Lancashire Holdings Limited

Alexander Maloney - Group Chief Executive Officer Elaine Whelan - Group CFO, Executive Director and CEO of Lancashire Insurance Company Paul Gregory - Group Chief Underwriting Officer and CEO of Lancashire Insurance Company Limited Denise O'Donoghue - ‎Head of Investments and Treasury Darren Redhead - CEO of Kinesis

Nicholas Johnson - Numis Securities Ltd. Benjamin Cohen - Canaccord Genuity Limited Andreas de Groot van Embden - Peel Hunt LLP Anna Hui - RBC Capital Markets, LLC

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

Today, we have Elaine Whelan, our Group CFO; Paul Gregory, our Group CEO; Denise O'Donoghue, who's our Head of Investors and treasury; and Darren Redhead, the CEO of Kinesis. I'm pleased to report a strong set of results for the first quarter, where our underwriting investment strategies continue to add value for our shareholders.

We returned on equity of 3.7% and a combined ratio of 85.6%. We continue to maintain a healthy underwriting result in a quarter which has seen some attrition.

The losses which we have suffered this quarter are all within management's expectations, so nothing out of the ordinary. But as we have said many times, a quarter can be bumpy depending on the timing of claims.

We have written less premium than in the first quarter of 2016 as we had a number of one-off premiums and yet I've seen from our political risk class, which is generally non-renewing, and some non-standard annual policies which skew the numbers. But when these are stripped out, comparable income is in line with our expectations.

But Elaine will give more details later. Our investment portfolio has performed modestly better than we expected for the quarter, generating a 0.7% return.

So overall, we are happy with our result for this quarter and we are in line with where we thought we would be at the start of 2017. The underwriting climate remains difficult, but we are finally starting to see things change.

We have seen the slowing of rate reductions across a number of classes of business as the realization that there is little margin for further reductions finally bites. This is by no means a hardening of the market, but one of the early signs that the cracks are appearing.

Within the broader insurance market, we've seen a number of people losing their jobs as tough decisions are being made on classes of business that make little economic sense. These actions are a sad reality of where we are in the cycle but, equally, a fair reflection of the lack of profitability across many classes of business after years of rate reductions driven by overcapacity.

I expect this process to continue until underwriting margins become more favorable as our industry gets to grips with thin margins and issues of expense. Indeed, a lot of the recent M&A activity, in my view, has been expense-synergy driven.

We welcome our CEO of Cathedral, Andrew McKee, to our business in June. Andrew is one of the final senior recruits to join Cathedral after a period of considerable operational upgrade.

I'm delighted at how Cathedral continues to perform as one of the upper-quartile syndicates in Lloyd's in very difficult trading conditions. Kinesis has grown modestly this year in assets under management and also in the number of investors we have.

I take comfort in the fact that Kinesis continues to underwrite only the deals which clear its hurdles. Again, as we have said many times, we don't just deploy capital for fees we are more interested in being good custodians of capital today, the benefit from these opportunities which may arise [indiscernible] cat loss in the future whenever that occurs.

So to summarize, we are finally seeing the cracks appearing after years of rate reductions, overcapacity of insurance capital, so and little loss activity. This will not in itself materially change the outlook, but we still believe that once enough capital is impaired, things will change.

Until that day, we will continue to stick to our path, and we will focus closely on producing sensible risk-adjusted returns for our shareholders and capital providers across Lancashire, Cathedral and Kinesis. And I'll hand over to Paul

Thanks Alex. Despite a few mid-sized losses in the quarter, I'm pleased to report that the group has produced a respectable combined ratio of 85.6%.

We've been very happy with our start to the year across all the underwriting teams within the group. The renewals of 1/1 were broadly in line with expectation, both in terms of market conditions and retaining the business we wanted to.

Across most product lines, rate and reductions are now in the single-digits, showing that the market is slowing, albeit the direction of the struggle has yet to change in our favor. This strength continued at 1/4, and the Japanese property cat renewals were very orderly and we maintained our positions with all our core clients.

In the Lancashire platforms, there were some non-annual, multiyear impact to premiums this quarter that Elaine will explain in more detail. We're also likely to do a bit more of this in the second quarter, so non-annual contracts renew later in the year.

The energy market continues to be a tricky place to operate. Pace of change has certainly slowed and even the environment remains very competitive.

