Lancashire: ‘Excellent Set Of Results’
Bermuda-based Lancashire Holdings Limited announced its results for the fourth quarter of 2010 and the year ended 31 December 2010. Operating out of offices Par-la-Ville Road, Lancashire is a global provider of specialty insurance products operating in Bermuda, London and Dubai.
Richard Brindle, Group Chief Executive Officer, commented: “In October 2010 Lancashire marked its fifth anniversary and, since our foundation, our approach to underwriting and capital management has been marked by discipline, teamwork and flexibility. These principles have once again been our trademark in the final quarter of 2010 when, as a general rule, premium rates have been flat or declining.
“I am therefore pleased to report another excellent set of financial results, and to note that Lancashire’s performance has, for the third time in the last four years, enabled us to pay a special dividend to our shareholders. Lancashire increased book value per share by 6.4% in the fourth quarter, delivering a return on equity of 23.3% for the full year. Since our inception in 2005 we have generated a compound annual return on equity of 20.3%. As of 18 February 2011 our original shareholders have received an annualized internal rate of return of 24.3% on their investment.
Financial highlights
| As at 31 December 2010 |
As at 31 December 2009 |
|
| Fully converted book value per share | $7.57 | $7.41 |
| Return on equity* – Q4 | 6.4% | 7.0% |
| Return on equity* – Year | 23.3% | 26.5% |
| Operating return on equity – Q4 | 8.2% | 7.7% |
| Operating return on equity – Year | 20.9% | 24.9% |
| Special dividend per common share** | $1.40 | $1.25 |
* Return on equity is defined as growth in fully converted book value per share, adjusted for dividends.
** See “Dividends” below for Record Date and Dividend Payment Date.
Financial highlights:
| Three months ended | Year ended | |||
| 31 Dec 2010 |
31 Dec 2009 |
31 Dec 2010 |
31 Dec 2009 |
|
| Highlights ($m) | ||||
| Gross premiums written | 94.0 | 103.4 | 689.1 | 627.8 |
| Net premiums written | 93.7 | 100.0 | 649.9 | 577.1 |
| Net profit after tax | 131.8 | 129.6 | 330.8 | 385.4 |
| Net operating profit | 123.4 | 122.4 | 306.5 | 364.7 |
| Share repurchases | nil | 16.9 | 136.4 | 16.9 |
| Per share data | ||||
| Fully diluted earnings per share | $0.76 | $0.69 | $1.86 | $2.05 |
| Fully diluted earnings per share – operating | $0.71 | $0.65 | $1.73 | $1.94 |
| Financial ratios | ||||
| Total investment return | (0.4%) | 0.5% | 4.2% | 3.9% |
| Net loss ratio | (6.1%) | (0.8)% | 27.0% | 16.6% |
| Combined ratio | 20.8% | 25.7% | 54.4% | 44.6% |
| Accident year loss ratio | 7.2% | 24.0% | 42.9% | 27.2% |
“2010 witnessed an active claims environment. Lancashire had moderate exposure to losses from both the Deepwater Horizon disaster and the Chile Maule earthquake but minimal losses to the New Zealand earthquake in the third quarter, the Australian floods at the turn of the year and the recent unrest in Tunisia and Egypt. Our overall premiums written fell in the fourth quarter. Premiums written increased significantly for energy but declined in other areas. This reflects the relative attractiveness of available opportunities between classes.
“Looking ahead, in the core area of underwriting, the bright spots continue to be in the offshore energy lines and the marine retrocessional sector, where premium rates have improved following the Deepwater Horizon disaster in the spring of 2010. We increased our sovereign risk book, contracts in the political risk class relating to sovereign or quasi-sovereign obligors, where we believe pricing remains attractive. Otherwise, premium rates have continued to weaken and we have reduced our underwriting exposure accordingly.
“In 2011 we believe that, whilst premium rates will tend to decline overall, our discipline, flexibility and strong and experienced team will keep our business model highly competitive. Companies often lose their discipline at this point in the cycle. Our daily underwriting call helps us stay focused on risk selection whilst protecting our core broker and client relationships. Lancashire is well positioned both for the soft market and to quickly take advantage of the next market moving event, whenever it might occur.”
