Lancashire Holdings Limited

Alex Maloney - Group Chief Executive Officer Paul Gregory - Group Chief Underwriting Officer and Chief Executive Officer, Lancashire Insurance Company (UK) Limited Elaine Whelan - Group Chief Financial Officer and CEO, Lancashire Insurance Company Limited

Ben Cohen - Canaccord Jonny Urwin - UBS Janet Demir - Morgan Stanley Andreas Van Embden - Peel Hunt Joanna Parsons - Stockdale Securities Anne Hue - RBC Capital Markets

Okay, thank you. Good morning everyone.

Thanks for calling in. I'm pleased to report a strong set of results for our third quarter.

Our return on equity of 3.1% and a combined ratio of 73.8% demonstrates our underwriting and investment strategies continue to fare well considering the difficult underwriting and investment conditions we continue to experience. Our year-to-date return on equity of 10.5% and combined ratio of 75.6% are excellent indicators of our ability to manage this stage of the cycle.

We said at the start of the year we believe we can maintain our premiums around the same level as 2015, which we have done within a reasonable margin. We have continued to add total focus on profitable underwriting across all of our platforms and manage our risk levels appropriately versus the underwriting opportunity.

We have reduced risk levels year-on-year. We see this would change in the overall outlook, so our strategy remains constant.

We continue to see declining pricing with underwriting margins staying in most, if not all classes of business. It does appear to be a realization that the pace of reductions will slow and we expect the 1st of January renewals to be in the region of single-digit reductions for quality accounts.

Our view hasn't changed and that we do not believe that pricing environment will materially improve until capital is impaired and capacity decreases. Hurricane Matthew was a timely reminder for our industry that when you're in a risk business, things can change quickly.

This hurricane does not appear to have generated any real material losses for the industry, but it could have generated one of the largest Cat losses we have seen for over a decade. Again, it demonstrates how easy it is to focus on premium, not risk at this stage of the cycle after such a benign period for such events and a very low insured Cat loss activity for several years.

The only thing which is guaranteed is the events such as this will eventually challenge our industry and we need to be able to respond accordingly and manage our customers' needs. We continue to make progress with the change management we are bringing to our Lloyd's business Cathedral.

We have hired many talented individuals to join our colleagues there and believe that our Lloyd's business will only become more aligned to the overall Group, allowing us to further leverage the benefits of our multi-platform business. Our underwriters at Cathedral continues to produce excellent underwriting results, while being totally focused on disciplined underwriting and risk selection.

We simply won't write risk for inadequate pricing. So our story doesn't change nor should it, as we see in our immediate change in the underwriting or investment environment.

Clearly, margins are tight across most product lines, but we have demonstrated that Lancashire, Cathedral and Kinesis models continues to produce excellent results for our shareholders in challenging times. I would like to thank everyone who works for our company for their huge effort in producing these results.

I'll now hand over to Paul.

Thanks, Alex. Once again, I am able to report a solid set of underwriting results with a combined ratio of 73.8% for the third quarter and 75.6% year-to-date.

This has helped to deliver another strong quarter of ROE for the Group. Most latently, all platforms within the Group continued to contribute to the Group's underwriting results.

We've reiterated many times that these are the toughest trading conditions we have faced as a business, but to continue to deliver market-leading underwriting results these are replacing. Albeit we do know and we do appreciate that the loss environment this year and in recent years has not been particularly testing.

This is something we do not forget. That said, for the combined ratio in the mid-70s, we certainly have a little bit of margin for when these losses inevitably do arrive.

In fact, the fourth quarter has kicked off with Hurricane Matthew, which turned out to be – turned out not to be a disruptive as first phase, but it's again a well-timed reminder where we are not been in a benign loss environment indefinitely. With underwriting margins so tight, it's not going to take much for the macro underwriting results for the industry to dip into the red.

As we look forward to 2017, we do not anticipate Hurricane Matthew having any significant impact to the broader market conditions, only a retraction of capital will stay there. However, it helps us edge slightly closer to the bottom of the cycle.

Our business is notoriously lumpy due to line sizes in the Lancashire platforms and the impact of multi-year deals, but quarter-to-quarter there could be premium movements between subclasses. In line with guidance, our premiums in 2016 have broadly tracked with those of 2015 demonstrating we continue to hold on to our core portfolio of risks.

