund portfolio as we slightly repositioned that, plus the movement on our interest rate hedge and some impairments.

The mark-to-market on our hedge funds goes through other investment incomes and the negative there is a reflection of the performance in the quarter. The rest of our portfolio mark-to-market posted a comprehensive income.

Overall, our diversification and interest rate hedging are serving us well. We will continue to manage our interest rate risk over the rest of this year and will stay fairly short duration at around the same level of risk assets.

Other income such as our third-party capital income, the reduction in this quarter is just the timing of receipt of profit commissions from Kinesis, as we wait for some collateral to be released. We anticipate receiving about another $4 million over the rest of the year on the 1/1/15 underwriting cycle.

As before, underwriting fees from Kinesis are earned in line with the underlying risk profile, so you will see most of that come in over the next couple of quarters. If there are no losses in the 1/1/16 underwriting cycle, profit commissions could be just under $6 million, but the earliest we could see that was the Q1 2017.

Lancashire’s G&A includes KCM’s expenses. While our overall G&A for the quarter is in line with our expectations, it does include some additional compensation expense in relation to previously announced Cathedral exec departure.

Employment costs are therefore slightly higher, but other expenses are down a little due to a reduction in some IT projects and consultancy costs. Reductions in stock comp costs due to RSS awards lapsing and departures were offset by an increase in performance assumptions.

Our financing expenses were negatively impacted by the mark to market on our interest rate swap and we also had an additional expense of just under $1 million this quarter for the renewal of our credit facility. Ignoring the swap mark to market, our financing costs still tend to be around $4 million a quarter.

The small tax credit for the quarter is driven by a combination of some prior period adjustments and some group relief taken. Finally on capital, as I said last quarter, we are targeting around $1.35 billion to $1.4 billion of capital for 2016.

But we will continue to monitor that closely as the year develops. If nothing happens to change the market this year, then we are likely to return earnings at the end of the year.

With that, I will now hand over to the operator for questions.

Hi, good afternoon everyone. I have got three questions.

The first one is just on your P&L, so it looks like your Japanese exposure has increased at April 1 up from 1st of, is that down sort of kind of increase in Japanese premium that we should expect to come through in Q2, that’s question one. The second question, just on reserve releases, if I look at the size of the reserve release compared to your – as percentage of your opening net reserves, it’s just over 2.5%.

So annualized that’s 10% of your opening net reserves, I guess as the book has shrunk, should we expect larger reserve releases as a percentage of net earned premium to come through. And the third question is probably one for Alex, but just on Cathedral, now that you are kind of more involved with the day-to-day running of the business, are there any areas that you think can be improved or kind of brought more in line with the way that Lancashire does things, I would be really interested in any thoughts there?

Thank you.

Okay. Kamran, so obviously I will take three and then Paul will do the Japanese one and then Elaine will do the reserves.

So I think my view of Cathedral is nothing has substantially changed. Obviously, we have had a number of departures.

Richard Williams, who is sitting next to me has stepped up to Active Underwriter. That’s good continuity for that business and it’s provided opportunities for other people internally to have a bigger job than what they had before.

So I think that’s good, that’s always been the kind of Lancashire way. Not much change at Cathedral over the years, because it’s a very stable business and obviously, when things have changed that creates opportunities for other people.

I think our Lloyd’s business – the Lloyd’s model is very different to the business outside of Lloyd’s. So I don’t see why we would change anything that makes sense.

That business is good, it’s profitable. The people there are very good.

But where I do see we can do some things, I think we can get closer together and I think there are probably opportunities around some of the reinsurance buying that we do as a group and I think we can get better at leveraging the spend we have in the market. As we have said many times before, we have put more reinsurance as a group.

We think that’s the right thing to do at this stage of the cycle. Have we leveraged that enough, probably not.

So I think we can look at that. Obviously, I am not proposing for one second that we would buy less reinsurance.

I just think we could probably get better at doing that. And then there will be some small things, maybe where we can get more efficient, work closer together, but there is no grand integration plan here.