It's certainly much too early to be optimistic about the energy market improving, but with a stable oil price, at least the customer base is better positioned to contemplate future development plans, which could help future demands. Thus far, we're very happy with how the energy team has weathered storm over the past two years so that we're very well positioned to make the most of any future opportunities.

Cathedral property trade team D&F lines successfully renewed the business they wanted to during Q1, with premium year-on-year across the two lines only down by about 6.5% kept broadly in line with rate reduction. Across the rest of the Cathedral business, premiums reduced in line with rates, and we also shared exposure in lines such as aviation, marine and energy as we continued to employ underwriting discipline.

There's also no premium in respect to contingency following our decision to exit this class. As Alex has said, Kinesis had a successful renewal season at 1/1, with assets under management largely increasing year-on-year as well as further diversifying both the client and investor base.

Our philosophy at Kinesis remains unchanged. If we can deploy funds that won't provide the required returns for our investors, then we'll do so.

If we cannot, we won't. It was pleasing to be able to grow Kinesis slightly and diversifying both the investor and client base built upon the solid foundations already laid in order expand Kinesis when the opportunity allows.

Across all the underwriting platforms, our underwriters have continued to execute the strategy set out to manage and navigate the soft market cycle. As I mentioned last quarter, we successfully renewed the vast majority of our reinsurance protections at 1/1.

We were able to purchase broader and deeper coverage, bringing risk levels down, which gives us more capital headroom than we would typically expect to carry. Hopefully, there'll be some improvement in market conditions so we can put this capital to work via underwriting.

With the markets not improved, then post wind season, we can review our capital needs, take the appropriate actions. I'll now pass over to Elaine.

Thanks, Paul. Hi, everyone.

Our results are on our website schedule. Our RoE of 2.7% for the quarter reflects decent results in the current environment.

We had a reduction in our net premiums earned this quarter, which is partly due to general market conditions and exposure reductions in our energy and aviation book. This also impacts the timing of our reinsurance renewals as we renewed some coverage earlier in the year.

We had a few losses reported in the quarter, which has led to slight uptick in our accident year loss ratio, although nothing of any great significance. We continued to see overall favorable development on our prior accident year.

With a loss ratio of 37.7% and a combined ratio of 85.6% for the quarter, our underwriting performance continues to be steady. Our investment portfolio performed well through another rate hike, which has seen a return of 0.7%.

At both Lancashire and Cathedral, as Paul has said, we maintained our core books to the 1/1 renewals. Our topline reduction as mentioned, due to some exposure reductions in our energy and aviation books and general pricing impacts on the Cathedral books, but mostly the impact of signing of multiyear deal renewals.

That impact is most notable in the multiple risk book, retaining a [indiscernible] fairly lumpy, we continue to see a good flow of new business on that book, just less than in Q1 last year. As we previously said, we do expect pricing pressure to continue in 2017 and expect our top line to come off a bit.

However, our 1/4 property cat renewals held up well with only a small reduction in exposure on our Japanese book. Our energy offshore renewals were lower mainly due to the timing of renewal of non-annual policies.

Our ceded premium is higher than Q1 last year due to renewing our group umbrella cover in January this year versus June last year. I anticipate our full-year spend to be in line with last year.

Otherwise, we have again been able to take advantage of further price savings and placing our main program and expanding some of our cover. Our acquisition cost ratio is in line with where we expect to be for the current business mix and the insurance program we have.

On losses as I mentioned, we've had a few losses reported this quarter, which elevated our loss ratio. None of these claims are significant individually and in total, they're less than 10% of our loss ratio.

That has our pure attritional loss ratio running a little higher than the mid-30s, but that's simply the nature of the book we write and it's not indicative of an underlying trend. I would still view our attritional loss ratio in the mid-30s.

We also had a 2016 accident year energy claim adjusting to this quarter. We've had some favorable development on other claims, plus more general IBNR releases due to lack of reported claims coming through.

Overall, we had net favorable development on prior accident years of $10.6 million for the quarter. Investments returned 0.7% for the quarter.

Although all of our asset classes had positive contribution to return, most of the return comes from our fixed insured portfolio. The market was well prepared for the Fed will increase and the increase in yields in the quarter solved it by narrowing credit spreads.

We're continuing to reposition our hedge fund portfolio. But otherwise, we're happy with the diversification we have in our portfolio under current duration positioning.