Our expectation to 2017 is that rates continue to reduce in most of our product lines and the rate reductions should be less significant than in recent years. In particular, the Catastrophe Reinsurance lines are likely to be less competitive than the Specialty Insurance lines, as it feels like they are starting out into bump along the bottom.

For us it means the same story as before, which is to fairly defend the so-called portfolio of business we have can purchase adequate reinsurance protection, so our risk levels are managed appropriately. Our reinsurance strategy has been beneficial this year and absent any shift in market dynamics, we will not be altering this strategy.

In any market there will always be new business opportunities and we will exploit days wherever possible, but at this stage of the cycle, there are far less than we would ideally like. So, our underwriters maintain a discipline and won't underwrite the top-line.

We do appreciate that this is a recovery message from us, but we strongly believe that this strategy is the correct one for this part of the cycle, enables the Group to produce acceptable returns to our shareholders. It's also one of the major reasons we've been successful in replenishing our underwriting teams with new talents throughout the year, as good underwriters want to be allowed to underwrite sensibly.

These new underwriters bring with the new broker and client relationships that would also help us develop our existing books of business both in the short and longer-term. I'll now pass over to Elaine.

Thanks, Paul. Hi, everyone.

Our results are on our website as usual. We had a quiet quarter on the loss front with sales reported, but we had some adverse developments on some of individual prior accident year claims.

We still had net favorable development for the quarter. Underwriting performance was therefore very good again this quarter with a net loss ratio of 25.3%.

Our investment portfolio also performed well despite the uncertainty in the market and our overall ROE for the quarter was 3.1%, bringing us to 10.5% for the year-to-date. With a bit of a reduction in this quarter in Cathedral's reserves for the Canadian wildfires, Cathedral contributed 1.1% to the ROE for the quarter bringing the contribution to ROE to 2.3% for the year-to-date.

While it's too early to provide a solid estimate, we will undoubtedly have a loss in the fourth quarter from Hurricane Matthew, although, we expect that to be contained within earnings. Other loss activity in the fourth quarter so far has been light.

Back to the current quarter, there is a reduction in gross premiums written this quarter compared to last year with most of that coming from Cathedral. While Cathedral maintained their core book with price reductions across both lines of business as pressure on rate continues.

On the Lancashire book, we had reductions primarily in the political and sovereign risk books and offshore energy. We are still seeing good deal flow in the political and sovereign risk books.

The timing is difficult to predict in that line of business due to the specific nature of the deals. For the offshore energy book, reduction is mostly due to reduction in exposures driven by the oil price.

The slight uptick in property Cats is just the timing of some multi-year contract renewals. While we don't give top-line guidance, as Paul said, we expect the current pricing pressure to continue into the fourth quarter and into next year.

The fourth quarter is typically our lowest volume quarter, so there is a less of an impact there. For 2017, I would imagine a top-line that will come up a little bit, although there are these bits and pieces of new business opportunities around.

Our premium ceded is higher than the prior year due to some premiums ceded to several [Indiscernible] facilities and also some reinstatement premiums. As Paul said, the additional reinsurance purchased this year has been beneficial to the Group which was some - recoveries last quarter, although there is a knock-on impact on net earned premiums.

Our net earned premiums also impacted by some of the longer tenure business we written in the political and sovereign risk book. So we will have the benefit of those premiums earning out over the years ahead.

Our acquisition cost ratio is trending back down, in line with expectations. I would anticipate the full year ratio to be around 26%.

On losses, as I mentioned, there has been very few reported, a couple of individual claims on prior accident years deteriorated, but we still had net favorable developments for the quarter. For 2014 and 2015 accident years in particular, had very few reported.

Investments, including currency hedging returned 0.6% for the quarter despite the increase in treasury yields. Our fixed maturity portfolio still generated a positive return due to credit spreads coming in and our risk assets performed well with strong returns from a bank loan equity and hedge fund portfolios.

With the expectation of Fed hikes in December to maintain our current portfolio positioning, continue to diversify our portfolio, take fairly short durations, and manage our interest rate risk. In other income, profit commissions from Kinesis are down to prior year.