We are going to do everything that makes sense. Not change anything where we don’t need to, but there is definitely things we can do as we work closer together.

And I really appreciate your thoughts. Thank you.

Thank you.

Well, Kamran and on Japan, yes we have been really pleased, actually with how 1/4 went across the group with our Japanese renewals both at Cathedral and in Lancashire Bermuda. I mean over the last few years as you know, we have established quite a presence in Japan and we had a number of our core clients come to us this renewal season and offer us the opportunity to have bigger participations.

And we have on some occasions done that. We think its good business.

The rating environment wasn’t too bad, it was about 7.5 to 10 off. So you might not necessarily see an increase in premiums, because some rates have been coming off.

We also hired a new guy at the tail end of last year, who was previously with [indiscernible] Japan, which has helped us develop some new relationships. So overall, renewal season at 1/4 both at Cathedral and at Lancashire Bermuda was very strong, which we are very happy about, because that’s obviously a very core part of our property cat portfolio.

Thanks Paul. Appreciate your thoughts.

And then on the reserve releases, I think we have said in the past not to read anything into reserve releases in any given quarter. It’s always nice to have them, but sometimes things go the other way.

A lot of the way through last year we were just releasing IBNR over the course of the year and we weren’t seeing much of the quota coming through in ‘13 and ‘14 and the same is going to happen this year, so far. We are not seeing much coming through on the ‘14 and ‘15 years, so we are releasing a little bit off of those years.

We do have a higher attritional rate than we have had in previous years. We have been guiding to around the mid-30s on that.

And then there is lower earnings that are off of that as well given where we are in the cycle. And we don’t really tend to forecast releases and a run rate on that.

Perfect. Thanks very much, Elaine.

Yes. Thank you.

Three questions, the first is on capital management, I wonder what the rationale is for the - a bit more modest payout ratio this quarter, like 62% on operating earnings, you mentioned the price pressure is unchanged at minus 10% across the portfolio and you also just renewed the pre-emption, the 15% you can take, so what kept you basically from further bringing down the capital in line with the business opportunity, that is my first question. Second is on these realized losses impairments, could you breakdown those $7.9 million into the hedge fund, interest rate hedge and impairment part and also comment should we consider all three to be one-offs or if there are more to come in the impairment or in the hedge fund portfolio.

And the third question is a bit more prospective, looking into Cathedral, I understood that you might want to use the more efficient environment of Cathedral to write more out of this platform as opposed to the Lancashire platform, at the moment I am not seeing this happening, so what are your thoughts, further exploiting Cathedral, the efficient platform you have there?

Okay. Thomas so Elaine will do one and two.

I think on your point three, I think the way we think about any business is, if you think what we have got. We have got three platforms.

We have got Lloyd’s platform, outside of Lloyd’s, like the old Lancashire and obviously, Kinesis. So we are always going to place the business where we see fit and where the client – what paper the client wants.

I think what we have is the optionality to place more business in Lloyd’s if that makes sense. I think obviously, we could have done it a couple of years ago now, we starting writing some energy business in Lloyd’s, some terrorism business in Lloyd’s.

But there is not a wholesale shift to put business in Lloyd’s. If that opportunity come up, we would do it.

If it made sense, we would do it. I think more than anything the point I am trying to make is I think having the options of three platforms we think is the perfect structure for us as a business, the product, the fit, within Lloyd’s and we spoke before about underwriters that we now have a Lloyd’s home to attract, so it’s an underwriter that we didn’t have before.

So we have options. I think it’s a fair criticism of ourselves that we haven’t done enough of that.

We haven’t attracted enough of those underwriters and that’s what we will totally focus on going forward. But there are no grand plans to put huge amounts of the business into Lloyd’s, but that’s not to say we wouldn’t do if it made sense, but it’s just having those options is the beauty of the three platforms.

Yes. And just one follow-up, I thought – I may have thought that the capital consumption for the business you do might be lower under the Lloyd’s umbrella rather than under the Lancashire platform, but maybe not?