The increase in other income this quarter was due to the timing of property commission recognition in Kinesis. In Q1 last year, some collateral for the 1/1/15 underwriting cycle [indiscernible], which puts the recognition of PC out later in the year.

In Q1 2017, most of the collateral for the 1/1/16 underwriting cycle has been released and therefore, we've been able to recognize most of the PC. The earnings pattern for the underwriting fees were broadly in line with last year.

We will see most of that coming through in the next couple of quarters. If there are no losses on the 1/1/17 underwriting cycle, also commission could be about $6.5 million with the earliest we would receive that with Q1 [2018].

The reduction in our G&A this quarter primarily due to the additional expense recorded in Q1 2016 due to Cathedral executive departures, continued benefits for the reduction in sale was offset by increases in favorable [indiscernible] of those as some additional expenses in relation to the news. A reduction in stock compensation charge are reflected from adjustments to ultimate best in performance assumptions, those entirely due to large lapsed due to the departure of Cathedral employees.

We had a small gain this quarter on the mark-to-market of interest rate swaps. Swaps yields rose slightly.

Ignoring the swap mark-to-market and any one-off costs, our financing costs still tend to be around $4 million a quarter. Lastly, on capital, we said last quarter that we're targeting around $1.3 billion to $1.5 billion of capital to support the complete tax rate.

We're clearly carrying a bit more than that at the moment and we'll keep that through the coming wind season. Once we see what 1 season brings us this year, we'll adjust that capital balance in November.

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

Good afternoon. Just one question, and also another quarter of price rate decreases.

I just wondered whether there any segments where the economics are becoming really marginal and might be unsustainable? Obviously, you've exited some segments in the past.

I just wondered whether any others might be on the watch list. Thanks

I think it's a good question, Nick. I mean, clearly, margins are tied across all classes.

It's something that we really look at all the time. I think that we would believe that our loss ratios are better than the market average, and that's why we can still convince ourselves that the lines of business we have make sense.

I think the only exception to that, and PG, correct me if I'm wrong, is the - when we called out the contingency clause last year. I mean that wasn't a huge book for us.

That was in our Cathedral business, but we just couldn't satisfy ourselves that there was an opportunity to make money in the future. So we will look at those things closely.

And I think as a broader comment, you are seeing that across the piece now. People are looking at classes of business that they haven't looked at for a number of years.

I think people are finally getting to grips with the realization that some of these product lines do not make money, and they can't continue to lose money. So that's something we see every day now, which is a big change we've seen.

But I think from where we are today with the classes business we have, we still believe that we can make sufficient return across the cycle for the credit lines that we currently underwrite.

Yes, I mean, Nick, it's certainly something, particularly at this stage of the cycle that we look at all the time. We look at every line of business quite regularly and take a view on the sustainability of those lines is something we do all the time.

And as you said and as Alex mentioned there, we have a history of if we don't think lines can be profitable, then we will take decisions and that contingency, as Alex mentioned and not that long ago in satellite on the Lancashire platform. So probably prepared to make those decisions, but as Alex said, at the moment, we continue to outperform in most of our major classes of business, so we're happy with the lines we've got at the moment.

Okay. Thanks very much.

Thanks Nick.

Hi, there. Thanks very much.

I just wanted to ask on the [indiscernible] premium. If you could be a bit more explicit about the outlook for the rest of the year.

I think you mentioned that you've pulled out of some areas. But the decline in the first quarter, I guess, was about 15%.

So that seems maybe quite steep. But if you could say a bit more about that.

And then secondly, how should we think about the decline in premium or in the topline with regards to what your capital requirements might be going forward once we get through the hurricane season. Would it be reasonable to see that they could come down in line with the retained premium?

Thanks.

Elaine?

Hi. Ben, we don't typically give very much guidance in terms of premium, which you know.

But we did expect there to be a bit of an impact in terms of topline from multi-years this year. It's not as big as it would've been back in kind of 2014, 2015.

We're talking kind of $30 million, $35 million, maybe $40 million now. And that won't lose [indiscernible] completely to the end.

But there will be a little bit of an impact to some of the higher volume of multi-years when the past runs off. And we are also expecting our non-multiyear, if you like, premium to come down a bit this year.

Just a reflection of placing. So that will obviously come through and have an impact on earnings as well.