Elaine Whelan, Group Chief Financial Officer, commented: “Our combined ratio for the fourth quarter was an excellent 20.8%, reflecting very low losses incurred by Lancashire, including in the property catastrophe class. Strong underwriting performance in the fourth quarter was dampened by a substantial drop in bond values, particularly in U.S. Treasuries. Unfortunately, as a result, our investments suffered a loss of 0.4% during the fourth quarter. We do not currently hold any equities and therefore did not benefit from the strong performance of that asset class. However, our investment portfolio structure ensured Q4 losses were minimal and we were still able to produce a respectable total investment return of 1.6% for the second half of 2010 and 4.2% for the year.
“With the announcement of our final dividend today we will have returned $1.135 billion, or 82%, of comprehensive income generated over the first five years of trading to our shareholders, and over 130% of comprehensive income generated this year, ending 2010 with just under $100 million less capital than we started with. We continue to actively monitor our capital levels versus the opportunities we see. We will also request shareholder approval for a renewed share repurchase authorisation at our Annual General Meeting in May. This should afford us the flexibility to manage our capital throughout the coming year, however circumstances unfold.”
Lancashire Renewal Price Index for major classes
Lancashire’s Renewal Price Index (“RPI”) is an internal tool that management uses to track trends in premium rates on a portfolio of insurance and reinsurance contracts. The RPI is calculated on a per contract basis and reflects Lancashire’s assessment of relative changes in price, terms, conditions and limits and is weighted by premium volume (see “Note Regarding RPI Tool” at the end of this announcement for further guidance). The following RPIs are expressed as an approximate percentage of pricing achieved on similar contracts written in 2009:
| Class | Year 2010 | Q4 2010 | Q3 2010 | Q2 2010 | Q1 2010 |
|---|---|---|---|---|---|
| Aviation (AV52) | 91% | 88% | 100% | 97% | 92% |
| Gulf of Mexico energy | 102% | 100% | 99% | 106% | 87% |
| Energy offshore worldwide | 105% | 101% | 114% | 109% | 98% |
| Marine | 98% | 100% | 100% | 96% | 99% |
| Direct and facultative | 93% | 92% | 96% | 92% | 95% |
| Property reinsurance | 96% | 90% | 96% | 94% | 97% |
| Terrorism | 92% | 90% | 92% | 93% | 92% |
| Combined | 97% | 90% | 99%* | 99%* | 96%* |
* Q1 to Q3 combined RPIs are unchanged from previously reported after being updated for subsequent adjustments to bound premium.
Underwriting results
Gross premiums written
| Q4 | Year | |||||||
|---|---|---|---|---|---|---|---|---|
|
2010
$m |
2009
$m |
Change
$m |
Change
% |
2010
$m |
2009
$m |
Change
$m |
Change
% |
|
|
Property
|
36.9
|
47.2
|
(10.3)
|
(21.8)
|
323.6
|
317.3
|
6.3
|
2.0
|
|
Energy
|
28.0
|
14.7
|
13.3
|
90.5
|
238.3
|
175.5
|
62.8
|
35.8
|
|
Marine
|
6.5
|
12.7
|
(6.2)
|
(48.8)
|
76.4
|
73.7
|
2.7
|
3.7
|
|
Aviation
|
22.6
|
28.8
|
(6.2)
|
(21.5)
|
50.8
|
61.3
|
(10.5)
|
(17.1)
|
|
Total
|
94.0
|
103.4
|
(9.4)
|
(9.1)
|
689.1
|
627.8
|
61.3
|
9.8
|
Gross premiums written decreased by 9.1% in the fourth quarter of 2010 compared to the same period in 2009. In 2010 annual gross premiums written increased by 9.8% compared to 2009. Excluding reinstatement premiums and the impact of multi-year contracts, gross premiums written in 2010 were 1.4% lower than 2009, with the declining pricing environment being offset by an improvement in energy pricing following the Deepwater Horizon loss.
The Group’s four principal classes, and the key market factors impacting them, are discussed below.