This is largely timing as we have received $2.9 million in Q4 as class order was released on the 01-01-2015 and 01-07-2015 underwriting cycles, but hopefully a little more still to come through. As there are no losses on the 01-01-2016 underwriting cycle, corporate commissions could be just under $6 million, but the earliest we will receive that would be Q1 2017.

Our G&A includes KCM's expenses. While our total G&A dollars spent is down than the prior year, the ratio has increased due to lower net earned premiums.

We saw a bit more benefit in our cost base this quarter from declining sterling exchange rates. That benefit offset increases elsewhere due to increased headcount and variability around incentive pays.

With more than half of our cost base in sterling, there should be some further benefits from the pound sterling in next year's expenses. While our stock comp expense is impacted by vesting and performance assumptions, the significant reduction in the quarter's expense, compared to the prior year is largely due to the departure of certain Cathedral employees earlier this year, as orders granted in acquisition lapsed.

We will see that trend continue for a few more quarters. We had a positive benefit this quarter in the mark-to-market of our interest rate swaps as yields rose.

Ignoring this swap mark-to-market and any one-off costs, our financing costs still tend to be around $4 million a quarter. Lastly on capital, as stated in the press release, we are declaring a special dividend of $0.75 per share.

We said earlier this year, if there are no changes in the market, we would be likely to return earnings and maintain capital at the $1.35 billion to $1.4 billion level. The market is much the same and our outlook on 01-01 is for continued reductions albeit at a slower pace.

There is some benefit to us from own reinsurance buying and with some further enhancements in our program and the comprehensive income of $123.3 million for the year-to-date, we're comfortably returning $150 million of capital. With that, I'll now hand over to the operator for questions.

Good afternoon. Thanks very much.

Hello. I wanted to ask two questions please.

Firstly, you made reference to the benefits of reinsurance in the quarter. I just wonder if you could say more about the lines and the size of the underlying - the gross loss, where you made the substantial recoveries that you referred to?

And secondly, I was wondering if you could give us an outlook for the development of earned premium going into next year, given that multi-year deals and where they fall, those tend to make that lumpy. Would you expect that to be flat or could that even rise a little bit?

Thank you.

So, Ben, on question one, there is a - quite a large energy loss in the market that you'd expect us to have. Our energy account is still substantial versus the market and we have one particular account that's got a large loss there and we have fairly a lot range on it to protect us for that loss.

So, at the moment we’d expect to have the less side sits in their market share and the regional program has worked accordingly. So it's pretty much same.

Right. Elaine, can you?

Yes, in terms of the outlook for earned premiums for next year, I think you should see that more broadly in line with this year. We do expect our top-line come down a little bit with pricing both in terms of the percentage of earned to net written should be both the same.

Okay, thank you very much.

Thanks for taking my questions. Just two from me.

So, firstly on reserve releases $5 million in the quarter was a bit low than I was thinking and that's way down by the marine losses the adverse development. I just wondered if you could quantify that.

I also saw a comment in the release that says, clearly, case reserves are coming down a bit. So you don't have any losses in recent years.

So, I was just trying to think about what reserve releases might do in the coming years. I guess, those will trend down towards the $40 million guidance?

And secondly, just thinking about the attritional loss ratio for next year, so, you're looking to hold the premium base broadly steady, down a little bit. You're talking about single-digit rate reductions on high quality business.

I mean will that just drop straight through to the attritional loss ratios presumably you won't be managing the cycle as actively as in the past? Thanks.

Okay, I think we've talked in previous quarters about the lumpiness of our book and reliabilities of loans. It’s very tightly dependent with the specialty lines we write and a loss can happen anytime and if and when that happens, it's going to be a prior accident year development or current year.

And this quarter overall, which is quite on both funds which take that at any day, we do have some old claims sitting around in there, and given the nature of the business we've got, we can't go against those. We’ve talked about that in past as well in terms of forecasting variability which is something that we don't really give any guidance on.

And our approach to reserving hasn't changed. So, there is air for attrition and if nothing comes through, then we release those to our kind of our IBNR and reporting partner releases are pretty much in line and then it comes down to individual larger losses or events.