So, I think if you put the whole business into Lloyd’s, that’s probably a true statement. But I think whilst we have various different platforms, I am not sure it would make a massive material difference to us.

And obviously, as Elaine said, the kind of capital that we are targeting supports what we want to do for the whole business and our ratings, etc. So, I think you are right, if you put everything into Lloyd’s, you would probably need less capital, but clearly, like any strategic decision there is pluses and minuses to doing that.

And what I am saying today is I still believe having three platforms is the best model for us.

Okay, thank you.

On the impairment side, there is obviously a little bit more moving things around this quarter, which I think is probably confusing, but a lot of it is geography. We have taken some stuff out of unrealized gains and losses and comprehensive income and it’s now being realized in the income statement and we took an impairment last quarter as well.

That’s a smaller proportion of the number that you have seen there. Actually, most of the numbers you are seeing there is the mark-to-market on our hedge and on our investment portfolio on interest rates and that moves around as yields move around.

And that’s about half, there is a bit of impairments, then there is a little bit on the hedge fund, because we also took a little bit off the hedge funds last quarter kind of done with that now and what we reposition a little bit on that. On the payout rate, I am not entirely sure I understand your question, but let me try and answer what I think you were asking.

We did a large dividend at the tail end of last year. And in the past we have split that and done a bit at the end of that year and a little bit in Q1.

We chose to do all of it in one go last year. We were just fairly solid in our market outlook.

What we have done since then is payout our kind of standard final ordinary dividend. And you will see quite a difference in terms of payout ratios, if that’s how you are looking at it.

Our dividend policy is for an interim and final ordinary dividend that we do at the same level every year. And then specials, we typically consider them outside a win season, that’s typically a November Board consideration.

And the only thing that drives the difference in that is if we are not quite so sure of what we are going to need at 1/1, but we were fairly confident of our outlook this year.

Yes. I just wondered why not payout more at the moment when it’s pretty clear that the pricing environment stays very competitive.

Just looking at your own ROE numbers, there seems not to be enough earnings pressure to see the end of the price softening. And so I would have expected, let’s say to have a bit more stronger signal on bringing the capital in line with the opportunity.

That was my own thought. I also looked up the previous years.

You always paid a pretty high dividend in Q4, but still paid some special in Q1. So, it’s the first time since 2012 if you didn’t do that.

So, that’s just struck my attention here.

Yes. So, I think what we have been doing over the last few years is paying out more than earnings and bringing our capital down as the market has been coming off.

We are at a fairly steady state with that now. And we are pretty happy with our core group and what we are writing there.

We are at a more stable level in terms of capital. And as I said, we are looking at the kind of $1.35 billion to $1.4 billion level and we were just under $1.4 billion at the end of the year.

And so we chose not to do anything else at that stage and wait and see how the year unfolded and what happens over win season and carry maybe a small excess in there, but it’s really not significant

But that means you assume that from year on much more stable premium levels, otherwise you wouldn’t need that?

That’s correct.

Yes. Okay, thank you.

Hi, there. I am going to do the three questions as well I am afraid.

Firstly, just on the energy book, if you add back the reserve releases it looks like you had quite a high combined ratio both in this quarter and last year. I appreciate obviously the losses are lumpy, but are you kind of confident that, that portfolio given all the pricing pressures is where you want it to be?

Secondly, on the investment side, can you just comment on the increase in the corporate bond holdings and the decline in credit quality from the AA minus to A plus? I think you said you weren’t planning any material changes in terms of your investment portfolio, but if you could just confirm that?

And thirdly in terms of the ROE outlook for the full year, could you just remind us in the context of Q1, which I guess was a mixed quarter sort of where you see yourself against that goal and do you think the market is going to allow you to achieve what you are looking to do? Thank you.

Okay, we will do Paul, Elaine and then I will try and answer the impossible question number three.

Hi, Ben. So, I think it’s a fair observation on the energy market at the moment.

It is incredibly challenging and it has been incredibly challenging for at least the last 12 months. I think if you look at 2015 in terms of losses into the market as a whole versus premium and how premium hemorrhaged across the market claims pretty much outstripped premium two to one.