Property gross premiums written decreased by 21.8% for the fourth quarter of 2010 compared to the same period in 2009 and increased by 2.0% for the year ended 31 December 2010 compared to the year ended 31 December 2009. In the fourth quarter of 2010, the majority of the Group’s property book showed premium reductions compared to the same period in the prior year. This largely reflects the declining pricing environment in addition to the timing of renewal of certain multi-year contracts in the terrorism portfolio. The growth area of political risk was attributable to the addition of the sovereign obligors’ line within this class in 2010. Reinsurance premiums for the year ended 31 December 2010 were marginally down on the prior year. At the start of 2010, price reductions in property reinsurance classes were minor and a tactical decision was taken to deploy more of the Group’s capital at the January 2010 reinsurance renewals than in prior years. A significant amount of new business across this line was therefore written in the first quarter of 2010, including some large multi-year property catastrophe reinsurance contracts, with a corresponding reduction in appetite in these lines during the remainder of the year. The property retrocession line was also impacted by declining pricing throughout the year, but included approximately $12.1 million of reinstatement premiums in the first quarter in connection with the Chile Maule earthquake in February. Within the terrorism line, premiums increased year on year due to opportunities that arose earlier in 2010 from the post recession recommencement of construction projects around the world, plus increased participation in international terror pools.
Energy gross premiums written increased by 90.5% for the fourth quarter of 2010 compared to the same period in 2009 and increased by 35.8% for the year ended 31 December 2010 compared to the year ended 31 December 2009. Although the majority of energy renewals took place during the second quarter, pricing remained positive in the offshore sector during the fourth quarter following the Deepwater Horizon loss in April 2010. The timing of some worldwide offshore contract renewals also had a positive impact on the fourth quarter premiums written compared to the same period in 2009. In the year to date, Gulf of Mexico premium volume was considerably higher compared to the prior year. This was driven by increased demand, including insureds seeking new layers and increased limits following the Deepwater Horizon loss. Premiums written were also buoyed by a number of large Gulf of Mexico catastrophe accounts being written or renewed on a multi-year basis. The Group also wrote some non-elemental Industry Loss Warranty covers in the second quarter following insurance industry losses suffered from Deepwater Horizon. $5.4 million of the premium in respect of these covers is included in the premium numbers for the energy excess of loss class.
Marine gross premiums written decreased by 48.8% for the fourth quarter of 2010, compared to the same period in 2009 and increased by 3.7% for the year ended 31 December 2010 compared to the year ended 31 December 2009. Pricing and renewal rates were broadly stable. The reduction in the fourth quarter of 2010 and the small increase for the year overall were largely driven by the timing of certain multi-year contract renewals and some contract extensions or exposure increases.
Aviation gross premiums written decreased by 21.5% for the fourth quarter of 2010 compared to the same period in 2009 and decreased by 17.1% for the year ended 31 December 2010 compared to the year ended 31 December 2009. The reduction was driven partly by a reduction in the number of flights flown and passengers travelling in the recent recessionary environment plus a competitive fourth quarter renewal environment.
*******
Ceded premiums decreased by $3.1 million, or 91.2% for the fourth quarter of 2010 and decreased by $11.5 million, or 22.7% for the year ended 31 December 2010 compared to the same periods in 2009. The fourth quarter is not a major renewal period for the Group’s reinsurance cover. The reduction in the cost of outwards reinsurance cover for the year was helped by improved pricing compared to 2009 and by a restructuring of the Group’s cover from a whole account cover to an individual risk cover, offset by the Group purchasing additional catastrophe cover on its U.S. property direct and facultative portfolio, and reinstating non-elemental cover on its marine and energy book in the second quarter.
*******
Net premiums earned as a proportion of net premiums written were 159.4% in the fourth quarter of 2010 compared to 155.6% in the same period in 2009 and 94.5% for the year ended 31 December 2010 compared to 103.0% in 2009. The significant increase in premium written volumes in the first quarter of 2010 as compared to 2009 resulted in a comparatively large deferral of earnings from earlier to later in the year and partially into 2011. Premiums on a significant multi-year contract within the property catastrophe reinsurance class and several within the energy Gulf of Mexico class, of $36.7 million and $33.4 million respectively, also drove the material deferrals of earning of premiums written earlier in the year. Year on year fourth quarter earnings are therefore broadly comparable, given relatively consistent levels of premiums written, although there remains a lag for the year to date.