And I am sure you know that they can either go support us or against us. In terms of the attritional loss ratio for next year, I don't really see any reason to change our guidance on that and that kind of like mid-30s kind of range.

And we are lower this quarter, but one quarter doesn't apply the change in that and if you wanted to price adjust that for next year, then you could, but we're actually seeing price declines slowing and being lower than have been up until now.

Thanks. Can I just follow-up on the reserve releases point, because I guess, I mean, obviously, you'll have your attrition, which is an ongoing level, but given we haven't really had the big losses for two or three years, you are not reserving those for those specific large losses.

But, I mean, I guess structurally, we should just think about reserve releases coming down, because they want the premium shrunk quite a large until we haven't had those – those large losses coming through. Is that a fair assumption?

No, I don't think so. When we look at the larger losses, we're looking at those in the best estimate basis and we are hoping to look at them right.

We do get some development off of some of those it works in our favor, but it also goes the other way. I think we saw in Thai flood loss, it developed adversely in early years and then it ended up being favorable in lately years and if you look at by cost concurrently then that obviously went against us as well.

So, as I said, things do never owned and it's not, but sandbagging old larger losses to get the releases going forward.

All right. Thank you.

Thank you. One of mine has been answered already.

So just one from me. You mentioned that you expect to operate at a similar capital total level to 2016 of $1.35 billion to $1.4 billion in 2017.

Given this, does this mean that you expect market conditions to remain broadly the same in next year? And should we then expect a similar level of capital returns?

Also, are you able to say at what end of the $1.35 billion to $1.4 billion you are most comfortable operating at? Thanks.

Let me just talk a little bit about outlook and we do expect pricing to come off a little bit, but we're very much defending our core book of business. So there is a degree of stability around that.

And I wouldn't want to be begin kind of try and forecast where our capital returns would be the this time next year and lot of that is dependent on loss performance throughout the year. And in terms of capital level, the $1.35 billion to $1.4 billion, we're probably more comfortable sitting at the lower end of that range of $1.35 billion.

Okay, thank you.

Hello. Good afternoon.

I just had one question about risk appetite. Given the fact that you are keeping your capital levels sort of stable.

Does that also mean that there is going to be no change in your risk appetite for 2017? I - just confirming whether there could be no changes in your gross risk appetite and no changes in your reinsurance program.

Thanks.

On that, Andreas, I mean clearly, we are just coming outside January renewals and we will see how they go and then also hopefully, we are just in the process of meeting with our reinsurers and working out what reinsurance that we have for 2017 and our general view is that, if we can buy more cover for around about the same price that's what we look to do. But we have done a lot surgery on our risk levels in the last couple of years, and we have managed our retentions down pretty low and we pull a lot of cover as well, as the talent as well.

So, there is a limit to what we can do. We are pretty comfortable where we are at.

We think we've got the appropriate amount of risk versus the opportunity. But that's not to say, if our renewal discussions in that range shows gets better than we think, maybe there is a bit more we can do, but as I did say earlier, the market is slowing up.

We are seeing pricing slowing up and we are seeing reinsurers hardening up. That's not to say the markets hardening in reinsurance, but the pricing is slowing down.

And I think that you are just seeing and there is very little margin left in all product lines and it’s going to be incredibly hard for anyone sensible to give lot surprising for 2017. So, we think we're going to be pretty similar to this year and hopefully, we can tweak a bit here in now.

But as I said, overall, we've done a lot of surgery in our risk levels. We're very comfortable where we are versus the opportunity and as we've always said a million times that we would love to achieve more risk, but we refuse to do that until we get paid for it.

Okay, thank you very much.

Thank you. I have two questions.

Firstly, on the energy markets, as you commented in your Investor Day, how challenging that is and I can see that in the comments today. But with the losses that are knocking around the market, could you give us a feel for how you think the energy market may respond in 2017?

Are we getting to a point where we may see some small positive movements or more capacity come out? And then secondly, as I am sure you're well aware of Blenheim have now got to go ahead and will be underwriting and some of your old colleagues are joining during 2017.

Could you update us on where you feel you are in terms of that Cathedral book and what business may or may not get lost? Thank you.

Sure. I'll take the Blenheim question and then I'll hand over to Paul to the energy one.