So, in terms of how we fared last year, I am actually very happy with how the portfolio fared. I mean, it produced circa $30 million of profit last year, which in any market is reasonable.

In last year’s market, it’s pretty impressive. I think we mentioned about a year ago now that whenever you have an oil price environment, where the dollar price of oil is low you tend to then see it pickup in attrition on the losses.

It just tends to happen. And that has certainly been the case over the last 12 months.

That has continued into this year. With all that said, we are pretty happy with the portfolio we have got, we are pretty much down to our core book.

That doesn’t mean to say we don’t get losses. Of course, we do.

Energy is a volatile portfolio. It is prone to losses.

I mean, in our 10-year history, we have been very fortunate to make a lot of money out of the energy portfolio and there was always going to come a time where we weren’t going to be able to make as much money as we have in the past. But fundamentally the portfolio is a strong one.

We do expect losses. There will be losses as there are in any class, but we are very happy with the shape of it as it sits today.

Okay, thanks.

Hi, Ben. On your investment question, I wouldn’t be anticipating any significant changes in our investment portfolio.

We do always look at it and try and tweak it around the edges and try and get a bit more out of it without adding any volatility. We are fairly happy with where we are positioned just now.

We might add a bit more credit into it and I did mention we are looking at just repositioning our hedge fund portfolio a little bit, but our overall appetite for risk assets hasn’t really changed. And you will see allocations move around a little bit around dividend time and as we liquidate some assets to payout the dividend and then it kind of builds back up again.

Right.

And then Ben, your third question, of course, I am going to be wrong whatever I say, but I think we have started – we have had a good first quarter, nearly 4%, if we could do anything – if we could do double-digits this year I would be delighted, I will take that now. Elaine is sort of looking at me funny.

So, I think we don’t give hard guidance, but 9% to 12% if we could do 10% I would be more than happy, but whatever I say is going to be wrong.

[indiscernible] for that one I think.

Yes, I am not going to sit here in my boxer shorts, so…

Okay, thank you.

Thanks.

Hello, all. Just a question on dividend given the unusual makeup of investment earnings in this quarter, can you just talk through how unrealized gains are treated in relation to just overall profits and dividends?

Do you just look at the P&L when setting dividends or do you also take into account cashless profits in comprehensive income? Thanks.

It’s definitely one for Elaine.

Is that your only question, we were getting used to having three. When we are looking at dividend, we look at what we have earned on an overall basis, we focus on comprehensive income, not profit before tax.

And we look at our overall capital base. And we work out what kind of business that we think we want to write.

And then look at how much we have got overall and then make our dividend assessment from that. So it’s going to all encompassing view of what we have got and it’s not a focus on profit before tax for us.

Okay, great. Thank you.

Hi, good afternoon. I have got just two questions or follow-ups from previous questions.

It’s firstly on reserving – after the reserve conservatism, it’s just in the last few quarters they have been particularly high, especially when you compare it to 18 months, 24 months ago, is that all because of benign loss environments, because I guess back 18 months, 24 months ago it wasn’t that different a picture and is this sustainable, just in terms of thinking, this come from recent accident years what would it look like if losses revert back to normal. And then second on capital, on the $1.35 billion to $1.4 billion range for 2016, is that your – that’s your target capital level, but is that the minimum capital that you can run with if the book doesn’t shrink further from here?

Yes, that’s the two questions. Thank you.

Yes.

And on reserving, I think if you want to go back and have a look at last year, as I said we weren’t really getting much reported coming through on the 2 years prior to that. So it was really the factor of releasing IBNR and nothing reported coming to replace that.

We also had that recovery that I mentioned which came through in Q1 of last year, which was a kind of a nice to have on that, so that was a bit more than we might have particularly expected in terms of last year. On the capital side of things again, it’s very much driven by what exposure we have got, what cat exposure we have got and what we want to write and what we think we can write to assess the capital.