*******
The Group’s net loss ratio for the fourth quarter of 2010 was negative 6.1% compared to negative 0.8% for the same period in 2009 and 27.0% for the year ended 31 December 2010 compared to 16.6% for 2009. Both fourth quarters reflect an unusually low number of reported losses during the period combined with favourable development of prior year loss reserves. The fourth quarter of 2010 also benefited from a reduction in the net loss for the Chile Maule earthquake of $6.8 million to $84.7 million compared to the previous quarter’s reported loss of $91.5 million. The Group’s expected net loss range is now $77.6 to $92.4 million compared to the initial reported range of $65.0 to $125.0 million at 31 March 2010. The twelve months to 31 December 2010 include the impact of the Chile Maule earthquake plus the total loss of the Deepwater Horizon drilling unit. Lancashire’s net claim for the Deepwater Horizon loss remains $25.0 million. Excluding these two events, the net loss ratio for the year would have been 7.2%. While our reserves in relation to the Chile Maule earthquake have become somewhat clearer, there continues to be considerable uncertainty on the eventual ultimate loss. In respect of the New Zealand earthquake and Queensland floods less than $5.0 million has been recorded within reserves for these events combined.
The table below provides further detail of loss development by class, excluding the impact of foreign exchange revaluations.
| Q4 | Year | |||
|---|---|---|---|---|
|
2010
$m |
2009
$m |
2010
$m |
2009
$m |
|
|
Property
|
(5.1)
|
7.5
|
28.8
|
44.4
|
|
Energy
|
20.0
|
29.6
|
47.6
|
9.3
|
|
Marine
|
6.3
|
2.2
|
17.7
|
6.1
|
|
Aviation
|
0.6
|
0.2
|
6.0
|
3.7
|
|
Total
|
21.8
|
39.5
|
100.1
|
63.5
|
Note: Positive numbers denote favourable development and negative numbers denote adverse development.
Net prior year reserve releases were $21.8 million and $100.1 million for the fourth quarter and for the year ended 31 December 2010 respectively, compared to $39.5 million and $63.5 million for the same periods in 2009. The favourable development in 2010 arose primarily from IBNR releases due to fewer than expected reported losses. In the first quarter of 2009 there was $39.8 million of adverse development on Hurricane Ike, which was subsequently reduced by $22.7 million in the fourth quarter of 2009, based on further loss adjustment reports and some negotiated settlements. The final net adverse development on Ike in 2009 as a whole was $17.1 million.
The accident year loss ratio for the fourth quarter of 2010, including the impact of foreign exchange revaluations, was 7.2% compared to 24.0% for the same period in 2009. The accident year loss ratio for the year ended 31 December 2010 was 42.9% compared to 27.2% for the year ended 31 December 2009. The fourth quarter of 2010 accident year loss ratio reflects the reduction in the Chile Maule net loss and an exceptionally low level of reported losses. Chile Maule and Deepwater Horizon contributed 15.2% and 4.5% respectively to the 2010 accident year loss ratio. Excluding the impact of foreign exchange revaluations, previous accident years’ ultimate losses developed as follows during 2010:
- 2006 – favourable development of $0.3 million (2009: $4.4 million development);
- 2007 – favourable development of $8.3 million (2009: $25.2 million);
- 2008 – favourable development of $36.0 million (2009: $33.9 million); and
- 2009 – favourable development of $55.5 million (2009: n/a).
The ratio of IBNR to total reserves was 38.4% at 31 December 2010 compared to 42.4% at 31 December 2009.
Investments
The Group continues to hold a conservative investment portfolio, consistent with its long-held philosophy, with a strong emphasis on preserving capital. At 31 December 2010, the managed portfolio comprised 78.1% fixed income securities and 21.9% cash and cash equivalents compared to 92.9% fixed income securities and 7.1% cash and cash equivalents at 31 December 2009. Key investment portfolio statistics are:
| As at | As at | |
|---|---|---|
| 31 December 2010 | 31 December 2009 | |
| Duration | 2.2 years | 2.3 years |
| Credit quality | AA | AA+ |
| Book yield | 2.4% | 2.8% |
| Market yield | 1.9% | 2.2% |
Net investment income, excluding realised and unrealised gains and losses, was $12.7 million for the fourth quarter of 2010, a decrease of 9.3% from the fourth quarter of 2009. While the decrease was partly due to lower yields compared to the fourth quarter of 2009, the majority was due to the reduction in the Group’s fixed income portfolio relative to the same period in 2009. This was driven largely by the funding of the Group’s special dividend payment. Net investment income was $53.4 million for the year ended 31 December 2010 compared to $56.0 million for the prior year, a decrease of $2.6 million, or 4.6%, reflecting the lower yield interest rate environment in 2010 compared to 2009.