And the impact that we're getting in terms of our reinsurance is tightening really. We've renewed some stock earlier in the year that we had in place at June last year.

So that will even out a bit more. We are expecting top line to be lower.

We are expecting the earned premiums to lower. But that's as much guidance as we're here to give at the moment.

And in terms of capital requirements, we've been saying $1.3 billion to $1.35 billion. We're probably at the lower end of that in terms of our capital expectations.

We've been focusing on corporate for a while now. I don't see anything changing there in terms of the focus on for book.

So any capital impact will just be a function of placing and exposure.

Okay. Thank you very much.

Hello, good afternoon. Just the questions for me, please.

First of all, on your prior year, I think there's been some settlements in the first quarter which were above your initial expectations. I'm just wondering whether there are any other large losses that came through in 2016 or 2015 that haven't settled yet and could lead to some reserve additions.

In terms of your reinsurance spend, I appreciate you brought forward material sort of spending to Q1 from Q3 last year. And I understand that this is sort of an umbrella cover for the full-year.

Does this mean that at the [1/6-1/7] renewals, you won't be purchasing any further cover ahead of the wind season? Or do you expect to change your risk profile at 1/6-1/7 ahead of your Q3?

And my final question is on the energy market. Yes, what are your expectations for renewals in Q2?

Is there any sort of light at the end of the tunnel? Thanks.

Okay, we'll go to PG for questions two and three and then we'll come back to Elaine.

Yes, on the reinsurance spend, you're right, we purchased something midyear last year and it actually just went into Q2. And we renewed that for the full-year at the beginning of January this year.

As we sit here today, I wouldn't expect to buy anything additional on the reinsurance side. Our appetite in terms of inwards business at 1/6-1/7, assuming the market remains as is, remains pretty static, as Elaine just referred to.

We're looking to renew our core book. But what I would also say is that we always look, as we walk into wind season, are there any opportunity in terms of reinsurance buying that makes sense.

We don't always review it, but at the moment, the plan would be to stick with what we've got. In terms of the energy market, I don't think we're at the point where we can say there's light at the end of the tunnel.

But what I would say is the pace of change has certainly slowed up quite a lot through 2017 versus 2016. So you are still seeing rate reductions, but they are a lot smaller than they were last year.

But obviously, there's a lot less premium in the market which we've talked about a number of times. The one thing I would say that's a slight light at the end of the tunnel is I think our clients have found their feet and have adjusted to the oil price change and are now set up to be stable.

And we've just started to see a few clients look at mothballing a few projects that were mothballed coming back online. It's very early days.

But obviously, that would be good for demand. But in terms of market dynamics, until this incapacity that comes out of the energy market, that's what the reinsurers are providing, then it's still going to be a competitive marketplace.

It's certainly a lot steadier than it was. It's just not moved in the right direction just yet.

But steady is better than the carnage that we witnessed over the past two years.

All right. Thanks.

And on the claims side of things, it was not pure settlement. It was a claim that got reported in this quarter.

So it's an energy claim that happened late last year. It's nothing really particularly unusual for something like that to take several months to come through.

That's quite common. And it's just a little bit above our attritional level.

So that's why we did that. In terms of whether there's anything else that it can come through, we do have some balances on our older years.

You can see those in our supplements. We've got some old political risk claims, energy claims, cat claims on there.

There's always a chance that something can develop adversely and we do talk about that every quarter. Our hope is that we've got a good reserve on there and that we'll see some favorable development that sometimes things go the other way.

We do take a long, hard look at those every quarter in our reserve committee, and anticipate what we think we need to reserve and hopefully it's all good there, but things can go against us.

All right. Thank you.

Hello. Just one question on Kinesis.

Can you give an indication of what level of profit commission we can expect through the rest of the year? Or have you taken it all now?

Thank you.

We've taken most of that. There might be a little bit more that we can do with the rest of this year.

If you look at the profit commission that we have for last year, I think that should give you kind of a good idea of the indication of the overall level. But the vast majority of the class was released on the 1/16 underwriting year.

So that's kind of done. And there hopefully will be something coming through on the 1/7/16 underwriting cycle.

But it's a much smaller. There's much less limit placed there so it wouldn't be very much.

Okay. Thank you.

Okay, thank you for your questions, and we'll talk to you next quarter.