And the $1.35 billion to $1.4 billion includes a buffer in there, so that we are able to absorb losses – reasonable sized losses, not like super losses when they come along and then be able to go and access the market afterwards and take advantage of that post loss environment. If there is anything particularly significant that happened, then we might be actually looking to go out and raise capital and take advantage of that post-loss environment.

Okay, great. Thanks a lot.

Hi there. So I am going to go back to three questions.

Sorry about that. The first one just touching on some of your comments around the top line, I am just trying to – like to understand that a bit better, because it seems like you are saying for the year you are still comfortable with having a broadly flat book, but Q1 is by far the biggest quarter in terms of premiums, it’s 40% give or take and that’s down 6%, so just wondering if you could explain how we are going to make that back up to be flat for the year, it seems a bit of a stretch.

And sort of related point also on top line, just looking at Cathedral, is 14% down really in line with expectations, it seems like quite a big number and again that’s by far the biggest quarter of the year in terms of premiums. The second question just on the loss ratio, so you are saying backing out mid-sized claims, you are in the sort of in the mid-30s as guided to, but if you exclude those mid-sized claims, it’s been a very benign quarter, so actually shouldn’t you be much lower than the mid-30s, I would have thought, given what else has happened or rather not happened, that should be more benign.

And then the third I guess more as an observation than a question really around the realized losses, we typically think of your book as being quite conservative and not really having much investment risk and yet seeing $9.3 million negative coming through the P&L in one quarter is – it’s quite a high amount, so I mean would you agree on that and how do we think about that and square that with what we typically think of as a low risk profile, I guess? Thank you.

So obviously, I will leave the more technical stuff to Elaine. I think on the top line stuff, Olivia, we are trying to – we don’t give hard – I wouldn’t describe it as hard guidance, I think we are just trying to give a flavor of – so much happened in 2015, I think we are just trying to say that we believe we will be broadly flat, whatever that means, for the year.

So we are not going to sit here and give hard guidance, as you know. One thing we are definitely not is a top line company, so we can only make certain assumptions, they may move around.

If you think of the Cathedral example again, everything we talk about here is about underwriting what’s in front of you and sometimes that’s a bit more difficult and if that means it’s 14%, it’s 14%. So we believe we are down to our core portfolio, pretty much, across the piece.

There are always some timing issues around premiums. Quarterly reporting doesn’t really help us in that regard.

And even in today’s market, we tend to write a smaller number of risks, particularly at Lancashire and some higher premiums. So it can jump around, but I am pretty confident that our top line will be broadly in line with where we think it’s going to be.

On the loss ratio, I think given where we are with the RPI adjusted your loss ratios that I am pretty comfortable with the kind of mid-30s target. And there has been a lot of stuff happening.

We have had a couple of mid-size energy losses, but they are also just small bits and pieces that happen from time to time anyway. On the realized losses, I wouldn’t say that we have changed anything in terms of our focus and philosophy around our investment portfolio and it’s still as conservative as it was.

It’s a case of where things appear now in line items, we used to mark everything to market. There are changes in – on the gains and losses.

We have got hedge funds now that the mark to market to income. And we have got some other structured notes and things like that that mark to market through income.

As I said, the largest part of that number for this quarter is actually the mark to market on our hedging in our portfolio, which I think kind of gives you a flavor of the conservatism we have got there, so I wouldn’t expect anything to change. And the only thing that’s probably new in there, which was in the last quarter as well as we have taken a little bit of impairments across some of our bank loan portfolio and a couple of energy stock.

Thank you. That’s helpful.

Yes. I would like to again congratulate the whole staff on the excellence of the consistency of the way your core book is performing.

And maybe just some more comments about that, because I think that’s extraordinary that with a lot of those companies you don’t see that and that’s been consistent with Lancashire over the years. And then just another remark as far as your maybe annualized ROE, you have to realize that we are in such a zero interest rate environment that there is a good argument that shadow interest rate is actually below zero and in that sense, it would mean that you should probably give 2% or 3% Brownie points to what your ROE is so that in the normal even low interest rate environment, you might make, say 14% and with this zero interest rate thing could be 2% or 3% below that, so put that in perspective, if you have any comments on that.