Total investment return, including net investment income, net realised gains and losses, impairments and net change in unrealised gains and losses, was negative $8.3 million for the fourth quarter of 2010 compared to positive $11.1 million for the fourth quarter of 2009, and was $84.5 million for the year ended 31 December 2010 compared to $82.9 million for the same period in 2009. The negative return in the fourth quarter of 2010 was due to the substantial drop in bond values in November and December 2010. Returns for the year, however, were marginally higher than 2009 due to the increased allocation to both corporate bonds and emerging market debt, which is now 6.8% of managed investments. The emerging market debt portfolio at 31 December 2010 was allocated as follows: 58.1% sovereign debt, 24.8% quasi-sovereign debt, and 17.1% corporate bonds; with an overall average credit quality of BBB-. The corporate bond allocation, excluding Federal Deposit Insurance Corporation guaranteed bonds, represented 31.1% at 31 December 2010 of managed invested assets compared to 23.6% at 31 December 2009. There were no impairments recorded in the year ended 31 December 2010 compared to $0.4 million for the year ended 31 December 2009.
Other operating expenses
Other operating expenses, excluding the cost of equity based compensation, are broadly consistent compared with the same period in 2009, reflecting the Group’s stable operating platform. Total employment costs, excluding equity based compensation, were $33.2 million for the year ended 31 December 2010 compared to $35.6 million in the twelve months to 31 December 2009.
Equity based compensation was $6.1 million in the fourth quarter of 2010 compared to $7.1 million in the same period last year. For the years ended 31 December 2010 and 2009 the charge was $21.1 million and $16.4 million, respectively. The reduction in the quarter to date expense was due to the decreasing costs of warrants and options as awards made under these schemes vest, offset to a degree by the maturing restricted share scheme. The increased 2010 expense reflects the maturing restricted share awards program, plus an increase in vesting assumptions given the Group’s excellent performance and an increase in the proportion of employees’ variable compensation provided as deferred shares compared to prior years. The restricted share program began in 2008.
Capital
At 31 December 2010, total capital was $1.416 billion, comprising shareholders’ equity of $1.287 billion and $128.8 million of long-term debt. Leverage was 9.1%. Total capital at 31 December 2009 was $1.510 billion.
Repurchase program
There were no shares repurchased during the fourth quarter of 2010 compared to $16.9 million of shares repurchased in the same period of 2009. In total $136.4 million of shares were repurchased in the year ended 31 December 2010 and $16.9 million in the year ended 31 December 2009. The share repurchase program had 7,841,826 shares of the authorised maximum of 18,250,306 remaining to be purchased at 31 December 2010.
The Board will be proposing, at the Annual General Meeting to be held on 5 May 2011 that the shareholders approve a renewed share repurchase program with such authority to expire on the conclusion of the 2012 Annual General Meeting or, if earlier, 15 months from the date the resolution approving the renewed share repurchase program is passed.
Dividends
The Lancashire Board declared the following dividends during 2010:
- A Final dividend in respect of 2009 of $0.10 per common share;
- An Interim dividend of $0.05 per common share; and
- A Special dividend of $1.40 per common share.
Lancashire announces that its Board has declared a final dividend in respect of 2010 of $0.10 per common share (approximately 6.2 pence per common share at the current exchange rate), which results in an aggregate payment of approximately $9.4 million. The dividend will be paid in Pounds Sterling on 20 April 2011 (the “Dividend Payment Date”) to shareholders of record on 18 March 2011 (the “Record Date”) using the £ / $ spot market exchange rate at the close of business in London on the Record Date.
In addition to the final dividend payment to shareholders, approximately $2.3 million in aggregate will be paid on the Dividend Payment Date to holders of share purchase warrants issued by the Company pursuant to the terms of the warrants.
The Group will continue to review the appropriate level and composition of capital for the Group with the intention of managing capital to enhance risk-adjusted returns on equity.