So, yes, those guys got approved, which wasn't a surprise to any of us here. But clearly, they have another competitor like everyone else and then we have said this lots of times, you are in a very difficult market already where everyone is competing.

So that's just another competitor, but clearly with those guys - that elements of our book, which they have very good client relationships with as do we. What we have done, we are pretty much fully staffed at the 1st of January, a number of those guys are still in the gardens that they are unable to underwrite the 1st of January anyway.

So, we're fully staffed everyone that we've employed, we've employed to have the same kind of client relationships. Quite honestly, I don't believe we will lose a material amount of business to Blenheim, that's not to say, they won't get business, but clearly they will.

Brokers are very good at shuffling the pack, but, we are completely aware of those guys' ability to look at the business that we have and we've done a huge amount of work already. So yes, we're off for that one.

They will get business. I don't believe they'll get as much business as I think they I will, because I think a start-up whoever you are in this market, quite honestly is close to impossible.

But as I say, one thing I want to be really clear on, is that, we will get into a pricing war with anyone. And I think, if we see – we see various things happen in the last quarter.

We saw an energy account that was at 50% reduction, which is insane particularly once Paul gives you a description of the current energy market. We walked away from that piece of business.

We saw a marine risk that was 40% off. We walked away from that piece of business.

You just did that final stage of the soft market where incumbents are doing crazy things. If you are a startup, you are pretty much going to have to do whatever the brokers tell you that's just the market you are in.

So, we won't compete on price, because the margins are so skinny already. We would rather walk away.

Hopefully, that doesn't happen. But as I said, it's tougher that we compete with everyone, everyday, anyway.

So, I don't think it massively changes anything for us really and 01-01will be difficult for everyone.

Okay, thank you.

Hi, Joanna, yes, everything you say was about the energy market in terms of the fundamentals would point to the market doing something in 2017 doing something positive unfortunately. As always, our market isn't particularly logical.

I mean, we had a run of losses in 2015, in 2016 overlaying that the premium into the upstream energy market is pretty much half in that time. Margins were incredibly tight, but the one thing we haven't seen is capacity exit the sector.

And unfortunately, until that point that happens, my view on a hope I am wrong by the way, my view is that that market won't change. I think the rate reductions will soften slightly in 2017 as people realize that there is very, very little margin in that business, but I still do think it will go down.

What will be interesting is, I don't think the reinsurance market is going to get any cheaper at 01-01, because they’ve themselves been hit with a number of losses, which is further going to squeeze the direct market. And it seems like that where you start to see some change.

But my general view is 2017 is too early. I think we're looking at 2018.

As I say, hope I am wrong, but adjust the fundamentals, adjust that nobody is leaving the sector and if capacity doesn't come out, and there is a far less premium, people will chase that premium, which will just make sure that there is still competition there. So, that's our view of the energy market in 2017.

Okay, thank you.

Hello. Just one question from me, please.

So, given that you have about $1.6 billion in capital and capital guidance is 1.25 billion to 1.4 billion. How should we be thinking about specials in Q4 this year?

Hi, Anne, and I think when you look at the capital, if you look at it on a tangible basis, actually it did knock off $154 million of tangible is safer to do $1.49 billion

Okay.

And then we have a dividend coming out of $150 million.

Okay. Thank you

Hi, I'm [Indiscernible] So another question on capital. So the capital base is stabilizing at these levels very much positioned for a stock market.

Just wondering how much headroom there is in capital for growth if you saw significant opportunities? How much could you grow volumes with the existing capital base?

Thanks.

Hi Nick. When we look at capital, we always put in a buffer for headroom there for loss absorption and for rating agencies.

So that we can take a loss and still be able to move forward not just to mark afterwards and that's a decent buffer that movement carrying also bit above that and just that we can see how the market shapes out next year, call it a little bit the reinsurance policy if you will, but I think we're pretty comfortable with the growth - plenty of headroom to be able to respond if something does happens.

Okay.

I think that makes us well, it just depends where the opportunity is. If the opportunity within in the specialty line or outside of Cat, obviously, we don't need as much capital as we do for Cat business.

Okay. Great, thank you very much.

Okay. Thanks for your time today and we will see you at the next one.