And then a specific question for Elaine and I think you may have answered that, on your finance charge this year is up $3.3 million and I guess that may have been probably the renewal of your credit facility, so if you could comment on that please? Thanks.

Okay. Frank thanks for your kind words.

I think the point you make about zero yield is the way I will kind of think about it and that I am sure if we were in a much more normal period, all shareholders would do on a much bigger return from their insurance portfolios, so it’s nice to hear that what we can produce for our shareholders today is acceptable. Obviously, that could change if we went back to a normalized world, but equally we would expect to make some investment returns in that world.

So for me it’s a relative game. It’s about taking enough insurance risk to give an acceptable return to our shareholders.

One thing that you always say and the rest of our shareholders say is that they don’t want us taking unnecessary risk and reaching for yield in a pretty choppy insurance environment, so that’s good to hear. So for us it’s about doing the right job, generating a good enough yield for you guys, not doing any too ridiculous.

We would love to take more insurance risk. We have always said that.

We’re only going to do that when the market is there. We would love to provide a bigger return, but until that day comes we are more than comfortable just producing what we need to, to provide the yield to keep you guys happy.

Core book, PG?

Yes, hi, Frank. Yes, I mean, it’s something that we have been very pleased about across the group over the last year or so really is how we have been able to defend that core portfolio.

And to be honest, it’s that core portfolio that means that we have been able to generate relatively respectable combined ratios through that period. I mean, we haven’t really seen any loss of that core book.

In every line of business, we have maintained our relevance and in a number of instances, in many lines, we have actually – and as I mentioned earlier on the call, Japan is a great example of that. We have actually been able to expand our participation with certain core clients which when better times return will obviously bode well.

Hi, Frank. I will just pick up on the finance charge.

Our standard kind of debt costs and other bits and pieces in there runs to about 4 million every quarter. The uptick this time round is the mark-to-market on the interest rate swap that we have got.

We have got a swap on the original Lancashire debt and there is a little bit in there for, as you said, the renewal of our credit facility. It expired in April.

So, we had to go ahead and renew that and its sub $1 million that’s in there, but that’s kind of one-off costs for this year.

Okay. Well, thanks, Elaine.

That makes sense. That’s just something minor, so appreciate that.

Yes. You are welcome, Frank.

Yes, good afternoon everyone. I have got three questions.

Maybe first question for Alex and Paul, I would be interested in getting your views on the overall reserve situation of the market. Is it something you are looking at and you are starting to see some weaknesses around?

I know that you are more on the short tail side and the market is probably more on the long tail side, on the relative basis, but any sense of how you are reading the market on that front will be quite interesting to get? The second question will be on Cathedral management.

Obviously, we had some big headlines over the past weeks, months. Could you somewhat reassure us that obviously the people who wanted to leave probably post the retention plan have now gone and will be freed from any additional headlines coming from that front?

And the third question will be we are now in a pretty, I would say, not stable environment, but situation where you are fighting with the environment focusing on your core book. There is still some sustaining of the prices.

Are there any high level strategic thinking in maybe in trying new business lines or adding things in your book that you are not doing obviously with the usual freedom you are having on the underwriting side and doing that with the right people? But I mean are we at a point where unfortunately there is nothing you can do much with the type of business you have been historically writing and that at the end of the day, strategically you are thinking in doing things a bit more differently than in the past?

Thank you.

Right. Okay, Thomas.

So, I think question one I will have a stab at. I am definitely not a casualty expert and that’s not our bag.

I think what’s interesting if you look at some of the things that have happened recently in some of the larger companies, I think there is clearly – I mean, people that write a lot of casualty business, it’s very easy for some of those people to move their numbers around and there has been some reserve strengthening from some of the carriers out there. I think Downing has described it as a sort of cheating phase.

So, usually if you look back in history, I am a sort of insurance historian and believe that nothing is going to be different this time round and that usually is a fair signal that maybe the game is up. So I don’t really know.

I think for me, it’s quite interesting. It’s very interesting when you see things like that happening.

So that I think is a reasonable sign that there is not much left in the tank for some of those companies. My general feeling on that is, for me, it kind of feels like the year 2000.

So, for anyone who was kind of around then, the late 90s was horrific. In the year 2000, things started to creak a little and I think there was a general realization that we were kind of bumping around the bottom of the market.

It kind of feels like that to me today, that’s not to say anything dramatic is going to change. But what I do believe is that there is not a lot of dollars left in the system.

And if you just look at the 2015 results for the whole industry, they are not that great bearing in mind nothing happened. So, I think it could go from looking vaguely okay or vaguely acceptable versus a zero yield environment to something that looks quite bad, quite quickly if you had a certain run of events.

So, that will be interesting to see what happens then. I think on the – I will talk about the Cathedral thing and I will let Paul talk about new business lines and how we think about that.

I think on the Cathedral side, obviously, we have been in the press a lot. We have had some departures.

I think there is a number of things there. I think if you step back and if you look – if you just think about it as any acquisition and the sort of natural development of when a company buys another company, there were certain incentives that matured at the end of January and there was – I think what I am trying to say is I think it was probably going to be inevitable that we are going to lose some people at that stage.

I believe that’s all happened now. I don’t believe we are going to lose any other people.

Obviously, I don’t know for sure, but I believe that the people that are here now are committed to the group and actually see it as an opportunity. And we need the people at Cathedral to step up and that’s what they have done.

Richard Williams has taken over as Active Underwriter. That’s exactly what I needed to happen, continuity of that business, because Cathedral is a good business.

There is nothing wrong with that business. The last thing I want to do is change anything about that business.

If anything, we want to do more business in Lloyd’s and we need the people at Cathedral to do that for us. And we constantly think about different product lines.

Paul can give you a bit more flavor on it, but actually this period of change has opened the door for a number of conversations. So, it’s been quite a fascinating time, albeit we have probably had too much going on and I am more than happy to go back to a period of calm, but it’s been quite interesting.

And as I said, it’s been fascinating some of the conversations we have had, because as you know, in our industry there is a lot going on. There is a huge amount going on with M&A and there are a number of individuals that don’t actually see working for a massive organization that may even do more M&A is a great opportunity for them.

And one of the things that we are so clear about here is that particularly for underwriters, if you come to work at a shop, you can still be an underwriter and that seems quite a novel concept at the moment in the current market. And actually good underwriters want to do that and that’s what we can offer them.

So, I am confident we can have more conversations. Whether we get some of those across the line or not, we will have to wait and see.

It’s always very difficult getting the best people, because there is not that many people in our world, but I do think we have things to offer that others can’t. Paul, do you want to give any more color about product lines?

Yes, I think I would just say that as we have said pretty much over the last couple of years, we are always open for conversations with people. We are always going to be focused on short-tail primarily and there are lines of business that we are not currently in.

I think, as Alex alluded to earlier in the call in answer to another question, a self-criticism is we probably should have done a bit more than we have. We are going to be focused on getting people in, assuming they are the right people and assuming that we think in time that those lines of business can make money.

I think in any line of business, at the moment, anything is going to be marginal, but if you can get the right people, you can still make money and then have the right team in placement for when there is a better opportunity in the future. And one of the pleasing things over the past few weeks and months is obviously following a number of departures.

In the Cathedral business, there was a lot of interest in joining the Lancashire Group. So, we are clearly a company that underwriters want to work for, which is great and then we just need to make more progress over the coming year in terms of getting people in.

And people can come in to any part of the business. It’s a beauty of having three platforms, which Alex mentioned earlier.

Some business is better suited to Lloyd’s. Some is better suited to company market and some might stick within Kinesis.

It doesn’t really matter to us. It’s just about getting the right people in.

So, that hasn’t changed. We are going to push harder to make sure we get some more people in over the next 12 to 18 months.

Thank you, guys.

As there is no further questions, thank you everybody for coming to the call today and we look forward to the next quarter.